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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 SEPTEMBER 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
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Commission Registrant; State of Incorporation; IRS Employer
File Number Address; and Telephone Number Identification No.
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1-9513 CMS ENERGY CORPORATION 38-2726431
(A Michigan Corporation)
Fairlane Plaza South, Suite 1100
330 Town Center Drive, Dearborn, Michigan 48126
(313)436-9200
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)
5444 Westheimer Road, P.O. Box 4967,
Houston, Texas 77210-4967
(713)989-7000
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
October 31, 1999:
<TABLE>
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CMS ENERGY CORPORATION:
CMS Energy Common Stock, $.01 par value 115,800,521
CMS Energy Class G Common Stock, no par value 0
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
SEPTEMBER 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
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Page
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Glossary........................................................................ 3
PART I:
CMS Energy Corporation
Management's Discussion and Analysis....................................... CMS-1
Consolidated Statements of Income.......................................... CMS-18
Consolidated Statements of Cash Flows...................................... CMS-20
Consolidated Balance Sheets................................................ CMS-22
Consolidated Statements of Common Stockholders' Equity..................... CMS-24
Condensed Notes to Consolidated Financial Statements....................... CMS-25
Report of Independent Public Accountants................................... CMS-45
Consumers Energy Company
Management's Discussion and Analysis....................................... CE-1
Consolidated Statements of Income.......................................... CE-13
Consolidated Statements of Cash Flows...................................... CE-14
Consolidated Balance Sheets................................................ CE-16
Consolidated Statements of Common Stockholder's Equity..................... CE-18
Condensed Notes to Consolidated Financial Statements....................... CE-19
Report of Independent Public Accountants................................... CE-31
Panhandle Eastern Pipe Line Company
Management's Discussion and Analysis....................................... PE-1
Consolidated Statements of Income.......................................... PE-7
Consolidated Statements of Cash Flows...................................... PE-9
Consolidated Balance Sheets................................................ PE-10
Consolidated Statements of Common Stockholder's Equity..................... PE-12
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 2. Changes in Securities and Use of Proceeds.......................... CO-2
Item 6. Exhibits and Reports on Form 8-K................................... CO-2
Signatures...................................................................... CO-3
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2
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GLOSSARY
Certain terms used in the text and financial statements are defined below.
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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>
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<TABLE>
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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
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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>
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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. Consumers is a 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, 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>
Millions, Except Per Share Amounts
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September 30 1999 1998 Change
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THREE MONTHS ENDED
<S> <C> <C> <C>
Consolidated Net Income $ 83 $ 81 $ 2
Net Income Attributable to Common Stocks:
CMS Energy 86 83 3
Class G (3) (2)
(1)
Earnings Per Average Common Share:
CMS Energy
Basic .79 .81 (.02)
Diluted .78 .80 (.02)
Class G
Basic and Diluted (.38) (.16) (.22)
NINE MONTHS ENDED (a)
Consolidated Net Income $ 256 $ 234 $ 22
Net Income Attributable to Common Stocks:
CMS Energy 248 226 22
Class G 8 8 -
Earnings Per Average Common Share:
CMS Energy
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CMS- 1
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<S> <C> <C> <C>
Basic 2.29 2.23 .06
Diluted 2.25 2.19 .06
Class G
Basic and Diluted .90 1.04 (.14)
TWELVE MONTHS ENDED (a)
Consolidated Net Income $ 307 $ 293 $ 14
Net Income Attributable to Common Stocks:
CMS Energy 294 279 15
Class G 13 14 (1)
Earnings Per Average Common Share:
CMS Energy
Basic 2.73 2.77 (.04)
Diluted 2.70 2.73 (.03)
Class G
Basic and Diluted 1.41 1.73 (.32)
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(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 third 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 oil and gas exploration and
production business; and lower losses from the international energy distribution
business. Partially offsetting these increases were lower earnings from the gas
utility, independent power production, marketing services and trading
businesses, and higher interest expense.
The increase in consolidated net income for the nine months ended September 30,
1999 over the comparable period in 1998 resulted from increased earnings in the
electric and gas utilities and natural gas transmission, storage and processing
business as a result of the Panhandle acquisition; lower losses from the
international energy distribution business; 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 lower earnings from the
independent power production business, 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 September
30, 1999 over the comparable 1998 period reflects increased earnings from the
electric utility; 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 independent
power production and oil and gas exploration and production 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
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CONSUMERS' ELECTRIC UTILITY RESULTS OF OPERATIONS
ELECTRIC PRETAX OPERATING INCOME:
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<CAPTION>
In Millions
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Three Months Nine Months Twelve Months
Ended Sept. 30 Ended Sept. 30 Ended Sept. 30
Change Compared to Prior Year 1999 vs 1998 1999 vs 1998 1999 vs 1998
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<S> <C> <C> <C>
Electric deliveries $ 6 $ 32 $ 25
Power supply costs and related revenue recovery 6 24 41
Other non-commodity revenue (5) (10) (11)
Operations and maintenance 9 6 3
General taxes and depreciation (1) (5) (4)
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Total change $ 15 $ 47 $ 54
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ELECTRIC DELIVERIES: Total electric deliveries for the three months, nine months
and twelve months ended September 30, 1999, increased in all customer classes
due primarily to sales growth. Electric deliveries were 10.9 billion kWh for the
three months ended September 30, 1999, an increase of 1.7 percent. Electric
deliveries were 31.3 billion kWh for the nine months ended September 30, 1999,
an increase of 3.8 percent. Electric deliveries were 41.2 billion kWh for the
twelve months ended September 30, 1999, an increase of 2.5 percent.
POWER COSTS:
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In Millions
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September 30 1999 1998 Change
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<S> <C> <C> <C>
Three months ended $ 335 $ 315 $ 20
Nine months ended 906 899 7
Twelve months ended 1,182 1,190 (8)
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</TABLE>
Power costs increased for the three and nine month periods ended September 30,
1999 compared to the same 1998 period as a result of higher sales. Power costs
decreased for the twelve month period ended September 30, 1999 compared to the
same 1998 period due to lower purchased power costs which more than offset the
increased power cost as a result of higher sales.
UNCERTAINTIES: Several trends or uncertainties may affect CMS Energy's financial
condition. These trends or uncertainties 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 Partnership; 4) electric industry restructuring; 5)
implementation of a frozen PSCR and initiatives to be undertaken to reduce
exposure to high energy prices; 6) nuclear 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
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Three Months Nine Months Twelve Months
Ended Sept. 30 Ended Sept.30 Ended Sept. 30
Change Compared to Prior Year 1999 vs 1998 1999 vs 1998 1999 vs 1998
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<S> <C> <C> <C>
Gas deliveries $ 1 $ 21 $ 8
Gas commodity and related revenue (11) - 10
Gas wholesale and retail services activities - 2 3
Operation and maintenance (4) (8) (1)
General taxes, depreciation and other 2 (9) (22)
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Total increase (decrease) in pretax operating income $ (12) $ 6 $ (2)
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</TABLE>
GAS DELIVERIES: System deliveries for the three month period ended September 30,
1999, including miscellaneous transportation, were 43.6 bcf compared to 42 bcf
for the same 1998 period. This increase of 3.8 percent was primarily due to
weather during the period. System deliveries for the nine months period ended
September 30, 1999, including miscellaneous transportation, were 272.3 bcf
compared to 249.8 bcf for the same 1998 period. This increase of 9.0 percent was
primarily due to colder temperatures during the 1999 heating season. System
deliveries for the twelve month period ended September 30, 1999, including
miscellaneous transportation, were 382.3 bcf compared to 376.7 bcf for the same
1998 period. This increase of 1.5 percent was again primarily the result of
colder temperatures during the 1999 heating season.
COST OF GAS SOLD:
<TABLE>
<CAPTION>
In Millions
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September 30 1999 1998 Change
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<S> <C> <C> <C>
Three months ended $ 44 $ 39 $ 5
Nine months ended 428 377 51
Twelve months ended 614 600 14
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</TABLE>
The cost increases for the three month period ended September 30, 1999 resulted
from higher gas cost during this period. The cost increases for the nine month
period and the twelve month period ended September 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
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
September 30, 1999 decreased $6 million (11 percent) from the comparable period
in 1998. This decrease primarily reflects the 1998 gains on the sales of a
biomass power purchase agreement and two biomass plants, partially offset by
increased operating income from international and domestic plant earnings and
fees. Pretax operating income for the nine months ended September 30, 1999
decreased $3 million (2 percent) from the comparable period in 1998. This
decrease primarily reflects 1998 gains on the sale of two power purchase
agreements and two biomass plants, 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, partially offset by increased operating income
from international and domestic plant earnings and fees, a gain on the sale of
two hydro plants in 1999, and increased earnings from the MCV Partnership.
Pretax operating income for the twelve months ended September 30, 1999 decreased
$11 million (7 percent) from the comparable period in 1998, primarily reflecting
the 1998 gains on the sale of plant assets and power purchase agreements, higher
operating expenses, the settlement of a lawsuit and the scheduled reduction of
the industry expertise service fee income earned in connection with the purchase
of Loy Yang, partially offset by increased international and domestic earnings.
OIL AND GAS EXPLORATION AND PRODUCTION RESULTS OF OPERATIONS
PRETAX OPERATING INCOME: Pretax operating income for the three months ended
September 30, 1999 increased $3 million (150 percent) from the comparable period
in 1998 as a result of higher realized commodity prices and lower exploration
expenses, partially offset by lower oil and gas production and higher operating
expenses. Pretax operating income for the nine months ended September 30, 1999
increased $1 million (8 percent) from the comparable period in 1998 due to
higher oil prices and lower exploration expenses, partially offset by lower
natural gas production, lower gas and natural gas liquid prices, and increased
operating expenses. Pretax operating income for the twelve months ended
September 30, 1999 decreased $15 million (68 percent) from the comparable period
in 1998 as a result of lower oil and gas prices, a gain in the prior period from
the sale of CMS Oil and Gas' entire interest in oil and gas properties in Yemen
and higher operating expenses, partially offset by an increase in oil
production.
NATURAL GAS TRANSMISSION, STORAGE AND PROCESSING RESULTS OF OPERATIONS
PRETAX OPERATING INCOME: Pretax operating income for the three months ended
September 30, 1999 increased $45 million (750 percent) from the comparable
period in 1998. The increase reflects earnings from Panhandle, which was
acquired in March 1999, and from other recently acquired international and
domestic operations. Pretax operating income for the nine months ended September
30, 1999 increased $74 million (264 percent) from the comparable period in 1998
primarily due to earnings from Panhandle and an Australian pipeline acquired in
December 1998, partially offset by gains in the prior period on the sale of
Petal Gas Storage Company and Australian gas reserves, and increased net
operating expenses primarily relating to the Panhandle acquisition. Pretax
operating income for the twelve months ended September 30, 1999 increased $74
million (224 percent) from the comparable period in 1998. The increase primarily
reflects earnings from Panhandle and an Australian pipeline acquired in December
1998, partially offset by a gain in the prior period on the sale of Petal Gas
Storage Company and Australian gas reserves.
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.
CMS-5
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MARKETING, SERVICES AND TRADING RESULTS OF OPERATIONS
PRETAX OPERATING INCOME: Pretax operating income for the three months ended
September 30, 1999 decreased $2 million from the comparable period in 1998. The
decrease results from increased gas price volatility and higher third quarter
1998 wholesale power sales, partially offset by additional gas sales. Pretax
operating income for the nine months ended September 30, 1999 decreased $1
million from the comparable period in 1998. The decrease results from higher gas
price volatility, partially offset by higher gas sales. Pretax operating income
for the twelve months ended September 30, 1999 increased $7 million from the
comparable period in 1998. The increase is a result of favorable gas margins and
additional gas sales. Gas managed and marketed for end users totaled 284 bcf and
223 bcf for the nine months ended September 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 September 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 $6.3 billion at
September 30, 1999 with a fair value of $6.1 billion. The fair value of CMS
Energy's interest rate swaps at September 30, 1999, with a notional amount of
$3.1 billion, was $2 million, representing the amount CMS Energy would receive
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 September 30,
1999.
CMS-6
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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
September 30, 1999, but would result in a net cash settlement of approximately
$47 million. The estimated fair value of the foreign exchange and option
contracts at September 30, 1999 was $24 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 September 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 cash is dividends and distributions
from subsidiaries. During the nine months ended September 30, 1999, Consumers
paid $207 million in common dividends and Enterprises paid $55 million in
common dividends to CMS Energy. In September 1999, Consumers declared a
$55 million dividend payable in November 1999 to CMS Energy. In June 1999, CMS
Energy contributed $150 million of paid-in capital to Consumers. CMS Energy's
consolidated 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 $386 million for the first nine months of 1999 and 1998,
respectively. The $54 million increase resulted from increased cash earnings,
partially offset by an increase in undistributed equity earnings of
unconsolidated subsidiaries. CMS Energy uses cash derived from operating
activities 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 $2.7 billion and $690 million for the first nine months of
1999 and 1998, respectively. The increase of $2.0 billion primarily reflects the
acquisition of Panhandle in March 1999. CMS Energy's expenditures during the
first nine months of 1999 for its utility and international businesses were $304
million and $2.4 billion, respectively, compared to $290 million and $424
million, respectively, during the comparable period in 1998.
FINANCING ACTIVITIES: CMS Energy's net cash provided by financing activities
totaled $2.4 billion and $336 million for the first nine months of 1999 and
1998, respectively. The increase of $2.1 billion in net cash provided by
financing activities resulted from an increase of $1.716 billion in the issuance
of new securities (see table below) and a decrease in the retirement of bonds
and other long-term debt ($574 million), partially offset by an increase in the
retirement of existing securities ($194 million).
CMS-7
<PAGE> 13
<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) 7.2%(1) $ 181 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
Adjustable Convertible Trust
Preferred Securities July 2004 8.75% $ 300 Repay debt and general
corporate purposes
----------
Subtotal $1,911
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 $2,711
=================================================================================================================================
</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 September 1999, Panhandle
exchanged the $800 million of notes originally issued by CMS Panhandle
Holding with substantially identical SEC-registered notes.
(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.
During the nine months ended September 30, 1999, CMS Energy declared and paid
$153 million in cash dividends to holders of CMS Energy Common Stock and $9
million in cash dividends to holders of Class G Common Stock. In September 1999,
the Board of Directors declared a quarterly dividend of $.365 per share on CMS
Energy Common Stock, payable in November 1999.
OTHER INVESTING AND FINANCING MATTERS: At September 30, 1999, the book value per
share of CMS Energy Common Stock and Class G Common Stock was $20.49 and $12.28,
respectively.
At September 30, 1999, CMS Energy had an aggregate $1.7 billion in securities
registered for future issuance, which may include the issuance of CMS Energy
Common Stock during the next twelve months.
CMS Energy has Senior Credit Facilities, unsecured lines of credit and letters
of credit as anticipated sources of funds to finance working capital
requirements and to pay for capital expenditures between long-term financings.
At September 30, 1999, the total amount available under the Senior Credit
Facilities was $8 million, and under the unsecured lines of credit and letters
of credit was $163 million. For detailed information, see Note 3, incorporated
by reference herein.
Consumers has credit facilities, lines of credit and a trade receivable sale
program in place as anticipated sources of funds to fulfill its currently
expected capital expenditures. For detailed information about these sources of
funds, see Note 3, incorporated by reference herein.
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 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.
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.
On October 25, 1999, CMS Energy exchanged approximately 6.1 million shares of
CMS Energy Common Stock for all of the approximately 8.7 million issued and
outstanding shares of Class G Common Stock in
CMS-9
<PAGE> 15
a tax-free exchange for United States federal income tax purposes. For detailed
information, see Note 7, incorporated by reference herein.
On November 10, 1999, CMS Energy privately placed 125,000 shares of its
Mandatorily Convertible Preferred Stock with CMS Share Trust, a Delaware
statutory business trust established by CMS Energy, in connection with a $125
million secured debt issuance by an unconsolidated subsidiary. The Mandatorily
Convertible Preferred Stock has a liquidation preference of $1,000 per share and
does not pay dividends while held by the CMS Share Trust. Under certain
circumstances involving the unconsolidated subsidiary's and CMS Energy's
inability to pay principal and/or interest on the subsidiary's debt, the
Mandatorily Convertible Preferred Stock may be remarketed to third parties with
the proceeds applied to payment of the subsidiary's debt. At the time of
remarketing, if any, a market-based dividend rate and the terms of the
conversion into CMS Energy Common Stock would be established.
On October 18, 1999, CMS Energy announced that because of the low market price
of CMS Energy Common Stock at that time, it identified an alternative way to
improve its balance sheet through the sale of non-strategic assets. CMS Energy
has identified for possible sale $1 billion of assets which are expected to
contribute little or no earnings benefit in the short to medium term. CMS Energy
plans to sell $500 to $700 million of such assets by the end of the first
quarter of 2000. While there are no assurances that agreements to sell such
assets, or to sell that amount of assets, will be achieved, the cash raised in
this manner is expected to make further issuance of equity securities
unnecessary in the near future.
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) $ 400 $ 435 $ 520
Consumers gas operations (a) 125 130 130
Independent power production 520 591 293
Oil and gas exploration and production 155 160 210
Natural gas transmission and storage 2,525(b) 247 200
International energy distribution 115 150 150
Marketing, services and trading 45 12 12
Other 10 - -
--------------------------------------------
$3,895 $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
CMS-10
<PAGE> 16
acquisitions and development of electric generating plants in the United States,
Latin America, North Africa, the Middle East, and select areas of Asia,
including India; 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.
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 2.6 percent per year in
electric system deliveries for the years 2000 to 2004. This growth rate does not
take into account the possible impact of restructuring or changed regulation on
the industry. Abnormal weather, changing economic conditions, or the developing
competitive market for electricity may affect actual electric sales by Consumers
in future periods.
RESTRUCTURING: Competition affects Consumers' retail electric business. To meet
its challenges, Consumers has 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 of these
contracts have termination and restructuring options available to customers
depending on business and regulatory circumstances that may occur in the future.
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. Detroit Edison, however, had previously
proposed that the parties terminate the pool agreement immediately. If the pool
agreement is terminated, Consumers could, among other alternatives, join a
regional transmission organization. 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
CMS-11
<PAGE> 17
Structure and Basis of Presentation, "Utility Regulation" and Note 2,
Uncertainties, "Consumers' Electric Utility Rate Matters - Electric
Restructuring", incorporated by reference herein.
RATE MATTERS: In November 1997, ABATE filed a complaint with the MPSC alleging
that Consumers' electric earnings are more than its authorized rate of return
and sought an immediate reduction in Consumers' electric rates. The MPSC staff
investigated the complaint and concluded in an April 1998 report that no formal
rate proceeding was warranted at that time. The MPSC has now scheduled this
matter for further proceedings that should lead to more definitive MPSC
resolution in the first quarter of 2000, absent prior agreement among the
parties. In those proceedings, ABATE and intervenors bear the burden of
convincing the MPSC to reduce electric rates, which will otherwise remain
unchanged. In its testimony filed in this case, ABATE claimed that Consumers'
received approximately $189 million in excess revenues for 1998. In its
testimony MPSC staff stated that 1998 financial results show excess revenues of
$118 million when actual results were compared to the previously authorized
electric return on equity, but recognized that no definitive conclusion could be
reached from such a simplistic computation about the proper level of future
retail electric rates. The MPSC staff presentation anticipated Consumers would
file testimony and exhibits using traditional ratemaking adjustments and
normalizations which would negate ABATE's claim of excessive earnings. Consumers
has filed such testimony showing that after such normalizations, there is a
revenue deficiency of approximately $3 million. The MPSC staff offered several
alternatives for the MPSC to consider. They involved several different refunds
or reductions which the MPSC could consider separately or in combination, but
which, if made would not result in a permanent future reduction in electric
rates in the amount being sought by ABATE. Consumers believes that ABATE has not
met its burden of proving that a reduction in rates is required. Consumers also
believes that ABATE's request for refunds from 1995 to present is inappropriate
and unlawful; no such retroactive rate adjustment has ever been granted by the
MPSC. 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 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
CMS-12
<PAGE> 18
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 CMS Energy's
financial position, liquidity, or results of operations.
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 September 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. 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.
CMS-13
<PAGE> 19
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 September 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 September 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 10/99 99% 10/99 97% 10/99 99% 9/99 100%
Oil and gas 9/99 100% 10/99 94% 10/99 96% 9/99 100%
Natural gas transmission 6/99 100% 10/99 99% 10/99 99% 9/99 100%
Marketing, services and trading 6/99 100% 10/99 99% 10/99 98% 10/99 90%
Essential goods and services 7/99 100% 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 segment presented.
COST OF REMEDIATION: CMS Energy expenses the cost of software modifications as
incurred, and capitalizes and amortizes the cost of new software and equipment
over its useful life. The total estimated cost of the Year 2000 Program is
approximately $30 million. Costs incurred through September 30, 1999 were
approximately $26 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.
CMS-14
<PAGE> 20
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 substantially
in place and will be executed, if necessary, 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 in anticipation that if 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 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 September 30, 1999, the change in
the foreign currency translation adjustment totaled $1 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 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 $1.7 billion at September 30, 1999, which includes $330
million, $350 million and $880 million for Australian, Brazilian and Argentine
foreign exchange contracts, respectively. The estimated fair value of the
foreign exchange and option contracts at September 30, 1999 was $24 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
CMS-15
<PAGE> 21
involve risk and uncertainty. CMS Energy bases these statements 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, political, 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 and tax 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-16
<PAGE> 22
(This page intentionally left blank)
CMS-17
<PAGE> 23
CMS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
September 30 1999 1998 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
In Millions, Except Per Share Amounts
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUE
Electric utility $ 753 $ 729 $ 2,052 $ 1,990 $ 2,667 $ 2,617
Gas utility 112 117 792 716 1,128 1,092
Natural gas transmission, storage and processing 233 20 546 69 637 94
Independent power production 103 95 261 214 324 266
Oil and gas exploration and production 25 15 69 46 86 72
Marketing, services and trading 216 305 520 748 711 1,074
Other 46 5 139 9 176 11
----------------------------------------------------------------------------
1,488 1,286 4,379 3,792 5,729 5,226
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation
Fuel for electric generation 116 109 315 273 401 359
Purchased power - related parties 140 143 418 433 559 585
Purchased and interchange power 151 248 357 492 449 569
Cost of gas sold 306 154 1,078 799 1,491 1,325
Other 250 200 707 558 912 744
----------------------------------------------------------------------------
963 854 2,875 2,555 3,812 3,582
Maintenance 53 49 141 128 189 180
Depreciation, depletion and amortization 141 112 429 347 566 472
General taxes 60 49 186 155 246 209
----------------------------------------------------------------------------
1,217 1,064 3,631 3,185 4,813 4,443
- ------------------------------------------------------------------------------------------------------------------------------------
PRETAX OPERATING INCOME (LOSS)
Electric utility 168 153 425 378 522 468
Gas utility (7) 6 87 81 132 134
Independent power production 51 57 120 123 141 152
Natural gas transmission, storage and processing 51 6 102 28 107 33
Oil and gas exploration and production 5 2 13 12 7 22
Marketing, services and trading - 2 1 2 3 (4)
Other 3 (4) - (17) 4 (22)
----------------------------------------------------------------------------
271 222 748 607 916 783
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER INCOME (DEDUCTIONS)
Accretion income 1 1 3 5 5 7
Accretion expense (4) (4) (11) (12) (15) (16)
Loss on MCV power purchases - - - (37) - (37)
Other, net (1) (3) 17 2 15 (6)
----------------------------------------------------------------------------
(4) (6) 9 (42) 5 (52)
- ------------------------------------------------------------------------------------------------------------------------------------
FIXED CHARGES
Interest on long-term debt 135 79 365 234 449 309
Other interest 17 8 37 33 52 48
Capitalized interest (11) (6) (34) (17) (46) (21)
Preferred dividends - 5 6 14 10 19
Preferred securities distributions 18 8 35 24 43 31
----------------------------------------------------------------------------
159 94 409 288 508 386
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 108 122 348 277 413 345
INCOME TAXES 25 41 92 86 106 95
----------------------------------------------------------------------------
CONSOLIDATED NET INCOME BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE 83 81 256 191 307 250
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR
PROPERTY TAXES, NET OF $23 TAX - - - 43 - 43
----------------------------------------------------------------------------
CONSOLIDATED NET INCOME $ 83 $ 81 $ 256 $ 234 $ 307 $ 293
====================================================================================================================================
</TABLE>
CMS-18
<PAGE> 24
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
September 30 1999 1998 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
In Millions, Except Per Share Amounts
<S> <C> <C> <C> <C> <C> <C> <C>
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKS CMS ENERGY $ 86 $ 83 $ 248 $ 226 $ 294 $ 279
CLASS G $ (3) $ (2) $ 8 $ 8 $ 13 $ 14
- ------------------------------------------------------------------------------------------------------------------------------------
AVERAGE COMMON SHARES OUTSTANDING CMS ENERGY 109 102 109 101 108 101
CLASS G 9 8 9 8 9 8
- ------------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS (LOSS) PER AVERAGE COMMON CMS ENERGY $ .79 $ .81 $ 2.29 $ 1.83 $ 2.73 $ 2.37
SHARE BEFORE CHANGE IN ACCOUNTING PRINCIPLE CLASS G $ (.38) $ (.16) $ .90 $ .68 $ 1.41 $ 1.37
- ------------------------------------------------------------------------------------------------------------------------------------
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, NET OF TAX, PER AVERAGE CMS ENERGY $ - $ - $ - $ .40 $ - $ .40
COMMON SHARE CLASS G $ - $ - $ - $ .36 $ - $ .36
- ------------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS (LOSS) PER AVERAGE CMS ENERGY $ .79 $ .81 $ 2.29 $ 2.23 $ 2.73 $ 2.77
COMMON SHARE CLASS G $ (.38) $ (.16) $ .90 $ 1.04 $ 1.41 $ 1.73
- ------------------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS (LOSS) PER AVERAGE CMS ENERGY $ .78 $ .80 $ 2.25 $ 2.19 $ 2.70 $ 2.73
COMMON SHARE CLASS G $ (.38) $ (.16) $ .90 $ 1.04 $ 1.41 $ 1.73
- ------------------------------------------------------------------------------------------------------------------------------------
DIVIDENDS DECLARED PER COMMON SHARE CMS ENERGY $ .365 $ .33 $ 1.025 $ .93 $ 1.355 $ 1.23
CLASS G $ .34 $ .325 $ .99 $ .945 $ 1.315 $ 1.255
====================================================================================================================================
</TABLE>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
CMS-19
<PAGE> 25
CMS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
In Millions
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Consolidated net income $ 256 $ 234 $ 307 $ 293
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization (includes nuclear
decommissioning of $38, $38, $50 and $51, respectively) 429 347 566 472
Loss on MCV power purchases - 37 - 37
Capital lease and debt discount amortization 36 29 58 37
Accretion expense 11 12 15 16
Accretion income - abandoned Midland project (3) (5) (4) (7)
Cumulative effect of accounting change - (66) - (66)
MCV power purchases (45) (48) (61) (63)
Undistributed earnings of related parties (70) (36) (129) (54)
Deferred income taxes and investment tax credit 16 61 9 74
Other 3 (8) 17 (7)
Changes in other assets and liabilities (193) (171) (208) (56)
---------------------------------------------------
Net cash provided by operating activities 440 386 570 676
- ----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Aquisition of companies net of cash acquired (1,899) - (1,899) -
Capital expenditures (excludes assets placed under capital lease) (479) (448) (1,326) (617)
Investments in partnerships and unconsolidated subsidiaries (291) (234) (402) (476)
Cost to retire property, net (62) (65) (80) (68)
Other 11 1 42 2
Proceeds from sale of property 2 56 3 59
---------------------------------------------------
Net cash used in investing activities (2,718) (690) (3,662) (1,100)
- ----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes, bonds and other long-term debt 2,415 1,273 2,845 1,725
Issuance of common stock 72 49 292 213
Retirement of bonds and other long-term debt (47) (621) (87) (1,069)
Borrowings (repayments) of lines of credit, net (185) (157) 43 (219)
Increase (decrease) in notes payable, net (11) (80) 16 (92)
Payment of common stock dividends (162) (102) (200) (134)
Payment of capital lease obligations (28) (26) (38) (35)
Retirement of preferred stock (194) - (194) -
Retirement of common stock - - (3) -
Proceeds from trust preferred securities 551 - 551 -
---------------------------------------------------
Net cash provided by financing activities 2,411 336 3,225 389
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS 133 32 133 (35)
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 101 69 101 136
---------------------------------------------------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 234 $ 101 $ 234 $ 101
==================================================================================================================================
</TABLE>
CMS-20
<PAGE> 26
<TABLE>
OTHER CASH FLOW ACTIVITIES AND NON-CASH INVESTING AND FINANCING ACTIVITIES WERE:
<S> <C> <C> <C> <C>
CASH TRANSACTIONS
Interest paid (net of amounts capitalized) $ 311 $ 229 $ 395 $ 321
Income taxes paid (net of refunds) 54 51 54 61
NON-CASH TRANSACTIONS
Nuclear fuel placed under capital lease $ 2 $ 21 $ 27 $ 21
Other assets placed under capital leases 11 11 14 12
Common stock issued to acquire companies - - 61 -
Assumption of debt 305 - 393 -
==================================================================================================================================
All highly liquid investments with an original maturity of three months or less are considered cash equivalents.
</TABLE>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
CMS-21
<PAGE> 27
CMS ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS SEPTEMBER 30 SEPTEMBER 30
1999 DECEMBER 31 1998
(UNAUDITED) 1998 (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------------------
In Millions
<S> <C> <C> <C>
PLANT AND PROPERTY (AT COST)
Electric utility $ 6,920 $ 6,720 $ 6,641
Gas utility 2,427 2,360 2,328
Natural gas transmission, storage and processing 1,912 341 170
Oil and gas properties (successful efforts method) 725 670 637
Independent power production 593 518 271
Other 422 373 49
-----------------------------------------------
12,999 10,982 10,096
Less accumulated depreciation, depletion and amortization 6,018 5,213 5,052
-----------------------------------------------
6,981 5,769 5,044
Construction work-in-progress 413 271 226
-----------------------------------------------
7,394 6,040 5,270
- ---------------------------------------------------------------------------------------------------------------------------------
INVESTMENTS
Independent power production 1,019 888 868
Natural gas transmission, storage and processing 564 494 341
International energy distribution 133 209 272
Midland Cogeneration Venture Limited Partnership 240 209 199
First Midland Limited Partnership 238 240 237
Other 34 33 35
-----------------------------------------------
2,228 2,073 1,952
- ---------------------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and temporary cash investments at cost, which approximates market 234 101 101
Accounts receivable, notes receivable and accrued revenue, less
allowances of $12, $13 and $8, respectively 1,023 720 457
Inventories at average cost
Gas in underground storage 288 219 276
Materials and supplies 144 99 91
Generating plant fuel stock 37 43 29
Deferred income taxes 13 - 14
Prepayments and other 222 225 170
-----------------------------------------------
1,961 1,407 1,138
- ---------------------------------------------------------------------------------------------------------------------------------
NON-CURRENT ASSETS
Nuclear decommissioning trust funds 572 557 510
Unamortized nuclear costs 506 - -
Postretirement benefits 351 373 381
Abandoned Midland Project 53 71 77
Other 1,529 789 602
-----------------------------------------------
3,011 1,790 1,570
-----------------------------------------------
TOTAL ASSETS $ 14,594 $ 11,310 $ 9,930
=================================================================================================================================
</TABLE>
CMS-22
<PAGE> 28
<TABLE>
<CAPTION>
STOCKHOLDERS' INVESTMENT AND LIABILITIES SEPTEMBER 30 SEPTEMBER 30
1999 DECEMBER 31 1998
(UNAUDITED) 1998 (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------------------
In Millions
<S> <C> <C> <C>
CAPITALIZATION
Common stockholders' equity $ 2,353 $ 2,216 $ 1,922
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
CMS Energy Trust II (b) 301 - -
Company-obligated Trust Preferred Securities of CMS RHINOS Trust (c) 250 - -
Long-term debt 7,092 4,726 4,248
Non-current portion of capital leases 89 105 77
------------------------------------------------
10,522 7,678 6,878
- ---------------------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases 308 293 171
Notes payable 317 328 302
Accounts payable 466 501 309
Accrued taxes 215 272 144
Accrued interest 114 65 64
Accounts payable - related parties 58 79 90
Power purchases 47 47 47
Accrued refunds 19 11 12
Other 447 211 189
------------------------------------------------
1,991 1,807 1,328
- ---------------------------------------------------------------------------------------------------------------------------------
NON-CURRENT LIABILITIES
Deferred income taxes 646 652 654
Postretirement benefits 479 489 499
Deferred investment tax credit 129 135 144
Regulatory liabilities for income taxes, net 121 87 83
Power purchases 87 121 134
Other 619 341 210
------------------------------------------------
2,081 1,825 1,724
------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 1 and 2)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $ 14,594 $ 11,310 $ 9,930
=================================================================================================================================
</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) 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. The
primary asset of CMS Energy Trust II is $310 million principal amount of 8.625
percent convertible junior subordinated debentures due July 2004 from CMS
Energy. For further discussion, see Note 3 to the Consolidated Financial
Statements.
(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-23
<PAGE> 29
CMS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 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 2,643 2,297 2,594 2,267 2,316 2,103
Redemption of affiliate's preferred stock - - (2) - (2) -
Common stock reacquired - - - - (3) -
Common stock reissued 2 - 2 - 2 -
Common stock issued:
CMS Energy 20 18 67 45 346 206
Class G 1 1 5 4 7 7
-----------------------------------------------------------------------------
At end of period 2,666 2,316 2,666 2,316 2,666 2,316
- ------------------------------------------------------------------------------------------------------------------------------------
REVALUATION CAPITAL
At beginning of period 10 (6) (9) (6) (16) (4)
Change in unrealized investment-gain (loss) (a) (7) (10) 12 (10) 19 (12)
-----------------------------------------------------------------------------
At end of period 3 (16) 3 (16) 3 (16)
- ------------------------------------------------------------------------------------------------------------------------------------
FOREIGN CURRENCY TRANSLATION
At beginning of period (126) (123) (136) (96) (132) (45)
Change in foreign currency translation (a) (11) (9) (1) (36) (5) (87)
-----------------------------------------------------------------------------
At end of period (137) (132) (137) (132) (137) (132)
- ------------------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS (DEFICIT)
At beginning of period (138) (292) (234) (379) (247) (406)
Consolidated net income (a) 83 81 256 234 307 293
Common stock dividends declared:
CMS Energy (122) (33) (193) (94) (228) (123)
Class G (3) (3) (9) (8) (12) (11)
-----------------------------------------------------------------------------
At end of period (180) (247) (180) (247) (180) (247)
-----------------------------------------------------------------------------
TOTAL COMMON STOCKHOLDERS' EQUITY $ 2,353 $ 1,922 $ 2,353 $ 1,922 $ 2,353 $ 1,922
====================================================================================================================================
(A) DISCLOSURE OF COMPREHENSIVE INCOME:
Revaluation capital
Unrealized investment-gain (loss), net of
tax of $4, $5, $(6), $5, $(9) and $6,
respectively $ (7) $ (10) $ 12 $ (10) $ 19 $ (12)
Foreign currency translation (11) (9) (1) (36) (5) (87)
Consolidated net income 83 81 256 234 307 293
-----------------------------------------------------------------------------
Total Consolidated Comprehensive Income $ 65 $ 62 $ 267 $ 188 $ 321 $ 194
=============================================================================
</TABLE>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
CMS-24
<PAGE> 30
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 a 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. In March 1999, CMS Energy completed the acquisition of Panhandle,
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, nine and twelve-month periods
ended September 30, 1999, undistributed equity earnings were $24 million, $70
million and $129 million, respectively, compared to $2 million, $36 million and
$54 million for the three, nine and twelve-month periods ended September 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 September 30, 1999, the
change in the foreign currency translation adjustment totaled $1 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-25
<PAGE> 31
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
September 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 Consumers recognizes revenues, expenses, assets and liabilities.
In March 1999, Consumers received MPSC electric restructuring orders which,
among other things, identified the terms and timing for implementing electric
restructuring in Michigan. Consistent with these orders, Consumers expected 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 September 30, 1999,
Consumers had a net investment in energy supply facilities of $934 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-26
<PAGE> 32
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.
<TABLE>
<CAPTION>
In Millions, except per share amounts
- -------------------------------------------------------------------------------------------
Three Months Nine Months Year ended
Ended September 30, Ended September 30, December 31,
1999 1998 1999 1998 1998
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating revenue $ 1,488 $ 1,376 $4,492 $4,096 $ 5,566
Consolidated net income 83 72 267 237 289
Basic earnings per share .79 .72 2.38 2.26 2.70
Diluted earnings per share .78 .71 2.35 2.22 2.67
- -------------------------------------------------------------------------------------------
<CAPTION>
September 30, December 31,
1999 1998 1998
- -------------------------------------------------------------------------------------------
Total assets $14,594 $12,367 $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. In 1997 the EPA revised these standards to impose further limitations
on nitrogen oxide and small particulate-related emissions. In May 1999 a United
States Court of Appeals ruled that the grant of authority to the EPA to revise
the standards as the EPA did, would amount to an unconstitutional delegation of
legislative power. As a result, the standards will not be implemented under the
1997 rule. The EPA has requested a rehearing of the court's decision.
In September 1998, based in part upon the 1997 standards, the EPA Administrator
issued 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. In May 1999 the United States Court of Appeals
granted an indefinite stay of the submission date for the State of Michigan's
implementation plan. Based upon the recent court rulings,
CMS-27
<PAGE> 33
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.
The preliminary estimate of capital expenditures to reduce nitrogen
oxide-related emissions to the level proposed by the State of Michigan for
Consumers' fossil-fueled generating units ranges from $150 million to $290
million, in 1999 dollars. If Consumers had to meet the EPA's 1997 proposed
requirements it is estimated that the cost to Consumers would be between $290
million and $500 million, in 1999 dollars. In both these cases the lower
estimate represents the capital expenditure level that would satisfactorily meet
the proposed emissions limits but would result in higher operating expense. The
higher estimate in the range includes expenditures that result in lower
operating costs while complying with the proposed emissions limit. Consumers
anticipates that these capital expenditures will be incurred between 1999 and
2004, or between 1999 and 2003 if the EPA's limits are imposed.
Consumers may need an equivalent amount of capital expenditures to comply with
the new small particulate standards some time after 2004 if those standards
become effective.
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 September 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-28
<PAGE> 34
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 October 1999, the Attorney General
filed an application for leave to appeal this decision to the Michigan Supreme
Court.
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
(subsequently extended to September 1999); 3) suspension of the PSCR process as
discussed below; and 4) the right of 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 would 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 March 1999, Consumers received MPSC electric
restructuring orders, which generally supported Consumers' implementation plan.
Consumers began implementing electric retail customer open access in September
1999, and will extend open access to 750 MW of Consumers' retail market by 2001.
On January 1, 2002, all of Consumers' electric customers will have the right to
choose generation suppliers.
There are numerous appeals pending at the Court of Appeals relating to the
MPSC's restructuring orders. 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. Although
CMS-29
<PAGE> 35
Consumers filed an appeal of the restructuring orders which asked the court to
rule that the MPSC could not mandate industry restructuring, Consumers has
subsequently requested to have that appeal dismissed. 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. Following receipt of comments, the MPSC issued an order on August 17,
1999 finding that it has jurisdiction to approve rates, terms, and conditions
for electricity retail wheeling (also known as electric customer choice) if a
utility voluntarily chooses to offer that service. The August 17th order also
requested that Consumers file a statement if it intended to continue with its
electric customer choice program. On September 1, 1999 Consumers filed a
statement reaffirming its decision to continue carrying out the customer choice
program as previously approved by the MPSC. ABATE and the Attorney General have
each appealed the August 17th order to the Court of Appeals. Both ABATE and the
Attorney General subsequently filed applications with the Michigan Supreme Court
asking that Court to bypass the Court of Appeals and immediately review the
lawfulness of the August 17th order. It is uncertain how the issues raised by
the MPSC's August 17th order will be resolved by the regulatory process, the
appellate courts or by legislation codifying the retail wheeling and related
Transition Cost recovery issues.
Several bills relative to electric restructuring have been introduced in the
Michigan legislature for consideration in the 1999-2000 legislative session.
Although Consumers has not specifically supported any of these bills, Consumers
believes legislation is desirable to provide statutory support for the MPSC
orders. Consumers is uncertain as to whether legislation will be enacted and
what effect any enacted legislation will have on Consumers. Similar uncertainty
exists with respect to the possibility that federal legislation restructuring
the electric power industry will be enacted. A variety of bills changing
existing federal regulation of the industry and potentially affecting state
regulation have been introduced in Congress in recent years. None has been
enacted.
Consumers believes progress is being made in discussions with its major
commercial and industrial customers, which, if successful, would result in
agreement on the need for, and substance of, electric restructuring legislation
in Michigan and have the effect of resolving Consumers' rate proceedings pending
before the MPSC. While there are no assurances that an agreement or legislation
will result, Consumers is optimistic that a positive outcome of the discussions
can be achieved. CMS Energy 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 suspension, customers
previously subject to the PSCR mechanism 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, when the PSCR process was employed, any change
in power supply costs was passed through to customers. In order to reduce the
risk of high energy prices during peak demand periods, Consumers purchased daily
call options, at a cost of approximately $19 million, to insure a reliable
source of energy during the months of June through September 1999, and expects
to use a similar strategy in the future. Consumers is planning to have
sufficient generation and purchased capacity for approximately a 15 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 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 a 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 necessarily own,
the transmission facilities of
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<PAGE> 36
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 by
December 31, 1999. 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
- ----------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended Twelve Months Ended
September 30 1999 1998 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Pretax operating income $13 $13 $39 $36 $52 $46
Income taxes and other 4 4 12 11 16 14
- ----------------------------------------------------------------------------------------------
Net income $9 $9 $27 $25 $36 $32
==============================================================================================
</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 these capacity costs, Consumers will
recover these increases through an adjustment to the currently frozen PSCR
factor that will be effective through 2001. Consumers expects to recover the
remaining increases through the Transition Cost true-up process and through
further adjustments to the PSCR factor. 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 resell to
PECO its capacity and energy purchases 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 PECO
agreement. If used as an offset to electric customers Transition Cost
responsibility, Consumers estimates that there could be a reduction of as much
as $58 million (on a net present value basis) of Transition Cost related to the
MCV PPA. In an order
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<PAGE> 37
issued in April 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. In
response to Consumers' and other parties' requests for clarification and
rehearing, in an August 1999 opinion, the MPSC partially granted the relief
Consumers requested on rehearing and attached certain additional conditions to
its approval. Those conditions relate to Consumers continued decision to carry
out the electricity customer choice program (which Consumers has affirmed as
discussed above) and a determination to revise its capacity solicitation process
(which Consumers has filed but is awaiting an MPSC decision). The August opinion
is a companion order to a power supply cost reconciliation order issued on the
same date in another case. This order affects the level of frozen power supply
costs recoverable in rates during future years when the transaction with PECO
would be taking place. Consumers filed a motion for clarification of the order
relating to the PECO agreement.
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 September 30, 1999 and September 30, 1998, the remaining after-tax
present value of the estimated future PPA liability associated with the 1992
loss totaled $87 million and $118 million, respectively. At September 30, 1999,
the undiscounted after-tax amount associated with this liability totaled $148
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 $24 million as of September 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 $35 $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.
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<PAGE> 38
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 annual 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 September
30, 1999 Consumers had loaded 18 dry storage casks with spent nuclear fuel at
Palisades. 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.
On October 15, 1999 a planned forty-day refueling and maintenance outage began
at Palisades. Consumers will replace certain nuclear fuel assemblies and 2
low-pressure steam turbines during the outage.
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 12 weeks of any outage, but would cover most of such costs
during the next 52 weeks of the outage, followed by reduced coverage to 80
percent for 110 additional weeks. 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,
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
CMS-33
<PAGE> 39
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.
Settlement discussions are underway which could further reduce the annual
recovery. 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 September 30, 1999, Consumers had an investment in nuclear
decommissioning trust funds of $392 million for Palisades and $180 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 nine months of 1999, Consumers spent $37
million for the decommissioning and withdrew $29 million from the Big Rock
nuclear decommissioning trust fund. In total, Consumers has spent $112 million
for the decommissioning and withdrew $103 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. Consumers has completed
initial investigations at the 23 sites. 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 has estimated its costs related to further investigation
and remedial action for all 23 sites using the Gas Research Institute-
Manufactured Gas Plant Probabilistic Cost Model. Using this model the costs are
estimated to be between $66 million and $118 million. These estimates are based
on undiscounted 1999 costs. Using the low end of the range, Consumers estimates
its remaining expenditures at $63 million as of September 30, 1999 and has
accrued a liability for the same amount and also established a corresponding
regulatory asset. 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-34
<PAGE> 40
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, and allow up to 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
September 30, 1999, more than 181,000 customers chose alternative gas suppliers,
representing approximately 42 bcf of gas load. The program allows Consumers to
earn a margin on the gas commodity provided it can continue to purchase gas at
prices below the $2.84/mcf cost allowed in its rate. 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 September 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: 3 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 an average price of 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 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. On September 16, 1999, Trunkline filed with FERC a
settlement agreement which would resolve certain issues in this proceeding and
would require Trunkline to refund approximately $2 million. The ALJ has
certified the settlement; it is currently pending review by FERC.
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 September 30, 1999 and December 31, 1998,
accounts receivable included $53 million and $50 million, respectively, due from
natural gas producers, and other current liabilities included $53 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
CMS-35
<PAGE> 41
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. On November 8, 1999, the FERC
issued a letter order dismissing Trunkline's filing without prejudice to
refiling the abandonment to reflect changed circumstances. Trunkline continues
to evaluate alternatives regarding the 26-inch pipeline.
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. The May 19, 1999 compliance filing
is pending FERC approval.
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 $3.895
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 September 30, 1999, CMS Energy and Enterprises have guaranteed up
to $447 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.
CMS-36
<PAGE> 42
3: SHORT-TERM AND LONG-TERM FINANCINGS, AND CAPITALIZATION
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 $379 million. At September 30, 1999, the total
amount utilized under the Senior Credit Facilities was $592 million, including
$41 million of contingent obligations, and under the unsecured lines of credit
and letters of credit was $216 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 September 30, 1999, this entire bridge loan
facility had been repaid.
At September 30, 1999, CMS Energy had $114 million of Series A GTNs, $112
million of Series B GTNs, $150 million of Series C GTNs, $199 million of Series
D GTNs, and $215 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 7.2 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-37
<PAGE> 43
CONSUMERS: At September 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 $275 million and $390 million of long-term securities with
maturities up to 30 years for refinancing purposes and for general corporate
purposes, respectively.
Consumers has an unsecured $300 million credit facility and unsecured lines of
credit aggregating $135 million. These facilities are available to finance
seasonal working capital requirements and to pay for capital expenditures
between long-term financings. At September 30, 1999, a total of $317 million was
outstanding at a weighted average interest rate of 6.1 percent, compared with
$302 million outstanding at September 30, 1998, at a weighted average interest
rate of 6.3 percent. In January 1999, Consumers renegotiated a variable-to-fixed
interest rate swap totaling $175 million. In September 1999, Consumers entered
into two variable-to-fixed interest rate swaps totaling $740 million.
Consumers also has in place a $325 million trade receivables sale program. At
September 30, 1999 and 1998, receivables sold under the program totaled $314
million and $307 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.
Subsequent to quarter end, 7 million shares of 9.25 percent Trust Preferred
Securities were issued and sold through Consumers Energy Company Financing III,
a wholly owned business trust consolidated with Consumers. Net proceeds from the
sale totaled approximately $170 million. Consumers formed the trust for the sole
purpose of issuing the Trust Preferred Securities. Consumers' obligations with
respect to the Trust Preferred Securities under the related tax-deductible
notes, under the indenture through which Consumers issued the notes, under
Consumers' guarantee of the Trust Preferred Securities, and under the
declaration by the trust, taken together, constitute a full and unconditional
guarantee by Consumers of the trust's obligations under the Trust Preferred
Securities.
Under the provisions of its Articles of Incorporation, Consumers had $318
million of unrestricted retained earnings available to pay common dividends at
September 30, 1999. In May 1999, Consumers declared and paid a $76 million
common dividend. In July 1999, Consumers declared a $35 million common dividend
which was paid in August 1999. In September 1999, Consumers declared a $55
million common dividend payable in November 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 September 1999, Panhandle exchanged
the $800 million of notes originally issued by CMS Panhandle Holding with
substantially identical SEC-registered notes.
CMS-38
<PAGE> 44
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.
4: EARNINGS PER SHARE AND DIVIDENDS
Earnings per share attributable to Common Stock for the three, nine and twelve
months ended September 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 September 30, 1999 and 1998 are based on 26.06
percent and 25.38 percent, respectively, of the income of Consumers Gas Group.
In October 1999, all of the issued and outstanding shares of Class G Common
Stock were exchanged for shares of CMS Energy Common Stock (see Note 7).
CMS-39
<PAGE> 45
COMPUTATION OF EARNINGS PER SHARE:
<TABLE>
<CAPTION>
In Millions, Except Per Share Amounts
- ---------------------------------------------------------------------------------------------------------
Three Months Nine Months Twelve Months
Ended Ended Ended
September 30 September 30 September 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
$ 83 $ 81 $256 $ 234 $307 $293
=====================================================
Net Income Attributable to Common Stocks:
CMS Energy - Basic EPS $ 86 $ 83 $248 $ 226 $294 $279
Add conversion of 7.75% Trust
Preferred Securities (net of tax) 2 2 6 6 9 9
-----------------------------------------------------
CMS Energy - Diluted EPS $ 88 $ 85 $254 $ 232 $303 $288
=====================================================
Class G:
Basic and Diluted EPS $ (3) $ (2) $ 8 $ 8 $ 13 $ 14
=====================================================
AVERAGE COMMON SHARES OUTSTANDING
APPLICABLE TO BASIC AND DILUTED EPS
CMS Energy:
Average Shares - Basic 109 102 109 101 108 101
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 114 107 114 106 113 106
=====================================================
Class G:
Average Shares
Basic and Diluted 9 8 9 8 9 8
=====================================================
EARNINGS PER AVERAGE COMMON SHARE
CMS Energy:
Basic $ .79 $ .81 $2.29 $2.23 $2.73 $2.77
Diluted $ .78 $ .80 $2.25 $2.19 $2.70 $2.73
Class G:
Basic and Diluted $ (.38) $ (.16) $ .90 $1.04 $1.41 $1.73
=========================================================================================================
</TABLE>
(a) Includes the cumulative effect of an accounting change in the first
quarter of 1998 which increased net income attributable 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 August 1999,
CMS Energy paid dividends of $.365 per share on CMS Energy Common Stock and $.34
per share on Class G Common Stock. In September
CMS-40
<PAGE> 46
1999, the Board of Directors declared a quarterly dividend of $.365 per share on
CMS Energy Common Stock, payable in November 1999. As a result of the exchange
of Class G Common Stock for CMS Energy Common Stock, no Class G Common Stock
dividend was declared in September. Class G Common Stock shareholders prior to
the exchange will receive the CMS Energy Common Stock dividend that is payable
in November 1999.
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 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
September 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.
CMS-41
<PAGE> 47
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 September 30, 1999, the fair value of
this contract reflected payment due to CMS Oil and Gas of $3 million. As of
September 30, 1999, the fair value of this contract is $17 million.
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 $3.1 billion at
September 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 $1.7 billion at September 30,
1999, which includes $330 million, $350 million and $880 million for Australian,
Brazilian and Argentine foreign exchange contracts, respectively. The estimated
fair value of the foreign exchange and option contracts at September 30, 1999
was $24 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
CMS-42
<PAGE> 48
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 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
- -----------------------------------------------------------------------------------------------------
September 30, December 31,
1999 1998
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Identifiable Assets
Electric utility (a) $ 4,540 $ 4,640
Gas utility (a) 1,760 1,726
Independent power production 2,688 2,252
Oil and gas exploration and production 590 547
Natural gas transmission, storage and processing 3,512 971
Marketing, services and trading 227 152
Other 1,277 1,022
-----------------------------------------------------------------
$14,594 $11,310
=====================================================================================================
</TABLE>
(a) Amounts include an attributed portion of Consumers' other common assets to
both the electric and gas utility businesses.
CMS-43
<PAGE> 49
7: EXCHANGE OF CLASS G COMMON STOCK
On October 25, 1999, CMS Energy exchanged approximately 6.1 million shares of
CMS Energy Common Stock for all of the approximately 8.7 million issued and
outstanding shares of Class G Common Stock in a tax-free exchange for United
States federal income tax purposes. The exchange ratio of .7041 share of CMS
Energy Common Stock for each share of Class G Common Stock represents the fair
market value of CMS Energy Common Stock equal to 115 percent of the fair market
value of one share of Class G Common Stock. Fair market values of CMS Energy
Common Stock and Class G Common Stock were determined by calculating the average
of the daily closing prices on the New York Stock Exchange from July 28, 1999 to
August 24, 1999. Unaudited pro forma earnings per share of CMS Energy for the
three, nine and twelve months ended September 30, 1999 and 1998, as if the
exchange had occurred as of the beginning of each respective period, are as
follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended Twelve Months Ended
September 30, 1999 1998 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per share $ .72 $ .76 $2.23 $2.19 $2.69 $2.75
Diluted earnings per share $ .71 $ .74 $2.20 $2.15 $2.66 $2.72
</TABLE>
CMS-44
<PAGE> 50
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 September 30, 1999
and 1998, the related consolidated statements of income and common stockholders'
equity for the three-month, nine-month, and twelve-month periods then ended, and
the related consolidated statements of cash flows for the nine-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,
1999, 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.
Detroit, Michigan,
November 10, 1999.
CMS-45
<PAGE> 51
(This page intentially left blank)
CMS-46
<PAGE> 52
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 a 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
- -------------------------------------------------------------------------------------------------------------------
September 30 1999 1998 Change
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Three months ended $ 88 $ 77 $ 11
Nine months ended 265 239 26
Twelve months ended 338 311 27
===================================================================================================================
</TABLE>
Net income available to the common stockholder was $88 million for the three
months ended September 30, 1999 compared to $77 million for the same 1998
period. The $11 million earnings increase was primarily due to increased
electric deliveries and lower operating costs including reduced power supply
costs and related revenue recovery. This increase was partially offset by a
regulatory disallowance of certain gas costs totaling $8 million for the 1997
and 1998 years. Net income for the nine months ended September 30, 1999 was $265
million compared to $239 million for the same period in 1998. The $26 million
earnings increase was due to increased electric deliveries, higher gas
deliveries as a result of colder temperatures during the heating season
compared to 1998, and changes in regulation which allow Consumers to benefit
from reduced electric and gas costs. These increases were partially offset by
the regulatory disallowance for the 1997 and 1998 years discussed above 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 September 30, 1999 was $338
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<PAGE> 53
million compared to $311 million for the same period in 1998. The $27 million
earnings increase was due to higher electric and gas deliveries and from lower
electric power costs and reduced gas costs. Partially offsetting these benefits
were additional operating expenses, the regulatory disallowance for the 1997 and
1998 years, 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
- -------------------------------------------------------------------------------------------------------------------
September 30 1999 1998 Change
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Three months ended $ 168 $ 153 $ 15
Nine months ended 425 378 47
Twelve months ended 522 468 54
===================================================================================================================
</TABLE>
Electric pretax operating income was $168 million for the three months ended
September 30, 1999 compared to $153 million for the same period in 1998. The $15
million earnings increase was the result of higher electric deliveries and lower
operating costs including reduced power supply costs and related revenue
recovery. Electric pretax operating income was $425 million for the nine months
ended September 30, 1999 compared to $378 million for the same period in 1998.
The $47 million earnings increase was again due to higher electric deliveries
and lower operating costs including reduced power supply costs. This earnings
increase was partially offset by reduced non-commodity revenues, and by higher
depreciation costs for new property and equipment. Electric pretax operating
income was $522 million for the twelve months ended September 30, 1999 compared
to $468 million for the same period in 1998. The $54 million earnings increase
was primarily due to higher electric deliveries and changes in regulation, which
after 1997 provided Consumers the opportunity to benefit from reduced power
supply costs. The following table quantifies these impacts on Pretax Operating
Income:
<TABLE>
<CAPTION>
In Millions
- -------------------------------------------------------------------------------------------------------------------
Three Months Nine Months Twelve Months
Ended Sept. 30 Ended Sept. 30 Ended Sept. 30
Change Compared to Prior Year 1999 vs 1998 1999 vs 1998 1999 vs 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Electric deliveries $ 6 $ 32 $ 25
Power supply costs and related revenue recovery 6 24 41
Other non-commodity revenue (5) (10) (11)
Operations and maintenance 9 6 3
General taxes and depreciation (1) (5) (4)
----------------------------------------------
Total change $ 15 $ 47 $ 54
==================================================================================================================
</TABLE>
ELECTRIC DELIVERIES: Total electric deliveries for the three months, nine months
and twelve months ended September 30, 1999, increased in all customer classes
due primarily to sales growth. Electric deliveries were 10.9 billion kWh for the
three months ended September 30, 1999, an increase of 1.7 percent. Electric
deliveries were 31.3 billion kWh for the nine months ended September 30, 1999,
an
CE-2
<PAGE> 54
increase of 3.8 percent. Electric deliveries were 41.2 billion kWh for the
twelve months ended September 30, 1999, an increase of 2.5 percent.
POWER COSTS:
<TABLE>
<CAPTION>
In Millions
- -------------------------------------------------------------------------------------------------------------------
September 30 1999 1998 Change
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Three months ended $ 335 $ 315 $ 20
Nine months ended 906 899 7
Twelve months ended 1,182 1,190 (8)
====================================================================================================================
</TABLE>
Power costs increased for the three and nine month periods ended September 30,
1999 compared to the same 1998 period as a result of higher sales. Power costs
decreased for the twelve month period ended September 30, 1999 compared to the
same 1998 period due to lower purchased power costs which more than offset the
increased power cost as a result of higher sales.
UNCERTAINTIES: Several trends or uncertainties may affect Consumers' financial
condition. These trends or uncertainties have, or Consumers reasonably expects
could have, a material impact on net sales, revenues, or income from continuing
electric operations. Such 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 Partnership; 4) electric industry restructuring; 5)
implementation of a frozen PSCR and initiatives to be undertaken to reduce
exposure to high energy prices; 6) nuclear 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
- -------------------------------------------------------------------------------------------------------------------
September 30 1999 1998 Change
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Three months ended $ (6) $ 6 $ (12)
Nine months ended 87 81 6
Twelve months ended 132 134 (2)
====================================================================================================================
</TABLE>
Gas pretax operating income resulted in a loss of $6 million for the three
months ended September 30, 1999 compared to income of $6 million for the same
period in 1998. The decrease of $12 million was primarily the result of a
regulatory disallowance of $7 million and increased operating costs. For the
nine months ended September 30, 1999, gas pretax operating income was $87
million compared to $81 million for the same period in 1998. The increase of $6
million was the result of increased gas deliveries due to colder temperatures
during the 1999 heating season and a regulatory change, 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
CE-3
<PAGE> 55
Consumers' gas customers. These increases were partially offset again by the
regulatory disallowance, as discussed above, higher operation and maintenance
costs, and higher depreciation due to new property and equipment. Gas pretax
operating income was $132 million for the twelve month period ended September
30, 1999 compared to $134 million for the same period in 1998. This decrease
reflects higher depreciation costs and general tax expense associated with new
property and equipment partially offset by higher gas deliveries and lower gas
costs. The following table quantifies these impacts on Pretax Operating Income:
<TABLE>
<CAPTION>
In Millions
- -------------------------------------------------------------------------------------------------------------------
Three Months Nine months Twelve Months
Ended Sept. 30 Ended Sept.30 Ended Sept. 30
Change Compared to Prior Year 1999 vs 1998 1999 vs 1998 1999 vs 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gas deliveries $ 1 $ 21 $ 8
Gas commodity and related revenue (11) - 10
Gas wholesale and retail services activities - 2 3
Operation and maintenance (4) (8) (1)
General taxes, depreciation and other 2 (9) (22)
----------------------------------------------
Total increase (decrease) in pretax operating income $ (12) $ 6 $ (2)
====================================================================================================================
</TABLE>
GAS DELIVERIES: System deliveries for the three month period ended September 30,
1999, including miscellaneous transportation, were 43.6 bcf compared to 42 bcf
for the same 1998 period. This increase of 3.8 percent was primarily due to
weather during the period. System deliveries for the nine months period ended
September 30, 1999, including miscellaneous transportation, were 272.3 bcf
compared to 249.8 bcf for the same 1998 period. This increase of 9.0 percent was
primarily due to colder temperatures during the 1999 heating season. System
deliveries for the twelve month period ended September 30, 1999, including
miscellaneous transportation, were 382.3 bcf compared to 376.7 bcf for the same
1998 period. This increase of 1.5 percent was again primarily the result of
colder temperatures during the 1999 heating season.
COST OF GAS SOLD:
<TABLE>
<CAPTION>
In Millions
- -------------------------------------------------------------------------------------------------------------------
September 30 1999 1998 Change
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Three months ended $ 44 $ 39 $ 5
Nine months ended 428 377 51
Twelve months ended 614 600 14
===================================================================================================================
</TABLE>
The cost increases for the three month period ended September 30, 1999 resulted
from higher gas cost during this period. The cost increases for the nine month
period and the twelve month period ended September 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> 56
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 operating activities from the
sale and transportation of natural gas and from the generation, transmission and
sale of electricity. Cash from operations totaled $534 million and $452 million
for the first nine months of 1999 and 1998, respectively. The $82 million change
was primarily due to higher electric and gas sales and a $93 million decrease in
accounts receivable partially offset by a $55 million increase in gas and coal
inventories. Consumers primarily uses cash derived from operating activities to
maintain and expand electric and gas systems, to retire portions of long-term
debt, and to pay dividends.
INVESTING ACTIVITIES: Cash used for investing activities totaled $(325) million
and $(235) million for the first nine months of 1999 and 1998, respectively. The
$90 million change was primarily the result of a $33 million increase in capital
expenditures, a $15 million increase in electric restructuring implementation
plan costs and the absence of $27 million proceeds from the 1998 sale of two
non-utility partnerships.
FINANCING ACTIVITIES: Cash used in financing activities totaled $(215) million
and $(196) million for the first nine months of 1999 and 1998, respectively.
This $19 million increase in the use of cash was primarily the result of a $200
million retirement of preferred stock and a $35 million increase in the payment
of common stock dividends. Offsetting this use of cash was a $14 million
increase in net proceeds from debt refinancing and a $200 million contribution
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 has credit facilities, lines of
credit and a trade receivable sale program in place as anticipated sources of
funds to fulfill its currently expected capital expenditures. For detailed
information about these sources of funds, see Note 3, Short-Term Financings and
Capitalization, incorporated by reference herein.
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.
CE-5
<PAGE> 57
<TABLE>
<CAPTION>
In Millions
- -------------------------------------------------------------------------------------------------------------------
Years Ended December 31 1999 2000 2001
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Construction $493 $539 $609
Nuclear fuel lease 11 - 19
Capital leases other than nuclear fuel 21 26 22
-------------------------------------------------
$525 $565 $650
===================================================================================================================
Electric utility operations (a) $400 $435 $520
Gas utility operations (a) 125 130 130
-------------------------------------------------
$525 $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 2.6 percent per year in
electric system deliveries for the years 2000 to 2004. This growth rate does not
take into account the possible impact of restructuring or changed regulation on
the industry. Abnormal weather, changing economic conditions, or the developing
competitive market for electricity may affect actual electric sales by Consumers
in future periods.
RESTRUCTURING: Competition affects Consumers' retail electric business. To meet
its challenges, Consumers has 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 of these
contracts have termination and restructuring options available to customers
depending on business and regulatory circumstances that may occur in the future.
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. Detroit Edison, however, had previously
proposed that the parties terminate the pool agreement immediately. If the pool
agreement is terminated, Consumers could, among other alternatives, join a
regional transmission organization. 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' electric earnings are more than its authorized rate of return
and sought an immediate reduction in Consumers' electric rates. The MPSC staff
investigated the complaint and concluded in an April 1998 report that no formal
rate proceeding was warranted at that time. The MPSC has now scheduled this
matter for further proceedings that should lead to more definitive MPSC
resolution in the first quarter of 2000, absent prior agreement among the
parties. In those proceedings, ABATE and intervenors bear the
CE-6
<PAGE> 58
burden of convincing the MPSC to reduce electric rates, which will otherwise
remain unchanged. In its testimony filed in this case, ABATE claimed that
Consumers' received approximately $189 million in excess revenues for 1998. In
its testimony MPSC staff stated that 1998 financial results show excess revenues
of $118 million when actual results were compared to the previously authorized
electric return on equity, but recognized that no definitive conclusion could be
reached from such a simplistic computation about the proper level of future
retail electric rates. The MPSC staff presentation anticipated Consumers would
file testimony and exhibits using traditional ratemaking adjustments and
normalizations which would negate ABATE's claim of excessive earnings. Consumers
has filed such testimony showing that after such normalizations, there is a
revenue deficiency of approximately $3 million. The MPSC staff offered several
alternatives for the MPSC to consider. They involved several different refunds
or reductions which the MPSC could consider separately or in combination, but
which, if made would not result in a permanent future reduction in electric
rates in the amount being sought by ABATE. Consumers believes that ABATE has not
met its burden of proving that a reduction in rates is required. Consumers also
believes that ABATE's request for refunds from 1995 to present is inappropriate
and unlawful; no such retroactive rate adjustment has ever been granted by the
MPSC. Consumers is unable to predict the outcome of this matter.
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. If uncorrected, this event could cause
Consumers to, among other things, delay the 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.
CE-7
<PAGE> 59
Consumers established a formal methodology 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. Consumers established a mainframe test environment in
1997 and established a test environment for network servers and stand-alone
personal computers in mid-1998. 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 nothing reintroduces year 2000
problems into remediated technology. This phase also includes 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 network carriers,
financial institutions, purchasing vendors, and software and hardware technology
vendors. Consumers is addressing the preparedness and risk of these external
businesses through readiness assessment questionnaires.
The following table shows the status of Consumers' Year 2000 Program by phase,
with target dates for completion and percentage complete based upon software and
hardware inventory counts as of September 30, 1999:
<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% 9/99 100% 9/99 100% 6/99 100%
Operating Services 3/98 100% 6/99 100% 9/99 100% 6/99 100%
Information Technology 3/98 100% 9/99 100% 9/99 100% 6/99 100%
Essential Goods
& Services 7/99 100% 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.
CE-8
<PAGE> 60
COST OF REMEDIATION: Consumers expenses the cost of software modifications as
incurred, and capitalizes and amortizes the cost of new software and equipment
over its useful life. The total estimated cost of the Year 2000 Program is $22
million. Costs incurred through September 30, 1999 were $20 million. Consumers'
annual Year 2000 Program costs represent approximately 1% to 10% of a typical
Consumers' annual information technology budget. Consumers funds Year 2000
compliance work primarily from operations. To date, the commitment of Consumers
resources to the year 2000 issue has not deferred any information technology
projects that could have a material adverse effect 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. This type of outcome could result in lost sales and
profits and 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 mitigate
the risks associated with these scenarios further.
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 in anticipation that if one
cannot meet its commitments, others may be able to. Contingency plans provided
for manual dispatching of crews and manual coordination of electrical load
balancing. Consumers revised these plans 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 government agencies. These plans address external factors that could
affect energy delivery and 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.
It cannot guarantee, however, that these costs, plans or time estimates will be
achieved. 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.
CE-9
<PAGE> 61
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,
Consumers enters into all derivative financial instruments 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 $12 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 September 30, 1999, Consumers had outstanding $127 million of
variable-rate debt net of any interest rate swaps. To minimize adverse
interest-rate changes, Consumers entered into fixed interest-rate swaps for a
notional amount of $915 million. Assuming a hypothetical 10 percent adverse
change in market interest rates, Consumers' exposure to earnings is limited to
$1 million. As of September 30, 1999, Consumers has outstanding fixed-rate debt
including fixed-rate swaps of $2.867 billion with a fair value of $2.835
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 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," and variations of such words and
similar expressions, are intended to identify forward-looking statements that
involve risk and uncertainty. Consumers bases these statements upon various
assumptions
CE-10
<PAGE> 62
involving judgments about 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; and year 2000 readiness. All of these
uncertainties are difficult to predict and many 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 from new information, future events or otherwise. Consumers
details certain risk factors periodically in various public filings it makes
with the SEC.
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CE-12
<PAGE> 64
CONSUMERS ENERGY COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30 1999 1998 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
In Millions
<S> <C> <C> <C> <C> <C>
OPERATING REVENUE
Electric .......................................... $ 753 $ 729 $ 2,052 $ 1,990 $ 2,667 $ 2,617
Gas ............................................... 112 117 792 716 1,128 1,092
Other ............................................. 13 14 41 37 55 48
-----------------------------------------------------------------------
878 860 2,885 2,743 3,850 3,757
- ------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation
Fuel for electric generation .................... 98 95 262 246 332 323
Purchased power - related parties ............... 140 143 418 433 559 585
Purchased and interchange power ................. 97 77 226 220 291 282
Cost of gas sold ................................ 44 39 428 377 614 600
Other ........................................... 143 147 423 409 559 548
-----------------------------------------------------------------------
522 501 1,757 1,685 2,355 2,338
Maintenance ....................................... 43 48 122 126 169 177
Depreciation, depletion and amortization .......... 94 93 307 291 418 395
General taxes ..................................... 44 47 148 146 202 199
-----------------------------------------------------------------------
703 689 2,334 2,248 3,144 3,109
- ------------------------------------------------------------------------------------------------------------------------------
PRETAX OPERATING INCOME
Electric .......................................... 168 153 425 378 522 468
Gas ............................................... (6) 6 87 81 132 134
Other ............................................. 13 12 39 36 52 46
-----------------------------------------------------------------------
175 171 551 495 706 648
-----------------------------------------------------------------------
OTHER INCOME (DEDUCTIONS)
Loss on MCV power purchases ....................... - - - (37) - (37)
Dividends and interest from affiliates ............ 4 4 10 11 13 15
Accretion income 1 1 3 5 5 7
Accretion expense (4) (4) (11) (12) (15) (16)
Other, net ........................................ 1 1 10 3 4 -
-----------------------------------------------------------------------
2 2 12 (30) 7 (31)
- ------------------------------------------------------------------------------------------------------------------------------
INTEREST CHARGES
Interest on long-term debt ........................ 35 35 105 103 140 137
Other interest .................................... 12 9 29 28 39 39
Capitalized interest .............................. - - - - - (1)
----------------------------------------------------------------------
47 44 134 131 179 175
- -----------------------------------------------------------------------------------------------------------------------------
NET INCOME BEFORE INCOME TAXES ...................... 130 129 429 334 534 442
INCOME TAXES ........................................ 37 43 144 111 168 137
----------------------------------------------------------------------
NET INCOME BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE ........................... 93 86 285 223 366 305
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR
PROPERTY TAXES, NET OF $23 TAX .................... - - - 43 - 43
----------------------------------------------------------------------
NET INCOME .......................................... 93 86 285 266 366 348
PREFERRED STOCK DIVIDENDS ........................... - 5 6 14 10 19
PREFERRED SECURITIES DISTRIBUTIONS .................. 5 4 14 13 18 18
----------------------------------------------------------------------
NET INCOME AVAILABLE TO COMMON STOCKHOLDER .......... $ 88 $ 77 $ 265 $ 239 $ 338 $ 311
=============================================================================================================================
</TABLE>
The accompanying condensed notes are an integral part of these statements.
CE-13
<PAGE> 65
CONSUMERS ENERGY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------
In Millions
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 285 $ 266 $ 366 $ 348
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization (includes nuclear
decommissioning of $38, $38, $50 and $51, respectively) 307 291 418 395
Loss on MCV power purchases - 37 - 37
Capital lease and other amortization 28 27 39 36
Accretion expense 11 12 15 16
Accretion income - abandoned Midland project (3) (5) (5) (7)
Deferred income taxes and investment tax credit (7) 21 (8) 24
Undistributed earnings of related parties (40) (37) (53) (48)
MCV power purchases (45) (48) (61) (63)
Cumulative effect of accounting change - (66) - (66)
Changes in other assets and liabilities (2) (46) (4) 81
-------------------------------------------
Net cash provided by operating activities 534 452 707 753
- -----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under capital lease) (291) (258) (402) (358)
Cost to retire property, net (62) (65) (79) (68)
Investments in nuclear decommissioning trust funds (38) (38) (50) (51)
Investment in Electric Restructuring Implementation Plan (24) (9) (31) (10)
Proceeds from FMLP 10 12 10 12
Proceeds from nuclear decommissioning trust funds 29 43 38 43
Proceeds from the sale of two non-utility partnerships - 27 - 27
Associated company preferred stock redemption 50 50 50 50
Other 1 3 - 4
-------------------------------------------
Net cash used in investing activities (325) (235) (464) (351)
- -----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of common stock dividends (208) (173) (276) (278)
Retirement of preferred stock (200) - (200) -
Payment of capital lease obligations (28) (26) (35) (36)
Retirement of bonds and other long-term debt (23) (759) (119) (759)
Preferred securities distributions (14) (13) (18) (18)
Payment of preferred stock dividends (9) (14) (14) (19)
Proceeds from bank loans 15 - 15 -
Increase (decrease) in notes payable, net 102 (75) 15 (87)
Proceeds from senior notes - 914 130 914
Contribution from (return of equity to) stockholder 150 (50) 250 (100)
-------------------------------------------
Net cash provided by (used in) financing activities (215) (196) (252) (383)
- -----------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND
TEMPORARY CASH INVESTMENTS (6) 21 (9) 19
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 25 7 28 9
------------------------------------------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 19 $ 28 $ 19 $ 28
===========================================================================================================
</TABLE>
CE-14
<PAGE> 66
<TABLE>
<CAPTION>
NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------
In Millions
OTHER CASH FLOW ACTIVITIES AND NON-CASH INVESTING AND FINANCING ACTIVITIES WERE:
CASH TRANSACTIONS
<S> <C> <C> <C> <C>
Interest paid (net of amounts capitalized) $ 131 $ 128 $ 163 $ 165
Income taxes paid (net of refunds) 155 113 194 108
NON-CASH TRANSACTIONS
Nuclear fuel placed under capital lease $ 2 $ 21 $ 27 $ 21
Other assets placed under capital leases 11 11 14 12
===========================================================================================================
</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-15
<PAGE> 67
CONSUMERS ENERGY COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS SEPTEMBER 30 SEPTEMBER 30
1999 DECEMBER 31 1998
(UNAUDITED) 1998 (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------
In Millions
<S> <C> <C> <C>
PLANT (AT ORIGINAL COST)
Electric $ 6,920 $ 6,720 $ 6,641
Gas 2,427 2,360 2,328
Other 25 25 26
---------------------------------------
9,372 9,105 8,995
Less accumulated depreciation, depletion and amortization 5,558 4,862 4,748
---------------------------------------
3,814 4,243 4,247
Construction work-in-progress 179 165 165
---------------------------------------
3,993 4,408 4,412
- ----------------------------------------------------------------------------------------------------------------
INVESTMENTS
Stock of affiliates 147 241 227
First Midland Limited Partnership 238 240 237
Midland Cogeneration Venture Limited Partnership 240 209 199
---------------------------------------
625 690 663
- ----------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and temporary cash investments at cost, which approximates market 19 25 28
Accounts receivable and accrued revenue, less allowances
of $4, $5 and $5, respectively 22 114 -
Accounts receivable - related parties 62 63 77
Inventories at average cost
Gas in underground storage 288 219 276
Materials and supplies 58 67 65
Generating plant fuel stock 37 43 29
Postretirement benefits 25 25 25
Prepaid property taxes and other 85 162 124
---------------------------------------
596 718 624
- ----------------------------------------------------------------------------------------------------------------
NON-CURRENT ASSETS
Regulatory assets
Unamortized nuclear costs 506 - -
Postretirement benefits 349 372 380
Abandoned Midland Project 53 71 77
Other 128 133 137
Nuclear decommissioning trust funds 572 557 510
Other 167 214 113
---------------------------------------
1,775 1,347 1,217
- ----------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 6,989 $ 7,163 $ 6,916
================================================================================================================
</TABLE>
CE-16
<PAGE> 68
<TABLE>
<CAPTION>
STOCKHOLDERS' INVESTMENT AND LIABILITIES SEPTEMBER 30 SEPTEMBER 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 645 502 402
Revaluation capital 41 68 57
Retained earnings since December 31, 1992 437 434 429
-----------------------------------------
1,964 1,845 1,729
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 2,009 2,007 1,977
Non-current portion of capital leases 84 100 77
-----------------------------------------
4,321 4,410 4,241
- ------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases 148 152 146
Notes payable 317 215 302
Accounts payable 156 190 160
Accrued taxes 89 238 109
Accounts payable - related parties 81 79 72
Power purchases 47 47 47
Accrued interest 31 36 26
Deferred income taxes 5 9 4
Accrued refunds 19 11 12
Other 206 138 143
-----------------------------------------
1,099 1,115 1,021
- ------------------------------------------------------------------------------------------------------------------
NON-CURRENT LIABILITIES
Deferred income taxes 620 666 661
Post-retirement benefits 425 456 467
Deferred investment tax credit 127 134 142
Regulatory liabilities for income taxes, net 121 87 83
Power purchases 87 121 134
Other 189 174 167
-----------------------------------------
1,569 1,638 1,654
- ------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 1 and 2)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $6,989 $7,163 $6,916
==================================================================================================================
</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.
CE-17
<PAGE> 69
CONSUMERS ENERGY COMPANY
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 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 645 452 502 452 402 502
Stockholder's contribution - - 150 - 250 -
Return of stockholder's contribution - (50) - (50) - (100)
Capital stock reacquired - - (7) - (7) -
--------------------------------------------------------------------
At end of period 645 402 645 402 645 402
- ----------------------------------------------------------------------------------------------------------------
REVALUATION CAPITAL
At beginning of period 57 59 68 58 57 45
Change in unrealized investment -
gain (loss) (a) (16) (2) (27) (1) (16) 12
----------------------------------------------------------------------
At end of period 41 57 41 57 41 57
- ----------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
At beginning of period 438 396 434 363 429 396
Net income (a) 93 86 285 266 366 348
Common stock dividends declared (89) (44) (262) (173) (330) (278)
Preferred stock dividends declared - (5) (6) (14) (10) (19)
Preferred securities distributions (5) (4) (14) (13) (18) (18)
--------------------------------------------------------------------
At end of period 437 429 437 429 437 429
- ----------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKHOLDER'S EQUITY $1,964 $1,729 $1,964 $1,729 $1,964 $1,729
================================================================================================================
(a) DISCLOSURE OF COMPREHENSIVE INCOME:
Revaluation capital
Unrealized investment - gain (loss),
net of tax of $(9), $(1), $(15), $-
$(9) and $7, respectively $ (16) $ (2) $ (27) $ (1) $ (16) $ 12
Net income 93 86 285 266 366 348
-------------------------------------------------------------------
Total Comprehensive Income $ 77 $ 84 $ 258 $ 265 $ 350 $ 360
====================================================================
</TABLE>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
CE-18
<PAGE> 70
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 a 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 Consumers recognizes revenues, expenses, assets and
liabilities.
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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 expected 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 September 30, 1999,
Consumers had a net investment in energy supply facilities of $934 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. In 1997 the EPA revised these standards to impose further limitations
on nitrogen oxide and small particulate-related emissions. In May 1999 a United
States Court of Appeals ruled that the grant of authority to the EPA to revise
the standards as
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the EPA did, would amount to an unconstitutional delegation of legislative
power. As a result, the standards will not be implemented under the 1997 rule.
The EPA has requested a rehearing of the court's decision.
In September 1998, based in part upon the 1997 standards, the EPA Administrator
issued 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. In May 1999 the United States Court of Appeals
granted an indefinite stay of the submission date for the State of Michigan's
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.
The preliminary estimate of capital expenditures to reduce nitrogen
oxide-related emissions to the level proposed by the State of Michigan for
Consumers' fossil-fueled generating units ranges from $150 million to $290
million, in 1999 dollars. If Consumers had to meet the EPA's 1997 proposed
requirements it is estimated that the cost to Consumers would be between $290
million and $500 million, in 1999 dollars. In both these cases the lower
estimate represents the capital expenditure level that would satisfactorily meet
the proposed emissions limits but would result in higher operating expense. The
higher estimate in the range includes expenditures that result in lower
operating costs while complying with the proposed emissions limit. Consumers
anticipates that these capital expenditures will be incurred between 1999 and
2004, or between 1999 and 2003 if the EPA's limits are imposed.
Consumers may need an equivalent amount of capital expenditures to comply with
the new small particulate standards some time after 2004 if those standards
become effective.
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.
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At September 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.
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 October 1999, the Attorney General
filed an application for leave to appeal this decision to the Michigan Supreme
Court.
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
(subsequently extended to September 1999); 3) suspension of the PSCR process as
discussed below; and 4) the right of all customers to choose
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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 would 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 March 1999, Consumers received MPSC electric
restructuring orders, which generally supported Consumers' implementation plan.
Consumers began implementing electric retail customer open access in September
1999, and will extend open access to 750 MW of Consumers' retail market by 2001.
On January 1, 2002, all of Consumers' electric customers will have the right to
choose generation suppliers.
There are numerous appeals pending at the Court of Appeals relating to the
MPSC's restructuring orders. 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. Although
Consumers filed an appeal of the restructuring orders which asked the court to
rule that the MPSC could not mandate industry restructuring, Consumers has
subsequently requested to have that appeal dismissed. 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. Following receipt of comments, the MPSC issued an order on August 17,
1999 finding that it has jurisdiction to approve rates, terms, and conditions
for electricity retail wheeling (also known as electric customer choice) if a
utility voluntarily chooses to offer that service. The August 17th order also
requested that Consumers file a statement if it intended to continue with its
electric customer choice program. On September 1, 1999 Consumers filed a
statement reaffirming its decision to continue carrying out the customer choice
program as previously approved by the MPSC. ABATE and the Attorney General have
each appealed the August 17th order to the Court of Appeals. Both ABATE and the
Attorney General subsequently filed applications with the Michigan Supreme Court
asking that Court to bypass the Court of Appeals and immediately review the
lawfulness of the August 17th order. It is uncertain how the issues raised by
the MPSC's August 17th order will be resolved by the regulatory process, the
appellate courts or by legislation codifying the retail wheeling and related
Transition Cost recovery issues.
Several bills relative to electric restructuring have been introduced in the
Michigan legislature for consideration in the 1999-2000 legislative session.
Although Consumers has not specifically supported any of these bills, Consumers
believes legislation is desirable to provide statutory support for the MPSC
orders. Consumers is uncertain as to whether legislation will be enacted and
what effect any enacted legislation will have on Consumers. Similar uncertainty
exists with respect to the possibility that federal legislation restructuring
the electric power industry will be enacted. A variety of bills changing
existing federal regulation of the industry and potentially affecting state
regulation have been introduced in Congress in recent years. None has been
enacted.
Consumers believes progress is being made in discussions with its major
commercial and industrial customers, which, if successful, would result in
agreement on the need for, and substance of, electric restructuring legislation
in Michigan and have the effect of resolving
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Consumers' rate proceedings pending before the MPSC. While there are no
assurances that an agreement or legislation will result, Consumers is optimistic
that a positive outcome of the discussions can be achieved. 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 suspension, customers
previously subject to the PSCR mechanism 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, when the PSCR process was employed, any change
in power supply costs was passed through to customers. In order to reduce the
risk of high energy prices during peak demand periods, Consumers purchased daily
call options, at a cost of approximately $19 million, to insure a reliable
source of energy during the months of June through September 1999, and expects
to use a similar strategy in the future. Consumers is planning to have
sufficient generation and purchased capacity for approximately a 15 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 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 a 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 necessarily 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 by December 31, 1999.
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.
Summarized Statements of Income for CMS Midland and CMS Holdings-
<TABLE>
<CAPTION>
In Millions
- ---------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended Twelve Months Ended
September 30 1999 1998 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Pretax operating income $13 $13 $39 $36 $52 $46
Income taxes and other 4 4 12 11 16 14
- ---------------------------------------------------------------------------------------------------------
Net income $9 $9 $27 $25 $36 $32
=========================================================================================================
</TABLE>
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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 these capacity costs, Consumers will
recover these increases through an adjustment to the currently frozen PSCR
factor that will be effective through 2001. Consumers expects to recover the
remaining increases through the Transition Cost true-up process and through
further adjustments to the PSCR factor. 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 resell to
PECO its capacity and energy purchases 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 PECO
agreement. If used as an offset to electric customers Transition Cost
responsibility, Consumers estimates that there could be a reduction of as much
as $58 million (on a net present value basis) of Transition Cost related to the
MCV PPA. In an order issued in April 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. In response to Consumers' and other parties' requests for
clarification and rehearing, in an August 1999 opinion, the MPSC partially
granted the relief Consumers requested on rehearing and attached certain
additional conditions to its approval. Those conditions relate to Consumers
continued decision to carry out the electricity customer choice program (which
Consumers has affirmed as discussed above) and a determination to revise its
capacity solicitation process (which Consumers has filed but is awaiting an MPSC
decision). The August opinion is a companion order to a power supply cost
reconciliation order issued on the same date in another case. This order affects
the level of frozen power supply costs recoverable in rates during future years
when the transaction with PECO would be taking place. Consumers filed a motion
for clarification of the order relating to the PECO agreement.
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 September 30, 1999 and September 30, 1998, the remaining after-tax
present value of the estimated future PPA liability associated with the 1992
loss totaled $87 million and $118 million, respectively. At September 30, 1999,
the undiscounted after-tax amount associated with this liability totaled $148
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,
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Consumers has an accumulated unrecovered after-tax shortfall of $24 million as
of September 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 $35 $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 annual 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 September
30, 1999 Consumers had loaded 18 dry storage casks with spent nuclear fuel at
Palisades. 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.
On October 15, 1999 a planned forty-day refueling and maintenance outage began
at Palisades. Consumers will replace certain nuclear fuel assemblies and 2
low-pressure steam turbines during the outage.
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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 12 weeks of any outage, but would cover most of such costs
during the next 52 weeks of the outage, followed by reduced coverage to 80
percent for 110 additional weeks. 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,
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. Settlement discussions are underway which could further reduce
the annual recovery. 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 September 30, 1999, Consumers had an investment in nuclear
decommissioning trust funds of $392 million for Palisades and $180 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
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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
nine months of 1999, Consumers spent $37 million for the decommissioning and
withdrew $29 million from the Big Rock nuclear decommissioning trust fund. In
total, Consumers has spent $112 million for the decommissioning and withdrew
$103 million from the Big Rock nuclear decommissioning trust fund. These
activities had no impact on net income.
CAPITAL EXPENDITURES: Consumers estimates electric capital expenditures,
including new lease commitments, of $400 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. Consumers has completed
initial investigations at the 23 sites. 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 has estimated its costs related to further investigation
and remedial action for all 23 sites using the Gas Research
Institute-Manufactured Gas Plant Probabilistic Cost Model. Using this model the
costs are estimated to be between $66 million and $118 million. These estimates
are based on undiscounted 1999 costs. Using the low end of the range, Consumers
estimates its remaining expenditures at $63 million as of September 30, 1999 and
has accrued a liability for the same amount and also established a corresponding
regulatory asset. 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.
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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, and allow up to 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
September 30, 1999, more than 181,000 customers chose alternative gas suppliers,
representing approximately 42 bcf of gas load. The program allows Consumers to
earn a margin on the gas commodity provided it can continue to purchase gas at
prices below the $2.84/mcf cost allowed in its rate. 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 September 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: 3 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 an average price of 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.
CE-29
<PAGE> 81
3: SHORT-TERM FINANCINGS AND CAPITALIZATION
AUTHORIZATION: At September 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 $275 million and $390 million of long-term securities with
maturities up to 30 years for refinancing purposes and for general corporate
purposes, respectively.
SHORT-TERM FINANCING: Consumers has an unsecured $300 million credit facility
and unsecured lines of credit aggregating $135 million. These facilities are
available to finance seasonal working capital requirements and to pay for
capital expenditures between long-term financings. At September 30, 1999, a
total of $317 million was outstanding at a weighted average interest rate of 6.1
percent, compared with $302 million outstanding at September 30, 1998, at a
weighted average interest rate of 6.3 percent. In January 1999, Consumers
renegotiated a variable-to-fixed interest rate swap totaling $175 million. In
September 1999, Consumers entered into two variable-to-fixed interest rate swaps
totaling $740 million.
Consumers also has in place a $325 million trade receivables sale program. At
September 30, 1999 and 1998, receivables sold under the program totaled $314
million and $307 million, respectively. Accounts receivable and accrued revenue
in the Consolidated Balance Sheets have been reduced to reflect receivables
sold.
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.
Subsequent to quarter end, 7 million shares of 9.25 percent Trust Preferred
Securities were issued and sold through Consumers Energy Company Financing III,
a wholly owned business trust consolidated with Consumers. Net proceeds from the
sale totaled approximately $170 million. Consumers formed the trust for the sole
purpose of issuing the Trust Preferred Securities. Consumers' obligations with
respect to the Trust Preferred Securities under the related tax-deductible
notes, under the indenture through which Consumers issued the notes, under
Consumers' guarantee of the Trust Preferred Securities, and under the
declaration by the trust, taken together, constitute a full and unconditional
guarantee by Consumers of the trust's obligations under the Trust Preferred
Securities.
Under the provisions of its Articles of Incorporation, Consumers had $318
million of unrestricted retained earnings available to pay common dividends at
September 30, 1999. In May 1999, Consumers declared and paid a $76 million
common dividend. In July 1999, Consumers declared a $35 million common dividend
which was paid in August 1999. In September 1999, Consumers declared a $55
million common dividend payable in November 1999.
CE-30
<PAGE> 82
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 September 30, 1999 and 1998, the related
consolidated statements of income and common stockholder's equity for the
three-month, nine-month, and twelve-month periods then ended, and the related
consolidated statements of cash flows for the nine-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.
Detroit, Michigan,
November 10, 1999.
CE-31
<PAGE> 83
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CE-32
<PAGE> 84
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 completed the exchange offer in 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-acquisition period and post-acquisition period financial results are
presented but are not comparable (See Note 1).
PE-1
- --------------------------------------------------------------------------------
<PAGE> 85
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
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
September 30 1999 1998 Change
- --------------------------------------------------------------------------------------
Nine Months Ended $ 62 $ 64 $ (2)
======================================================================================
</TABLE>
For the three months ended September 30, 1999, net income was $14 million, up $3
million from the corresponding period in 1998. Total natural gas transportation
volumes for the three months ended September 30, 1999 increased 7 percent from
the same period in 1998. For the nine months ended September 30, 1999, net
income was $62 million, down $2 million from the corresponding period in 1998.
Total natural gas transportation volumes for the nine months ended September 30,
1999 decreased 2 percent from the same period in 1998.
Revenues for the three months and the nine months ended September 30, 1999
decreased $2 million and $19 million, respectively, from the corresponding
periods in 1998 due primarily to declining reservation rates and revenues and
the transfer of Panhandle Field Services to Duke Energy in March 1999, partially
offset by Trunkline LNG terminalling revenues in 1999.
Operating expenses for the three months and the nine months ended September 30,
1999 decreased $7 million and $18 million, respectively, from the corresponding
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 nine months ended September
30, 1999 increased $12 million and $26 million from the corresponding periods in
1998 primarily due to interest on the new debt assumed by Panhandle (See Note
11). Other interest decreased $14 million and $27 million for the three months
and nine months ended September 30, 1999 from the corresponding 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).
PE-2
- --------------------------------------------------------------------------------
<PAGE> 86
<TABLE>
<CAPTION>
OPERATING INCOME:
In Millions
- --------------------------------------------------------------------------------------------------------
Nine Months
Ended September 30
Change Compared to Prior Year 1999 vs. 1998
- --------------------------------------------------------------------------------------------------------
<S> <C>
Commodity revenue $ (1)
Reservation and other revenues (18)
Operations and maintenance 19
General taxes (1)
--------------------------
Total Change $ (1)
========================================================================================================
</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 $122 million and $119 million for the
first nine months of 1999 and 1998, respectively. Panhandle uses operating cash
primarily to maintain and expand its gas systems and pay dividends.
INVESTING ACTIVITIES: Panhandle's consolidated net cash used in investing
activities totaled $1.9 billion and $119 million for the first nine 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 nine 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 being satisfied
by cash from operations.
PE-3
- --------------------------------------------------------------------------------
<PAGE> 87
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 financial position, liquidity, or results of operations.
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.
PE-4
- --------------------------------------------------------------------------------
<PAGE> 88
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.
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 had 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 September 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.
PE-5
- --------------------------------------------------------------------------------
<PAGE> 89
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.
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> 90
PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In millions)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30
----------------------
Nine
Months
Mar. 29- Jan. 1- Ended
Sep. 30, Mar. 28 Sep. 30,
1999 1998 1999 1999 1998
------ ------ -------- ------- --------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUE
Transportation and storage of natural gas $ 98 $ 109 $ 199 $ 123 $ 346
Other 9 - 17 5 17
----- ----- ----- ----- -----
Total operating revenue 107 109 216 128 363
----- ----- ----- ----- -----
OPERATING EXPENSES
Operation and maintenance 44 51 85 40 144
Depreciation and amortization 15 15 30 14 44
General taxes 7 7 14 7 20
----- ----- ----- ----- -----
Total operating expenses 66 73 129 61 208
----- ----- ----- ----- -----
PRETAX OPERATING INCOME 41 36 87 67 155
OTHER INCOME (DEDUCTIONS), NET - 1 - 4 6
INTEREST CHARGES
Interest on long-term debt 18 6 39 5 18
Other interest - 14 - 13 40
----- ----- ----- ----- -----
Total Fixed Charges 18 20 39 18 58
----- ----- ----- ----- -----
NET INCOME BEFORE INCOME TAXES 23 17 48 53 103
INCOME TAXES 9 6 19 20 39
----- ----- ----- ----- -----
CONSOLIDATED NET INCOME $ 14 $ 11 $ 29 $ 33 $ 64
===== ===== ===== ===== =====
</TABLE>
The accompanying condensed notes are an integral part of these statements.
PE-7
<PAGE> 91
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PE-8
<PAGE> 92
PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
March 29- January 1- Nine Months Ended
September 30, 1999 March 28, 1999 September 30 ,1998
------------------ -------------- ------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 29 $ 33 $ 64
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 31 14 46
Deferred income taxes 14 - (7)
Changes in current assets and liabilities 35 (29) 2
Other, net (8) 3 14
------- ------- -------
Net cash provided by operating activities 101 21 119
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of Panhandle (1,900) - -
Capital and investment expenditures (27) (4) (66)
Net decrease (increase) in advances receivable - parent - (17) (53)
Retirements and other - - -
------- ------- -------
Net cash used in investing activities (1,927) (21) (119)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Contribution from parent 1,116 - -
Proceeds from senior notes 785 - -
Net decrease (increase) in note receivable - parent (46) - -
Dividends paid (29) - -
------- ------- -------
Net cash provided by financing activities 1,826 - -
------- ------- -------
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) $ 30 $ 12 $ 64
Income taxes paid (net of refunds) 5 37 56
</TABLE>
The accompanying condensed notes are an integral part of these statements.
PE-9
<PAGE> 93
PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
September 30,
1999 December 31,
(Unaudited) 1998
------------- ------------
<S> <C> <C>
ASSETS
PROPERTY, PLANT AND EQUIPMENT
Cost $1,500 $2,760
Less accumulated depreciation and amortization 31 1,798
------ ------
Sub-total 1,469 962
Construction work-in-progress 28 17
------ ------
Net property, plant and equipment 1,497 979
------ ------
INVESTMENTS
Advances receivable - related parties - 738
Investment in affiliates 2 44
Other - 6
------ ------
Total investments and other assets 2 788
------ ------
CURRENT ASSETS
Receivables 89 94
Inventory and supplies 45 55
Deferred income taxes 11 2
Current portion of regulatory assets - 6
Note receivable - related parties 46 -
Other 28 23
------ ------
Total current assets 219 180
------ ------
NON-CURRENT ASSETS
Goodwill, net 702 -
Deferred income taxes - -
Debt expense 12 11
Other 3 15
------ ------
Total non-current assets 717 26
------ ------
TOTAL ASSETS $2,435 $1,973
====== ======
</TABLE>
The accompanying condensed notes are an integral part of these statements.
PE-10
<PAGE> 94
<TABLE>
<CAPTION>
September 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 - 91
------ ------
Total common stockholder's equity 1,128 558
Long-term debt 1,094 299
------ ------
Total capitalization 2,222 857
------ ------
CURRENT LIABILITIES
Note payable - PanEnergy - 675
Accounts payable 5 56
Accrued taxes 11 58
Accrued interest 10 8
Other 121 117
------ ------
Total current liabilities 147 914
------ ------
NON-CURRENT LIABILITIES
Deferred income taxes - 99
Other 66 103
------ ------
Total non-current liabilities 66 202
------ ------
COMMITMENTS AND CONTINGENCIES (NOTES 6 AND 7)
TOTAL STOCKHOLDER'S INVESTMENT AND LIABILITIES $2,435 $1,973
====== ======
</TABLE>
The accompanying condensed notes are an integral part of these statements.
PE-11
<PAGE> 95
PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
(UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
March 29- January 1- Nine Months Ended
September 30, 1999 March 28, 1999 September 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 29 33 64
Assumption of net liability by PanEnergy - 57 -
Common stock dividends (29) (81) (2)
------- ------- -------
At end of period - 101 96
------- ------- -------
TOTAL COMMON STOCKHOLDER'S EQUITY $ 1,128 $ 568 $ 563
======= ======= =======
</TABLE>
The accompanying condensed notes are an integral part of these statements.
PE-12
<PAGE> 96
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 completed
the exchange offer in September 1999.
PE-13
<PAGE> 97
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, certain components of the financial statements may 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 711
Regulatory Assets, Net (15)
Liabilities (39)
Debt Valuation (6)
Other 10
- ------------------------------------------------------------
Total $ 1,306
============================================================
</TABLE>
Goodwill of approximately $711 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 may 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.
Pro forma 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
- -----------------------------------------------------------------------------------------------------------------
Nine Months Ended Nine Months Ended Year Ended
September 30, 1999 September 30, 1998 December 31, 1998
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 340 $ 339 $ 470
Net Income 56 44 60
Total Assets 2,435 2,437 2,477
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
PE-14
<PAGE> 98
2. REGULATORY MATTERS
Effective August 1996, Trunkline placed into effect a general rate increase,
subject to refund. Hearings were completed in October 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. On September 16, 1999, Trunkline filed with FERC a
settlement agreement which would resolve certain issues in this proceeding and
would require Trunkline to refund approximately $2 million. The ALJ has
certified the settlement; it is currently pending review by FERC.
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 September 30, 1999 and December 31, 1998,
accounts receivable included $53 million and $50 million, respectively, due from
natural gas producers, and other current liabilities included $53 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.
On November 8, 1999, the FERC issued a letter order dismissing Trunkline's
filing without prejudice to refiling the abandonment to reflect changed
circumstances. Trunkline continues to evaluate alternatives regarding the
26-inch pipeline.
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. The May 19, 1999 compliance filing
is pending FERC approval.
PE-15
<PAGE> 99
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
- -----------------------------------------------------------------------
September 30, December 31,
1999 1998
- -----------------------------------------------------------------------
<S> <C> <C>
Receivables $ 9 $ 2
Accounts payable - 46
Taxes accrued - 35
- -----------------------------------------------------------------------
</TABLE>
Interest charges included $14 million for the three months ended September 30,
1998; $13 million and $42 million for the nine months ended September 30, 1999
and 1998, respectively, for interest associated with notes payable to a
subsidiary of Duke Energy. Other income includes $1 million for the nine months
ended September 30, 1999 for interest on notes receivable from CMS Capital.
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 September 30, 1999 and
December 31, 1998, other current assets included $21 million and $20 million,
respectively, and other current liabilities included $25 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.
LEE 8 STORAGE. Panhandle, through its subsidiary Panhandle Storage, owns a 40
percent interest in the Lee 8 partnership, which operates a 1.4 bcf natural gas
storage facility in Michigan. This interest results from the contribution of the
stock of Panhandle Storage to Panhandle Eastern Pipe Line Company by CMS
Panhandle Holding on March 29, 1999.
PE-16
<PAGE> 100
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.
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
$38 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> 101
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> 102
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 completed the exchange offer in 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> 103
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
September 30, 1999, and the related consolidated statements of income, common
stockholder's equity and cash flows for the three-month and nine-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.
Houston, Texas
November 5, 1999
PE-20
<PAGE> 104
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
quarters ended March 31, 1999 and June 30, 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> 105
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
RECENT SALES OF UNREGISTERED EQUITY SECURITIES
On November 10, 1999, CMS Energy issued in a private placement pursuant
to Section 4(2) of the Securities Act 125,000 shares of its Mandatorily
Convertible Preferred Stock to CMS Share Trust, a Delaware statutory business
trust, in exchange for all of the beneficial interest in such trust.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) LIST OF EXHIBITS
(3)(a) - Restated Articles of Incorporation of CMS Energy.
(4)(a) - Third Supplemental Indenture dated as of November 4, 1999, between
Consumers and The Bank of New York, as Trustee.
(12) - CMS Energy: Statements regarding computation of Ratio of Earnings to
Fixed Charges
(15)(a) - CMS Energy: Letter of Independent Public Accountant
(15)(b) - Consumers: 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
(B) REPORTS ON FORM 8-K
CMS Energy filed Current Reports on Form 8-K on July 1, 1999 covering matters
pursuant to "Item 5. Other Events" and "Item 7. Exhibits", on July 13, 1999
covering matters pursuant to "Item 7. Exhibits", and on September 9, 1999,
September 24, 1999, October 18, 1999 and October 26, 1999 each covering matters
pursuant to "Item 5. Other Events".
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", and on September 9,
1999, September 24, 1999, October 18, 1999 and October 26, 1999 each covering
matters pursuant to "Item 5. Other Events".
Panhandle Eastern Pipe Line Company filed 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."
CO-2
<PAGE> 106
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: November 12, 1999 By: /s/ A.M. Wright
-------------------------------------------
Alan M. Wright
Senior Vice President and
Chief Financial Officer
CONSUMERS ENERGY COMPANY
-------------------------------------------
(Registrant)
Dated: November 12, 1999 By: /s/ A.M. Wright
-------------------------------------------
Alan M. Wright
Senior Vice President and
Chief Financial Officer
PANHANDLE EASTERN PIPE LINE COMPANY
-------------------------------------------
(Registrant)
Dated: November 12, 1999 By: /s/ A.M. Wright
-------------------------------------------
Alan M. Wright
Senior Vice President and
Chief Financial Officer
<PAGE> 107
(This page intentionally left blank)
CO-4
<PAGE> 108
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
(3)(a) Restated Articles of Incorporation of CMS Energy.
(4)(a) Third Supplemental Indenture dated as of November 4, 1999,
between Consumers and The Bank of New York, as Trustee.
(12) CMS Energy: Statements regarding computation of Ratio of
Earnings to Fixed Charges
(15)(a) CMS Energy: Letter of Independent Public Accountant
(15)(b) Consumers: 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
<PAGE> 1
EXHIBIT (3)(a)
STATE OF MICHIGAN
MICHIGAN DEPARTMENT OF CONSUMER AND INDUSTRY SERVICES
CORPORATION, SECURITIES AND LAND DEVELOPMENT BUREAU
LANSING, MICHIGAN
RESTATED ARTICLES OF INCORPORATION
(Profit Corporation)
Corporation Identification Number 485-283
These Restated Articles of Incorporation of CMS Energy Corporation (the
"Corporation") are executed pursuant to the provisions of Sections 641 through
651, Act 284, Public Acts of 1972, as amended, (the "Act"). An amendment to
these Restated Articles of Incorporation was authorized by the Board of
Directors at its meeting held on September 24, 1999 and by a Special Committee
of the Board of Directors held on November 2, 1999, pursuant to the provisions
of Section 642 of the Act in order to restate and integrate and do not further
amend the Articles.
The present name of the Corporation is CMS Energy Corporation. There are
no former names.
The date of filing the original Articles of Incorporation in Michigan
was February 26, 1987.
RESTATED ARTICLES OF INCORPORATION
The following Restated Articles of Incorporation supersede the original
Articles as amended and shall be the Articles of Incorporation of CMS Energy
Corporation.
ARTICLE I
The name of the corporation is CMS Energy Corporation (hereinafter
called the "Corporation").
ARTICLE II
The purpose or purposes for which the Corporation is organized is to
engage in any activity within the purposes for which corporations may be
organized under the Business Corporation Act of Michigan.
ARTICLE III
The total number of shares of all classes of stock which the Corporation
shall have authority to issue is 320,000,000, of which 10,000,000 shares, par
value $.01 per share, are of a class designated Preferred Stock ("Preferred
Stock"), 250,000,000 shares, par value $.01 per share, are of a class designated
Common Stock ("CMS Energy Common Stock"), and 60,000,000 shares, no par value,
are of a class designated Class G Common Stock ("Class G Common Stock"). The CMS
Energy Common Stock and the Class G Common Stock are hereinafter collectively
referred to as the "Common Stock".
The statement of the designations and the voting and other powers,
preferences and rights, and the qualifications, limitations or restrictions
thereof, of the Common Stock and of the Preferred Stock is as follows:
1
<PAGE> 2
PREEMPTIVE RIGHTS
The holders of shares of Preferred Stock or of Common Stock shall have
no preemptive rights to subscribe for or purchase any additional issues of
shares of the capital stock of the Corporation of any class now or hereafter
authorized or any Preferred Stock, bonds, debentures, or other obligations or
rights or options convertible into or exchangeable for or entitling the holder
or owner to subscribe for or purchase any shares of capital stock, or any rights
to exchange shares issued for shares to be issued.
PREFERRED STOCK
The shares of Preferred Stock may be issued from time to time in one or
more series with such relative rights and preferences of the shares of any such
series as may be determined by the Board of Directors. The Board of Directors is
authorized to fix by resolution or resolutions adopted prior to the issuance of
any shares of each particular series of Preferred Stock, the designation,
powers, preferences and relative, participating, optional and other rights, and
the qualifications, limitations and restrictions thereof, if any, of such
series, including, but without limiting the generality of the foregoing, the
following:
(a) The rate of dividend, if any;
(b) The price at and the terms and conditions upon which shares
may be redeemed;
(c) The rights, if any, of the holders of shares of the series
upon voluntary or involuntary liquidation, merger, consolidation,
distribution or sale of assets, dissolution or winding up of the
Corporation;
(d) Sinking fund or redemption or purchase provisions, if any, to
be provided for shares of the series;
(e) The terms and conditions upon which shares may be converted
into shares of other series or other capital stock, if issued with the
privilege of conversion; and
(f) The voting rights in the event of default in the payment of
dividends or under such other circumstances and upon such conditions as
the Board of Directors may determine.
No holder of any shares of any series of Preferred Stock shall be entitled to
vote in the election of directors or in respect of any other matter except as
may be required by the Michigan Business Corporation Act, as amended, or as is
permitted by the resolution or resolutions adopted by the Board of Directors
authorizing the issue of such series of Preferred Stock.
Series Established By Articles
There is hereby established one series of Preferred Stock designated as
Series A Mandatorily Convertible Preferred Stock.
Series A Mandatorily Convertible Preferred Stock
Section 1. Dividends.
(a) The holders of the Mandatorily Convertible Preferred Stock shall not be
entitled to receive any dividends prior to, or with respect to any period ending
prior to, the Rate Reset Date. The holders of the Mandatorily Convertible
2
<PAGE> 3
Preferred Stock, in preference to the rights of holders of any junior stock but
subject to the rights of holders of any senior stock, shall be entitled to
receive, when, as and if declared by the Board of Directors out of any funds
legally available therefor, cumulative cash dividends from the Rate Reset Date
at the Reset Dividend Rate, and no more, payable on the dates as set forth in
this Section 3. Dividends shall accrue on any given share of Mandatorily
Convertible Preferred Stock from the Rate Reset Date. Dividends shall be payable
quarterly in arrears on each January 1, April 1, July 1, and October 1
commencing on the first such date following the Rate Reset Date (each such date
being hereinafter referred to as a "Dividend Payment Date"), or, if any Dividend
Payment Date is not a Business Day, then the Dividend Payment Date shall be the
next succeeding Business Day. Each such dividend shall be payable to holders of
record as they appear on the books of the Corporation or any transfer agent for
the Mandatorily Convertible Preferred Stock on such record dates as shall be
fixed by the Board of Directors subject to applicable law (which record date
shall be no more than 60 days prior to the date fixed for the payment thereof).
Dividends on the Mandatorily Convertible Preferred Stock shall accrue on a daily
basis commencing on and including the Rate Reset Date, and accrued dividends for
each dividend period or portion thereof shall cumulate, to the extent not paid,
as of the date on which they were to have been paid. A dividend period shall
commence on a Dividend Payment Date or the Rate Reset Date, as the case may be,
and continue to the day next preceding the next succeeding Dividend Payment
Date. Accumulated unpaid dividends shall not accrue interest. Dividends (or cash
amounts equal to accrued and unpaid dividends) payable on the Mandatorily
Convertible Preferred Stock for any period less than or more than a full
quarterly period shall be computed on the basis of a 360-day year of twelve
30-day months and the actual number of days elapsed in any period less than one
month. Dividends on the Mandatorily Convertible Preferred Stock shall accrue
whether or not the Corporation has earnings, whether or not there are funds
legally available for the payment of such dividends and whether or not such
dividends are declared. Dividends in arrears for any past dividend periods or
portions thereof may be declared and paid at any time without reference to any
regular Dividend Payment Date to holders of record on such date as shall be
fixed by the Board of Directors subject to applicable law. Dividends on the
Mandatorily Convertible Preferred Stock shall cease to accrue on the earlier of
(i) the day immediately preceding the CMS Mandatory Conversion Date, or (ii) the
day immediately prior to their earlier conversion.
(b) As long as any shares of Mandatorily Convertible Preferred Stock are
outstanding, no dividends or other distributions for any dividend period (other
than dividends or other distributions payable in shares of, or warrants, rights
or options exercisable for or convertible into, junior stock, and cash in lieu
of fractional shares of such junior stock in connection with any such dividend
or distribution) will be paid on any junior stock unless: (i) full dividends, if
any, on all outstanding shares of senior stock, parity stock and Mandatorily
Convertible Preferred Stock have been paid, or declared and set aside for
payment, for all dividend periods terminating on or prior to the payment date of
such junior stock dividend or distribution, to the extent such dividends on
senior stock, parity stock or Mandatorily Convertible Preferred Stock are
cumulative; (ii) the Corporation has paid or set aside all amounts, if any, then
or theretofore required to be paid or set aside for all purchase, retirement,
and sinking funds, if any, for any outstanding shares of senior stock, parity
stock and Mandatorily Convertible Preferred Stock; and (iii) the Corporation is
not in default on any of its obligations to redeem any outstanding shares of
senior stock, parity stock or Mandatorily Convertible Preferred Stock.
In addition, as long as any Mandatorily Convertible Preferred Stock is
outstanding, no shares of any junior stock may be purchased, redeemed, or
otherwise acquired by the Corporation or any Subsidiary (except in connection
with a reclassification or exchange of any junior stock through the issuance of
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other junior stock (and cash in lieu of fractional shares of such junior stock
in connection therewith) and except for the acquisition of shares of any junior
stock pursuant to contractual obligations binding against the Corporation or any
Subsidiary that were entered into prior to the date of the first issuance of
shares of Mandatorily Convertible Preferred Stock or pursuant to contractual
obligations that are entered into at a time subsequent thereto when such
acquisitions of shares could be made pursuant to this Subsection 3(b)) nor may
any funds be set aside or made available for any sinking fund for the purchase
or redemption of any junior stock unless: (i) full dividends, if any, on all
outstanding shares of senior stock, parity stock and Mandatorily Convertible
Preferred Stock have been paid, or declared and set aside for payment, for all
dividend periods terminating on or prior to the date of such purchase,
redemption or acquisition, to the extent dividends on such senior stock, parity
stock or Mandatorily Convertible Preferred Stock dividends are cumulative; (ii)
the Corporation has paid or set aside all amounts, if any, then or theretofore
required to be paid or set aside for all purchase, retirement, and sinking
funds, if any, for any outstanding shares of senior stock, parity stock and
Mandatorily Convertible Preferred Stock; and (iii) the Corporation is not in
default on any of its obligations to redeem any outstanding shares of senior
stock, parity stock or Mandatorily Convertible Preferred Stock. Subject to the
provisions described above, such dividends or other distributions (payable in
cash, property, or junior stock) as may be determined from time to time by the
Board of Directors may be declared and paid on the shares of any junior stock
and from time to time junior stock may be purchased, redeemed or otherwise
acquired by the Corporation or any Subsidiary. In the event of the declaration
and payment of any such dividends or other distributions, the holders of such
junior stock will be entitled, to the exclusion of holders of any outstanding
senior stock or parity stock, to share therein according to their respective
interests.
(c) As long as any Mandatorily Convertible Preferred Stock is outstanding,
dividends or other distributions for any dividend period may not be paid on any
outstanding shares of parity stock (other than dividends or other distributions
payable in shares of, or warrants, rights or options exercisable for or
convertible into, parity stock or junior stock and cash in lieu of fractional
shares of such parity stock or junior stock in connection with any such
dividend), unless either: (a) (i) full dividends, if any, on all outstanding
shares of senior stock, parity stock and Mandatorily Convertible Preferred Stock
have been paid, or declared and set aside for payment, for all dividend periods
terminating on or prior to the payment date of such senior stock, parity stock
or Mandatorily Convertible Preferred Stock dividend or distribution, to the
extent dividends on such senior stock, parity stock or Mandatorily Convertible
Preferred Stock are cumulative; (ii) the Corporation has paid or set aside all
amounts, if any, then or theretofore required to be paid or set aside for all
purchase, retirement and sinking funds, if any, for any outstanding shares of
senior stock, parity stock and Mandatorily Convertible Preferred Stock; and
(iii) the Corporation is not in default on any of its obligations to redeem any
outstanding shares of senior stock, parity stock or Mandatorily Convertible
Preferred Stock; or (b) any such dividends are declared and paid pro rata so
that the amounts of any dividends declared and paid per share on outstanding
Mandatorily Convertible Preferred Stock and each share of such parity stock will
in all cases bear to each other the same ratio that accrued and unpaid dividends
(including any accumulation with respect to unpaid dividends for prior dividend
periods, if such dividends are cumulative) per share of outstanding Mandatorily
Convertible Preferred Stock and such outstanding shares of parity stock bear to
each other.
In addition, as long as any Mandatorily Convertible Preferred Stock is
outstanding, no shares of any parity stock may be purchased, redeemed or
otherwise acquired by the Corporation or any Subsidiary (except with any junior
stock and cash in lieu of fractional shares of such junior stock in connection
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therewith and except for the acquisition of shares of any parity stock pursuant
to contractual obligations binding against the Corporation or any Subsidiary
that were entered into prior to the date of the first issuance of shares of
Mandatorily Convertible Preferred Stock or pursuant to contractual obligations
that are entered into at a time subsequent thereto when such acquisitions of
shares could be made pursuant to this Subsection 3(c)) unless: (i) full
dividends, if any, on all outstanding shares of senior stock, parity stock and
Mandatorily Convertible Preferred Stock have been paid, or declared and set
aside for payment, for all dividend periods terminating on or prior to the date
of such purchase, redemption or other acquisition, to the extent dividends on
such senior stock, parity stock or Mandatorily Convertible Preferred Stock are
cumulative; (ii) the Corporation has paid or set aside all amounts, if any, then
or theretofore required to be paid or set aside for all purchase, retirement,
and sinking funds, if any, for any outstanding shares of senior stock, parity
stock and Mandatorily Convertible Preferred Stock; and (iii) the Corporation is
not in default of any of its obligations to redeem any outstanding shares of
senior stock, parity stock or Mandatorily Convertible Preferred Stock, unless
all parity stock and Mandatorily Convertible Preferred Stock as to which such a
default exists is purchased or redeemed on a pro rata basis.
(d) Any dividend payment made on the Mandatorily Convertible Preferred Stock
shall first be credited against the earliest accrued but unpaid dividend due
with respect to the Mandatorily Convertible Preferred Stock.
(e) All dividends paid with respect to the Mandatorily Convertible Preferred
Stock shall be paid pro rata to the holders entitled thereto.
(f) Holders of the Mandatorily Convertible Preferred Stock shall be entitled to
receive dividends in preference to and in priority over any dividends upon any
shares of the Corporation ranking junior to the Mandatorily Convertible
Preferred Stock as to dividends, but subject to the rights of holders of shares
of the Corporation having a preference and a priority over the payment of
dividends on the Mandatorily Convertible Preferred Stock.
Section 2. Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Corporation, then,
before any distribution or payments shall be made to the holders of any junior
stock, but subject to the rights of any senior stock or parity stock, the
holders of the Mandatorily Convertible Preferred Stock shall be entitled to be
paid in full in cash the amount of $1,000 per share, together with accrued
dividends to the date of such distribution or payment, whether or not earned or
declared. If such payment shall have been made in full to the holders of the
Mandatorily Convertible Preferred Stock and all preferential payments or
distributions to be made with respect to senior stock and parity stock have been
made in full, the remaining assets and funds of the Corporation shall be
distributed among the holders of the junior stock, according to their respective
rights and preferences and in each case according to their respective shares.
If, upon any liquidation, dissolution or winding up of the affairs of the
Corporation, the amounts so payable are not paid in full to the holders of all
shares of the Mandatorily Convertible Preferred Stock and parity stock, the
holders of the Mandatorily Convertible Preferred Stock, together with holders of
parity stock, shall share ratably in any distribution of assets in proportion to
the full amounts to which they would otherwise be respectively entitled. Neither
the consolidation or merger of the Corporation or the statutory exchange of
securities with another entity, nor the sale, lease, transfer, exchange or
conveyance of all or a part of its assets, shall be deemed a liquidation,
dissolution or winding up of the affairs of the Corporation within the meaning
of the foregoing provisions of this Section 4.
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Section 3. Redemption. The Corporation shall have the right to redeem all, but
not part, of the outstanding Mandatorily Convertible Preferred Stock at any time
following a Redemption Event and prior to a Rate Reset Date at the redemption
price of $1,000 per share, together with accrued but unpaid dividends to the
date of payment, whether or not earned or declared (the "Redemption Price"). The
Corporation shall not have the right to redeem any or all of the Mandatorily
Convertible Preferred Stock at any other time. Notice of a redemption of the
Mandatorily Convertible Preferred Stock shall be mailed, addressed to the holder
or holders of record of such shares at their respective addresses as they shall
appear on the books of the Corporation, such mailing to be at least two Business
Days and not more than sixty days prior to the date fixed for redemption. Each
such notice of redemption shall specify the date fixed for redemption and the
Redemption Price. On or after the date fixed for redemption as stated in such
notice, each holder of the shares called for redemption shall surrender the
certificate evidencing such shares to the Corporation and shall thereupon be
entitled to receive payment of the Redemption Price. If, on the date fixed for
redemption, funds necessary for the redemption shall be available therefor and
shall have been irrevocably deposited or set aside, then, notwithstanding that
the certificates evidencing any shares so called for redemption shall not have
been surrendered, the dividends with respect to the shares so called shall cease
to accrue after the date fixed for redemption, the shares shall no longer be
deemed outstanding, and all rights whatsoever with respect to the shares so
called for redemption (except the right of the holders to receive the Redemption
Price without interest upon surrender of their certificates therefor) shall
terminate.
Section 4. Conversion.
(a) Unless previously converted at the option of the holder in accordance with
the provisions hereof, on the CMS Mandatory Conversion Date each outstanding
share of Mandatorily Convertible Preferred Stock shall, without additional
notice to holders thereof, convert automatically (the "CMS Mandatory
Conversion") into (i) a number of fully paid and non-assessable shares of CMS
Common Stock at the CMS Mandatory Conversion Rate (as defined herein) in effect
on the CMS Mandatory Conversion Date; and (ii) the right to receive an amount in
cash equal to all accrued and unpaid dividends on such share of Mandatorily
Convertible Preferred Stock (other than previously declared dividends payable to
a holder of record as of a prior date) to and including the day immediately
prior to the CMS Mandatory Conversion Date, whether or not earned or declared,
out of funds legally available therefor (and if sufficient funds are not then
legally available therefor, the Corporation shall pay such amount, if any, pro
rata (based on the amounts so owing) to the holders of the Mandatorily
Convertible Preferred Stock and any parity stock then entitled to similar
payment as is then legally available therefor and shall pay any deficiency
thereafter as soon as funds are legally available therefor). The "CMS Mandatory
Conversion Rate" is equal to the following number of shares of CMS Common Stock
per share of Mandatorily Convertible Preferred Stock: (a) if the CMS Mandatory
Conversion Date Market Price is greater than or equal to the CMS Threshold
Appreciation Price, the quotient of (i) $1,000 divided by (ii) the CMS Threshold
Appreciation Price; (b) if the CMS Mandatory Conversion Date Market Price is
less than the CMS Threshold Appreciation Price but is greater than the Reset
Price, the quotient of $1,000 divided by the CMS Mandatory Conversion Date
Market Price; and (c) if the CMS Mandatory Conversion Date Market Price is less
than or equal to the Reset Price, the quotient of $1,000 divided by the Reset
Price, subject to adjustment as provided in this Section 6. "CMS Mandatory
Conversion Date Market Price" shall mean the Average Trading Price per share of
CMS Common Stock for the 20 consecutive Trading Days immediately prior to, but
not including, the CMS Mandatory Conversion Date; provided, however, that if an
event occurs during such 20 consecutive Trading Days that would require an
adjustment to the CMS Mandatory Conversion Rate pursuant to Section 6(c) or
6(e), the Board of Directors may make
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such adjustments to the Average Trading Price for shares of CMS Common Stock for
such 20 Trading Day period as it reasonably deems appropriate to effectuate the
intent of the adjustments in Sections 6(c) and 6(e), in which case any such
determination by the Board of Directors shall be set forth in a resolution of
the Board of Directors and shall be conclusive absent manifest error.
Dividends on the Mandatorily Convertible Preferred Stock shall cease to accrue,
and Mandatorily Convertible Preferred Stock shall cease to be outstanding, on
the CMS Mandatory Conversion Date. The Corporation shall make such arrangements
as it deems appropriate for the issuance of certificates representing CMS Common
Stock and for the payment of cash in respect of such accrued and unpaid
dividends, if any, or cash in lieu of fractional shares, if any, in exchange for
and contingent upon surrender of certificates representing the Mandatorily
Convertible Preferred Stock, and the Corporation may defer the payment of
dividends on such CMS Common Stock and the voting thereof until, and make such
payment and voting contingent upon, the surrender of such certificates
representing the Mandatorily Convertible Preferred Stock, provided that the
Corporation shall give the holders of the Mandatorily Convertible Preferred
Stock such notice of any such actions as the Corporation deems appropriate and
upon such surrender such holders shall be entitled to receive such dividends
declared and paid on such CMS Common Stock subsequent to the CMS Mandatory
Conversion Date. Amounts payable in cash in respect of the Mandatorily
Convertible Preferred Stock or in respect of such CMS Common Stock shall not
bear interest.
(b) Shares of Mandatorily Convertible Preferred Stock are convertible, at the
option of the holders thereof ("CMS Optional Conversion") at any time after the
date hereof and before the CMS Mandatory Conversion Date, into CMS Common Stock
at a rate equal to 24.779 shares of CMS Common Stock per share of Mandatorily
Convertible Preferred Stock (the "CMS Optional Conversion Rate"), subject to
adjustment as set forth in this Section 6; provided, however, that the CMS
Optional Conversion Rate shall adjust as of the Rate Reset Date (regardless of
the adjustments made to the CMS Optional Conversion Rate after the issuance of
the shares of Mandatorily Convertible Preferred Stock and prior to the Rate
Reset Date) to the following number of shares of CMS Common Stock per share of
Mandatorily Convertible Preferred Stock: the quotient of (i) $1,000 divided by
(ii) the CMS Threshold Appreciation Price, subject to further adjustment as set
forth in this Section 6. CMS Optional Conversion of shares of Mandatorily
Convertible Preferred Stock may be effected by delivering certificates
evidencing such shares of Mandatorily Convertible Preferred Stock, together with
written notice of conversion and, if required by the Corporation, a proper
assignment of such certificates to the Corporation or in blank (and, if
applicable as provided in the following paragraph, cash payment of an amount
equal to the dividends attributable to the current dividend period payable on
such shares), to the office of the transfer agent for the shares of Mandatorily
Convertible Preferred Stock or to any other office or agency maintained by the
Corporation for that purpose and otherwise in accordance with CMS Optional
Conversion procedures established by the Corporation. Each CMS Optional
Conversion shall be deemed to have been effected immediately before the close of
business on the date on which the foregoing requirements shall have been
satisfied. The CMS Optional Conversion shall be at the CMS Optional Conversion
Rate in effect at such time and on such date.
Holders of shares of Mandatorily Convertible Preferred Stock at the close of
business on a record date for any payment of declared dividends shall be
entitled to receive the dividend payable on such shares on the corresponding
Dividend Payment Date notwithstanding the CMS Optional Conversion of such shares
following such record date and on or prior to such Dividend Payment Date.
However, shares of Mandatorily Convertible Preferred Stock surrendered for CMS
Optional Conversion after the close of business on a record date for any payment
of declared dividends and before the opening of business on the next succeeding
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Dividend Payment Date must be accompanied by payment in cash of an amount equal
to the dividends attributable to the current dividend period payable on such
shares on such next succeeding Dividend Payment Date. Except as provided above,
upon any CMS Optional Conversion, the Corporation shall make no payment of or
allowance for unpaid dividends, whether or not in arrears, on such converted
shares of Mandatorily Convertible Preferred Stock as to which CMS Optional
Conversion has been effected or for previously declared dividends or
distributions on the shares of CMS Common Stock issued upon such CMS Optional
Conversion.
(c) The CMS Optional Conversion Rate shall be adjusted from time to time, and
the CMS Mandatory Conversion Rate shall be adjusted from time to time after the
Rate Reset Date, as follows:
(1) In case the Corporation shall (i) pay a dividend on its CMS Common Stock in
other CMS Common Stock, (ii) subdivide or split its outstanding CMS Common Stock
into a greater number of shares, (iii) combine its outstanding CMS Common Stock
into a smaller number of CMS Common Stock, or (iv) issue by reclassification of
its CMS Common Stock any other CMS Common Stock (including in connection with a
merger in which the Corporation is a surviving corporation), then, in any such
event, (1) the CMS Mandatory Conversion Rate in effect immediately prior to such
event shall be adjusted such that the Reset Price shall be adjusted by
multiplying it by a fraction (which fraction and all other fractions referred to
herein may be improper fractions), the numerator of which is one and the
denominator of which is the number of shares of CMS Common Stock that a holder
of one share of CMS Common Stock prior to any event described above would hold
after such event (assuming the issuance of fractional shares) (the
"Recapitalization Adjustment Ratio"), and (2) the CMS Optional Conversion Rate
in effect immediately prior to such event shall be adjusted by multiplying it by
a fraction, the numerator of which is one and the denominator of which is the
Recapitalization Adjustment Ratio. Such adjustment shall become effective
immediately after the effective date of any such event (or the earlier record
date in the case of any such dividend) whenever any of the events listed above
shall occur.
(2) In case the Corporation shall issue rights or warrants to all holders of its
CMS Common Stock entitling them (for a period, except in the case of Rights,
expiring within 45 days after the record date for determination of the
shareholders entitled to receive such rights or warrants) to subscribe for or
purchase CMS Common Stock at a price per share of CMS Common Stock less than the
current market price per share of CMS Common Stock (as defined in Section 6(d)
below) on such record date, then in each such case the CMS Mandatory Conversion
Rate on the date of such issuance shall be adjusted such that the Reset Price
shall be adjusted by multiplying it by a fraction the numerator of which shall
be the sum of (x) the number of shares of CMS Common Stock outstanding
immediately prior to such issuance, plus (y) the number of additional shares of
CMS Common Stock which the aggregate offering price of the total number of
shares of CMS Common Stock so offered for subscription or purchase would
purchase at the Average Trading Price for a share of CMS Common Stock for the
record date for such issuance, and the denominator of which shall be the sum of
(x) the number of shares of CMS Common Stock outstanding immediately prior to
such issuance, plus (y) the number of additional shares of CMS Common Stock
offered for subscription or purchase pursuant to such rights or warrants (the
"Anti Dilution Adjustment Ratio") and (B) the CMS Optional Conversion Rate in
effect on the record date described below shall be adjusted by multiplying it by
a fraction, the numerator of which is one and the denominator of which is the
Anti Dilution Adjustment Ratio. For the purposes of this Subsection (2): the
issuance of rights or warrants to subscribe for or purchase securities
exercisable for, convertible into, or exchangeable for, shares of CMS Common
Stock shall be deemed to be the issuance of rights or warrants to purchase the
shares of CMS Common
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Stock into which such securities are exercisable, convertible or exchangeable at
an aggregate offering price equal to the aggregate offering price of such
securities plus the minimum aggregate amount (if any) payable upon the exercise,
conversion or exchange of such securities. Such adjustment shall become
effective at the opening of business on the Business Day next following the
record date for such rights or warrants. To the extent that any shares of CMS
Common Stock, or securities exercisable for, convertible into, or exchangeable
for, shares of CMS Common Stock so offered for subscription or purchase are not
so subscribed or purchased by the expiration of such rights or warrants, the CMS
Mandatory Conversion Rate, the CMS Threshold Appreciation Price, the Reset Price
and the CMS Optional Conversion Rate shall each be readjusted to the rates or
amounts, respectively, which would then be in effect, had the adjustment made
upon the issuance of such rights or warrants been made upon the basis of the
issuance of rights or warrants in respect of only the number of shares of CMS
Common Stock and securities exercisable for, convertible into, or exchangeable
for, shares of CMS Common Stock actually issued upon exercise of such rights or
warrants.
(3) If the Corporation shall pay a dividend or make a distribution to all
holders of its CMS Common Stock consisting of evidences of its indebtedness or
other assets (including capital shares of the Corporation other than CMS Common
Stock but excluding any Ordinary Cash Dividends (as defined below)), or shall
issue to all holders of its CMS Common Stock rights or warrants to subscribe for
or purchase any of its securities (other than those referred to in Subsection
(2) above), then in each such case the CMS Mandatory Conversion Rate in effect
immediately prior to such event shall be adjusted such that the Reset Price
shall be adjusted by multiplying it by a fraction, the numerator of which shall
be the Average Trading Price for a share of CMS Common Stock on such record
date, minus the fair market value as of such record date of the portion of
evidences of indebtedness or other assets so distributed, or of such
subscription rights or warrants, applicable to one share of CMS Common Stock
(provided that such numerator shall never be less than $1.00) and the
denominator of which shall be the Average Trading Price for a share of CMS
Common Stock on such record date, (the "Distribution Adjustment Ratio") and (B)
the Optional Conversation Rate in effect immediately prior to such event shall
be adjusted by multiplying it by a fraction, the numerator of which is one and
the denominator of which is the Distribution Adjustment Ratio. Such adjustment
shall become effective on the opening of business on the Business Day next
following the record date for such dividend or distribution or the determination
of shareholders entitled to receive such dividend or distribution or rights or
warrants, as the case may be. "Ordinary Cash Dividends" shall mean (i) any
regular cash dividend on the CMS Common Stock that does not exceed the per share
amount of the immediately preceding regular cash dividend on the CMS Common
Stock (as adjusted to appropriately reflect any of the events referred to in
Section 6(c)(1)) and (ii) any other cash dividend or distribution which, when
combined on a per share basis with the per share amount of all other cash
dividends and distributions paid on the CMS Common Stock during the 365 day
period ending on the date of declaration of such dividend or distribution (as
adjusted to appropriately reflect any of the events referred to in Section
6(c)(1) and excluding cash dividends or distributions that resulted in an
adjustment to the CMS Mandatory Conversion Rate or the CMS Optional Conversion
Rate), does not exceed 10% of the current market price per CMS Common Stock
(determined pursuant to Section 6(d)) on the Trading Day immediately preceding
the date of declaration of such dividend or distribution.
(d) For the purpose of any computation under Section 6(c) above, the "current
market price per share of CMS Common Stock" on any date in question shall mean
the Average Trading Price for shares of CMS Common Stock for the 15 consecutive
Trading Days ending on the earlier of the day in question and, if applicable,
the day before the "ex" date with respect to the issuance or distribution
requiring
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such computation; provided, however, that if another event occurs that would
require an adjustment pursuant to Section 6(c), the Board of Directors of the
Corporation may make such adjustments to the Average Trading Price for shares of
CMS Common Stock during such 15 Trading Day period as it reasonably deems
appropriate to effectuate the intent of the adjustments in Section 6(c), in
which case any such determination by the Board of Directors of the Corporation
shall be set forth in a Board resolution and shall be conclusive absent manifest
error. For purposes of this paragraph, the term "'ex' date", when used with
respect to any issuance or distribution, means the first date on which the
shares of CMS Common Stock trade regular way on the relevant exchange or in the
relevant market from which the Average Trading Price was obtained without the
right to receive such issuance or distribution. For the purpose of any
computation under Section 6(c) above, the "fair market value" of any assets,
evidences of indebtedness, subscription rights or warrants on any date in
question: (i) in the event any such item is a publicly traded security
("Publicly Traded Security"), shall be determined for such date pursuant to the
provisions of this Section 6(d) for determination of the "current market price
per share of CMS Common Stock", except that (x) each reference therein to "CMS
Common Stock" shall be deemed to mean such Publicly Traded Security, and (y) if
such Publicly Traded Security does not trade on a "when issued" basis for the 15
consecutive Trading Days preceding the "ex" date, such determination shall be
made for the period of 15 consecutive Trading Days commencing on the "ex" date;
and (ii) in the event any such item is not a Publicly Traded Security, shall be
reasonably determined in good faith for such date by the Board of Directors of
the Corporation, as evidenced by a resolution of the Board, whose determination
shall be conclusive absent manifest error.
(e) In any case of any reclassification of CMS Common Stock (other than a
reclassification of the CMS Common Stock referred to in Section 6(c)(1)); any
consolidation or merger of the Corporation with or into another corporation or
other entity (other than a merger resulting in a reclassification of the CMS
Common Stock referred to in Section 6(c)(1); any sale or conveyance to another
entity (other than a Subsidiary) of all or substantially all of the assets of
the Corporation; or the statutory exchange of securities with another
corporation or entity (other than in connection with a merger or acquisition)
(any such event referred to herein as a "Transaction"), then the CMS Optional
Conversion Rate and CMS Mandatory Conversion Rate shall be adjusted so that
after consummation of such a Transaction the holders of shares of Mandatory
Convertible Preferred Stock will receive, in lieu of the number of shares of CMS
Common Stock which such holder would have received upon conversion but for such
Transaction, the kind and amount of securities, cash or other property
receivable upon consummation of such Transaction by a holder of such number of
shares of CMS Common Stock, subject to further adjustment as provided in this
Section 6, including without limitation, an adjustment to the CMS Optional
Conversion Rate on the Rate Reset Date if such Transaction occurs prior to the
Rate Reset Date. On and after the consummation of any such Transaction, the CMS
Mandatory Conversion Date Market Price, which shall be used for purposes of the
determination as to which of clauses (a), (b) or (c) of the definition of CMS
Mandatory Conversion Rate applies, shall mean the sum of (i) the product of the
Average Trading Price of any Publicly Traded Security received upon consummation
of such Transaction for the 20 consecutive Trading Days immediately prior to,
but not including, the CMS Mandatory Conversion Date multiplied by the fraction
of such security received in such Transaction per share of CMS Common Stock
(assuming the issuance of fractional shares) plus (ii) the fair market value of
the cash and other property received upon consummation of such Transaction per
share of CMS Common Stock as of the day preceding the CMS Mandatory Conversion
Date as determined in accordance with Subsection 6(d). In determining the kind
and amount of securities, cash or other property receivable upon consummation of
such Transaction by a holder of shares of CMS Common Stock, it shall be assumed
that such holder is not a person or entity with which the Corporation
consolidated or into which the Corporation was
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merged or which merged into the Corporation or with which such statutory
exchange occurred, as the case may be, or an affiliate of any such Person and
that such holder of CMS Common Stock failed to exercise rights of election, if
any, as to the kind or amount of securities, cash, or other property receivable
upon consummation of such transaction (provided that, if the kind or amount of
securities, cash, or other property receivable upon consummation of such
Transaction is not the same for each non electing share, then the kind and
amount of securities, cash or other property receivable upon consummation of
such transaction for each non electing share shall be deemed to be the kind and
amount so receivable per share by a plurality of the non electing shares). In
the event of such a reclassification, consolidation, merger, sale, conveyance or
exchange, effective provision shall be made in the Restated Articles of
Incorporation, as amended and restated, or similar document of the resulting or
surviving corporation or entity so that the conversion rate applicable to any
securities or property into which the shares of the Mandatorily Convertible
Preferred Stock shall then be convertible shall be subject to adjustment from
time to time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the CMS Common Stock contained in Subsections (1) to
(3) of Section 6(c) inclusive, above, and the other provisions of this Section 6
with respect to the CMS Common Stock shall apply on terms as nearly equivalent
as practicable to any such other securities and property deliverable upon
conversion of shares of Mandatorily Convertible Preferred Stock.
(f) Whenever any adjustments are required in the shares of CMS Common Stock into
which each share of Mandatorily Convertible Preferred Stock is convertible, the
Corporation shall forthwith (a) compute the adjusted Mandatory Conversation Rate
and CMS Optional Conversion Rate in accordance herewith and prepare a
certificate signed by an officer of the Corporation setting forth the adjusted
CMS Mandatory Conversion Rate and the CMS Optional Conversion Rate, describing
in reasonable detail the method of calculation used and the facts requiring such
adjustment and upon which such adjustment is based, which certificate shall be
conclusive, final and binding evidence of the correctness of the adjustment and
file with the transfer agent of the Mandatorily Convertible Preferred Stock such
certificate and (b) cause a copy of such certificate to be mailed to each holder
of record of the Mandatorily Convertible Preferred Stock as of or promptly after
the effective date of such adjustment and, with respect to adjustments
applicable after the Rate Reset Date, make a prompt public announcement of such
adjustment.
(g) The Corporation shall at all times reserve and keep available, free from
preemptive rights, out of its authorized but unissued shares of CMS Common Stock
for the purpose of issuance upon conversion of the Mandatorily Convertible
Preferred Stock a number of shares of CMS Common Stock equal to the product of
(i) the number of shares of CMS Common Stock then deliverable at such time upon
an CMS Optional Conversion of all shares of the Mandatorily Convertible
Preferred Stock multiplied by (ii) 2.0.
(h) The Corporation will pay any and all documentary stamp or similar issue or
transfer taxes that may be payable in respect of the issuance or delivery of
shares of CMS Common Stock on conversion of shares of the Mandatorily
Convertible Preferred Stock pursuant to Section 6. The Corporation shall not,
however, be required to pay any tax which may be payable in respect of any
transfer involving the issue and delivery of shares of CMS Common Stock in the
name other than in that which the shares of Mandatorily Convertible Preferred
Stock so converted were registered and no such issue and delivery shall be made
unless and until the person requesting such issue has paid to the Corporation
the amount of any such tax, or has established, to the satisfaction of the
Corporation, that such tax has been paid.
(i) For the purpose of this Section 6, the term "CMS Common Stock" shall include
any shares of the Corporation of any class or series which has no preference or
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priority in the payment of dividends or in the distribution of assets upon any
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation and which is not subject to redemption by the Corporation. However,
CMS Common Stock issuable upon conversion of the Mandatorily Convertible
Preferred Stock shall include only shares of the class designated as CMS Common
Stock as of the original date of issuance of the Mandatorily Convertible
Preferred Stock, or shares of the Corporation of any classes or series resulting
from any reclassification or reclassifications thereof (including
reclassifications referred to in clause (iv) of Subsection 6(c)(1)) and which
have no preference or priority in the payment of dividends or in the
distribution of assets upon any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation and which are not subject to
redemption by the Corporation, provided that, if at any time, there shall be
more than one such resulting class or series, the shares of such class and
series then so issuable shall be in the same proportion, if possible, or if not
possible, in substantially the same proportion which the total number of shares
of such class and series resulting from all such reclassifications bears to the
total number of shares of all classes and series resulting from all such
reclassifications.
(j) No fractional shares or scrip representing fractional shares shall be issued
upon the conversion of the Mandatorily Convertible Preferred Stock. If any such
conversion would otherwise require the issuance of a fractional share, an amount
equal to such fraction multiplied by the current market price per share of CMS
Common Stock (determined as provided in Section 6(d)) of the CMS Common Stock on
the date of conversion shall be paid to the holder in cash by the Corporation.
If on such date there is no current market price per share of CMS Common Stock,
the fair market value of a share of CMS Common Stock (determined as provided in
Section 6(d)) on such date, shall be used. If more than one share of Mandatorily
Convertible Preferred Stock shall be surrendered for conversion at one time by
or for the same holder, the number of full shares of CMS Common Stock issuable
upon conversion thereof shall be computed on the basis of the aggregate number
of shares of Mandatorily Convertible Preferred Stock so surrendered.
(k) All shares of the Mandatorily Convertible Preferred Stock purchased or
otherwise acquired by the Corporation (including shares surrendered for
conversion) shall be canceled and thereupon restored to the status of authorized
but unissued shares of Preferred Stock undesignated as to series.
(l) No adjustment in the CMS Mandatory Conversion Rate and the CMS Optional
Conversion Rate shall be required unless such adjustment (plus any adjustments
not previously made by reason of this Section 6(l)) would require an increase or
decrease of at least 1% in the number of shares of CMS Common Stock into which
each share of the Mandatorily Convertible Preferred Stock is then convertible;
provided, however, that any adjustments which by reason of this Section 6(l) are
not required to be made shall be carried forward and taken into account in any
subsequent adjustment and provided further that any adjustment shall be required
and made in accordance with the provisions of Section 6(c) not later than such
time as may be required in order to preserve the tax free nature of a
distribution to the holders of shares of CMS Common Stock. If any action or
transaction would require adjustment to the CMS Mandatory Conversion Rate or the
CMS Optional Conversion Rate pursuant to this Section 6, only one adjustment
shall be made and such adjustment shall be the amount of the adjustment that has
the highest absolute value. All calculations under this Section 6 shall be made
to the nearest one thousandth of a share of CMS Common Stock.
(m) The Board of Directors may make such upward adjustments in the CMS Mandatory
Conversion Rate and the CMS Optional Conversion Rate, in addition to those
required by this Section 6, as shall be determined by the Board of Directors, as
evidenced by a resolution of the Board of Directors, to be advisable in order
that any stock dividends, subdivisions of shares, distribution of rights to
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purchase stock or securities, or distribution of securities convertible into or
exchangeable for stock (or any transaction that could be treated as any of the
foregoing transactions pursuant to Section 305 of the Internal Revenue Code of
1986, as amended) made by the Corporation to its stockholders after the Rate
Reset Date shall not be taxable. The determination of the Board of Directors as
to whether an adjustment should be made pursuant to the provisions of this
Subsection (m), and if so, as to what adjustment should be made and when, shall
be conclusive, final and binding on the Corporation and all stockholders of the
Corporation.
(n) In any case in which Section 6 shall require that an adjustment as a result
of any event become effective at the opening of business on the Business Day
next following a record date and the date fixed for conversion occurs after such
record date, but before the occurrence of such event, the Corporation may, in
its sole discretion, elect to defer the following until after the occurrence of
such event: (A) issuing to the holder of any converted Mandatorily Convertible
Preferred Stock the additional shares of CMS Common Stock issuable upon such
conversion over the shares of CMS Common Stock issuable before giving effect to
such adjustments and (B) paying to such holder any amount in cash in lieu of a
fractional share of CMS Common Stock pursuant to Section 6(j).
(o) Notwithstanding the foregoing provisions of this Section 6, no adjustment of
the CMS Optional Conversion Rate or the CMS Mandatory Conversion Rate shall be
required to be made upon the issuance of any shares of CMS Common Stock pursuant
to any present or future plan providing for the reinvestment of dividends or
interest payable on securities of the Corporation and the investment of
additional optional amounts in shares of CMS Common Stock under any such plan.
(p) Notwithstanding any other provision of this Section 6, the issuance or
distribution of Rights shall not be deemed to constitute an issuance or a
distribution or dividend of rights, warrants, or other securities to which any
of the adjustment provisions described above applies until the occurrence of the
earliest Rights Event.
(q) For purposes of this Section 6, shares of CMS Common Stock owned by, or held
for the account of, the Corporation, a Subsidiary or another entity of which a
majority of the common stock or common equity interests are owned, directly or
indirectly, by the Corporation shall be deemed to be not outstanding.
Section 5. Voting Rights. The holders of Mandatorily Convertible Preferred Stock
shall have no right to vote except as otherwise specifically provided herein, in
the Restated Articles of Incorporation, as amended and restated, or as required
by statute.
(a) So long as any shares of Mandatorily Convertible Preferred Stock are
outstanding, in addition to any other vote or consent of shareholders required
in the Restated Articles of Incorporation, as amended and restated, or by law,
the consent of the holders of at least a majority of the Mandatorily Convertible
Preferred Stock, given in person or by proxy, either in writing without a
meeting (if permitted by law) or by vote at any meeting called for the purpose,
shall be necessary for effecting or validating:
(1) any amendment, alteration or repeal of any of the provisions of the Restated
Articles of Incorporation, as amended and restated,, which affects adversely the
powers, rights or preferences of the holders of the Mandatorily Convertible
Preferred Stock or reduces the minimum time required for any notice to which
holders of Mandatorily Convertible Preferred Stock then outstanding may be
entitled; provided, that the amendment of the provisions of the Restated
Articles of Incorporation, as amended and restated, so as to authorize or
create, or to increase the authorized amount of, any junior stock or parity
stock shall not be
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deemed to affect adversely the powers, rights or preferences of the holders of
the Mandatorily Convertible Preferred Stock and shall not be subject to approval
by the holders of the Mandatorily Convertible Preferred Stock and such holders
shall not be entitled to vote thereon to the fullest extent permitted by law;
(2) the authorization, creation or issuance of, or the increase in the
authorized amount of, any stock of any class or series, or any security
convertible into stock of any class or series, ranking senior to the Mandatorily
Convertible Preferred Stock; or
(3) the merger or consolidation of the Corporation with or into any other
corporation or other entity or a statutory share exchange with another
corporation or entity, unless in connection with such merger, consolidation or
statutory share exchange each holder of shares of Mandatorily Convertible
Preferred Stock immediately preceding such merger, consolidation or share
exchange shall either (I) with respect to a merger, consolidation or statutory
share exchange consummated prior to, on or after the Rate Reset Date, receive or
continue to hold in the surviving or resulting corporation or other corporation
or entity the same number of shares, with substantially the same rights and
preferences (except as contemplated by Subsection 6(e) and except for those
rights and preferences that could be affected without the vote of the holders of
the Mandatorily Convertible Preferred Stock, such as the authorization and
issuance of junior stock), as correspond to the shares of Mandatorily
Convertible Preferred Stock held immediately prior to such merger or
consolidation or (II) with respect to a merger, consolidation or statutory share
exchange consummated after the Rate Reset Date, receive the kind and amount of
securities, cash and other property that would have been receivable upon
consummation of such merger, consolidation or share exchange by such holder
(subject to the assumptions set forth in Section 6(e)) if the CMS Mandatory
Conversion had occurred immediately prior to the consummation of such merger,
consolidation or share exchange and the CMS Mandatory Conversion Rate was
determined as of such time (and if clause (I) or (II) are applicable, then such
merger, consolidation or statutory share exchange shall not be subject to
approval by the holders of the Mandatorily Convertible Preferred Stock and such
holders shall not be entitled to vote thereon).
(b) Holders of Mandatorily Convertible Preferred Stock shall not be entitled to
receive notice of any meeting of shareholders at which they are not entitled to
vote or consent except as otherwise provided by applicable law.
Section 6. Other Rights. Shares of Mandatorily Convertible Preferred Stock shall
not have any relative, participating, optional or other special rights or powers
other than as set forth herein, in the Restated Articles of Incorporation, as
amended and restated, or as required by law.
Section 7. Notices. In case, at any time while any shares of Mandatorily
Convertible Preferred Stock are outstanding, (i) the Corporation shall declare a
dividend (or any other distribution) on its CMS Common Stock, excluding any cash
dividends, (ii) the Corporation shall authorize the issuance to all holders of
its CMS Common Stock of rights or warrants to subscribe for or purchase shares
of CMS Common Stock or of securities exercisable for, convertible into, or
exchangeable for, shares of CMS Common Stock, (iii) the Corporation shall
authorize any reclassification of its CMS Common Stock (other than a subdivision
or combination thereof) or any consolidation or merger or statutory share
exchange to which the Corporation is a party and for which approval of any
stockholders of the Corporation is required (except for a merger of the
Corporation into one of its Subsidiaries solely for the purpose of changing the
corporate name or corporate domicile of the Corporation to another state of the
United States and in connection with which there is no substantive change in the
rights or privileges of any securities of the Corporation other than changes
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resulting from differences in the corporate statutes of the then existing and
the new state of domicile), or the sale or transfer to another corporation of
the property of the Corporation as an entirety or substantially as an entirety,
(iv) the Corporation shall authorize the voluntary or involuntary dissolution,
liquidation or winding up of the Corporation, or (v) there shall occur any Pro
Rata Repurchase, then the Corporation shall cause to be filed at each office or
agency maintained for the purpose of conversion of the Mandatorily Convertible
Preferred Stock, and shall cause to be mailed to the holders of Mandatorily
Convertible Preferred Stock at their last addresses as they shall appear on the
stock register, at least 10 days before the date hereinafter specified (or the
earlier of the dates hereinafter specified, in the event that more than one date
is specified), a notice stating (A) the date on which a record is to be taken
for the purpose of such dividend, distribution, rights or warrants, or, if a
record is not to be taken, the date as of which the holders of CMS Common Stock
of record to be entitled to such dividend, distribution, rights or warrants are
to be determined, or (B) the date on which any such reclassification,
consolidation, merger, sale, transfer, dissolution, liquidation, winding up or
Pro Rata Repurchase is expected to become effective, and the date as of which it
is expected that holders of CMS Common Stock of record shall be entitled to
exchange their CMS Common Stock for securities or other property (including
cash), if any, deliverable upon such reclassification, consolidation, merger,
sale, transfer, dissolution, liquidation or winding up or Pro Rata Repurchase;
provided, however, that if any such action requiring such notice is to occur
prior to the Rate Reset Date, then such notice need only be given on or before
the date of such action. The failure to give or receive the notice required
hereby or any defect therein shall not affect the legality or validity of such
dividend, distribution, right or warrant or other action.
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SERIES A MANDATORILY CONVERTIBLE PREFERRED STOCK
Section 8. Definitions. Capitalized terms used but not defined herein shall have
the meaning ascribed thereto in the Restated Articles of Incorporation, as
amended and restated. In addition, the following terms shall have the following
meanings when used herein:
"Average Trading Price" for any given period, including a single day, means, for
a security, an amount equal to (i) the sum of the Closing Price for such
security on each Trading Day in such period divided by (ii) the total number of
Trading Days in such period.
"Board of Directors" shall mean the Board of Directors of the Corporation.
"Business Day" shall mean any day other than a Saturday, Sunday, or a day on
which commercial banking institutions in New York, New York, Wilmington,
Delaware or the State of Michigan are authorized or obligated by law or
executive order to close.
"Closing Price" means, for a security, the closing price for such security on
the Trading Day in question (or if such day is not a Trading Day then as of the
Trading Day next preceding such day) as reported by Bloomberg L.P., or if not so
reported by Bloomberg L.P., as reported by another recognized source selected by
the Board of Directors of the Corporation.
"CMS Common Stock" shall have the meaning specified in Section 6(i) hereof.
"CMS Mandatory Conversion" shall have the meaning specified in Section 6(a)
hereof.
"CMS Mandatory Conversion Date" means the date on which the Mandatorily
Convertible Preferred Stock will be converted automatically into CMS Common
Stock on the third anniversary of the Rate Reset Date in accordance with and as
defined in the CMS Remarketing Agreement.
"CMS Mandatory Conversion Date Market Price" shall have the meaning specified in
Section 6(a).
"CMS Mandatory Conversion Rate" shall have the meaning specified in
Section 6(a) hereof.
"CMS Optional Conversion" shall have the meaning specified in Section 6(b).
"CMS Optional Conversion Rate" shall have the meaning specified in Section 6(b).
"CMS Remarketing Agent" shall have the meaning ascribed to such term in the CMS
Remarketing Agreement.
"CMS Remarketing Agreement" shall mean the CMS Preferred Stock Remarketing and
Registration Rights Agreement dated as of November 10, 1999 among the
Corporation, the CMS Share Trust, Bank One Trust Company, N.A. as Series A-1
Indenture Trustee, and Donaldson, Lufkin & Jenrette Securities Corporation, as
CMS Remarketing Agent. The Corporation will furnish any shareholder of the
Corporation with a copy of the CMS Remarketing Agreement without charge upon
request in writing to the Secretary of the Corporation.
"CMS Threshold Appreciation Price" means the product of (i) the Reset Price and
(ii) 1.10.
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"Dividend Payment Date" shall have the meaning specified in Section 3(a) hereof.
"Failed Remarketing" shall have the meaning ascribed to such term in the CMS
Remarketing Agreement.
"Final Sale Date" shall have the meaning ascribed to such term in the CMS
Remarketing Agreement.
"junior stock" shall mean (and references to shares ranking "junior to" the
Mandatorily Convertible Preferred Stock shall refer to), with respect to
Sections 3 and 7, CMS Common Stock and any other class or series of stock of the
Corporation which by its terms is not entitled to receive any dividends unless
all dividends required to have been paid or declared and set apart for payment
on the Mandatorily Convertible Preferred Stock shall have been so paid or
declared and, with respect to Sections 4 and 7, CMS Common Stock and any other
class or series of stock of the Corporation which by its terms is not entitled
to receive any assets upon the liquidation, dissolution or winding up of the
affairs of the Corporation until the Mandatorily Convertible Preferred Stock
shall have received the entire amount to which such stock is entitled upon
liquidation, dissolution or winding up.
"parity stock" shall mean (and references to shares ranking "on a parity with"
the Mandatorily Convertible Preferred Stock shall refer to), with respect to
Sections 3 and 7, any class or series of stock of the Corporation which by its
terms is entitled to receive payment of dividends on a parity with the
Mandatorily Convertible Preferred Stock and, with respect to Sections 4 and 7,
any class or series of stock of the Corporation which by its terms is entitled
to receive assets upon the liquidation, dissolution or winding up of the affairs
of the Corporation on a parity with the Mandatorily Convertible Preferred Stock.
"Principal Market" means the principal exchange on which the security in
question is traded or the principal market on which such security is quoted, as
determined by the Board of Directors of the Corporation.
"Pro Rata Repurchase" means any purchase of shares of CMS Common Stock by the
Corporation or any affiliate thereof (as defined in Rule 12b-2 under the
Securities Exchange Act of 1934 (the "Exchange Act")) pursuant to any tender
offer or exchange offer subject to Section 13(e) of the Exchange Act, or
pursuant to any other offer available to substantially all holders of CMS Common
Stock, whether for cash, shares of capital stock of the Corporation, other
securities of the Corporation, evidences of indebtedness of the Corporation or
any other person or any other property (including, without limitation, shares of
capital stock, other securities or evidences of indebtedness of a Subsidiary),
or any combination thereof, effected while any of the shares of Mandatorily
Convertible Preferred Stock are outstanding; provided, however, that "Pro Rata
Repurchase" shall not include any purchase of shares by the Corporation or any
affiliate thereof made in open market transactions substantially in accordance
with the requirements of Rule 10b-18 as in effect under the Exchange Act or on
such other terms and conditions as the Board of Directors shall have determined
are reasonably designed to prevent such purchases from having a material effect
on the trading market for the CMS Common Stock. A Pro Rata Repurchase shall be
deemed to be effective on the date of acceptance of shares for purchase or
exchange under any tender or exchange offer which is a Pro Rata Repurchase or
the date of purchase with respect to any Pro Rate Repurchase that is not a
tender or exchange offer.
"Rate Reset Date" shall have the meaning ascribed to such term in the CMS
Remarketing Agreement.
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"Redemption Event" means the occurrence of any of the following: (i) any
consolidation or merger of the Corporation with or into another corporation or
entity or the statutory exchange of securities with another corporation or
entity, unless in connection with such consolidation, merger or exchange the
outstanding shares of CMS Common Stock immediately preceding the consummation of
such consolidation, merger or exchange are converted into, exchanged for or
otherwise represent at least a majority of the outstanding shares of common
stock of the surviving or resulting corporation or entity immediately succeeding
the consummation of such consolidation, merger or exchange; or (ii) the
Corporation sells or conveys to another entity (other than a Subsidiary) all or
substantially all of the assets of the Corporation.
"Reset Common Yield" shall mean the quotient of (i) the product of (x) 4 and (y)
the highest amount of the ordinary quarterly cash dividend on one share of CMS
Common Stock most recently declared prior to the Series A-1 Note Trigger Date
(as appropriately adjusted for the events referred to in Section 6(c)(1)),
unless subsequent to such declaration and prior to the Series A-1 Note Trigger
Date, the Corporation has publicly announced a change to, or elimination of, its
ordinary quarterly cash dividend and filed with the Securities and Exchange
Commission a document including such change or elimination, in which case the
amount of such proposed ordinary quarterly cash dividend or $0.00 if such
dividend is to be eliminated, divided by (ii) the Reset Price (provided,
however, that if as of the Series A-1 Note Trigger Date there is more than one
class of CMS Common Stock, then the Reset Common Yield shall be calculated with
respect to each then outstanding class of CMS Common Stock, and the Reset Common
Yield as used herein shall be the amount calculated with respect to the class of
CMS Common Stock resulting in the greatest Reset Common Yield).
"Reset Dividend Rate" shall mean an amount per share per annum equal to the
product of (i) the sum of (x) the Reset Common Yield (expressed as a
percentage), plus (y) 7.0% and (ii) $1,000 (rounded to the nearest cent).
"Reset Price" shall mean the higher of (i) the Closing Price of a share of CMS
Common Stock on the Series A-1 Note Trigger Date or (ii) the quotient (rounded
up to the nearest cent) of $125,000,000 divided by the number, as of the Series
A-1 Note Trigger Date, of the authorized but unissued shares of CMS Common Stock
that have not been reserved as of the Series A-1 Note Trigger Date by the Board
of Directors for other purposes subject to adjustment as provided in Section 6.
"Rights" means rights or warrants distributed by the Corporation under a
shareholder rights plan or agreement to all holders of CMS Common Stock
entitling the holders thereof to subscribe for or purchase shares of the
Corporation's capital stock (either initially or under certain circumstances),
which rights or warrants, until the occurrence of a specified event or events
("Rights Events"):
(i) are deemed to be transferred with such shares of CMS Common Stock,
(ii) are not exercisable, and
(iii) are also issued in respect of future issuances of CMS Common Stock.
"Rights Events" shall have the meaning ascribed to such term in the definition
of Rights.
"senior stock" shall mean (and references to shares ranking "senior to" or
"prior to" the Mandatorily Convertible Preferred Stock shall refer to), with
respect to Sections 3 and 7, any class or series of stock of the Corporation
ranking senior to the Mandatorily Convertible Preferred Stock in respect of the
right to receive dividends and, with respect to Sections 4 and 7, any class or
series of stock of the Corporation ranking senior to the Mandatorily Convertible
Preferred Stock
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with respect to the right to receive assets upon the liquidation, dissolution or
winding up of the affairs of the Corporation. All classes or series of stock of
the Corporation other than junior stock or parity stock shall be senior stock
with respect to the Mandatorily Convertible Preferred Stock, except to the
extent expressly provided otherwise in the Restated Articles of Incorporation,
as amended and restated.
"Series A-1 Notes" shall have the meaning ascribed to such term in the CMS
Remarketing Agreement.
"Series A-1 Note Trigger Date" shall mean the earlier of (A) the Successful
Repricing Date or (B) the date of a Failed Remarketing.
"Subsidiary" means any corporation or other entity of which securities or other
ownership interests having ordinary voting power to elect a majority of the
board of directors or other individuals performing similar functions, are at the
time directly or indirectly owned by the Corporation.
"Successful Repricing Date" shall have the meaning ascribed to such term in the
CMS Remarketing Agreement.
"Trading Day" means a day on which the Principal Market with respect to the
security in question is regularly scheduled to be open for trading. For purposes
of this definition, a day on which any such exchange is scheduled to close (as
opposed to unexpectedly closing) prior to its regular closing time shall not
constitute a Trading Day.
Section 2. Designation and Amount. The distinctive designation of the series of
Preferred Stock created by this amendment to the Restated Articles of
Incorporation shall be the "Series A Mandatorily Convertible Preferred Stock."
The number of shares that shall constitute such series shall be 125,000 shares.
COMMON STOCK
The shares of Common Stock may be issued from time to time as the Board
of Directors shall determine for such consideration as shall be fixed by the
Board of Directors. Each share of Common Stock of the Corporation shall be equal
to every other share of said stock in every respect, except as otherwise
provided in this Common Stock Division of Article III. Capitalized terms in this
Common Stock Division of Article III have the respective meanings set forth in
Section 6 of this Common Stock Division of Article III. The relative voting,
distribution, dividend, liquidation and other rights and limitations of the CMS
Energy Common Stock and Class G Common Stock are as follows:
(1) Dividend Rights. Subject to the express terms of any outstanding
series of Preferred Stock, dividends or distributions may be paid in cash or
otherwise upon the CMS Energy Common Stock and the Class G Common Stock out of
the assets of the Corporation in the relationship and upon the terms provided
for below with respect to each such class:
(a) Dividends on CMS Energy Common Stock. Dividends and
distributions on the CMS Energy Common Stock may be declared and paid
only out of the assets of the Corporation legally available therefor.
(b) Dividends on Class G Common Stock. Dividends and
distributions on the Class G Common Stock may be declared and paid only
out of the lesser of (i) the assets of the Corporation legally available
therefor and (ii) the Available Class G Dividend Amount.
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(c) Discrimination between CMS Energy Common Stock and Class G
Common Stock. The Board of Directors, subject to Sections l(a) and l(b),
may, in its sole discretion, declare dividends or distributions payable
exclusively to the holders of CMS Energy Common Stock, exclusively to
the holders of Class G Common Stock or to the holders of both of such
classes in equal or unequal amounts, notwithstanding the amounts of
assets available for dividends or distributions on each class, the
respective voting rights of each class, the amounts of prior dividends
declared on each class or any other factor.
(2) Exchange or Redemption. Shares of Class G Common Stock are subject
to exchange or redemption upon the terms provided below:
(a) Exchange or Redemption of Class G Common Stock.
(i) In the event of the Disposition, in one transaction or
a series of related transactions, by the Corporation of all or
substantially all of the properties and assets attributed to the
Consumers Gas Group (other than in connection with the
Disposition by the Corporation of all of its properties and
assets in one transaction or a series of related transactions
which results in the dissolution, liquidation or winding up of
the Corporation referred to in Section 4) to any person, entity
or group (other than (A) the holders of all outstanding shares of
Class G Common Stock on a pro rata basis or (B) any person,
entity or group in which the Corporation, directly or indirectly,
owns a majority equity interest), the Corporation shall, on or
prior to the first Business Day following the 90th day following
the consummation of such Disposition, exchange each outstanding
share of Class G Common Stock for a number of fully paid and
nonassessable shares of CMS Energy Common Stock having a Fair
Market Value equal to 110% of the Fair Market Value of one share
of Class G Common Stock as of the date of the first public
announcement by the Corporation of such Disposition.
For purposes of this Section 2(a)(i):
(x) as of any date, "substantially all of the properties
and assets attributed to the Consumers Gas Group" shall mean a
portion of such properties and assets (A) that represents at
least 80% of the then-current market value (as determined by the
Board of Directors) of the properties and assets attributed to
the Consumers Gas Group as of such date or (B) from which were
derived at least 80% of the aggregate revenues for the
immediately preceding twelve fiscal quarterly periods of the
Corporation (calculated on a pro forma basis to include revenues
derived from any of such properties and assets acquired during
such period) derived from properties and assets attributed to the
Consumers Gas Group during such periods;
(y) if immediately after any event, the Corporation,
directly or indirectly, owns less than a majority equity interest
in any person, entity or group in which the Corporation, directly
or indirectly, owned a majority equity interest immediately prior
to the occurrence of such event, a Disposition of all of the
properties and assets attributed to the Consumers Gas Group owned
by such person, entity or group shall be deemed to have occurred;
and
(z) in the case of a Disposition of properties and assets
in a series of related transactions, such Disposition shall not
be deemed to have been consummated until the consummation of the
last of such transactions.
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(ii) The Board of Directors may, by a majority vote of the
directors then in office, at any time declare that each of the
outstanding shares of Class G Common Stock shall be exchanged, on
an Exchange Date set forth in a notice to holders of Class G
Common Stock pursuant to Section 2(b)(i), for a number of fully
paid and nonassessable shares of CMS Energy Common Stock having a
Fair Market Value equal to 115% of the Fair Market Value of one
share of Class G Common Stock as of the date of the first public
announcement by the Corporation of such exchange.
(iii) At any time on or after the date on which all of the
consolidated assets and liabilities attributed to the Consumers
Gas Group (and no other assets or liabilities) become the
consolidated assets and liabilities of a single corporation, all
of the common stock of which is owned by the Corporation ("Gas
Group Subsidiary"), the Board of Directors may, in its sole
discretion and by a majority vote of the directors then in
office, provided that there are assets of the Corporation legally
available therefor, declare that all of the outstanding shares of
Class G Common Stock shall be exchanged on an Exchange Date set
forth in a notice to holders of Class G Common Stock pursuant to
Section 2(b)(i), for a number of the outstanding shares of common
stock of the Gas Group Subsidiary equal to the product of the Gas
Group Fraction and the number of all outstanding shares of common
stock of the Gas Group Subsidiary, on a pro rata basis, each of
which shall, upon such issuance, be fully paid and nonassessable.
(iv) After any Exchange Date on which all outstanding
shares of Class G Common Stock were exchanged, any share of Class
G Common Stock that is issued on conversion or exercise of any
Convertible Securities shall, immediately upon issuance pursuant
to such conversion or exercise and without any notice or any
other action on the part of the Corporation or its Board of
Directors or the holder of such share of Class G Common Stock:
(A) in the event the then-outstanding shares of
Class G Common Stock were exchanged for CMS Energy Common
Stock on such Exchange Date pursuant to Section 2(a)(i) or
2(a)(ii), be exchanged for the kind and amount of shares
of capital stock and other securities and property that a
holder of such Convertible Security would have been
entitled to receive pursuant to the terms of such
Convertible Security had such terms provided that the
conversion or exercise privilege in effect immediately
prior to any exchange by the Corporation of any of its
capital stock for shares of any other capital stock of the
Corporation would be adjusted so that the holder of any
such Convertible Security thereafter surrendered for
conversion or exercise would be entitled to receive the
number of shares of capital stock of the Corporation and
other securities and property such holder would have owned
immediately following such action had such Convertible
Security been converted or exercised immediately prior
thereto; or
(B) in the event the then-outstanding shares of
Class G Common Stock were exchanged for common stock of
the Gas Group Subsidiary pursuant to Section 2(a)(iii), be
redeemed, to the extent of the assets of the Corporation
legally available therefor, for $.01 in cash.
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The provisions of clause (A) of this Section 2(a)(iv) shall not apply to
the extent that equivalent adjustments are otherwise made pursuant to the
provisions of such Convertible Securities.
(b) General Exchange Provisions.
(i) In the event of any exchange pursuant to this Section
2, the Corporation shall cause to be given to each holder of
Class G Common Stock to be so exchanged a notice stating (A) that
shares of such class of Common Stock shall be exchanged, (B) the
Exchange Date, (C) the kind and amount of shares of capital stock
or cash and/or securities or other property to be received by
such holder with respect to each share of such class of Common
Stock held by such holder, including details as to the
calculation thereof, (D) the place or places where certificates
for shares of such class of Common Stock, properly endorsed or
assigned for transfer (unless the Corporation shall waive such
requirement), are to be surrendered for delivery of certificates
for shares of such capital stock or cash and/or securities or
other property and (E) that, subject to Section 2(b)(iii) hereof,
dividends or other distributions on such shares of Common Stock
will cease to be paid as of such Exchange Date. Such notice shall
be sent by first class mail, postage prepaid, not less than 30
nor more than 60 days prior to the Exchange Date, and in any case
to each holder of shares of such class of Common Stock to be
exchanged at such holder's address as the same appears on the
stock transfer books of the Corporation. Neither the failure to
mail such notice to any particular holder of such class of Common
Stock nor any defect therein shall affect the sufficiency thereof
with respect to any other holder of such class of Common Stock.
(ii) The Corporation shall not be required to issue or
deliver fractional shares of any class of capital stock or any
fractional securities to any holder of Class G Common Stock upon
any exchange, dividend or other distribution pursuant to this
Section 2. If more than one share of Class G Common Stock shall
be held at the same time by the same holder, the Corporation may
aggregate the number of shares of any class of capital stock that
shall be issuable or the amount of securities that shall be
deliverable to such holder upon any exchange, dividend or other
distribution (including any fractions of shares or securities).
If the number of shares of any class of capital stock or the
amount of securities remaining to be issued or delivered to any
holder of Class G Common Stock is a fraction, the Corporation
shall, if such fraction is not issued or delivered to such
holder, pay a cash adjustment in respect of such fraction in an
amount equal to the fair market value of such fraction on the
fifth Business Day prior to the date such payment is to be made.
For purposes of the preceding sentence, "fair market value" of
any fraction shall be (A) in the case of any fraction of a share
of any class of Common Stock, the product of such fraction and
the Fair Market Value of such share and (B) in the case of any
other fractional security, such value as is determined by the
Board of Directors.
(iii) No adjustments in respect of dividends or other
distributions shall be made upon the exchange of any shares of
Class G Common Stock; provided, however, that if the Exchange
Date with respect to such class of Common Stock shall be
subsequent to the record date for the payment of a dividend or
other distribution thereon or with respect thereto, the holders
of shares of such class of Common Stock at the close of business
on such record date shall be entitled to receive the dividend or
other distribution payable on or
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<PAGE> 23
with respect to such shares on the date set for payment of such
dividend or other distribution, notwithstanding the exchange of
such shares or the Corporation's default in payment of the
dividend or distribution due on such date.
(iv) Before any holder of shares of Class G Common Stock
shall be entitled to receive certificates representing shares of
any capital stock or cash and/or securities or other property to
be received by such holder with respect to such shares of such
class of Common Stock pursuant to this Section 2, such holder
shall surrender at such office as the Corporation shall specify
certificates for such shares of Common Stock, properly endorsed
or assigned for transfer (unless the Corporation shall waive such
requirement). The Corporation will as soon as practicable after
such surrender of certificates representing such shares of such
class of Common Stock deliver to the person for whose account
such shares of such class of Common Stock were so surrendered, or
to the nominee or nominees of such person, certificates
representing the number of whole shares of the kind of capital
stock or cash and/or securities or other property to which such
person shall be entitled as aforesaid, together with any
fractional payment contemplated by Section 2(b)(ii).
(v) From and after any applicable Exchange Date, all
rights of a holder of shares of Class G Common Stock that were
exchanged shall cease except for the right, upon surrender of the
certificates representing such shares, to receive certificates
representing shares of the kind and amount of capital stock or
cash and/or securities or other property for which such shares
were exchanged, together with any fractional payment contemplated
by Section 2(b)(ii) and rights to dividends or other
distributions as provided in Section 2(b)(iii). No holder of a
certificate that immediately prior to the applicable Exchange
Date for Class G Common Stock represented shares of such class of
Common Stock shall be entitled to receive any dividend or other
distribution with respect to shares of any kind of capital stock
into which such shares were exchanged until surrender of such
holder's certificate for a certificate or certificates
representing shares of such kind of capital stock. Upon such
surrender, there shall be paid to the holder the amount of any
dividends or other distributions (without interest) which
theretofore became payable with respect to a record date after
the Exchange Date, but that were not paid by reason of the
foregoing, with respect to the number of whole shares of the kind
of capital stock represented by the certificate or certificates
issued upon such surrender. From and after an Exchange Date for
Class G Common Stock, the Corporation shall, however, be entitled
to treat the certificates for shares of Class G Common Stock that
have not yet been surrendered for exchange as evidencing the
ownership of the number of whole shares of the kind or kinds of
capital stock for which the shares of Class G Common Stock
represented by such certificates shall have been exchanged,
notwithstanding the failure to surrender such certificates.
(vi) The Corporation will pay any and all documentary,
stamp or similar issue or transfer taxes that may be payable in
respect of the issue or delivery of any shares of capital stock
on exchange of shares of Class G Common Stock pursuant hereto.
The Corporation shall not, however, be required to pay any tax
that may be payable in respect of any transfer involved in the
issue and delivery of any shares of capital stock in a name other
than that in which the shares of Class G Common Stock so
exchanged were registered, and no such issue or delivery shall be
made unless and until the person requesting such
23
<PAGE> 24
issue has paid to the Corporation the amount of any such tax, or
has established to the satisfaction of the Corporation that such
tax has been paid.
(c) Increase in Authorized Shares in Connection with Exchange. In
order to give effect to any exchange of Class G Common Stock for CMS
Energy Common Stock as contemplated by Sections 2(a)(i) and 2(a)(ii),
the Board of Directors shall have the authority pursuant to Section
303(3) of the Michigan Business Corporation Act, or any successor
provision, to amend these Articles of Incorporation to increase the
number of authorized shares of CMS Energy Common Stock to the number
that will be sufficient, when added to the previously authorized but
unissued shares of CMS Energy Common Stock, to give effect to the
exchange of Class G Common Stock. The foregoing exchange provisions
shall be deemed to be a "conversion privilege" of the shares of Class G
Common Stock within the meaning of Section 303(3) of the Michigan
Business Corporation Act, or any successor provision.
(3) Voting Rights. (a) Except as provided in Section 3(b) and except as
otherwise provided by law, the holders of CMS Energy Common Stock and Class G
Common Stock shall vote together as a single class on all matters as to which
holders of Common Stock are entitled to vote. Subject to Section 5, on all
matters to be voted on by the holders of CMS Energy Common Stock and Class G
Common Stock together as a single class, (i) each share of outstanding CMS
Energy Common Stock shall have one vote and (ii) each share of outstanding Class
G Common Stock shall have one vote. If shares of only one class of Common Stock
are outstanding, each share of that class shall have one vote. If any class of
Common Stock of the Corporation is entitled to vote separately as a class, with
respect to any matter, each share of that class shall be entitled to one vote in
the separate vote on such matter.
(b) Unless the vote or consent of the holders of a greater number of
shares shall then be required by law, the vote or consent of the holders of a
majority of all of the shares of either class of Common Stock then outstanding,
voting as a separate class, shall be necessary for authorizing, effecting or
validating the merger or consolidation of the Corporation into or with any other
entity if such merger or consolidation would adversely affect the powers or
special rights of such class of Common Stock either directly by amendment of
these Articles of Incorporation or indirectly by requiring the holders of such
class to accept or retain, in such merger or consolidation, anything other than
(i) shares of such class or (ii) shares of the surviving or resulting
corporation having, in either case, powers and special rights identical to those
of such class prior to such merger or consolidation.
(4) Liquidation Rights. Subject to Section 5, in the event of the
dissolution, liquidation or winding up of the Corporation, whether voluntary or
involuntary, after payment or provision for payment of the debts and other
liabilities of the Corporation and after there shall have been paid or set apart
for the holders of Preferred Stock the full preferential amounts (including any
accumulated and unpaid dividends) to which they are entitled, the holders of
Class G Common Stock and CMS Energy Common Stock shall be entitled to receive,
on a per share basis, the same portion of all of the assets of the Corporation
remaining for distribution to the holders of Common Stock, regardless of whether
or not any of such assets were attributed to the Consumers Gas Group. Neither
the merger or consolidation of the Corporation into or with any other
corporation, nor the merger or consolidation of any other corporation into or
with the Corporation nor any sale, transfer or lease of all or any part of the
assets of the Corporation, shall be deemed to be a dissolution, liquidation or
winding up for purposes of this Section 4.
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<PAGE> 25
(5) Subdivision or Combination. If the Corporation shall in any manner
subdivide (by stock split, stock dividend or otherwise) or combine (by reverse
stock split or otherwise) the outstanding shares of either Class G Common Stock
or CMS Energy Common Stock, the voting and liquidation rights of CMS Energy
Common Stock relative to Class G Common Stock shall be appropriately adjusted so
as to avoid any dilution in the aggregate voting or liquidation rights of either
class of Common Stock.
(6) Definitions. As used in this Common Stock Division of Article III,
the following terms shall have the following meanings (with terms defined in the
singular having comparable meaning when used in the plural and vice versa),
unless another definition is provided or the context otherwise requires.
See Attached
ARTICLE IV
The address of the registered office is Fairlane Plaza South, Suite
1100, 330 Town Center Drive, Dearborn, Michigan 48126. The name of the resident
agent at the registered office is Thomas A. McNish. The mailing address of the
registered office is: 212 W. Michigan Ave., M440, Jackson, MI 49201-2277.
ARTICLE V
Special meetings of the shareholders may be called only by the Board of
Directors or by the Chairman of the Board.
ARTICLE VI
The number of directors of the Corporation shall be as specified in, or
determined in the manner provided in, the bylaws of the Corporation.
Any vacancies occurring on the Corporation's Board of Directors (whether
by reason of the death, resignation or removal of a director) may be filled by a
majority vote of the directors then in office although less than a quorum. An
increase in the number of members of the Board of Directors shall be construed
as creating a vacancy.
ARTICLE VII
A director may be removed by the affirmative vote of a majority of the
members of the Board of Directors then in office. A director also may be removed
by shareholders, but only for cause, at an annual meeting of shareholders and by
the affirmative vote of a majority of the shares then entitled to vote for the
election of directors. For purposes of this section, cause for removal shall be
construed to exist only if a director whose removal is proposed has been
convicted of a felony by a court of competent jurisdiction and such conviction
is no longer subject to appeal or has been adjudged by a court of competent
jurisdiction to be liable for willful misconduct in the performance of his or
her duty to the Corporation in a matter of substantial importance to the
Corporation and such adjudication is no longer subject to appeal.
ARTICLE VIII
A director shall not be personally liable to the Corporation or its
shareholders for monetary damages for breach of duty as a director except (i)
for a breach of the director's duty of loyalty to the Corporation or its
shareholders, (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) for a violation of
Section 551(1) of the Michigan Business Corporation Act, and (iv) for any
transaction from which the director derived an improper personal benefit. No
amendment to or repeal of this Article VIII, and no modification to its
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<PAGE> 26
provisions by law, shall apply to, or have any effect upon, the liability or
alleged liability of any director of the Corporation for or with respect to any
acts or omissions of such director occurring prior to such amendment, repeal or
modification.
ARTICLE IX
Each director and each officer of the Corporation shall be indemnified
by the Corporation to the fullest extent permitted by law against expenses
(including attorneys' fees), judgments, penalties, fines and amounts paid in
settlement actually and reasonably incurred by him or her in connection with the
defense of any proceeding in which he or she was or is a party or is threatened
to be made a party by reason of being or having been a director or an officer of
the Corporation. Such right of indemnification is not exclusive of any other
rights to which such director or officer may be entitled under any now or
hereafter existing statute, any other provision of these Articles, bylaw,
agreement, vote of shareholders or otherwise. If the Business Corporation Act of
the State of Michigan is amended after approval by the shareholders of this
Article IX to authorize corporate action further eliminating or limiting the
personal liability of directors, then the liability of a director of the
Corporation shall be eliminated or limited to the fullest extent permitted by
the Business Corporation Act of the State of Michigan, as so amended. Any repeal
or modification of this Article IX by the shareholders of the Corporation shall
not adversely affect any right or protection of a director of the Corporation
existing at the time of such repeal or modification.
ARTICLE X
Each director shall be a shareholder of the Corporation and any director
ceasing to be a shareholder shall thereupon immediately cease to be a director.
ARTICLE XI
The Corporation reserves the right to amend, alter, change or repeal any
provision in these Articles of Incorporation as permitted by law, and all rights
conferred on shareholders herein are granted subject to this reservation.
Notwithstanding the foregoing, the provisions of Articles V, VI, VII, VIII, IX
and this Article XI may not be amended, altered, changed or repealed unless such
amendment, alteration, change or repeal is approved by the affirmative vote of
the holders of not less than 75% of the outstanding shares entitled to vote
thereon.
Signed on November 8, 1999
CMS ENERGY CORPORATION
(S E A L)
By: /s/ Thomas A. McNish
-------------------------------
Thomas A. McNish
Vice President and Secretary
STATE OF MICHIGAN)
) ss.
COUNTY OF JACKSON)
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<PAGE> 27
On this 8th day of November, 1999, before me appeared Thomas A. McNish,
to me personally known, who, being by me duly sworn, did say that he is Vice
President and Secretary of CMS Energy Corporation, which executed the foregoing
instrument, and that the seal affixed to said instrument is the corporate seal
of said corporation, and that said instrument was signed and sealed in behalf of
said corporation by authority of its Board of Directors and shareholders, and
said officer acknowledged said instrument to be the free act and deed of said
corporation.
/s/ Renne E. Stephens
-----------------------------------
(S E A L) Renne E. Stephens
Notary Public for Jackson County
State of Michigan
My Commission Expires March 5, 2003
27
<PAGE> 28
ATTACHMENT TO PAGE 25
"Available Class G Dividend Amount" on any date ("calculation date") shall
mean the excess of:
(i) the product of (a) the Gas Group Fraction as of such calculation date and
(b) an amount equal to the total assets attributed to the Consumers Gas Group
less the total liabilities attributed to the Consumers Gas Group as of such
calculation date determined in accordance with generally accepted accounting
principles as in effect at such time applied on a basis consistent with that
applied in determining Consumers Gas Group Income; over
(ii) the product of (a) the Gas Group Fraction as of such calculation date and
(b) the amount that would be needed to satisfy any preferential rights to which
holders of any preferred stock attributed to the Consumers Gas Group are
entitled as of such calculation date;
provided that such excess shall be reduced by an amount, if any, sufficient to
ensure that the businesses attributed to the Consumers Gas Group shall be able
to pay their debts as they become due in the usual course of business.
"Business Day" shall mean each weekday other than any day on which any relevant
class of Common Stock is not traded on any national securities exchange or the
National Association of Securities Dealers Automated Quotations National Market
or in the over-the-counter market.
"Consumers Gas Group" shall mean, at any time, (i) all of the gas storage
business of Michigan Gas Storage Company, (ii) all of the gas utility business
of Consumers Power Company, (iii) all assets and liabilities of the Corporation
to the extent attributed to either of such businesses, whether or not such
assets or liabilities are or were assets and liabilities of such companies,
(iv) all assets and properties of the Corporation which when attributed to the
Consumers Gas Group increase the Retained Interest Shares, and (v) such
businesses, assets, and liabilities acquired directly or indirectly by the
Corporation after the Effective Date and determined by the Board of Directors
to be attributed to the Consumers Gas Group; provided that, from and after any
dividend or distribution with respect to any shares of Class G Common Stock
(other than a dividend or distribution payable in shares of Class G Common
Stock or Convertible Securities convertible into Class G Common Stock or
exercisable for Class G Common Stock), or any repurchase of shares of Class G
Common Stock from holders of Class G Common Stock generally, there shall no
longer be attributed to the Consumers Gas Group an amount of assets or
properties of the Consumers Gas Group equal to the aggregate amount of such
kind of assets or properties so paid in respect of shares of Class G Common
Stock multiplied by a fraction, the numerator of which is equal to the Retained
Interest Shares and the denominator of which is equal to the number of
outstanding shares of Class G Common Stock at such time.
"Consumers Gas Group Income" shall mean the consolidated net income or loss
attributed to the Consumers Gas Group determined in accordance with generally
accepted accounting principles, including consolidated income and expenses of
Consumers Power Company attributed to the operations of the Consumers Gas Group
on a substantially consistent basis, including, without limitation, corporate
administrative costs, net interest and other financial costs and income taxes.
"Convertible Securities" shall mean any securities of the Corporation that are
convertible into or exercisable for or evidence the right to acquire any shares
of CMS Energy Common Stock or Class G Common Stock, whether at such time or
upon the occurrence of certain events, pursuant to antidilution provisions of
such securities or otherwise.
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"Disposition" shall mean a sale, transfer, assignment or other disposition
(whether by merger, consolidation, sale or contribution of assets, properties or
stock or otherwise), but shall not include (1) an attribution of assets or
properties of the Corporation to the Consumers Gas Group if such attribution
increases the Retained Interest Shares, or (2) assets or properties of the
Corporation ceasing to be attributed to the Consumers Gas Group if the result
is a decrease in the Retained Interest Shares.
"Effective Date" shall mean May 22, 1995.
"Exchange Date" shall mean any date fixed for an exchange of shares of CMS
Energy Common Stock for Class G Common Stock, as set forth in a notice to
holders of Class G Common Stock pursuant to Section 2(b)(i) or of Convertible
Securities convertible into or exercisable for shares of Class G Common Stock.
"Fair Market Value" of shares of either class of Common Stock on any date means
the average of the daily closing prices thereof for the period of 20
consecutive Business Days commencing on the 30th Business Day prior to such
date. The closing price of shares of a class of Common Stock for each Business
Day shall be (i) if such shares are listed or admitted to trading on a national
securities exchange, the closing price on the New York Stock Exchange Composite
Tape (or any successor composite tape reporting transactions on national
securities exchanges) or, if such New York Stock Exchange Composite Tape shall
not be in use or shall not report transactions in such shares, the last
reported sales price regular way on the principal national securities exchange
on which such shares are listed or admitted to trading (which shall be the
national securities exchange on which the greatest number of such shares of
stock has been traded during such 20 consecutive Business Days), or, if there
is no transaction on any such Business Day in any such situation, the mean of
the bid and asked prices on such Business Day, or (ii) if such shares are not
listed or admitted to trading on any such exchange, the closing price, if
reported, or, if the closing price is not reported, the average of the closing
bid and asked prices as reported by the National Association of Securities
Dealers Automated Quotations or a similar source selected from time to time by
the Corporation for this purpose, and (iii) reduced, if such Business Day is
prior to any "ex" date or any similar date occurring during such period for any
dividend or distribution paid or to be (other than as contemplated in (iv)
below) paid with respect to such shares, by the fair market value (as
determined by the Board of Directors) of the per share amount of such dividend
or distribution, and (iv) appropriately adjusted, if such Business Day is prior
to (A) the effective date of any subdivision (by stock split, stock dividend,
or otherwise) or combination (by reverse stock split or otherwise) of such
shares, or (B) the "ex" date or any similar date for any dividend or
distribution of shares of such class of Common Stock on the outstanding shares
of such class of Common Stock, occurring during such period, to reflect such
subdivision, combination, dividend or distribution. In the event such closing
or bid and asked prices are unavailable, the Fair Market Value of such shares
shall be determined by the Board of Directors.
"Gas Group Fraction" as of any date is a fraction the numerator of which shall
be the number of shares of Class G Common Stock outstanding on such date and
the denominator of which shall be the sum of the number of shares of Class G
Common Stock outstanding on such date plus the Retained Interest Shares on such
date, provided that such fraction shall in no event be greater than one.
"Gas Group Subsidiary" shall have the meaning set forth in Section 2(a)(iii).
"Retained Interest Shares" shall initially be 32,000,000 shares; provided,
however, that such number from time to time shall be:
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<PAGE> 30
(i) adjusted as appropriate to reflect subdivisions (by stock split or
otherwise) and combinations (by reverse stock split or otherwise) of Class G
Common Stock and dividends or distributions of shares of Class G Common Stock
to holders thereof and other reclassifications of Class G Common Stock;
(ii) decreased by (A) the number of Retained Interest Shares issued or sold by
the Corporation, (B) the number of Retained Interest Shares issued upon
conversion or exercise of Convertible Securities which are not attributed to
the Consumers Gas Group, (C) the number of Retained Interest Shares issued by
the Corporation as a dividend or distribution or by reclassification or
exchange to holders of CMS Energy Common Stock and (D) the number (rounded, if
necessary, to the nearest whole number) equal to the aggregate fair value (as
determined by the Board of Directors) of assets or properties of the
Corporation which cease to be attributable to the Consumers Gas Group in
consideration for a decrease in the Retained Interest Shares divided by the
Fair Market Value of one share of Class G Common Stock as of the date such
assets or properties cease to be attributable to the Consumers Gas Group; and
(iii) increased by (A) the number of outstanding shares of Class G Common Stock
repurchased by the Corporation with assets which are not attributed to the
Consumers Gas Group, and (B) the number (rounded, if necessary, to the nearest
whole number) equal to the fair value (as determined by the Board of Directors)
of assets or properties of the Corporation that are attributed to the Consumers
Gas Group in consideration for an increase in the Retained Interest Shares
divided by the Fair Market Value of one share of Class G Common Stock as of the
date of such attribution.
(7) Determinations by the Board of Directors. Any determinations made in
compliance with applicable law by the Board of Directors of the Corporation
under any provision in this Article III shall be final and binding on all
shareholders of the Corporation.
30
<PAGE> 1
EXHIBIT (4)(a)
====================================
THIRD SUPPLEMENTAL INDENTURE
between
CONSUMERS ENERGY COMPANY
and
THE BANK OF NEW YORK
Dated as of November 4, 1999
====================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
ARTICLE I. DEFINITIONS
SECTION 1.1. Definition of Terms.............................................................................2
ARTICLE II. GENERAL TERMS AND CONDITIONS OF THE NOTES
SECTION 2.1. Designation and Principal Amount................................................................3
SECTION 2.2. Maturity........................................................................................3
SECTION 2.3. Form and Payment................................................................................3
SECTION 2.4. Global Note.....................................................................................4
SECTION 2.5. Interest........................................................................................5
ARTICLE III. REDEMPTION OF THE NOTES
SECTION 3.1. Special Event Redemption........................................................................6
SECTION 3.2. Optional Redemption by Issuer...................................................................7
SECTION 3.3. No Sinking Fund.................................................................................7
ARTICLE IV. EXTENSION OF INTEREST PAYMENT PERIOD
SECTION 4.1. Extension of Interest Payment Period............................................................7
SECTION 4.2. Notice of Extension.............................................................................8
ARTICLE V. EXPENSES
SECTION 5.1. Payment of Expenses.............................................................................9
SECTION 5.2. Payment Upon Resignation or Removal............................................................10
ARTICLE VI. SUBORDINATION
SECTION 6.1. Agreement to Subordinate.......................................................................10
ARTICLE VII. COVENANT TO LIST ON EXCHANGE
SECTION 7.1. Listing on an Exchange.........................................................................10
ARTICLE VIII. FORM OF NOTES
SECTION 8.1. Form of Note...................................................................................10
ARTICLE IX. ORIGINAL ISSUE OF NOTES
SECTION 9.1. Original Issue of Notes........................................................................16
ARTICLE X. MISCELLANEOUS
SECTION 10.1 Provisions of Indenture for the Sole Benefit of Parties and
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
Holders of Trust Securities....................................................................17
SECTION 10.2 Ratification of Indenture......................................................................17
SECTION 10.3. Trustee Not Responsible for Recitals...........................................................17
SECTION 10.4. Governing Law..................................................................................17
SECTION 10.5. Separability...................................................................................17
SECTION 10.6. Counterparts...................................................................................18
</TABLE>
ii
<PAGE> 4
THIRD SUPPLEMENTAL INDENTURE, dated as of November 4, 1999, (the
"Third Supplemental Indenture"), between Consumers Energy Company, a Michigan
Corporation (the "Issuer"), and The Bank of New York, as trustee (the "Trustee")
under the Indenture dated as of January 1, 1996 between the Issuer and the
Trustee (the "Indenture").
WHEREAS, the Issuer executed and delivered the Indenture to the
Trustee to provide for the future issuance of the Issuer's Securities to be
issued from time to time in one or more series as might be determined by the
Issuer under the Indenture, in an unlimited aggregate principal amount which may
be authenticated and delivered as provided in the Indenture; and
WHEREAS, Section 2.3 of the Indenture permits the terms of any
series of Securities to be established in an indenture supplemental to the
Indenture; and
WHEREAS, Section 8.1(d) of the Indenture provided that a
supplemental indenture may be entered into without the consent of any Holders of
Securities to supplement certain provisions of the Indenture; and
WHEREAS, Section 8.1(e) of the 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, pursuant to the terms of the Indenture, the Issuer desires
to provide for the establishment of a new series of its Securities to be known
as its 9 1/4% Subordinated Debentures due December 31, 2029 (the "Notes"), the
form and substance of such Notes and the terms, provisions and conditions
thereof to be set forth as provided in the Indenture and this Third Supplemental
Indenture; and
WHEREAS, Consumers Energy Company Financing III, a Delaware
statutory business trust (the "Trust"), has offered to the public $175 million
aggregate liquidation amount of its 9 1/4% Trust Originated Preferred Securities
(the "Preferred Securities"), representing undivided beneficial interests in the
assets of the Trust and proposes to invest the proceeds from such offering,
together with the proceeds of the issuance and sale by the Trust to the Issuer
of $5,412,375 aggregate liquidation amount of its 9 1/4% Trust Originated Common
Securities (together the "Trust Securities"), in $180,412,375 aggregate
principal amount of the Notes; and
WHEREAS, the Issuer wishes to supplement Section 13.2 of the
Indenture with respect to the Notes and the Preferred Securities; and
WHEREAS, the Issuer has requested that the Trustee execute and
deliver this Third Supplemental Indenture and all requirements necessary to make
this Third Supplemental Indenture a valid instrument in accordance with its
terms, and to make the Notes, when executed by the Issuer and authenticated and
delivered by the Trustee, the valid obligations of the Issuer, have been
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<PAGE> 5
performed, and the execution and delivery of this Third Supplemental Indenture
has been duly authorized in all respects.
NOW THEREFORE, in consideration of the purchase and acceptance of
the Notes by the Holders thereof, and for the purpose of setting forth, as
provided in the Indenture, the form and substance of the Notes and the terms,
provisions and conditions thereof, the Issuer covenants and agrees with the
Trustee as follows:
ARTICLE I.
DEFINITIONS
SECTION 1.1. Definition of Terms.
Unless the context otherwise requires:
(a) a term defined in the Indenture has the same meaning when used
in this Third Supplemental Indenture;
(b) a term defined anywhere in this Third Supplemental Indenture has
the same meaning throughout;
(c) the singular includes the plural and vice versa;
(d) a reference to a Section or Article is to a Section or Article
of this Third Supplemental Indenture;
(e) headings are for convenience of reference only and do not affect
interpretation;
(f) the following terms have the meanings given to them in the
Declaration: (i) Clearing Agency; (ii) Delaware Trustee; (iii) Redemption Tax
Opinion; (iv) No Recognition Opinion; (v) Preferred Security Certificate; (vi)
Property Trustee; (vii) Regular Trustees; (viii) Special Event; (ix) Tax Event;
(x) Underwriting Agreement; (xi) Investment Company Event; and (xii)
Distribution;
(g) the following terms have the meanings given to them in this
Section 1.1(g):
"Additional Interest" shall have the meaning set forth in
Section 2.5.
"Compounded Interest" shall have the meaning set forth in
Section 4.1.
"Coupon Rate" shall have the meaning set forth in Section 2.5.
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"Declaration" means the Amended and Restated Declaration of Trust of
Consumers Energy Company Financing III, a Delaware statutory business trust,
dated as of November 4, 1999.
"Deferred Interest" shall have the meaning set forth in Section 4.1.
"Dissolution Event" means that, as a result of the occurrence and
continuation of a Special Event, the Trust is to be dissolved in accordance with
the Declaration, and the Notes held by the Property Trustee are to be
distributed to the holders of the Trust Securities issued by the Trust pro rata
in accordance with the Declaration.
"Extended Interest Payment Period" shall have the meaning set forth
in Section 4.1.
"Global Note" shall have the meaning set forth in Section 2.4.
"Non Book-Entry Preferred Securities" shall have the meaning set
forth in Section 2.4.
"Optional Redemption Price" shall have the meaning set forth in
Section 3.2.
ARTICLE II.
GENERAL TERMS AND CONDITIONS OF THE NOTES
SECTION 2.1. Designation and Principal Amount.
There is hereby authorized and established a series of unsecured
Securities designated the "9 1/4% Subordinated Debentures due December 31,
2029", limited in aggregate principal amount to $175,000,000 (except as
contemplated in Section 2(f)(2) of the Indenture).
SECTION 2.2. Maturity.
The Maturity Date of the Notes is December 31, 2029.
SECTION 2.3. Form and Payment.
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<PAGE> 7
The Notes shall be issued in fully registered form without interest
coupons. Principal and interest on the Notes issued in certificated form will be
payable, the transfer of such Notes will be registrable and such Notes will be
exchangeable for Notes bearing identical terms and provisions, at the office or
agency of the Trustee in the Borough of Manhattan, the City of New York;
provided, however, that payment of interest may be made at the option of the
Issuer by check mailed to the Holder at such address as shall appear in the
Security Register or by wire transfer to an account maintained by the Holder.
Notwithstanding the foregoing, so long as the Holder of any Notes is the
Property Trustee, the payment of the principal of and interest (including
Compounded Interest and Additional Interest, if any) on such Notes held by the
Property Trustee will be made at such place and to such account as may be
designated by the Property Trustee.
SECTION 2.4. Global Note.
(a) In connection with a Dissolution Event,
(i) the Notes may be presented to the Trustee by the Property
Trustee in exchange for a global Note in an aggregate principal amount
equal to the aggregate principal amount of all outstanding Notes (a
"Global Note"), to be registered in the name of the Clearing Agency, or
its nominee, and delivered by the Trustee to the Clearing Agency for
crediting to the accounts of its participants pursuant to the instructions
of the Regular Trustees and the Clearing Agency will act as Depository for
the Notes. The Issuer upon any such presentation, shall execute a Global
Note in such aggregate principal amount and deliver the same to the
Trustee for authentication and delivery in accordance with the Indenture
and this Third Supplemental Indenture. Payments on the Notes issued as a
Global Note will be made to the Depositary; and
(ii) if any Preferred Securities are held in non book-entry
certificated form, the Notes may be presented to the Trustee by the
Property Trustee and any Preferred Security Certificate which represents
Preferred Securities other than Preferred Securities held by the Clearing
Agency or its nominee ("Non Book-Entry Preferred Securities") will be
deemed to represent beneficial interests in Notes presented to the Trustee
by the Property Trustee having an aggregate principal amount equal to the
aggregate liquidation amount of the Non Book-Entry Preferred Securities
until such Preferred Security Certificates are presented to the Security
Registrar for transfer or reissuance at which time such Preferred Security
Certificates will be canceled and a Note, registered in the name of the
holder of the Preferred Security Certificate or the transferee of the
holder of such Preferred Security Certificate, as the case may be, with an
aggregate principal amount equal to the aggregate liquidation amount of
the Preferred Security Certificate canceled, will be executed by the
Issuer and delivered to the Trustee for authentication and delivery in
accordance with the Indenture and this Third Supplemental Indenture.
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<PAGE> 8
(b) Except as provided in (c) below, a Global Note may be
transferred, in whole but not in part, only to another nominee of the
Depositary, or to a successor Depositary selected or approved by the Issuer or
to a nominee of such successor Depositary.
(c) If at any time the Depositary notifies the Issuer that it is
unwilling or unable to continue as Depositary or if at any time the Depositary
for such series shall no longer be registered or in good standing under the
Securities Exchange Act of 1934, as amended, or other applicable statute or
regulation, and a successor Depositary for such series is not appointed by the
Issuer within 90 days after the Issuer receives such notice or becomes aware of
such condition, as the case may be, the Issuer will execute, and, subject to
Section 2.8 of the Indenture, the Trustee, upon written notice from the Issuer,
will authenticate and deliver the Notes in definitive registered form, in
authorized denominations, and in an aggregate principal amount equal to the
principal amount of the Global Note in exchange for such Global Note. In
addition, the Issuer may at any time determine that the Notes shall no longer be
represented by a Global Note. In such event the Issuer will execute, and subject
to Section 2.8 of the Indenture, the Trustee, upon receipt of an Officers'
Certificate evidencing such determination by the Issuer, will authenticate and
deliver the Notes in definitive registered form, in authorized denominations,
and in an aggregate principal amount equal to the principal amount of the Global
Note in exchange for such Global Note. Upon the exchange of the Global Note for
such Notes in definitive registered form, in authorized denominations, the
Global Note shall be canceled by the Trustee. Such Notes in definitive
registered form issued in exchange for the Global Note shall be registered in
such names and in such authorized denominations as the Depositary, pursuant to
instructions from its direct or indirect participants or otherwise, shall
instruct the Trustee. The Trustee shall deliver such Notes to the Depositary for
delivery to the Persons in whose names such Notes are so registered.
SECTION 2.5. Interest.
(a) Each Note will bear interest at the rate of 9.25% per annum (the
"Coupon Rate") from the original date of issuance until the principal thereof
becomes due and payable, and on any overdue principal and (to the extent that
payment of such interest is enforceable under applicable law) on any overdue
installment of interest, at the Coupon Rate, compounded quarterly, payable
(subject to the provisions of Article IV) quarterly in arrears on March 31, June
30, September 30 and December 31 of each year (each, an "Interest Payment Date,"
commencing on December 31, 1999), to the Person in whose name such Note or any
predecessor Note is registered, at the close of business on the regular record
date for such interest installment, which, in respect of any Notes of which the
Property Trustee is the Holder or a Global Note, shall be the close of business
on the Business Day next preceding that Interest Payment Date. Notwithstanding
the foregoing sentence, if the Preferred Securities are no longer in book-entry
only form or, except if the Notes are held by the Property Trustee, the Notes
are not represented by a Global Note, the regular record date for such interest
installment shall be the fifteenth day of the month in which the applicable
Interest Payment Date occurs.
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<PAGE> 9
(b) The amount of interest payable for any period will be computed
on the basis of a 360-day year of twelve 30-day months. Except as provided in
the following sentence, the amount of interest payable for any period shorter
than a full quarterly period for which interest is computed, will be computed on
the basis of the actual number of days elapsed in such a 90-day period. In the
event that any date on which interest is payable on the Notes is not a Business
Day, then payment of interest payable on such date will be made on the next
succeeding day which is a Business Day (and without any interest or other
payment in respect of any such delay), except that, if such Business Day is in
the next succeeding calendar year, such payment shall be made on the immediately
preceding Business Day, in each case with the same force and effect as if made
on such date.
(c) If, at any time while the Property Trustee is the Holder of any
Notes, the Trust or the Property Trustee is required to pay any taxes, duties,
assessments or governmental charges of whatever nature (other than withholding
taxes) imposed by the United States, or any other taxing authority, then, in any
case, the Issuer will pay as additional interest ("Additional Interest") on the
Notes held by the Property Trustee, such additional amounts as shall be required
so that the net amounts received and retained by the Trust and the Property
Trustee after paying such taxes, duties, assessments or other governmental
charges will be equal to the amounts the Trust and the Property Trustee would
have received had no such taxes, duties, assessments or other governmental
charges been imposed.
ARTICLE III.
REDEMPTION OF THE NOTES
SECTION 3.1. Special Event Redemption.
If (a) a Tax Event has occurred and is continuing and (i) the Issuer
has received a Redemption Tax Opinion, or (ii) The Regular Trustees shall have
been informed by tax counsel that a No Recognition Opinion cannot be delivered
to the Trust, or (b) an Investment Company Event has occurred and is continuing,
then, notwithstanding Section 3.2(a) but subject to Section 3.2(b) and Article
Eleven of the Indenture, the Issuer shall have the right upon not less than 30
days' nor more than 60 days' notice to the Holders of the Notes to redeem the
Notes, in whole or in part, for cash within 90 days' following the occurrence of
such Special Event (the "90 Day Period") at a redemption price equal to 100% of
the principal amount to be redeemed plus any accrued and unpaid interest thereon
to the date of such redemption (the "Redemption Price"), provided that, if at
the time there is available to the Issuer or the Trust the opportunity to
eliminate, within the 90 Day Period, the Special Event by taking some
ministerial action ("Ministerial Action"), such as filing a form or making an
election, or pursuing some other similar reasonable measure which has no adverse
effect on the Issuer, the Trust or the Holders of the Trust Securities issued by
the Trust, the Issuer shall pursue such Ministerial Action in lieu of
redemption, and, provided, further, that the Issuer shall have no right to
redeem the Notes while the Trust is pursuing any Ministerial Action pursuant to
its obligations under the Declaration. The Redemption Price shall be paid prior
to 12:00 noon, New
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<PAGE> 10
York time, on the date of such redemption or such earlier time as the Issuer
determines, and the Issuer shall deposit with the Trustee an amount sufficient
to pay the Redemption Price by 10:00 a.m., New York time, on the date such
Redemption Price is to be paid.
SECTION 3.2. Optional Redemption by Issuer.
(a) Subject to the provisions of Section 3.2(b) and to the
provisions of Article Eleven of the Indenture, the Issuer shall have the right
to redeem the Notes, in whole or in part, from time to time, on or after
November 4, 2004, at a redemption price equal to 100% of the principal amount to
be redeemed plus any accrued and unpaid interest thereon to the date of such
redemption (the "Optional Redemption Price"). Any redemption pursuant to this
paragraph will be made upon not less than 30 days' nor more than 60 days' notice
to the Holder of the Notes, at the Optional Redemption Price. If the Notes are
only partially redeemed pursuant to this Section 3.2, the Notes will be redeemed
on a pro rata basis; provided that, if at the time of redemption the Notes are
registered as a Global Note, the Depository shall determine, in accordance with
its procedures, the principal amount of such Notes held by each Holder of Notes
to be redeemed. The Optional Redemption Price shall be paid prior to 12:00 noon,
New York time, on the date of such redemption or at such earlier time as the
Issuer determines and the Issuer shall deposit with the Trustee an amount
sufficient to pay the Optional Redemption Price by 10:00 a.m., New York time, on
the date such Optional Redemption Price is to be paid.
(b) If a partial redemption of the Notes would result in the
delisting of the Preferred Securities from any national securities exchange or
other organization on which the Preferred Securities are then listed, the Issuer
shall not be permitted to effect such partial redemption and may only redeem the
Notes in whole.
SECTION 3.3. No Sinking Fund.
The Notes are not entitled to the benefit of any sinking fund.
ARTICLE IV.
EXTENSION OF INTEREST PAYMENT PERIOD
SECTION 4.1. Extension of Interest Payment Period.
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<PAGE> 11
The Issuer shall have the right, at any time and from time to time
during the term of the Notes, to defer payments of interest by extending the
interest payment period of such Notes for a period not exceeding 20 consecutive
quarters (the "Extended Interest Payment Period"), during which Extended
Interest Payment Period no interest shall be due and payable; provided that, no
Extended Interest Payment Period may extend beyond the Maturity Date. To the
extent permitted by applicable law, interest, the payment of which has been
deferred because of the extension of the interest payment period pursuant to
this Section 4.1, will bear interest thereon at the Coupon Rate compounded
quarterly for each quarter of the Extended Interest Payment Period ("Compounded
Interest"). At the end of the Extended Interest Payment Period, the Issuer shall
pay all interest accrued and unpaid on the Notes, including any Additional
Interest and Compounded Interest (together, "Deferred Interest") that shall be
payable to the Holders of the Notes in whose names the Notes are registered in
the Security Register on the First record date after the end of the Extended
Interest Payment Period. Prior to the termination of any Extended Interest
Payment Period, the Issuer may further extend such period, provided that such
period together with all such further extensions thereof shall not exceed 20
consecutive quarters. Upon the termination of any Extended Interest Payment
Period and upon the payment of all Deferred Interest then due, the Issuer may
commence a new Extended Interest Payment Period, subject to the foregoing
requirements. No interest shall be due and payable during an Extended Interest
Payment Period, except at the end thereof, but the Issuer may prepay at any time
all or any portion of the interest accrued during an Extended Interest Payment
Period.
The limitations set forth in Section 3.5 of the Indenture shall
apply during any Extended Interest Payment Period.
SECTION 4.2. Notice of Extension.
(a) If the Property Trustee is the only registered Holder of the
Notes at the time the Issuer elects an Extended Interest Payment Period, the
Issuer shall give written notice to the Regular Trustees, the Property Trustee
and the Trustee of its election of such Extended Interest Payment Period one
Business Day before the earlier of (i) the next succeeding date on which
Distributions on the Trust Securities issued by the Trust are payable, or (ii)
the date the Trust is required to give notice of the record date, or the date
such Distributions are payable, to the New York Stock Exchange or other
applicable self-regulatory organization or to holders of the Preferred
Securities, but in any event at least one Business Day before such record date.
(b) If the Property Trustee is not the only Holder of the Notes at
the time the Issuer elects an Extended Interest Payment Period, the Issuer shall
give the Holders of the Notes and the Trustee written notice of its election of
such Extended Interest Payment Period one Business Days before the earlier of
(i) the next succeeding Interest Payment Date, or (ii) the date the Issuer is
required to give notice of the record or payment date of such interest payment
to the New York Stock Exchange or other applicable self-regulatory organization
or to Holders of the Notes.
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(c) The quarter in which any notice is given pursuant to paragraphs
(a) or (b) of this Section 4.2 shall be counted as one of the 20 quarters
permitted in the maximum Extended Interest Payment Period permitted under
Section 4.1.
ARTICLE V.
EXPENSES
SECTION 5.1. Payment of Expenses.
In connection with the offering, sale and issuance of the Notes to
the Property Trustee and in connection with the sale of the Trust Securities by
the Trust, the Issuer, in its capacity as borrower with respect to the Notes,
shall:
(a) pay all costs and expenses relating to the offering, sale and
issuance of the Notes, including commissions to the underwriters payable
pursuant to the Underwriting Agreement and the Pricing Agreements, and
compensation of the Trustee under the Indenture in accordance with the
provisions of Section 6.6 of the Indenture;
(b) pay all costs and expenses of the Trust (including, but not
limited to, costs and expenses relating to the organization of the Trust, the
offering, sale and issuance of the Trust Securities (including commissions to
the underwriters in connection therewith), the fees and expenses of the Property
Trustee and the Delaware Trustee, the costs and expenses relating to the
operation of the Trust, including without limitation, costs and expenses of
accountants, attorneys, statistical or bookkeeping services, expenses for
printing and engraving and computing or accounting equipment, paying agent(s),
registrar(s), transfer agent(s), duplicating, travel and telephone and other
telecommunications expenses and costs and expenses incurred in connection with
the acquisition, financing, and disposition of Trust assets);
(c) be primarily liable for any indemnification obligations arising
with respect to the Declaration; and
(d) pay any and all taxes (other than United States withholding
taxes attributable to the Trust or its assets) and all liabilities, costs and
expenses with respect to such taxes of the Trust.
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<PAGE> 13
SECTION 5.2. Payment Upon Resignation or Removal.
Upon termination of this Third Supplemental Indenture or the
Indenture or the removal or resignation of the Trustee pursuant to Section 6.10
of the Indenture, the Issuer shall pay to the Trustee all amounts accrued to the
date of such termination, removal or resignation. Upon termination of the
Declaration or the removal or resignation of the Delaware Trustee or the
Property Trustee, as the case may be, pursuant to Section 5.6 of the
Declaration, the Issuer shall pay to the Delaware Trustee or the Property
Trustee, as the case may be, all amounts accrued to the date of such
termination, removal or resignation.
ARTICLE VI.
SUBORDINATION
SECTION 6.1. Agreement to Subordinate.
The Issuer covenants and agrees, and each Holder of Notes issued
hereunder, by such Holder's acceptance thereof likewise covenants and agrees,
that pursuant to Section 2.3(f)(9) of the Indenture all Notes shall be issued as
Subordinated Securities subject to the provisions of Article Twelve of the
Indenture and this Article VI; and each Holder of a Note by its acceptance
thereof accepts and agrees to be bound by such provisions.
ARTICLE VII.
COVENANT TO LIST ON EXCHANGE
SECTION 7.1. Listing on an Exchange.
In connection with the distribution of the Notes to the holders of
the Preferred Securities upon a Dissolution Event, the Issuer will use its best
efforts to list such Notes on the New York Stock Exchange or on such other
exchange as the Preferred Securities are then listed.
ARTICLE VIII.
FORM OF NOTES
SECTION 8.1. Form of Note.
The Notes and the Trustee's Certificate of Authentication to be
endorsed thereon are to be substantially in the following forms and the Notes
shall have such additional terms as may be set forth in such form:
(FORM OF FACE OF NOTE)
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[IF THE NOTE IS TO BE A GLOBAL NOTES, INSERT - This Note is a Global
Note within the meaning of the Indenture hereinafter referred to, and is
registered in the name of, a Depositary or a nominee of a Depositary. This Note
is exchangeable for Notes registered in the name of a person other than the
Depositary or its nominee only in the limited circumstances described in the
Indenture, and no transfer of this Note (other than a transfer of this Note as a
whole by the Depositary to a nominee of the Depositary or by a nominee of the
Depositary to the Depositary or another nominee of the Depositary) may be
registered except in limited circumstances.
Unless this Note is presented by an authorized representative of The
Depository Trust Company (55 Water Street, New York, New York) to the issuer or
its agent for registration of transfer, exchange or payment, and any Note issued
is registered in the name of Cede & Co. or such other name as requested by an
authorized representative of The Depository Trust Company and any payment hereon
is made to Cede & Co., ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY A PERSON IS WRONGFUL since the registered owner hereof, Cede & Co.,
has an interest herein.]
No.
$
CUSIP NO. 210518BG0
CONSUMERS ENERGY COMPANY
9 1/4% SUBORDINATED DEBENTURES
DUE DECEMBER 31, 2029
Consumers Energy Company, a Michigan corporation (the "Issuer",
which term includes any successor corporation under the Indenture hereinafter
referred to), for value received, hereby promises to pay to ______________, or
registered assigns, the principal sum of one hundred eighty million four hundred
twelve thousand and three hundred seventy five Dollars ($180,412,375) on
December 31, 2029, and to pay interest on said principal sum from November 4,
1999, or from the most recent interest payment date (each such date, an
"Interest Payment Date") to which interest has been paid or duly provided for,
quarterly (subject to deferral as set forth herein) in arrears on March 31, June
30, September 30 and December 31 of each year commencing December 31, 1999 at
the rate of 9 1/4% per annum until the principal hereof shall have become due
and payable, and on any overdue principal and premium, if any, and (without
duplication and to the extent that payment of such interest is enforceable under
applicable law) on any overdue installment of interest at the same rate per
annum compounded quarterly. 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. In the event that any date on which interest is payable on this Note is
not a Business Day, then payment of interest payable on such date will be made
on the next succeeding day that is a Business Day (and without any interest
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<PAGE> 15
or other payment in respect of any such delay), except that, if such Business
Day is in the next succeeding calendar year, such payment shall be made on the
immediately preceding Business Day, in each case with the same force and effect
as if made on such date. The interest installment so payable, and punctually
paid or duly provided for, on any Interest Payment Date will, as provided in the
Indenture, be paid to the person in whose name this Note (or one or more
Predecessor Securities, as defined in said Indenture) is registered at the close
of business on the regular record date for such interest installment, which
shall be the close of business on the Business Day next preceding such Interest
Payment Date. [IF PURSUANT TO THE PROVISIONS OF THE INDENTURE THE DEBENTURES ARE
NO LONGER REPRESENTED BY A GLOBAL NOTE -- which shall be the close of business
on the 15th day of the month in which such Interest Payment Date occurs.] If and
to the extent the Issuer shall default in the payment of the interest due on
such Interest Payment Date, interest shall be paid to the person in whose name
this Note is registered at the close of business on a subsequent record date
(which shall not be less than five Business Days prior to the date of payment of
such defaulted interest) established by notice given by mail by or on behalf of
the Issuer to the Holder of this Note not less than 15 days preceding such
subsequent Record Date. The principal of (and premium, if any) and the interest
on this Note shall be payable at the office or agency of the Trustee in the
Borough of Manhattan, the City of New York maintained for that purpose in any
coin or currency of the United States of America that at the time is legal
tender for payment of public and private debts; provided, however, that payment
of interest may be made at the option of the Issuer by check mailed to the
registered Holder at such address as shall appear in the Security Register or by
wire transfer to an account maintained by the Holder. Notwithstanding the
foregoing, so long as the Holder of this Note is the Property Trustee, the
payment of the principal of (and premium, if any) and interest on this Note will
be made at such place and to such account as may be designated by the Property
Trustee.
The indebtedness evidenced by this Note is, to the extent provided
in the Indenture, subordinate and junior in right of payment to the prior
payment in full of all Senior Indebtedness, and this Note is issued subject to
the provisions of the Indenture with respect thereto. Each Holder of this Note,
by accepting the same, (a) agrees to and shall be bound by such provisions, (b)
authorizes and directs the Trustee on his or her behalf to take such action as
may be necessary or appropriate to acknowledge or effectuate the subordination
so provided and (c) appoints the Trustee his or her attorney-in-fact for any and
all such purposes. Each Holder hereof, by his or her acceptance hereof, hereby
waives all notice of the acceptance of the subordination provisions contained
herein and in the Indenture by each holder of Senior Indebtedness, whether now
outstanding or hereafter incurred, and waives reliance by each such holder upon
said provisions.
This Note shall not be entitled to any benefit under the Indenture
hereinafter referred to, be valid or become obligatory for any purpose until the
Certificate of Authentication hereon shall have been signed by or on behalf of
the Trustee.
The provisions of this Note are continued on the reverse side hereof
and such continued provisions shall for all purposes have the same effect as
though fully set forth at this place.
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<PAGE> 16
IN WITNESS WHEREOF, the Issuer has caused this instrument to be
executed.
Dated
Consumers Energy Company
[Seal] By:
Name:
Title
Attest:
By:
Name:
Title:
(FORM OF CERTIFICATE OF AUTHENTICATION)
CERTIFICATE OF AUTHENTICATION
This is one of the Securities of the series of Securities described
in the within-mentioned Indenture.
[ ]
--------------------------------
as Trustee
By
Authorized Signatory
(FORM OF REVERSE OF NOTE)
This Note is one of a duly authorized series of Securities of the
Issuer (herein sometimes referred to as the "Notes"), specified in the
Indenture, all issued or to be issued in one or more series under and pursuant
to an Indenture dated as of January 1, 1996, duly executed and delivered between
the Issuer and The Bank of New York, a New York banking corporation, as Trustee
(the "Trustee"), as supplemented by certain supplemental indentures, including
the Third Supplemental Indenture
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<PAGE> 17
dated as of November 4, 1999, between the Issuer and the Trustee (the Indenture
as so supplemented, the "Indenture"), to which Indenture and all indentures
supplemental thereto reference is hereby made for a description of the rights,
limitations of rights, obligations, duties and immunities thereunder of the
Trustee, the Issuer and the Holders of the Notes. By the terms of the Indenture,
the Notes are issuable in series that may vary as to amount, date of maturity,
rate of interest and in other respects as provided in the Indenture. This series
of Notes is limited in aggregate principal amount as specified in said Third
Supplemental Indenture.
The Issuer shall have the right to redeem this Note at the option of
the Issuer, without premium or penalty, in whole or in part at any time on or
after November 4, 2004, or at any time in certain circumstances upon the
occurrence of a Special Event, at a redemption price equal to 100% of the
principal amount plus any accrued but unpaid interest, to the date of such
redemption. Any redemption pursuant to this paragraph will be made upon not less
than 30 days nor more than 60 days' notice. If the Notes are only partially
redeemed by the Issuer pursuant to an Optional Redemption, the Notes will be
redeemed pro rata.
In the event of redemption of this Note in part only, a new Note or
Notes of this series for the unredeemed portion hereof will be issued in the
name of the Holder hereof upon the cancellation hereof.
In case an Event of Default, as defined in the Indenture, shall have
occurred and be continuing, the principal of all of the Notes may be declared,
and upon such declaration shall become, due and payable, in the manner, with the
effect and subject to the conditions provided in the Indenture.
The Indenture contains provisions permitting the Issuer and the
Trustee, with the consent of the Holders of not less than a majority in
aggregate principal amount of the Notes and other Indenture securities of each
series affected at the time Outstanding and affected (voting as one class), as
defined in the Indenture, to execute supplemental indentures for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of the Indenture or of any supplemental indenture or of modifying in
any manner the rights of the Holders of the Notes; provided, however, that the
Company and the Trustee may not, without the consent of the Holder of each Note
then Outstanding and affected thereby: (a) change the time of payment of the
principal (or any installment) of any Note, or reduce the principal amount
thereof, or reduce the rate or change the time of payment of interest thereon,
or impair the right to institute suit for the enforcement of any payment on any
Note when due or (b) reduce the percentage in principal amount of the Notes, the
consent of whose Holders is required for any such modification or for any waiver
provided for in the Indenture. The Indenture also contains provisions providing
that prior to the acceleration of the maturity of any Note or other securities
outstanding under the Indenture, the Holders of a majority in aggregate
principal amount of Notes of and other Securities Outstanding under the
Indenture with respect to which a default or/an Event of Default shall have
occurred and be continuing (voting as one class) may on behalf of the Holders of
all such affected Securities (including the Notes) waive any past default and
its consequences, except a default or an Event of Default in respect of a
covenant or provision of the Indenture or of any Note or other Security which
cannot be modified
14
<PAGE> 18
or amended without the consent of the Holder of each Note or other Security
affected. Any such consent or waiver by the registered Holder of this Note
(unless revoked as provided in the Indenture) shall be conclusive and binding
upon such Holder and upon all future Holders and owners of this Note and of any
Note issued in exchange herefor or in place hereof (whether by registration of
transfer or otherwise), irrespective of whether or not any notation of such
consent or waiver is made upon this Note.
No reference herein to the Indenture and no provision of this 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 premium, if any, and
interest on this Note at the time and place and at the rate and in the money
herein prescribed.
The Issuer shall have the right at any time during the term of the
Notes and from time to time to extend the interest payment period of such Notes
for up to 20 consecutive quarters (an "Extended Interest Payment Period"), at
the end of which period the Issuer shall pay all interest then accrued and
unpaid (together with interest thereon at the rate specified for the Notes to
the extent that payment of such interest is enforceable under applicable law).
Before the termination of any such Extended Interest Payment Period, the Issuer
may further extend such Extended Interest Payment Period, provided that such
Extended Interest Payment Period together with all such further extensions
thereof shall not exceed 20 consecutive quarters. At the termination of any such
Extended Interest Payment Period and upon the payment of all accrued and unpaid
interest and any additional amounts then due, the Issuer may commence a new
Extended Interest Payment Period.
As provided in the Indenture and subject to certain limitations
therein set forth, this Note is transferable by the registered Holder hereof on
the Security Register of the Issuer, upon surrender of this Note for
registration of transfer at the office or agency of the Trustee in the City and
State of New York accompanied by a written instrument or instruments of transfer
in form satisfactory to the Issuer or the Trustee duly executed by the
registered Holder hereof or his attorney duly authorized in writing, and
thereupon one or more new Notes of authorized denominations and for the same
aggregate principal amount and series will be issued to the designated
transferee or transferees. No service charge will be made for any such transfer,
but the Issuer may require payment of a sum sufficient to cover any tax or other
governmental charge payable in relation thereto.
Prior to due presentment for registration of transfer of this Note,
the Issuer, the Trustee, any paying agent and the Security Registrar may deem
and treat the registered holder hereof as the absolute owner hereof (whether or
not this Note shall be overdue and notwithstanding any notice of ownership or
writing hereon made by anyone other than the Security Registrar) for the purpose
of receiving payment of or on account of the principal hereof and premium, if
any, and interest due hereon and for all other purposes, and neither the Issuer
nor the Trustee nor any paying agent nor any Security Registrar shall be
affected by any notice to the contrary.
No recourse shall be had for the payment of the principal of or the
interest on this Note, or for any claim based hereon, or otherwise in respect
hereof, or based on or in respect of the
15
<PAGE> 19
Indenture, against any incorporator, stockholder, officer or director, past,
present or future, as such, of the Issuer or of any predecessor or successor
corporation, whether by virtue of any constitution, statute or rule of law, or
by the enforcement of any assessment or penalty or otherwise, all such liability
being, by the acceptance hereof and as part of the consideration for the
issuance hereof, expressly waived and released.
Notes of this series so issued are issuable only in registered form
without coupons in denominations of $25 and any integral multiple thereof. As
provided in the Indenture and subject to certain limitations herein and therein
set forth, Notes of this series so issued are exchangeable for a like aggregate
principal amount of Notes of this series in authorized denominations, as
requested by the Holder surrendering the same.
All terms used in this Note that are defined in the Indenture shall
have the meanings assigned to them in the Indenture.
[END OF FORM OF NOTE]
ARTICLE IX.
ORIGINAL ISSUE OF NOTES
SECTION 9.1. Original Issue of Notes.
Notes in the aggregate principal amount of $____________ may, upon
execution of this Third Supplemental Indenture, be executed by the Issuer and
delivered to the Trustee for authentication, and the Trustee shall thereupon
authenticate and deliver said Notes to or upon the written order of the Issuer,
in accordance with Section 2.4 of the Indenture.
16
<PAGE> 20
ARTICLE X.
MISCELLANEOUS
SECTION 10.1 Provisions of Indenture for the Sole Benefit of Parties and
Holders of Trust Securities.
Notwithstanding Section 13.2 of the Indenture, for so long as any
Trust Securities remain outstanding, the Issuer's obligations under the
Indenture and this Third Supplemental Indenture will also be for the benefit of
the holders of the Trust Securities, and the Issuer acknowledges and agrees that
such holders will be entitled to enforce certain payment obligations under the
Notes directly against the Issuer to the extent provided in the Declaration.
SECTION 10.2 Ratification of Indenture.
The Indenture, as supplemented by this Third Supplemental Indenture,
is in all respects ratified and confirmed, and this Third Supplemental Indenture
shall be deemed part of the Indenture in the manner and to the extent herein and
therein provided.
SECTION 10.3. Trustee Not Responsible for Recitals.
The recitals herein contained are made by the Issuer and not by the
Trustee, and the Trustee assumes no responsibility for the correctness thereof.
The Trustee makes no representation as to the validity or sufficiency of this
Third Supplemental Indenture.
SECTION 10.4. Governing Law.
This Third Supplemental Indenture and each Note shall be deemed to
be a contract made under the internal laws of the State of Michigan, and for all
purposes shall be construed in accordance with the laws of said State; provided,
however, that the rights, duties and obligations of the Trustee are governed and
construed in accordance with the laws of the State of New York.
SECTION 10.5. Separability.
In case any one or more of the provisions contained in this Third
Supplemental Indenture or in the Notes shall for any reason be held to be
invalid, illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provisions of this Third
Supplemental Indenture or of the Notes, but this Third Supplemental Indenture
and the Notes shall be construed as if such invalid or illegal or unenforceable
provision had never been contained herein or therein.
17
<PAGE> 21
SECTION 10.6. Counterparts.
This Third Supplemental Indenture may be executed in any number of
counterparts each of which shall be an original, but such counterparts shall
together constitute but one and the same instrument.
18
<PAGE> 22
IN WITNESS WHEREOF, the parties hereto have caused this Third
Supplemental Indenture to be duly executed on the date or dates indicated in the
acknowledgments and as of the day and year first above written.
Consumers Energy Company
By: /s/ Alan M. Wright
--------------------------------
Name: Alan M. Wright
Title: Senior Vice President and
Chief Financial Officer
[Seal]
Attest:
By: /s/ Thomas A. McNish
----------------------
Thomas A. McNish
Vice President
and Secretary
The Bank of New York, as Trustee
By: /s/ Michael Culhane
----------------------
Name: Michael Culhane
Title: Vice President
19
<PAGE> 1
Exhibit (12)
CMS ENERGY CORPORATION
Ratio of Earnings to Fixed Charges and Preferred
Securities Dividends and Distributions
(Millions of Dollars)
<TABLE>
<CAPTION>
Nine Months
Ended /---------- Years Ended December 31 ----------/
September 30, 1999 1998 1997 1996 1995 1994
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(b)
Earnings as defined (a)
Consolidated net income $ 256 $ 242 $ 244 $ 224 $ 195 $ 177
Income taxes 91 100 108 137 113 91
Exclude equity basis subsidiaries (53) (92) (80) (85) (57) (18)
Fixed charges as defined, adjusted to
exclude capitalized interest of $34, $28, $13,
$5, $4 and $2 million for the nine months
ended September 30, 1999 and for the years ended
December 31, 1998, 1997, 1996, 1995
and 1994, respectively 413 395 360 313 299 253
-----------------------------------------------------------
Earnings as defined $ 707 $ 645 $ 632 $ 589 $ 550 $ 503
===========================================================
Fixed charges as defined (a)
Interest on long-term debt $ 365 $ 319 $ 273 $ 230 $ 224 $ 193
Estimated interest portion of lease rental 4 8 8 10 9 9
Other interest charges 38 48 49 43 42 30
Preferred securities dividends and
distributions 62 77 67 54 42 36
-----------------------------------------------------------
Fixed charges as defined $ 469 $ 452 $ 397 $ 337 $ 317 $ 268
===========================================================
Ratio of earnings to fixed charges and
preferred securities dividends and distributions 1.51 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)(a)
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 September 30, 1999, which includes our report
dated November 10, 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.
Detroit, Michigan,
November 10, 1999.
<PAGE> 1
Exhibit (15)(b)
To Consumers Energy Company:
We are aware that Consumers Energy Company has incorporated by reference in its
Registration Statement No. 333-89363 its Form 10-Q for the quarter ended
September 30, 1999, which includes our report dated November 10, 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.
Detroit, Michigan,
November 10, 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 3,974
<OTHER-PROPERTY-AND-INVEST> 5,648
<TOTAL-CURRENT-ASSETS> 1,961
<TOTAL-DEFERRED-CHARGES> 3,011
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 14,594
<COMMON> 1
<CAPITAL-SURPLUS-PAID-IN> 2,666
<RETAINED-EARNINGS> (180)
<TOTAL-COMMON-STOCKHOLDERS-EQ> 2,353
944
44
<LONG-TERM-DEBT-NET> 2,086
<SHORT-TERM-NOTES> 317
<LONG-TERM-NOTES-PAYABLE> 5,006
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 273
0
<CAPITAL-LEASE-OBLIGATIONS> 89
<LEASES-CURRENT> 35
<OTHER-ITEMS-CAPITAL-AND-LIAB> 3,313
<TOT-CAPITALIZATION-AND-LIAB> 14,594
<GROSS-OPERATING-REVENUE> 4,379
<INCOME-TAX-EXPENSE> 92
<OTHER-OPERATING-EXPENSES> 3,631
<TOTAL-OPERATING-EXPENSES> 3,723
<OPERATING-INCOME-LOSS> 656
<OTHER-INCOME-NET> 9
<INCOME-BEFORE-INTEREST-EXPEN> 665
<TOTAL-INTEREST-EXPENSE> 368
<NET-INCOME> 297
41
<EARNINGS-AVAILABLE-FOR-COMM> 256
<COMMON-STOCK-DIVIDENDS> 202
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 440
<EPS-BASIC> 2.29<F1>
<EPS-DILUTED> 2.25
<FN>
<F1>EPS for CMS Energy Common Stock $2.29
EPS for Class G Common Stock $ .90
</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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 3,974
<OTHER-PROPERTY-AND-INVEST> 644
<TOTAL-CURRENT-ASSETS> 596
<TOTAL-DEFERRED-CHARGES> 1,775
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 6,989
<COMMON> 841
<CAPITAL-SURPLUS-PAID-IN> 645
<RETAINED-EARNINGS> 437
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,923
220
44
<LONG-TERM-DEBT-NET> 808
<SHORT-TERM-NOTES> 317
<LONG-TERM-NOTES-PAYABLE> 1,201
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 115
0
<CAPITAL-LEASE-OBLIGATIONS> 84
<LEASES-CURRENT> 33
<OTHER-ITEMS-CAPITAL-AND-LIAB> 2,244
<TOT-CAPITALIZATION-AND-LIAB> 6,989
<GROSS-OPERATING-REVENUE> 2,885
<INCOME-TAX-EXPENSE> 144
<OTHER-OPERATING-EXPENSES> 2,334
<TOTAL-OPERATING-EXPENSES> 2,478
<OPERATING-INCOME-LOSS> 407
<OTHER-INCOME-NET> 12
<INCOME-BEFORE-INTEREST-EXPEN> 419
<TOTAL-INTEREST-EXPENSE> 134
<NET-INCOME> 285
20
<EARNINGS-AVAILABLE-FOR-COMM> 265
<COMMON-STOCK-DIVIDENDS> 262
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 534
<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 September 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 89,000
<ALLOWANCES> 0
<INVENTORY> 45,000
<CURRENT-ASSETS> 219,000
<PP&E> 1,520,000
<DEPRECIATION> 23,000
<TOTAL-ASSETS> 2,435,000
<CURRENT-LIABILITIES> 147,000
<BONDS> 1,094,000
0
0
<COMMON> 1,000
<OTHER-SE> 1,127,000
<TOTAL-LIABILITY-AND-EQUITY> 2,435,000
<SALES> 0
<TOTAL-REVENUES> 344,000
<CGS> 0
<TOTAL-COSTS> 125,000
<OTHER-EXPENSES> 65,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 57,000
<INCOME-PRETAX> 154,000
<INCOME-TAX> 39,000
<INCOME-CONTINUING> 62,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 62,000
<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 a 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.
As a result of CMS Energy's acquisition of Panhandle in March 1999, management
determined that having a separate tracking stock for Consumers Gas Group was no
longer in CMS Energy's best interests. Therefore, on October 25, 1999, CMS
Energy exchanged approximately 6.1 million shares of CMS Energy Common Stock for
all of the approximately 8.7 million issued and outstanding shares of Class G
Common Stock in a tax-free exchange for federal income tax purposes, as more
fully discussed in Note 5.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
In Millions
- --------------------------------------------------------------------------------
September 30 1999 1998 Change
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Three Months Ended $(13) $ (5) $ (8)
Nine Months Ended 30 35 (5)
Twelve Months Ended 47 58 (12)
================================================================================
</TABLE>
Net income for the three month period ended September 30, 1999 decreased
compared with the same period ending September 30, 1998, primarily as a result
of a one-time regulatory disallowance of certain gas costs. The decrease in net
income for the nine months ended September 30, 1999 compared to the same 1998
period reflects the benefit resulting from a one-time accounting change for
property taxes in the first quarter of 1998 (which changed the recognition of
property tax expense from expensing on a calendar year basis to a fiscal year
basis, resulting in a benefit of $18 million, or $12 million after-tax), a
one-time regulatory disallowance of certain gas costs in 1999, and increased
depreciation, partially offset by increased gas deliveries due to colder
temperatures during the 1999 heating season and a regulatory change which
suspended the GCR clause, allowing the opportunity to benefit from lower gas
prices. The decrease in earnings for the twelve months ended September 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.
1
<PAGE> 2
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 nine months of 1999 and 1998 totaled $134 million
and $66 million, respectively. The $68 million increase primarily reflects
increased depreciation, the absence of the 1998 cumulative effect of the
property tax accounting change, and increased accounts payable amounts due to
the timing of cash payments. Consumers Gas Group uses its 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 nine
months of 1999 and 1998 totaled $80 million and $84 million, respectively. The
$4 million decrease in cash used primarily reflects decreased capital
expenditures.
FINANCING ACTIVITIES: Cash used in financing activities during the first nine
months of 1999 totaled $56 million while cash provided by financing activities
during the first nine months of 1998 totaled $20 million. The $76 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 September 30,
1999, receivables sold totaled $314 million. Consumers Gas Group's attributed
portion of these receivables sold totaled $42 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.
2
<PAGE> 3
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.
3
<PAGE> 4
CONSUMERS GAS GROUP
STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30 1999 1998 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
In Millions, Except Per Share Amounts
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUE $ 112 $ 117 $ 792 $ 716 $ 1,128 $ 1,092
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation
Cost of gas sold 44 39 428 377 614 600
Other 49 46 143 136 184 183
-------------------------------------------------------------------------
93 85 571 513 798 783
Maintenance 9 8 26 25 34 34
Depreciation, depletion and amortization 10 10 70 60 107 89
General taxes 7 8 38 37 57 52
-------------------------------------------------------------------------
119 111 705 635 996 958
- ------------------------------------------------------------------------------------------------------------------------------------
PRETAX OPERATING INCOME (LOSS) (7) 6 87 81 132 134
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER INCOME (DEDUCTIONS) - - 4 - - (2)
- ------------------------------------------------------------------------------------------------------------------------------------
FIXED CHARGES
Interest on long-term debt 7 7 22 21 29 28
Other interest 6 3 13 11 17 15
Preferred dividends - 1 1 3 2 4
-------------------------------------------------------------------------
13 11 36 35 48 47
INCOME (LOSS) BEFORE INCOME TAXES (20) (5) 55 46 84 85
INCOME TAXES (7) - 25 23 37 39
-------------------------------------------------------------------------
NET INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE (13) (5) 30 23 47 46
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR
PROPERTY TAXES, NET OF $6 TAX - - - 12 - 12
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (13) $ (5) $ 30 $ 35 $ 47 $ 58
====================================================================================================================================
NET INCOME (LOSS) ATTRIBUTABLE TO CMS ENERGY
SHAREHOLDERS THROUGH RETAINED INTEREST $ (10) $ (3) $ 22 $ 27 $ 34 $ 44
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) ATTRIBUTABLE TO CLASS G SHAREHOLDERS $ (3) $ (2) $ 8 $ 8 $ 13 $ 14
- ------------------------------------------------------------------------------------------------------------------------------------
AVERAGE CLASS G COMMON SHARES OUTSTANDING 9 8 9 8 9 8
- ------------------------------------------------------------------------------------------------------------------------------------
BASIC AND DILUTED EARNINGS (LOSS) PER AVERAGE CLASS G
COMMON SHARE BEFORE CHANGE IN ACCOUNTING PRINCIPLE $ (.38) $ (.16) $ .90 $ .68 $ 1.41 $ 1.37
- ------------------------------------------------------------------------------------------------------------------------------------
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE,
NET OF TAX, PER AVERAGE CLASS G COMMON SHARE $ - $ - $ - $ .36 $ - $ .36
- ------------------------------------------------------------------------------------------------------------------------------------
BASIC AND DILUTED EARNINGS (LOSS) PER AVERAGE CLASS G
COMMON SHARE $ (.38) $ (.16) $ .90 $ 1.04 $ 1.41 $ 1.73
- ------------------------------------------------------------------------------------------------------------------------------------
DIVIDEND DECLARED PER CLASS G COMMON SHARE $ .34 $ .325 $ .99 $ .945 $ 1.315 $ 1.255
====================================================================================================================================
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
</TABLE>
4
<PAGE> 5
CONSUMERS GAS GROUP
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30 1999 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 30 $ 35
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization 70 60
Capital lease and other amortization 3 5
Deferred income taxes and investment tax credit (4) 11
Cumulative effect of accounting change - (18)
Changes in other assets and liabilities 35 (27)
-----------------------------
Net cash provided by operating activities 134 66
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under capital lease) (73) (81)
Cost to retire property, net (7) (7)
Proceeds from the sale of property 1 3
Other (1) 1
-----------------------------
Net cash used in investing activities (80) (84)
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Retirement of preferred stock (43) -
Return of CMS Energy stockholders' contribution (35) (32)
Payment of common stock dividends (33) (31)
Retirement of bonds and other long-term debt (22) (150)
Payment of capital lease obligations (3) (5)
Contribution from CMS Energy stockholders 63 15
Increase (decrease) in notes payable, net 8 37
Issuance of common stock 5 4
Proceeds from bank loans 4 -
Proceeds from senior notes - 182
-----------------------------
Net cash provided by (used in) financing activities (56) 20
- ----------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS (2) 2
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 2 2
-----------------------------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ - $ 4
================================================================================================================
OTHER CASH FLOW ACTIVITIES AND NON-CASH INVESTING AND FINANCING ACTIVITIES WERE:
CASH TRANSACTIONS
Interest paid (net of amounts capitalized) $ 32 $ 29
Income taxes paid (net of refunds) 38 35
NON-CASH TRANSACTIONS
Assets placed under capital lease $ 4 $ 5
================================================================================================================
<CAPTION>
TWELVE MONTHS ENDED
SEPTEMBER 30 1999 1998
- ----------------------------------------------------------------------------------------------------------------
In Millions
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 47 $ 58
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization 107 89
Capital lease and other amortization - 6
Deferred income taxes and investment tax credit 1 9
Cumulative effect of accounting change - (18)
Changes in other assets and liabilities 23 23
--------------------------------
Net cash provided by operating activities 178 167
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under capital lease) (103) (115)
Cost to retire property, net (9) (10)
Proceeds from the sale of property 2 3
Other - 3
--------------------------------
Net cash used in investing activities (110) (119)
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Retirement of preferred stock (43) -
Return of CMS Energy stockholders' contribution (35) (71)
Payment of common stock dividends (44) (42)
Retirement of bonds and other long-term debt (42) (150)
Payment of capital lease obligations (4) (6)
Contribution from CMS Energy stockholders 85 15
Increase (decrease) in notes payable, net (30) 2
Issuance of common stock 7 7
Proceeds from bank loans 4 -
Proceeds from senior notes 30 182
--------------------------------
Net cash provided by (used in) financing activities (72) (63)
- ----------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS (4) (15)
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 4 19
--------------------------------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ - $ 4
================================================================================================================
OTHER CASH FLOW ACTIVITIES AND NON-CASH INVESTING AND FINANCING ACTIVITIES WERE:
CASH TRANSACTIONS
Interest paid (net of amounts capitalized) $ 40 $ 39
Income taxes paid (net of refunds) 37 38
NON-CASH TRANSACTIONS
Assets placed under capital lease $ 4 $ 6
================================================================================================================
</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.
5
<PAGE> 6
CONSUMERS GAS GROUP
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS SEPTEMBER 30 SEPTEMBER 30
1999 DECEMBER 31 1998
(UNAUDITED) 1998 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------
In Millions
<S> <C> <C> <C>
PLANT AND PROPERTY (AT COST)
Plant and property $ 2,427 $ 2,360 $ 2,328
Less accumulated depreciation, depletion and amortization 1,315 1,252 1,213
---------------------------------------------------
1,112 1,108 1,115
Construction work-in-progress 36 31 31
---------------------------------------------------
1,148 1,139 1,146
- ------------------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and temporary cash investments at cost, which approximates market - 2 4
Accounts receivable and accrued revenue, less allowances
of $2, $3, and $3, respectively 24 75 5
Inventories at average cost
Gas in underground storage 288 219 276
Materials and supplies 5 6 6
Prepayments and other 32 51 40
---------------------------------------------------
349 353 331
- ------------------------------------------------------------------------------------------------------------------------------
NON-CURRENT ASSETS
Postretirement benefits 123 131 134
Deferred income taxes 45 16 14
Other 95 87 62
---------------------------------------------------
263 234 210
---------------------------------------------------
TOTAL ASSETS $ 1,760 $ 1,726 $ 1,687
==============================================================================================================================
</TABLE>
6
<PAGE> 7
<TABLE>
<CAPTION>
STOCKHOLDERS' INVESTMENT AND LIABILITIES SEPTEMBER 30 SEPTEMBER 30
1999 DECEMBER 31 1998
(UNAUDITED) 1998 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------
In Millions
<S> <C> <C> <C>
CAPITALIZATION
Common stockholders' equity $ 409 $ 379 $ 349
Preferred stock 10 52 52
Long-term debt 449 454 449
Non-current portion of capital leases 15 14 16
--------------------------------------------------------------
883 899 866
- ------------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases 33 37 39
Notes payable 126 118 156
Accounts payable 110 92 86
Accrued taxes 33 61 34
Accrued refunds 19 9 10
Accrued interest 9 8 6
Deferred income taxes 4 4 4
Other 62 47 43
--------------------------------------------------------------
396 376 378
- ------------------------------------------------------------------------------------------------------------------------
NON-CURRENT LIABILITIES
Regulatory liabilities for income taxes, net 214 189 183
Postretirement benefits 149 159 162
Deferred investment tax credit 24 25 24
Other 94 78 74
--------------------------------------------------------------
481 451 443
--------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTE 4)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $ 1,760 $ 1,726 $ 1,687
========================================================================================================================
</TABLE>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
7
<PAGE> 8
CONSUMERS GAS GROUP
STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 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 112 84 113 102 89 138
Common stock issued 1 1 5 4 7 7
CMS Energy stockholders' contribution 33 15 63 15 85 15
Return of CMS Energy stockholders' contribution - (11) (35) (32) (35) (71)
--------------------------------------------------------------------------
At end of period 146 89 146 89 146 89
- ---------------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
At beginning of period 103 92 82 72 76 60
Net income (loss) (13) (5) 30 35 47 58
Common stock dividends declared (11) (11) (33) (31) (44) (42)
--------------------------------------------------------------------------
At end of period 79 76 79 76 79 76
--------------------------------------------------------------------------
TOTAL COMMON STOCKHOLDERS' EQUITY $ 409 $ 349 $ 409 $ 349 $ 409 $ 349
=================================================================================================================================
</TABLE>
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
8
<PAGE> 9
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 a 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 September 30, 1999 and September 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 nine months ended September 30, 1999 and 1998, are based on
26.06 percent, 25.38 percent of the income of Consumers Gas Group, respectively.
In February and May 1999, CMS Energy paid dividends of $.325 per share on Class
G Common Stock. In August 1999, CMS Energy paid a dividend of $.34 per share on
Class G Common Stock.
In October 1999, the Class G Common Stock was exchanged for CMS Energy Common
Stock, and therefore, no Class G dividend was declared (see Note 5). Class G
shareholders prior to the exchange will receive the CMS Energy dividend that is
payable in November 1999.
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.
9
<PAGE> 10
Consumers generally manages its short-term financings on a centralized
consolidated basis. The portion of receivables sold attributable to Consumers
Gas Group at September 30, 1999 and 1998, is estimated by management to be $42
million and $52 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.
5: EXCHANGE OF CLASS G COMMON STOCK
On October 25, 1999, CMS Energy exchanged approximately 6.1 million shares of
CMS Energy Common Stock for all of the 8.7 million issued and outstanding shares
of Class G Common Stock in a tax-free exchange for United States Federal Income
tax purposes. The exchange ratio of .7041 share of CMS Energy Common Stock for
each share of Class G Common Stock represents the fair market value of CMS
Energy Common Stock equal to 115 percent of the fair market value of one share
of Class G Common Stock. Fair market values of CMS Energy Common Stock and Class
G Common Stock were determined by calculating the average of the daily closing
prices on the New York Stock Exchange from July 28, 1999 to August 24, 1999.
10
<PAGE> 11
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 September 30, 1999 and 1998, the
related statements of income and common stockholders' equity for the
three-month, nine-month, and twelve-month periods then ended, and the related
consolidated statements of cash flows for the nine-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.
Detroit, Michigan,
November 10, 1999.
