<PAGE> 1
================================================================================
FORM 8-K
CURRENT REPORT
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) MARCH 29, 1999
Commission Registrant; State of Incorporation; IRS Employer
File Number Address; and Telephone Number Identification No
1-9513 CMS ENERGY CORPORATION 38-2726431
(A Michigan Corporation)
Fairlane Plaza South, Suite 1100
330 Town Center Drive
Dearborn, Michigan 48126
(313) 436-9261
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<PAGE> 2
ITEM 2. ACQUISITION OF ASSETS
On March 29, 1999, CMS Energy Corporation ("CMS Energy") announced that it had
closed on its previously announced acquisition of all the stock of Panhandle
Eastern Pipe Line Company ("Panhandle") and its principal subsidiaries,
Trunkline Gas Company and Pan Gas Storage Company, from subsidiaries of Duke
Energy Corporation ("Duke"). It also acquired the stock of Panhandle Storage
Company and Trunkline LNG Company. (These companies together with their
subsidiaries Panhandle Eastern Resources, Inc., Trunkline Field Services
Company, Trunkline Gas Resources, Inc., and Trunkline Pipeline Holdings, Inc.
are hereinafter referred to as the "Panhandle Companies".)
The purchase price for the stock of the Panhandle Companies was $1.9 billion in
cash and existing Panhandle debt of approximately $300 million. Concurrent with
the closing, CMS Panhandle Holding Company ("CMS Holding"), a newly formed
interim holding company for the Panhandle Companies, issued $800 million of
senior unsecured notes which were guaranteed by Panhandle. The CMS Holding notes
were issued in a 144A offering in three tranches: $300 million of 6.125% senior
notes due 2004; $200 million of 6.500% senior notes due 2009; and $300 million
of 7.000% senior notes due 2029. CMS Energy intends to merge CMS Holding into
Panhandle during the second quarter of 1999, at which time Panhandle will
replace CMS Holding as the obligor on the CMS Holding notes. CMS Holding's and
Panhandle's combined $1.1 billion of long-term senior notes as well as
approximately an additional $1.1 billion of CMS Energy unsecured bridge and
revolving credit loans became a part of CMS Energy's consolidated indebtedness
as of March 29, 1999. The $600 million CMS Energy bridge loan has a weighted
average interest rate of 5.94% and a term of six months, and the approximately
$500 million CMS Energy revolver loan has a weighted average interest rate of
6.22%. The bridge loan was provided by Barclays Bank PLC, Nationsbank, N.A.,
and Union Bank of California, N.A., and the revolver loan is with a consortium
of banks for which The Chase Manhattan Bank serves as administrative agent. CMS
Energy expects to complete permanent financing of the acquisition with the sale
of approximately $600 million of CMS Energy Common Stock.
Panhandle and Trunkline Gas Company, together with the two gas storage companies
acquired, are primarily engaged in the interstate transportation and storage of
natural gas. The acquired assets include 10,400 miles of mainline natural gas
pipeline extending from the Texas Gulf Coast to Michigan and from the
Kansas/Oklahoma mid-continent region to Michigan with a combined capacity of 4.4
billion cubic feet per day, and 70 billion cubic feet of underground working gas
storage facilities. The Trunkline and Panhandle transmission systems connect
directly with the intrastate gas transmission system of Consumers Energy
Company, CMS Energy's Michigan electric and gas utility subsidiary. Consumers
Energy Company is one of the largest gas transmission customers of the two
acquired pipeline companies.
Trunkline LNG Company owns a liquified natural gas ("LNG") regasification plant
and related LNG tanker port, unloading facilities and LNG and gas storage
facilities located at Lake Charles, Louisiana. The LNG plant has the capacity to
deliver 700 million cubic feet per day but has been operated on a limited basis
for a number of years.
The Panhandle Companies compete with a number of interstate and intrastate
pipeline companies in the transportation and storage of natural gas. The
principal elements of competition among pipelines are rates, terms of service
and flexibility and reliability of service. The rates and conditions of service
of the principal Panhandle Companies are subject to regulation by the Federal
Energy Regulatory Commission.
Although Panhandle is subject to the informational filing requirements of the
Securities Exchange Act of 1934 and Panhandle's Consolidated Financial
Statements and Notes thereto are filed as an exhibit to this report, readers
should review such historic Panhandle information in light of the changes
reflected in the CMS Energy Unaudited Pro Forma Financial Information filed as
an exhibit to this report. Readers should note in particular that prior to the
closing of the acquisition, Panhandle's interest in Northern Border Partners LP
and certain non-operating assets which were not material in amount or revenue
impact were transferred from the Panhandle Companies to other subsidiaries of
Duke. In addition, certain intercompany accounts, including advances, between
the Panhandle Companies and Duke were eliminated. Also, contemporaneous with
the acquisition, the stock of Panhandle Storage Company and Trunkline LNG
Company was contributed by CMS Holding to Panhandle so that they became
subsidiaries of Panhandle. Finally, readers should be aware of the pending
merger of CMS Holding into Panhandle and the impact of that merger on
Panhandle's financial information.
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<PAGE> 3
ITEM 7. EXHIBITS
(a) Financial Statements of Business Acquired - Attached as Exhibit 99(a)
are the Panhandle Consolidated Financial Statements and Notes to
Consolidated Financial Statements for the Years Ended December 31, 1998,
1997 and 1996 as well as audit reports from each of Deloitte & Touche
LLP and KPMG LLP.
(b) Pro Forma Financial Information - Attached as Exhibit 99(b) is the CMS
Energy Unaudited Pro Forma Financial Information reflecting the
acquisition of the Panhandle Companies.
(c) Exhibits -
(23)(a) - Consent of Deloitte & Touche LLP, independent auditors.
(23)(b) - Consent of KPMG LLP, independent certified public accountants.
(99)(a) - Panhandle Consolidated Financial Statements and Notes to
Consolidated Financial Statements for the Years Ended
December 31, 1998, 1997 and 1996.
(99)(b) - CMS Energy Unaudited Pro Forma Financial Information
reflecting the acquisition of the Panhandle Companies.
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<PAGE> 4
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CMS ENERGY CORPORATION
Dated: April 6, 1999 By: /s/ Alan M. Wright
-------------------------
Alan M. Wright
Senior Vice President and
Chief Financial Officer
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<PAGE> 5
EXHIBIT INDEX
-------------
Exhibit No. Description
- ----------- ------------
(23)(a) - Consent of Deloitte & Touche LLP, independent auditors.
(23)(b) - Consent of KPMG LLP, independent certified public accountants.
(99)(a) - Panhandle Consolidated Financial Statements and Notes to Consolidated
Financial Statements for the Years Ended December 31, 1998, 1997 and
1996.
(99)(b) - CMS Energy Unaudited Pro Forma Financial Information reflecting the
acquisition of the Panhandle Companies.
<PAGE> 1
EXHIBIT 23(a)
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statement
Nos. 33-29681, 33-47629, 33-60007, 33-61595, 33-62573, 333-32229, 333-34087,
333-60795, 333-63229 and 333-68937, all of CMS Energy Corporation, of our
report on the consolidated financial statements of Panhandle Eastern Pipe Line
Company for the year ended December 31, 1998, dated February 12, 1999,
appearing in this Form 8-K of CMS Energy Corporation.
/s/ Deloitte & Touche LLP
Charlotte, North Carolina
April 6, 1999
<PAGE> 1
EXHIBIT 23(b)
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Panhandle Eastern Pipe Line Company:
We consent to the incorporation by reference in the registration statements
No. 33-29681, No. 33-47629, No. 33-60007, No. 33-61595, No. 33-62573, No.
333-32229, No. 333-34087, No. 333-60795, No. 333-63229 and No. 333-68937 of CMS
Energy Corporation of our report dated January 16, 1997, with respect to the
consolidated statements of income, common stockholder's equity, and cash flows
of Panhandle Eastern Pipe Line Company and Subsidiaries for the year ended
December 31, 1996, which report appears in the Form 8-K of CMS Energy dated
March 29, 1999.
/s/ KPMG LLP
Houston, Texas
April 6, 1999
<PAGE> 1
EXHIBIT 99(A)
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------
1998 1997 1996
-------------------------------------------------------------
<S> <C> <C> <C>
OPERATING REVENUES
Transportation and storage of natural gas $ 468 $ 501 $ 510
Other 28 33 29
----------- ----------- -----------
Total operating revenues 496 534 539
----------- ----------- -----------
OPERATING EXPENSES
Operation and maintenance 213 254 260
Depreciation and amortization 56 59 58
Property and other taxes 26 26 27
----------- ----------- -----------
Total operating expenses 295 339 345
----------- ----------- -----------
OPERATING INCOME 201 195 194
OTHER INCOME AND EXPENSES 24 6 4
----------- ----------- -----------
EARNINGS BEFORE INTEREST AND TAXES 225 201 198
INTEREST EXPENSE 77 73 62
----------- ----------- -----------
EARNINGS BEFORE INCOME TAXES 148 128 136
INCOME TAXES 57 48 48
----------- ----------- -----------
NET INCOME $ 91 $ 80 $ 88
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
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<PAGE> 2
PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------
1998 1997 1996
----------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 91 $ 80 $ 88
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 61 61 61
Deferred income taxes 17 2 (88)
Rate settlement - (70) (9)
(Increase) Decrease in
Receivables 12 (48) (31)
Inventory (17) 6 11
Other current assets 15 11 (2)
Increase (Decrease) in
Accounts payable 10 15 (3)
Taxes accrued (19) (10) 8
Other current liabilities 3 35 23
Other, net 1 24 48
------- ------- -------
Net cash provided by operating activities 174 106 106
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital and investment expenditures (85) (105) (52)
Net increase in advances receivable - parent (106) (9) (84)
Proceeds from sales, retirements and other 17 8 30
------- ------- -------
Net cash used in investing activities (174) (106) (106)
------- ------- -------
Net decrease in cash and cash equivalents - - -
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD - - -
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ - $ - $ -
======= ======= =======
SUPPLEMENTAL DISCLOSURES
Cash paid for interest (net of amount capitalized) $ 78 $ 81 $ 62
Cash paid for income taxes $ 56 $ 65 $ 60
</TABLE>
See Notes to Consolidated Financial Statements.
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<PAGE> 3
PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
December 31,
-------------------------
1998 1997
---------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Receivables $ 94 $ 106
Inventory and supplies 55 38
Other 31 48
---------- -----------
Total current assets 180 192
---------- -----------
INVESTMENTS AND OTHER ASSETS
Advances and note receivable - parent 738 662
Investment in affiliates 44 47
Other 6 7
---------- -----------
Total investments and other assets 788 716
---------- -----------
PROPERTY, PLANT AND EQUIPMENT
Cost 2,777 2,734
Less accumulated depreciation and amortization 1,798 1,776
---------- -----------
Net property, plant and equipment 979 958
---------- -----------
REGULATORY ASSETS
Debt expense 11 13
Other 15 22
---------- -----------
Total regulatory assets 26 35
---------- -----------
TOTAL ASSETS $ 1,973 $ 1,901
========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
A-3
<PAGE> 4
PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1998 1997
---------- ----------
LIABILITIES AND STOCKHOLDER'S EQUITY
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 56 $ 46
Notes payable - parent 675 675
Taxes accrued 58 77
Interest accrued 8 8
Other 117 114
--------- ---------
Total current liabilities 914 920
--------- ---------
LONG-TERM DEBT 299 299
--------- ---------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 99 82
Other 103 99
--------- ---------
Total deferred credits and other liabilities 202 181
--------- ---------
COMMON STOCKHOLDER'S EQUITY
Common stock, no par, 1,000 shares authorized, issued and outstanding 1 1
Paid-in capital 466 466
Retained earnings 91 34
--------- ---------
Total common stockholder's equity 558 501
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 1,973 $ 1,901
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
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<PAGE> 5
PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
(IN MILLIONS)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1998 1997 1996
---------- --------- ----------
<S> <C> <C> <C>
COMMON STOCK
Balance at beginning of year $ 1 $ 1 $ 1
---------- ---------- ----------
BALANCE AT END OF YEAR 1 1 1
---------- ---------- ----------
PAID-IN CAPITAL
Balance at beginning of year 466 466 466
---------- ---------- ----------
BALANCE AT END OF YEAR 466 466 466
---------- ---------- ----------
RETAINED EARNINGS
Balance at beginning of year 34 29 141
Net income 91 80 88
Common stock dividends (34) (75) (200)
---------- ---------- ----------
BALANCE AT END OF YEAR 91 34 29
---------- ---------- ----------
TOTAL COMMON STOCKHOLDER'S EQUITY $ 558 $ 501 $ 496
========== ========== ==========
</TABLE>
See Notes to Consolidated Financials Statements.
A-5
<PAGE> 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1. NATURE OF OPERATIONS
Panhandle Eastern Pipe Line Company (PEPL) is a wholly owned subsidiary of
PanEnergy Corp. (PanEnergy), which is an indirect wholly owned subsidiary of
Duke Energy Corporation (Duke Energy). PEPL and its subsidiaries (the Company)
are primarily engaged in the interstate transportation and storage of natural
gas. The interstate natural gas transmission and storage operations of the
Company are subject to the rules and regulations of the Federal Energy
Regulatory Commission (FERC).
PanEnergy and Texas Eastern Corporation (TEC), a subsidiary of PanEnergy,
entered into an agreement to sell PEPL, Trunkline Gas Company (Trunkline), a
subsidiary of PEPL, and additional storage related to those systems, along with
Trunkline LNG Company, a subsidiary of TEC, to CMS Energy Corporation (CMS
Energy). The sales price of $2.2 billion involves cash proceeds of $1.9 billion
and existing PEPL debt of approximately $300 million. Certain assets and
liabilities, such as the Houston office building, certain environmental, legal
and tax liabilities, and substantially all intercompany balances, will be
retained by PanEnergy and TEC. The sale is contingent upon receipt of clearances
under the Hart-Scott-Rodino Act. Closing is expected in early 1999.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION. The consolidated financial statements include the accounts of all
of the Company's majority-owned subsidiaries after the elimination of
significant intercompany transactions and balances. Investments in other
entities that are not controlled by the Company, but where it has significant
influence over operations, are accounted for using the equity method.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Although these estimates are based on management's knowledge of current and
expected future events, actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS. All liquid investments with maturities at date of
purchase of three months or less are considered cash equivalents.
INVENTORY. Inventory consists of gas held for operations and materials and
supplies and is recorded at the lower of cost or market, primarily using the
weighted average cost method ($30 million and $20 million at December 31, 1998
and 1997, respectively) and the last-in first-out method ($25 million and $18
million at December 31, 1998 and 1997, respectively).
GAS IMBALANCES. Gas imbalances occur as a result of differences in volumes of
gas received and delivered. Gas imbalance receivables and payables are valued at
lower of cost or market.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are stated at
original cost. The Company capitalizes all construction-related direct labor
and material costs, as well as indirect construction costs. The cost of renewals
and betterments that extend the useful life of property, plant and equipment is
also capitalized. The cost of repairs and replacements is charged to expense as
incurred. Depreciation is generally computed using the straight-line method. The
composite weighted-average depreciation rates were 2.2%, 2.2% and 2.1 % for
1998, 1997 and 1996, respectively.
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<PAGE> 7
When property, plant and equipment maintained by the Company's regulated
operations are retired, the original cost plus the cost of retirement, less
salvage, is charged to accumulated depreciation and amortization. When entire
regulated operating units are sold or non-regulated properties are retired or
sold, the property and related accumulated depreciation and amortization
accounts are reduced, and any gain or loss is recorded in income, unless
otherwise required by the FERC.
IMPAIRMENT OF LONG-LIVED ASSETS. The recoverability of long-lived assets and
intangible assets are reviewed whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable. Such
evaluation is based on various analyses, including undiscounted cash flow
projections.
UNAMORTIZED DEBT PREMIUM, DISCOUNT AND EXPENSE. Premiums, discounts and expenses
incurred in connection with the issuance of presently outstanding long-term debt
are amortized over the terms of the respective issues. Any call premiums or
unamortized expenses associated with refinancing higher-cost debt obligations
used to finance regulated assets and operations are amortized consistent with
regulatory treatment of those items.
ENVIRONMENTAL EXPENDITURES. Environmental expenditures that relate to an
existing condition caused by past operations and do not contribute to current or
future revenue generation are expensed. Environmental expenditures relating to
current or future revenues are expensed or capitalized as appropriate.
Liabilities are recorded when environmental assessments and/or clean-ups are
probable and the costs can be reasonably estimated. Certain of these
environmental assessments and clean-up costs are expected to be recovered from
the Company's customers and have, therefore, been deferred and are included in
the Consolidated Balance Sheets as Regulatory Assets. (See Note 11 to the
Consolidated Financial Statements.)
COST-BASED REGULATION. The Company's regulated operations are subject to the
provisions of Statement of Financial Accounting Standards (SFAS) No. 71,
"Accounting for the Effects of Certain Types of Regulation." Accordingly,
certain assets and liabilities that result from the regulated ratemaking process
are recorded that would not be recorded under generally accepted accounting
principles for non-regulated entities. These regulatory assets and liabilities
are classified in the Consolidated Balance Sheets as Regulatory Assets and
Deferred Credits and Other Liabilities, respectively. The applicability of SFAS
No. 71 is routinely evaluated, and factors such as the impact of competition and
the necessity to discount cost based rates charged to customers are considered.
Increasing competition might require companies to reduce their asset balances to
reflect a market basis less than cost and to write off their associated
regulatory assets. Management cannot predict the potential impact, if any, of
increasing competition on future financial position or results of operations.
However, the Company continues to position itself to effectively meet these
challenges by maintaining competitive prices.
REVENUES. Revenues on transportation and storage of natural gas are recognized
as service is provided. When rate cases are pending final approval, a portion of
the revenues is subject to possible refund. Reserves have been established where
required for such cases.
During 1998, sales to ProLiance Energy, L.L.C. accounted for approximately 10%
of consolidated revenues of the Company. During 1997, sales to ProLiance Energy,
L.L.C. and Consumers Energy Company, a subsidiary of CMS Energy, each accounted
for approximately 10% of consolidated revenues of the Company. In 1996, no
single customer accounted for 10% or more of consolidated revenues. No other
customer accounted for 10% or more of consolidated revenues during 1998, 1997 or
1996.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION (AFUDC). AFUDC represents the
estimated debt and equity costs of capital funds necessary to finance the
construction of new regulated facilities. AFUDC is a non-cash item and is
recognized as a cost of Property, Plant and Equipment, with offsetting credits
to Other Income and Expenses and to Interest Expense. After construction is
completed, the Company is permitted to recover these costs, including a fair
return, through their inclusion in rate base and in the provision for
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<PAGE> 8
depreciation. Rates used for capitalization of AFUDC by the Company's regulated
operations are calculated in compliance with FERC rules.
INCOME TAXES. Duke Energy and its subsidiaries file a consolidated federal
income tax return. Federal income taxes have been provided by the Company on the
basis of its separate company income and deductions in accordance with
established practices of the consolidated group. Deferred income taxes have been
provided for temporary differences. Temporary differences occur when events and
transactions recognized for financial reporting result in taxable or
tax-deductible amounts in different periods. Investment tax credits have been
deferred and arc being amortized over the estimated useful lives of the related
properties.
RECLASSIFICATIONS. Certain amounts have been reclassified in the Consolidated
Financial Statements to conform to the current presentation.
New Accounting Standard. In September 1998, SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," was issued. 'Me Company is
required to adopt this standard by January 1, 2000. SFAS No. 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. The Company is
currently reviewing the expected impact of SFAS No. 133 on consolidated results
of operations and financial position.
3. REGULATORY MATTERS
On April 1, 1992 and November 1, 1992, PEPL placed into effect subject to
refund, general rate increases. On February 26, 1997, the FERC approved PEPL's
settlement agreement which provided final resolution of refund matters and
established prospective rates. The agreement terminated other actions relating
to these proceedings as well as PEPL's restructuring of rates and transition
cost recoveries related to FERC Order 636. The settlement will not have a
material impact on future operating revenues or financial position of the
Company. As a result of the resolution of these and certain other proceedings,
PEPL refunded $38 million to customers in 1997 and recorded earnings before
interest and taxes of $33 million and $8 million in 1997 and 1996, respectively.
Effective August 1, 1996, Trunkline placed into effect a general rate increase,
subject to refund Hearings were completed in the third quarter of 1997. A
decision on the remaining phase of the rate proceeding was received on November
2, 1998 from the administrative law judge. The case is pending a decision by the
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 also ordered to refund
these amounts to their customers. All payments are to be made in compliance with
prescribed FERC requirements. At December 31, 1998 and December 31, 1997,
Accounts Receivable included $50 million and $54 million, respectively, due from
natural gas producers and Other Current Liabilities included $50 million and $54
million, respectively, for related obligations.
In June 1998, Trunkline filed 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 of
PanEnergy, which has entered into an option agreement with Aux Sable Liquids
Products, L.P., for potential conversion of the line for transportation of
hydrocarbon vapors. Trunkline has asked 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 is exercised. The abandonment would reduce Trunkline's
certificated capacity from the current level of 1,8 10 million dekatherms per
day (Mdth/d) to 1,555 Mdth/d and will have no adverse effect an Trunkline's
ability to meet all of its firm service obligations. The filing is pending FERC
action.
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<PAGE> 9
4. RELATED PARTY TRANSACTIONS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
(In millions) For the Years Ended December 31,
- ----------------------------------------------------------------------------------------------------
1998 1997 1996
----------------------------------------
<S> <C> <C> <C>
Transportation of natural gas $29 $32 $30
Other operating revenues 15 27 9
Operation and maintenance (a) 60 66 68
Interest expense, net 55 49 35
- ----------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes allocated benefit plan costs.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
(In millions) December 31,
- ------------------------------------------------------------------------------
1998 1997
-------------------
<S> <C> <C>
Receivables $ 2 $ 8
Accounts payable 46 37
Taxes accrued 35 55
- ------------------------------------------------------------------------------
</TABLE>
Advances and Note Receivable-Parent included a $30 million note at December 31,
1997, which bore interest at the London Interbank Offered Rate plus 0.5%. The
remainder of Advances and Note Receivable-Parent do not bear interest. Advances
are carried as open accounts and are not segregated between current and
non-current amounts. Increases and decreases in advances result from the
movement of funds to provide for operations, capital expenditures and debt
payments of the Company.
5. GAS IMBALANCES
The Consolidated Balance Sheets included in-kind balances as a result of
differences in gas volumes received and delivered. At December 31, 1998 and
1997, other current assets included $20 million and $24 million, respectively,
related to gas imbalances. Other current liabilities included $22 million at
both December 31, 1998 and 1997 related to gas imbalances.
6. INCOME TAXES
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
INCOME TAX EXPENSE (in millions)
- -----------------------------------------------------------------------------------------------------
For the Years Ended December 31,
-------------------------------------------
1998 1997 1996
-------------------------------------------
Current income taxes
<S> <C> <C> <C>
Federal $34 $41 $123
State 6 5 13
-------------------------------------------
Total current income taxes 40 46 136
-------------------------------------------
Deferred income taxes, net
Federal 14 1 (76)
State 3 1 (12)
-------------------------------------------
Total deferred income taxes, net 17 2 (88)
-------------------------------------------
Total income tax expense $57 $48 $ 48
=====================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
INCOME TAX EXPENSE RECONCILIATION TO STATUTORY RATE (in millions)
- -----------------------------------------------------------------------------------------------------
For the Years Ended December 31,
-------------------------------------------
1998 1997 1996
-------------------------------------------
<S> <C> <C> <C>
Income tax, computed at the statutory rate $52 $45 $48
Adjustments resulting from:
State income tax, net of federal income tax effect 5 3 -
-------------------------------------------
Total income tax expense $57 $48 $48
===========================================
Effective tax rate 38.5% 37.5% 35.3%
- -----------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 10
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
NET DEFERRED INCOME TAX LIABILITY COMPONENTS (in millions)
- ---------------------------------------------------------------------------------------
December 31,
--------------------------------
1998 1997
--------------------------------
<S> <C> <C>
Deferred credits and other liabilities $ 85 $ 95
Other 3 3
--------------------------------
Total deferred income tax assets 88 98
--------------------------------
Investments and other assets (18) (16)
Property, plant and equipment (148) (131)
Regulatory assets (12) (23)
--------------------------------
Total deferred income tax liabilities (178) (170)
--------------------------------
State deferred income tax, net of federal tax effect (7) (6)
--------------------------------
Net deferred income tax liability (97) (78)
--------------------------------
Portion classified as current asset 2 4
--------------------------------
Noncurrent liability $ (99) $ (82)
=======================================================================================
</TABLE>
7. PROPERTY, Plant and Equipment
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
(In millions) 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Transmission $2,003 $1,925
Gathering 265 256
Underground storage 320 320
General plant 161 172
Construction work in progress 28 61
--------------------------------
Total property, plant, and equipment 2,777 2,734
Less accumulated depreciation and amortization 1,798 1,776
--------------------------------
Net property, plant and equipment $ 979 $ 958
=======================================================================================
</TABLE>
8. FINANCIAL INSTRUMENTS
The Company's financial instruments include $299 million of long-term debt at
both December 31, 1998 and 1997, respectively, with an approximate fair value of
$318 million and $313 million as of December 31, 1998 and 1997, respectively.
Estimated fair value amounts of long-term debt were obtained from independent
parties. Judgment is required in interpreting market data to develop the
estimates of fair value. Accordingly, the estimates determined as of December
31, 1998 and 1997 are not necessarily indicative of the amounts the Company
could have realized in current market exchanges.
The fair value of notes payable - parent is not materially different from their
carrying amounts because the stated rates approximate market rates.
Guarantees made to affiliates have no book value associated with them and there
are no fair values readily determinable since quoted market prices are not
available. The fair values of advances and note receivable - parent are not
readily determinable since such amounts are carried as open accounts. See Note
4, Related Party Transactions.
A-10
<PAGE> 11
9. LONG TERM DEBT
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
December 31,
----------------------
(In millions) Year Due 1998 1997
- -----------------------------------------------------------------------------------------------
<C> <C> <C> <C>
7 7/8% Note 2004 $100 $100
7.2% - 7.95% Debentures 2023 -2024 200 200
Unamortized debt discount and premium, net (1) (1)
----------------------
Total long-term debt $299 $299
- -----------------------------------------------------------------------------------------------
</TABLE>
The 7.2% - 7.95% Debentures have call options whereby the Company has the option
to repay the debt early. Based on the year in which the Company may first
exercise the redemption options, all $200 million could potentially be repaid in
2003.
Notes payable-parent includes a $675 million note bearing interest at prime rate
and maturing on June 30, 1999.
10. INVESTMENT IN AFFILIATES
Investments in affiliates which are not controlled by the Company but where the
Company has significant influence over operations are accounted for by the
equity method. These investments include undistributed earnings of $14 million
and $15 million in 1998 and 1997, respectively. The Company's proportionate
share of net income from these affiliates for the years ended December 31, 1998,
1997 and 1996 was $6 million, $5 million and $6 million, respectively. These
amounts are reflected in the Consolidated Statements of Income as Other
Operating Revenues. Investment in affiliates includes the following:
NORTHERN BORDER PARTNERS, L.P. Northern Border Partners, L.P. (Northern Border)
is a master limited partnership (MLP) that owns 70% of Northern Border Pipeline
Company, a partnership operating a pipeline transporting natural gas from Canada
to the Midwest area of the United States. PEPL has a 7.0% limited partnership
interest in Northern Border, and thus, an indirect 4.9% ownership interest in
Northern Border Pipeline Company. PEPL transferred its interest in Northern
Border to a subsidiary of PanEnergy in early 1999 in conjunction with the
planned sale of PEPL and Trunkline to CMS Energy.
WESTANA GATHERING COMPANY. Westana Gathering Company is a joint venture that
provides gathering, processing and marketing services for natural gas producers
in Oklahoma.
11. COMMITMENTS AND CONTINGENCIES
FUTURE CONSTRUCTION COSTS. Projected 1999 capital and investment expenditures
for the Company, including allowance for funds used during construction, are
approximately $65 million, of which approximately $50 million relates to
companies expected to be sold to CMS Energy. These projections include market
expansion projects and costs relating to existing assets. All projected capital
and investment expenditures are subject to periodic review and revision and may
vary significantly depending on acquisition opportunities, market volatility,
economic trends and the value-added opportunities presented.
ENVIRONMENTAL. The Company is subject to federal, state and local regulations
regarding air and water quality, hazardous and solid waste disposal and other
environmental matters.
The Company 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. The Company has communicated with the Environmental
Protection Agency and appropriate state regulatory agencies on these matters.
Under the terms of the sales agreement with CMS Energy discussed
A-11
<PAGE> 12
in Note 1 to the Consolidated Financial Statements, PanEnergy is obligated to
complete the PEPL and Trunkline clean-up programs at certain agreed-upon sites.
These clean-up programs are expected to continue until 2001.
At December 31, 1998 and 1997, remaining estimated clean-up costs on the
Company's systems have been accrued and are included in the Consolidated Balance
Sheets as Other Current Liabilities and Deferred Credits and Other Liabilities.
These cost estimates represent gross clean-up costs expected to be incurred,
have not been discounted or reduced by customer recoveries and generally do not
include fines, penalties or third-party claims. Costs to be recovered from
customers are included in the Donsolidated Balance Sheets as of December 31,
1998 and 1997, as Regulatory Assets.
The federal and state clean-up programs are not expected to interrupt or
diminish the Company's ability to deliver natural gas to customers. Based on
experience to date and costs incurred for clean-up operations, management
believes the resolution of matters relating to the environmental issues
discussed above will not have a material adverse effect on consolidated results
of operations or financial position.
LITIGATION. Under the terms of the agreement with CMS Energy discussed in Note 1
to the Consolidated Financial Statements, PanEnergy is retaining certain legal
and tax liabilities of the Company, including the matters specifically discussed
below.
On April 25, 1997, a group of affiliated plaintiffs that own and/or operate
various pipeline and marketing companies and partnerships primarily in Kansas
filed suit against PEPL in the U.S. District Court for the Western District of
Missouri. The plaintiffs allege that PEPL has engaged in unlawful and
anti-competitive conduct with regard to requests for interconnects with the PEPL
system for service to the Kansas City area. Asserting that PEPL has violated the
antitrust laws and tortiously interfered with the plaintiffs' business
expectancies, the plaintiffs seek compensatory and punitive damages. Based on
information currently available to the Company, management believes that the
resolution of this matter will not have a material adverse effect on
consolidated results of operations or financial position.
On May 13, 1997, Anadarko Petroleum Corporation (Anadarko) filed suits against
PEPL and other 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 purchasers of gas from
Anadarko, retroactive to 1983. On October 20, 1998 and January 15, 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. The Company believes
the resolution of this matter will not have a material adverse effect on
consolidated results of operations or financial position.
The Company and its subsidiaries are 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, the
Company has made accruals in accordance with SFAS No. 5, "Accounting for
Contingencies," in order to provide for such matters. Management believes that
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. The Company'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
A-12
<PAGE> 13
resolve. If required to reimburse or indemnify the producers, the Company's
pipelines will file with FERC to recover a portion of these costs from pipeline
customers. Management believes that 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
PEPL and Northern Border Pipeline Company, PEPL guarantees payment to Northern
Border Pipeline Company under a transportation agreement held by an affiliate of
Pan-Alberta Gas Limited. The transportation agreement requires estimated total
payments of S58 million for 1999 through 2001. Management believes that the
probability that PEPL will be required to perform under this guarantee is
remote.
LEASES. The Company utilizes assets under operating leases in several areas of
operations. Consolidated rental expense amounted to $15 million, $20 million and
$30 million in 1998, 1997 and 1996, respectively. Future minimum rental payments
under the Company's various operating leases for the years 1999 through 2003 are
$11 million, $11 million, $9 million, $6 million and $1 million,
respectively.
12. Benefit Plans
RETIREMENT PLAN. The Company participates in PanEnergy's non-contributory
defined benefit retirement plan covering most employees with a minimum of one
year vesting service. Through December 31, 1998, the plan provided retirement
benefits for eligible employees of the Company that are generally based on an
employee's years of benefit accrual service and highest average eligible
earnings.
PanEnergy's policy is to fund amounts, as necessary, on an actuarial basis to
provide assets sufficient to meet benefits to be paid to plan participants. With
respect to the entire plan, the fair value of the plan assets of $819 million
and $748 million at December 31, 1998 and 1997, respectively, exceeded the
projected benefit obligations of $338 million and $290 million, as of December
31, 1998 and 1997, respectively. Under the terms of the agreement with CMS
Energy discussed in Note 1 to the Consolidated Financial Statements, benefit
obligations related to active employees and certain plan assets will transfer to
CMS Energy, and benefit obligations related to existing retired employees and
remaining plan assets will be retained by PanEnergy.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Assumptions Used in PanEnergy's Pension and Other Postretirement Benefits
Accounting (a)
- ----------------------------------------------------------------------------------------------------
(Percent) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 6.75 7.25 7.50
Salary increase 4.67 4.75 5.00
Expected long-term rate of return on plan assets 9.25 9.25 9.50
Assumed tax rate, where applicable 39.60 39.60 39.60
- ----------------------------------------------------------------------------------------------------
</TABLE>
(a) Reflects weighted averages across all plans.
The Company's net periodic pension benefit, as allocated by PanEnergy, was $14
million, $13 million and $11 million for the years ended December 31, 1998,
1997 and 1996, respectively.
PanEnergy also sponsors, and the Company participates in, an employee savings
plan that covers substantially all employees. The Company expensed plan
contributions of $3 million each year in 1998, 1997 and 1996.
OTHER POSTRETIREMENT BENEFITS. The Company, in conjunction with PanEnergy,
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 plan amendments effective late 1998
and early 1999, health care benefits for future retirees were changed to limit
employer contributions and medical coverage.
A-13
<PAGE> 14
The Company accrues such benefit costs over the active service period of
employees to the date of full eligibility for the benefits. The net unrecognized
transition obligation, resulting from the implementation of accrual accounting,
is being amortized over approximately 20 years. With respect to the entire plan,
the fair value of the plan assets was $150 million and $ 122 million at December
31, 1998 and 1997, respectively, and the accumulated postretirement benefit
obligation was $225 million and $256 million at December 31, 1998 and 1997,
respectively. Under the terms of the agreement with CMS Energy discussed in Note
1 to the Consolidated Financial Statements, benefit obligations related to
active employees will transfer to CMS Energy, and benefit obligations related to
existing retired employees and plan assets will be retained by PanEnergy.
It is the Company's and PanEnergy's general policy to fund accrued
postretirement health care costs. PanEnergy's retiree life insurance plan is
fully funded based on actuarially determined requirements.
The Company's net periodic postretirement benefit cost, as allocated by
PanEnergy, was $7 million each year in 1998, 1997 and 1996.
For measurement purposes, a 5% weighted average rate of increase in the per
capita cost of covered health care benefits was assumed for 1998. The rate was
assumed to decrease gradually to 4.75% for 2005 and remain at that level
thereafter. Assumed health care cost trend rates have a significant effect on
the amounts reported for the Company's health care plans.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
SENSITIVITY TO CHANGES IN ASSUMED HEALTH CARE COST TREND RATES
- ---------------------------------------------------------------------------------------------------
1-Percentage- 1-Percentage-
(In millions) Point Increase Point Decrease
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Effect on total of service and interest cost components $ - $ -
Effect on postretirement benefit obligation $ 5 $(4)
- ---------------------------------------------------------------------------------------------------
</TABLE>
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
First Second Third Fourth
(In millions) Quarter Quarter Quarter Quarter Total
- -----------------------------------------------------------------------------------------------------------
1998
<S> <C> <C> <C> <C> <C>
Operating revenues $139 $ 116 $111 $130 $496
Operating income 70 44 36 51 201
EBIT 76 47 37 65 225
Net income 35 17 11 28(b) 91
1997
Operating revenues $166(a) $ 119 $116 $ 133 $ 534
Operating income 88 44 24 39 195
EBIT 96 48 24 33 201
Net income 48 18 3 11 80
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes the effect of the favorable resolution of certain regulatory
matters.
(b) Includes a gain on the sale of certain general partnership interests.
A-14
<PAGE> 15
INDEPENDENT AUDITORS' REPORT
Panhandle Eastern Pipe Line Company:
We have audited the accompanying consolidated balance sheets of Panhandle
Eastern Pipe Line Company and subsidiaries (the Company) as of December 31, 1998
and 1997, and the related consolidated statements of income, common
stockholder's equity and cash flows for the two years in the period ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements based on our audit. The consolidated financial statements
of the Company for the year ended December 31, 1996 were audited by other
auditors whose report, dated January 16, 1997, expressed an unqualified opinion
on those financial statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such 1998 and 1997 consolidated financial statements present
fairly, in all material respects, the financial position of the Company as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the two years in the period ended December 31, 1998 in conformity
with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Charlotte, North Carolina
February 12, 1999
A-15
<PAGE> 16
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Panhandle Eastern Pipe Line Company
We have audited the accompanying consolidated statements of income, common
stockholder's equity, and cash flows of Panhandle Eastern Pipe Line Company for
the year ended December 31, 1996. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Panhandle Eastern Pipe Line Company for the year ended December 31, 1996 in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
Houston, Texas
January 16, 1997
A-16
<PAGE> 1
EXHIBIT 99(b)
UNAUDITED PRO FORMA FINANCIAL INFORMATION
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS OF CMS ENERGY CORPORATION
The following Unaudited Pro Forma Combined Financial Statements (the "Pro Forma
Financial Statements") of CMS Energy Corporation ("CMS Energy") illustrate the
effects of: (1) various restructuring, realignment, and elimination of
activities between the Panhandle Companies (as defined below) and Duke Energy
Corporation and its subsidiaries ("Duke Energy") prior to the closing of the
acquisition (the "Acquisition") of Panhandle Eastern Pipe Line Company
("Panhandle") and its principal subsidiaries, Trunkline Gas Company and Pan Gas
Storage and its affiliates, Panhandle Storage Company and Trunkline LNG Company
(collectively the "Panhandle Companies") by CMS Energy; (2) the adjustments
resulting from the Acquisition by CMS Energy; and (3) the public issuance of
$800 million of Notes by CMS Panhandle Holding Company ("CMS Holding"), $500
million of Senior Notes by CMS Energy, and 13 million shares of common stock by
CMS Energy aggregating approximately $600 million (the "Financing
Transactions"). A portion of the net proceeds from the Financing Transactions
will be used to retire bridge facilities of CMS Energy which initially were used
in financing the Acquisition. The Unaudited Pro Forma Combined Balance Sheet has
been prepared as if such transactions occurred on December 31, 1998; the
Unaudited Pro Forma Combined Income Statement has been prepared as if such
transactions occurred as of January 1, 1998.
The Pro Forma Financial Statements reflect CMS Energy acquiring all of the
common stock of the Panhandle Companies. The Pro Forma Financial Statements also
reflect, prior to the Acquisition, the transfer of Panhandle's interest in
Northern Border Partners LP and certain non-operating assets to other
subsidiaries of Duke Energy, and the elimination of certain intercompany
accounts, including advances, between Panhandle and Duke Energy. The purchase
price for the common stock of the Panhandle Companies is $1.9 billion in cash.
After giving effect to the anticipated merger of CMS Holding into Panhandle
during the second quarter of 1999, Panhandle will have approximately $1.1
billion of debt outstanding. This indebtedness includes approximately $300
million of existing Panhandle debt and the $800 million CMS Holdings debt
incurred in the Financing Transactions. CMS Energy's acquisition of the
Panhandle Companies will be accounted for under the purchase method.
A final determination of required purchase accounting adjustments, including the
allocation of the purchase price to the assets acquired and liabilities assumed
based on their respective fair values, has not yet been made. Accordingly, the
purchase accounting adjustments made in connection with the development of the
Pro Forma Financial Statements are preliminary and have been made solely for
purposes of developing the pro forma combined financial information. However,
CMS Energy management believes that the pro forma adjustments and the underlying
assumptions reasonably present the significant effects of the Acquisition and
the Financing Transactions. In addition, CMS Energy will undertake a study to
determine the fair value of the assets and liabilities of the Panhandle
Companies and will revise the purchase accounting adjustments upon completion of
that study. The actual financial position and results of operations of the
combined entity will differ, perhaps significantly, from the pro forma amounts
reflected herein because of a variety of factors, including access to additional
information, changes in value and changes in operating results between the dates
of the Pro Forma Financial Statements and the date on which the Acquisition
takes place. The Pro Forma Financial Statements are not necessarily indicative
of actual operating results or financial position had the Acquisition and the
Financing Transactions occurred as of the dates indicated above, nor do they
purport to indicate operating results or financial position which may be
attained in the future.
The significant adjustments to the pro forma net income reflect (1) higher
depreciation and amortization expense to give effect to the allocation of excess
purchase price and the fair value of net assets acquired related to property,
plant and equipment prospectively depreciated over a 40-year period, (2)
elimination of pension and rental income, and (3) lower interest expense from
the cancellation of certain indebtedness
F-1
<PAGE> 2
between Panhandle and Duke Energy and additional interest expense reflecting the
new debt issuances of both CMS Holding and CMS Energy.
The significant adjustments to the pro forma financial position reflect (1)
elimination of the advances to Duke Energy and the notes payable to Duke Energy,
(2) increases to property, plant and equipment and accrued liabilities for the
purchase price allocation, (3) recognition of goodwill in the fair value
calculation, (4) decreases in taxes and other liabilities assumed by Duke
Energy, and (5) increases in long-term debt and common stockholders' equity in
connection with the Acquisition and the Financing Transactions.
The Panhandle Companies financial statements utilized in the preparation of the
Pro Forma Financial Statements are based upon financial statements and
information obtained from Duke Energy and Panhandle.
The Pro Forma Financial Statements should be read in conjunction with the
historical financial statements of both CMS Energy and Panhandle and the notes
to the Pro Forma Financial Statements included elsewhere herein. The pro forma
adjustments do not reflect any potential operating efficiencies or cost savings
which CMS Energy management believes are achievable with respect to the combined
companies.
F-2
<PAGE> 3
CMS ENERGY CORPORATION
UNAUDITED PRO FORMA COMBINED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1998
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Panhandle Companies
Pre-Acquisition Pro Forma
-----------------------------------------------------------------
Restructuring Elimination of Panhandle
CMS Energy Panandle and Duke Energy Companies
Historical Historical Realignment Activities as Adjusted
------------ ------------ ------------- -------------- -----------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUE $ 5,141 $ 496 $ (3) (a) $ (14) (b) $ 479
OPERATING EXPENSES
Operations and maintenance 3,667 213 (2) (a) 9 (c) 220
Depreciation and amortization 484 56 (2) (a) (4) (d) 50
Property and other taxes 215 26 2 (a) (1) (e) 27
---------- --------- ---------- ---------- ----------
4,366 295 (2) 4 297
---------- --------- ---------- ---------- ----------
PRETAX OPERATING INCOME 775 201 (1) (18) 182
OTHER INCOME (DEDUCTIONS) (46) 24 (14) (f) 10
FIXED CHARGES 387 77 (1) (a) (54) (g) 22
---------- --------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 342 148 - 22 170
INCOME TAXES 100 57 1 (a) 7 (h) 65
---------- --------- ---------- ---------- ----------
CONSOLIDATED NET INCOME BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE 242 91 (1) 15 105
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
FOR PROPERTY TAXES, NET OF $23 TAX 43
---------- --------- ---------- ---------- ----------
CONSOLIDATED NET INCOME $ 285 $ 91 $ (1) $ 15 $ 105
========== ========= ========== ========== ==========
BASIC EARNINGS PER AVERAGE COMMON SHARE
CMS ENERGY $ 2.65
==========
CLASS G $ 1.56
==========
DILUTED EARNINGS PER AVERAGE COMMON SHARE
CMS ENERGY $ 2.62
==========
CLASS G $ 1.56
==========
AVERAGE COMMON SHARES OUTSTANDING
CMS ENERGY 102
==========
CLASS G 8
==========
<CAPTION>
Pro Forma Acquisition
----------------------------------------------------------------------------------
Acquisition Financing Intercompany CMS Energy
Adjustments Transactions Eliminations Pro Forma
----------------- ------------- -------------- -----------
<S> <C> <C> <C> <C>
OPERATING REVENUE $ (9) (i) $ - $ (45) (n) $ 5,566
OPERATING EXPENSES
Operations and maintenance (45) (n) 3,842
Depreciation and amortization 7 (j) 541
Property and other taxes 242
----------- ----------- ----------- ----------
7 - (45) 4,625
----------- ----------- ----------- ----------
PRETAX OPERATING INCOME (16) - - 941
OTHER INCOME (DEDUCTIONS) (36)
FIXED CHARGES 91 (l) 500
----------- ----------- ----------- ----------
INCOME BEFORE INCOME TAXES (16) (91) - 405
INCOME TAXES (6) (k) (32) (m) 128
----------- ----------- ----------- ----------
CONSOLIDATED NET INCOME BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE (10) (59) - 277
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
FOR PROPERTY TAXES, NET OF $23 TAX 43
----------- ----------- ----------- ----------
CONSOLIDATED NET INCOME $ (10) $ (59) $ - $ 320
=========== =========== =========== ==========
BASIC EARNINGS PER AVERAGE COMMON SHARE
CMS ENERGY $ 2.66
==========
CLASS G $ 1.56
==========
DILUTED EARNINGS PER AVERAGE COMMON SHARE
CMS ENERGY $ 2.63
==========
CLASS G $ 1.56
==========
AVERAGE COMMON SHARES OUTSTANDING
CMS ENERGY 14 116
=========== ==========
CLASS G - 8
=========== ==========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Income Statement.
F-3
<PAGE> 4
CMS ENERGY CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED INCOME STATEMENT
Restructuring and Realignment:
(a) To reflect the results of operations of Panhandle Storage Company and
Trunkline LNG Company, both acquired by CMS Energy, and the transfer of
Panhandle's interest in Northern Border Partners LP and certain
non-operating assets to other subsidiaries of Duke Energy under the
provisions of the Stock Purchase Agreement dated as of October 31, 1998,
between CMS Energy and subsidiaries of Duke Energy (the "Stock Purchase
Agreement").
Elimination of Duke Energy Activities:
(b) To reflect the elimination of rental income earned by Panhandle on an
office building, which was transferred to Duke Energy under the
provisions of the Stock Purchase Agreement.
(c) To reflect the elimination of pension income recognized by Panhandle on
the overfunded pension plans of Duke Energy. Under the provisions of the
Stock Purchase Agreement, Duke Energy transfered to CMS Energy an
amount of pension assets equivalent to the Panhandle Companies'
liabilities assumed by CMS Energy.
(d) To reflect the elimination of depreciation associated with an office
building and certain other assets, which were transferred to Duke
Energy under the provisions of the Stock Purchase Agreement.
(e) To reflect the elimination of ad valorem taxes associated with an office
building, which was transferred to Duke Energy under the provisions
of the Stock Purchase Agreement.
(f) To reflect the elimination of a December 1998 gain on the sale of
Panhandle's general partnership interest in Northern Border Partners LP.
(g) To reflect a reduction in interest expense relating to the settlement of
certain short-term notes payable to Duke Energy under the provisions of
the Stock Purchase Agreement.
(h) To reflect the income tax expense effects of the pro forma adjustments
(b) through (g) at an estimated rate of 35%.
Acquisition Adjustments:
(i) To reflect the elimination of non-cash amortization of deferred credits
associated with a Trunkline LNG Company rate settlement.
(j) To reflect depreciation expense on the fair value of property, plant and
equipment prospectively depreciated over a 40-year period which
approximates the Federal Energy Regulatory Commission ("FERC")-approved
depreciation rate for the regulated property, plant and equipment of the
Panhandle Companies. Also reflects amortization expense over a 40-year
period of the estimated goodwill recognized in the Acquisition.
(k) To reflect the income tax expense effects of pro forma adjustment (i)
and (j) at an estimated rate of 35%.
F-4
<PAGE> 5
Financing Transactions:
(l) To reflect the increase of interest expense relating to the issuance of
$800 million of CMS Holding Notes with a weighted average interest rate of
6.8% and $500 million of CMS Energy senior debt with a coupon of 7.5%. An
increase of 1/8% in interest rates would have the impact of increasing total
pro forma interest expense by approximately $1.6 million for the year ended
December 31, 1998.
(m) To reflect the income tax expense effects of pro forma adjustment (l) at an
estimated rate of 35%.
Intercompany Eliminations:
(n) To reflect the elimination of intercompany transactions between CMS Energy
and the Panhandle Companies.
F-5
<PAGE> 6
CMS ENERGY CORPORATION
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
As of December 31, 1998
(Dollars in million)
<TABLE>
<CAPTION>
Panhandle Companies
Pre-Acquisition Pro Forma
--------------------------------------------------------------
Restructuring Elimination of Panhandle
CMS Energy Panhandle and Duke Energy Companies
Historical Historical Realignment Activities as Adjusted
---------- ---------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS
NET PROPERTY, PLANT AND EQUIPMENT $ 6,040 $ 979 $ 101 (a) $ (72) (b) $ 1,008
INVESTMENTS
Advances and notes receivable -parent - 738 - (738) (c) -
Investments in affiliates and other 2,073 50 (41) (a) 9
--------- --------- --------- --------- ---------
2,073 788 (41) (738) 9
--------- --------- --------- --------- ---------
CURRENT ASSETS
Cash and temporary cash investments 101 -
Accounts receivable and accrued revenue 720 94 (3) (a) (1) (c) 90
Other current assets 586 86 (2) (a) (6) (d) 78
--------- --------- --------- --------- ---------
1,407 180 (5) (7) 168
--------- --------- --------- --------- ---------
NON-CURRENT ASSETS 1,790 26 - (2) (d) 24
--------- --------- --------- --------- ---------
TOTAL ASSETS $ 11,310 $ 1,973 $ 55 $ (819) $ 1,209
========= ========= ========= ========= =========
STOCKHOLDER'S EQUITY AND LIABILITIES
CAPITALIZATION
Common stockholders' equity $ 2,216 $ 558 $ 16 (a) $ 142 (g) $ 716
Preferred stock of subsidiary 238 -
Trust preferred securities 393 -
Long-term debt 4,726 299 (3) (a) 3 (c) 299
Non-current portion of capital leases 105 -
--------- --------- --------- --------- ---------
7,678 857 13 145 1,015
--------- --------- --------- --------- ---------
CURRENT LIABILITIES
Current portion of long-term
debt and capital leases 293 -
Notes payable 328 675 (675) (e) -
Accounts payable 501 56 (48)(a) 8
Other current liabilities 688 183 3 (a) (68) (f) 108
(10) (d)
--------- --------- --------- --------- ---------
1,810 914 (45) (753) 116
--------- --------- --------- --------- ---------
NON-CURRENT LIABILITIES
Deferred income taxes 649 99 51 (a) (150) (f) -
Postretirement benefits 489 -
Other non-current liabilities 684 103 36 (a) (61) (b) 78
--------- --------- --------- --------- ---------
1,822 202 87 (211) 78
--------- --------- --------- --------- ---------
TOTAL STOCKHOLDERS' INVESTMENT AND
LIABILITIES $ 11,310 $ 1,973 $ 55 $ (819) $ 1,209
========= ========= ========= ========= =========
<CAPTION>
Pro Forma Acquisition
---------------------------------------------------------
Acquisition Financing Intercompany CMS Energy
Adjustments Transactions Eliminations Pro Forma
----------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
NET PROPERTY, PLANT AND EQUIPMENT $ 603 (h) $ - $ - $ 7,616
(35)(i)
INVESTMENTS
Advances and notes receivable -parent -
Investments in affiliates and other 2,082
------- -------- ---------- ---------
- - - 2,082
------- -------- ---------- ---------
CURRENT ASSETS
Cash and temporary cash investments 101
Accounts receivable and accrued revenue (3) (o) 807
Other current assets 664
------- -------- ---------- ---------
- - (3) 1,572
------- -------- ---------- ---------
NON-CURRENT ASSETS 700 (j) - - 2,514
------- -------- ---------- ---------
TOTAL ASSETS $ 1,268 $ - $ (3) $ 13,784
======= ======== ========== =========
STOCKHOLDER'S EQUITY AND LIABILITIES
CAPITALIZATION
Common stockholders' equity $1,184 (k) $ 600 (l) $ - $ 2,816
(1,900)(m)
Preferred stock of subsidiary 238
Trust preferred securities 393
Long-term debt 19 (j) 1,300 (n) 6,344
Non-current portion of capital leases 105
------- -------- ---------- ---------
1,203 - - 9,896
------- -------- ---------- ---------
CURRENT LIABILITIES
Current portion of long-term debt and capital
leases 293
Notes payable 328
Accounts payable (3) (o) 506
Other current liabilities 796
------- -------- ---------- ---------
- - (3) 1,923
------- -------- ---------- ---------
NON-CURRENT LIABILITIES
Deferred income taxes 649
Postretirement benefits 489
Other non-current liabilities 100 (j) 827
(35)(i)
------- -------- ---------- ---------
65 - - 1,965
------- -------- ---------- ---------
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $ 1,268 $ - $ (3) $ 13,784
======= ======== ========== =========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Balance Sheet.
F-6
<PAGE> 7
CMS ENERGY CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
Restructuring and Realignment:
(a) To reflect the financial position of Panhandle Storage Company and
Trunkline LNG Company, both acquired by CMS Energy, and the transfer of
Panhandle's interest in Northern Border Partners LP and certain
non-operating assets to other subsidiaries of Duke Energy under the
provisions of the Stock Purchase Agreement.
Elimination of Duke Energy Activities:
(b) To reflect the transfer to Duke Energy of certain assets, primarily an
office building, under the provisions of the Stock Purchase Agreement.
(c) To reflect the settlement of the advances and notes receivable from Duke
Energy under the provisions of the Stock Purchase Agreement.
(d) To reflect the transfer from the Panhandle Companies to Duke Energy of
certain environmental and litigation liabilities and the related assets
under the provisions of the Stock Purchase Agreement.
(e) To reflect the settlement of certain short-term notes payable to Duke
Energy under the provisions of the Stock Purchase Agreement.
(f) To reflect the transfer from the Panhandle Companies to Duke Energy of
all tax liabilities under the provisions of the Stock Purchase
Agreement.
(g) To reflect the settlement and transfer of certain assets and liabilities
described in pro forma adjustments (b) through (f).
Acquisition Adjustments:
(h) To reflect the increase in property, plant and equipment to adjust the
historical value of these assets to their estimated fair values. The
allocation reflects CMS Energy's internal evaluation of the excess
purchase price and is subject to the completion of a study to determine
the fair value of the property. Should the study not support such
allocation to property, plant and equipment, the excess of total
purchase price over the fair value of the net assets acquired will be
reflected as an adjustment to the preliminary estimate of goodwill.
(i) To reflect the elimination of deferred credits associated with a
Trunkline LNG Company rate settlement.
(j) To reflect the preliminary estimated acquisition adjustments under the
purchase method of accounting to record assets acquired and liabilities
assumed at estimated fair value for (1) the preliminary estimate of
goodwill, (2) increase of certain other assets, deferred charges and
regulatory assets, (3) the long-term debt assumed, (4) the assumption of
benefit plan obligations by the Panhandle Companies, previously assumed
by Duke Energy, and (5) the accrual of certain obligations of the
Panhandle Companies which are expected to be paid after completion of
the transaction. The following adjustments reflect CMS Energy
management's intended business strategies which may differ from the
business strategies employed by Duke Energy management prior to the
Acquisition:
(Dollars in millions)
Other assets including goodwill $700
Other non-current liabilities 100
F-7
<PAGE> 8
(k) To reflect the increase in common stockholders' equity as a result of
pro forma adjustments (h) through (j).
Financing Transactions:
(l) To reflect the assumed public issuance of approximately 14 million
shares of common stock of CMS Energy aggregating $600 million. The
anticipated net proceeds will be used to retire a portion of the
indebtedness incurred to acquire the Panhandle Companies.
(m) To reflect the payment of $1.9 billion in cash to Duke Energy for the
acquisition of the Panhandle Companies.
(n) To reflect the issuance of $800 million of CMS Holding Notes and
$500 million CMS Energy senior debt.
Intercompany Eliminations:
(o) To reflect the elimination of intercompany transactions between CMS
Energy and the Panhandle Companies.
F-8
