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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
REGISTRANT TITLE OF CLASS ON WHICH REGISTERED
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CMS ENERGY CORPORATION Common Stock, $.01 par value New York Stock Exchange
CMS ENERGY TRUST II 8.75% Adjustable Convertible Trust Securities New York Stock Exchange
CMS ENERGY TRUST III 7.25% Premium Equity Participating Security Units New York Stock Exchange
CONSUMERS ENERGY
COMPANY Preferred Stocks, $100 par value: $4.16 Series, $4.50 Series New York Stock Exchange
CONSUMERS POWER
COMPANY FINANCING I 8.36% Trust Originated Preferred Securities New York Stock Exchange
CONSUMERS ENERGY
COMPANY FINANCING II 8.20% Trust Originated Preferred Securities New York Stock Exchange
CONSUMERS ENERGY
COMPANY FINANCING
III 9.25% Trust Originated Preferred Securities New York Stock Exchange
CONSUMERS ENERGY
COMPANY FINANCING IV 9.00% Trust Originated Preferred Securities New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrants' knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Panhandle Eastern Pipe Line Company meets the conditions set forth in General
Instructions I(1)(a) and (b) of Form 10-K and is therefore filing this Form 10-K
with the reduced disclosure format. Items 4, 6, 10, 11, 12 and 13 have been
omitted and Items 1, 2 and 7 have been reduced in accordance with Instruction I.
The aggregate market value of CMS Energy voting and non-voting common equity
held by non-affiliates was $2,909,720,407 for the 133,473,415 CMS Energy Common
Stock shares outstanding on February 28, 2002.
On February 28, 2002 CMS Energy held all voting and non-voting common equity of
Consumers and Panhandle.
Documents incorporated by reference: CMS Energy's proxy statement and Consumers
information statement relating to the 2002 annual meeting of shareholders to be
held May 24, 2002, are incorporated by reference in Part III, except for the
organization and compensation committee report, performance graph and audit
committee report contained therein.
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CMS Energy Corporation
and
Consumers Energy Company
and
Panhandle Eastern Pipe Line Company
Annual Reports on Form 10-K to the Securities and Exchange Commission for the
Year Ended
December 31, 2001
This combined Form 10-K is separately filed by 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 its 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
PAGE
----
Glossary ............................................................ 3
PART I:
Item 1. Business.................................................... 8
Item 2. Properties.................................................. 32
Item 3. Legal Proceedings........................................... 32
Item 4. Submission of Matters to a Vote of Security Holders......... 32
PART II
Item 5. Market for CMS Energy's, Consumers' and Panhandle's Common
Equity and Related Stockholder Matters...................... 33
Item 6. Selected Financial Data..................................... 33
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 34
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 34
Item 8. Financial Statements and Supplementary Data................. 35
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................... CO-1
PART III
Item 10. Directors and Executive Officers of CMS Energy and
Consumers................................................... CO-2
Item 11. Executive Compensation...................................... CO-2
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. CO-2
Item 13. Certain Relationships and Related Transactions.............. CO-2
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... CO-3
2
GLOSSARY
Certain terms used in the text and financial statements are defined below.
ABATE..................................... Association of Businesses Advocating Tariff Equity
ALJ....................................... Administrative Law Judge
APB....................................... Accounting Principles Board
APB Opinion No. 18........................ APB Opinion No. 18, "The Equity Method of Accounting for
Investments in Common Stock"
APB Opinion No. 25........................ APB Opinion No. 25, "Accounting for Stock Issued to
Employees"
APB Opinion No. 30........................ APB Opinion No. 30, "Reporting Results of Operations --
Reporting the Effects of Disposal of a Segment of a
Business"
AMT....................................... Alternative minimum tax
Alliance.................................. Alliance Regional Transmission Organization
Anadarko.................................. Anadarko Petroleum Corporation, a non-affiliated company
Articles.................................. Articles of Incorporation
Attorney General.......................... Michigan Attorney General
bcf....................................... Billion cubic feet
BG LNG Services........................... BG LNG Services, Inc., a subsidiary of BG Group of the
United Kingdom
Big Rock.................................. Big Rock Point nuclear power plant, owned by Consumers
Board of Directors........................ Board of Directors of CMS Energy
Bookouts.................................. Unplanned netting of transactions from multiple
contracts
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, redeemed in October 1999
Clean Air Act............................. Federal Clean Air Act, as amended
CMS Capital............................... CMS Capital Corp., a subsidiary of Enterprises
CMS Electric and Gas...................... CMS Electric and Gas Company, a subsidiary of
Enterprises
CMS Energy................................ CMS Energy Corporation, the parent of Consumers and
Enterprises
CMS Energy Common Stock................... Common stock of CMS Energy, par value $.01 per share
CMS Gas Transmission...................... CMS Gas Transmission Company, a subsidiary of
Enterprises
CMS Generation............................ CMS Generation Co., a subsidiary of Enterprises
CMS Holdings.............................. CMS Midland Holdings Company, a subsidiary of Consumers
CMS 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 Holdings, LLC............... A subsidiary of Panhandle Eastern Pipe Line
Common Stock.............................. All classes of Common Stock of CMS Energy and each of
its subsidiaries, or any of them individually, at the
time of an award or grant under the Performance
Incentive Stock Plan
Consumers................................. Consumers Energy Company, a subsidiary of CMS Energy
Consumers Campus Holdings................. Consumers Campus Holdings, L.L.C., a wholly owned
subsidiary of Consumers
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
3
Customer Choice Act....................... Customer Choice and Electricity Reliability Act, a
Michigan statute enacted in June 2000 that allows all
retail customers choice of alternative electric
suppliers no later than January 1, 2002, provides for
full recovery of net stranded costs and implementation
costs, establishes a five percent reduction in
residential rates, establishes rate freeze and rate cap,
and allows for Securitization
Detroit Edison............................ The Detroit Edison Company, a non-affiliated company
DIG....................................... Dearborn Industrial Generation, L.L.C., a wholly owned
subsidiary of CMS Generation
DIG Statement No. C15..................... Derivatives Implementation Group, Statement 133
Implementation Issue No. C15, "Scope Exceptions: Normal
Purchases and Normal Sales Exception for Certain
Option-Type Contracts and Forward Contracts in
Electricity"
DIG Statement No. C16..................... Derivatives Implementation Group, Statement 133
Implementation Issue No. C16, "Scope Exceptions:
Applying the Normal Purchases and Normal Sales Exception
to Contracts That Combine a Forward Contract and a
Purchased Option Contract"
DOE....................................... U.S. Department of Energy
Dow....................................... The Dow Chemical Company, a non-affiliated company
DSM....................................... Demand-side management
Duke Energy............................... Duke Energy Corporation, a non-affiliated company
EITF...................................... Emerging Issues Task Force
El Chocon................................. Hidroelectrica El Chocon S.A.
Enterprises............................... CMS Enterprises Company, a subsidiary of CMS Energy
EPA....................................... U. S. Environmental Protection Agency
EPS....................................... Earnings per share
FASB...................................... Financial Accounting Standards Board
FERC...................................... Federal Energy Regulatory Commission
FMLP...................................... First Midland Limited Partnership, a partnership which
holds a lessor interest in the MCV facility
FTC....................................... Federal Trade Commission
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, $400 million Series E and $300 million
Series F
GWh....................................... Gigawatt-hour
INGAA..................................... Interstate Natural Gas Association of America
IPP....................................... Independent Power Producer
ISO....................................... Independent System Operator
ITC....................................... Investment tax credit
Jorf Lasfar............................... The 1,356 MW coal-fueled power plant in Morocco, jointly
owned by CMS Generation and ABB Energy Venture, Inc.
kWh....................................... Kilowatt-hour
LIBOR..................................... London Inter-Bank Offered Rate
Loy Yang.................................. The 2,000 MW brown coal fueled Loy Yang A power plant
and an associated coal mine in Victoria, Australia, in
which CMS Generation holds a 50 percent ownership
interest
LNG....................................... Liquefied natural gas
LNG Holdings.............................. CMS Trunkline LNG Holdings, LLC, jointly owned by CMS
Panhandle Holdings, LLC and Dekatherm Investor Trust
Ludington................................. Ludington pumped storage plant, jointly owned by
Consumers and Detroit Edison
4
mcf....................................... Thousand cubic feet
MCV Facility.............................. A natural gas-fueled, combined-cycle cogeneration
facility operated by the MCV Partnership
MCV Partnership........................... Midland Cogeneration Venture Limited Partnership in
which Consumers has a 49 percent interest through CMS
Midland
MD&A...................................... Management's Discussion and Analysis
MEPCC..................................... Michigan Electric Power Coordination Center
METC...................................... Michigan Electric Transmission Company, a subsidiary of
Consumers Energy
Michigan Gas Storage...................... Michigan Gas Storage Company, a subsidiary of Consumers
Mbbls..................................... Thousand barrels
MMbbls.................................... Million barrels
MMBtu..................................... Million British thermal unit
MMcf...................................... Million cubic feet
MPSC...................................... Michigan Public Service Commission
MTH....................................... Michigan Transco Holdings, Limited Partnership
MW........................................ Megawatts
NEIL...................................... Nuclear Electric Insurance Limited, an industry mutual
insurance company owned by member utility companies
Nitrotec.................................. Nitrotec Corporation, a propriety gas technology company
in which CMS Gas Transmission owns an equity interest
NMC....................................... Nuclear Management Company, a Wisconsin company, formed
in 1999 by Northern States Power Company (now Xcel
Energy Inc.), Alliant Energy, Wisconsin Electric Power
Company, and Wisconsin Public Service Company to operate
and manage nuclear generating facilities owned by the
four utilities
NOx....................................... Nitrogen Oxide
NRC....................................... Nuclear Regulatory Commission
NYMEX..................................... New York Mercantile Exchange
OATT...................................... Open Access Transmission Tariff
OPEB...................................... Postretirement benefit plans other than pensions for
retired employees
Palisades................................. Palisades nuclear power plant, 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 LNG. Panhandle is a wholly owned
subsidiary of CMS Gas Transmission
Panhandle Eastern Pipe Line............... Panhandle Eastern Pipe Line Company, a wholly owned
subsidiary of CMS Gas Transmission
Panhandle Storage......................... CMS Panhandle Storage Company, a subsidiary of Panhandle
Eastern Pipe Line Company
PCB....................................... Polychlorinated biphenyl
Pension Plan.............................. The trusteed, non-contributory, defined benefit pension
plan of Panhandle, Consumers and CMS Energy
PFD....................................... Proposal For Decision
Powder River.............................. CMS Oil & Gas owns a significant interest in 13 coal bed
methane fields or projects developed within the Powder
River Basin which spans the border between Wyoming and
Montana.
PPA....................................... The Power Purchase Agreement between Consumers and the
MCV Partnership with a 35-year term commencing in March
1990
ppm....................................... Parts per million
5
Price Anderson Act........................ Price Anderson Act, enacted in 1957 as an amendment to the Atomic
Energy Act of 1954, as revised and extended over the years. This act
stipulates between nuclear licensees and the U.S. government the
insurance, financial responsibility, and legal liability for nuclear
accidents.
PSCR...................................... Power supply cost recovery
PUHCA..................................... Public Utility Holding Company Act of 1935
PURPA..................................... Public Utility Regulatory Policies Act of 1978
RTO....................................... Regional Transmission Organization
SAB....................................... Staff Accounting Bulletin
SAB No. 101............................... SEC SAB No. 101, "Revenue Recognition"
Sea Robin................................. Sea Robin Pipeline Company
SEC....................................... U.S. Securities and Exchange Commission
Securitization............................ A financing authorized by statute in which a MPSC approved flow of
revenues from a portion of the rates charged by a utility to its
customers is set aside and pledged as security for the repayment of
Securitization bonds issued by a special purpose entity affiliated
with such utility
Senior Credit Facilities.................. $450 million one-year revolving credit facility maturing in June 2002
and a $300 million three-year revolving credit facility, maturing in
June 2004
SERP...................................... Supplemental Executive Retirement Plan
SFAS...................................... Statement of Financial Accounting Standards
SFAS No. 5................................ SFAS No. 5, "Accounting for Contingencies"
SFAS No. 13............................... SFAS No. 13 "Accounting for Leases"
SFAS No. 34............................... SFAS No. 34, "Capitalization of Interest Cost"
SFAS No. 52............................... SFAS No. 52, "Foreign Currency Translation"
SFAS No. 71............................... SFAS No. 71, "Accounting for the Effects of Certain Types of
Regulation"
SFAS No. 87............................... SFAS No. 87, "Employers' Accounting for Pension"
SFAS No. 106.............................. SFAS No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions"
SFAS No. 109.............................. SFAS No. 109, "Accounting for Income Taxes"
SFAS No. 115.............................. SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities"
SFAS No. 121.............................. SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of"
SFAS No. 123.............................. SFAS No. 123, "Accounting for Stock-Based Compensation"
SFAS No. 133.............................. SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities, as amended and interpreted"
SFAS No. 141.............................. SFAS No. 141, "Business Combinations"
SFAS No. 142.............................. SFAS No. 142, "Goodwill and Other Intangible Assets"
SFAS No. 143.............................. SFAS No. 143, "Accounting for Asset Retirement Obligations"
SFAS No. 144.............................. SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets"
SIPS...................................... State Implementation Plans
SOP....................................... Statement of Position
6
Stranded 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 and regulatory assets
Superfund................................. Comprehensive Environmental Response, Compensation and
Liability Act
TBtu...................................... Trillion british thermal unit
TGN....................................... Transportadora de Gas del Norte S.A., a natural gas
pipeline located in Argentina
Transition Costs.......................... Stranded Costs, as defined, plus the 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
Union..................................... Utility Workers of America, AFL-CIO
7
PART I
ITEM 1. BUSINESS.
GENERAL
CMS ENERGY
CMS Energy, formed in Michigan in 1987, is an integrated energy company
operating in the United States and in selected growth markets around the world.
CMS Energy has a strong asset base, supplemented with an active marketing,
services and trading capability. Its two principal subsidiaries are Consumers
and Enterprises. Consumers is a public utility that provides natural gas and/or
electricity to almost 6 million of the 10 million residents in the 68 Michigan
lower peninsula counties. Enterprises, through subsidiaries, is engaged in
several energy businesses in the United States and in selected international
growth markets.
In 2001, CMS Energy's consolidated operating revenue was $9.60 billion. See
BUSINESS SEGMENTS later in this Item 1 for further discussion of each segment.
CONSUMERS
Consumers, formed in Michigan in 1968, is the successor to a corporation
organized in Maine in 1910 that conducted business in Michigan from 1915 to
1968. In 1997, Consumers, formerly named Consumers Power Company, changed its
name to Consumers Energy Company to better reflect its integrated electricity
and gas businesses.
Consumers' service areas include automotive, metal, chemical, food and wood
products and a diversified group of other industries. Consumers' consolidated
operations account for a majority of CMS Energy's total assets and income, as
well as a substantial portion of its operating revenue. At year-end 2001,
Consumers' customer base and operating revenues were as follows:
CUSTOMERS OPERATING 2001 VS. 2000
SERVED REVENUE OPERATING REVENUE
(MILLIONS) (MILLIONS) % INCREASE/(DECREASE)
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Electric Utility Business.............................. 1.70 $2,633 (1.61)
Gas Utility Business................................... 1.63 1,338 11.87
Other.................................................. -- 43(a) (31.75)
Total................................................ 3.33 $4,014 2.01
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(a) Primarily represents earnings attributable to Consumers' interest in the
MCV Partnership and MCV Facility, the earnings of which are reported within
CMS Energy's independent power production business segment.
Consumers' rates and certain other aspects of its business are subject to
the jurisdiction of the MPSC and FERC, as described in CMS ENERGY, CONSUMERS AND
PANHANDLE REGULATION later in this Item 1.
CONSUMERS PROPERTIES -- GENERAL: The principal properties of Consumers and
its subsidiaries are owned in fee, except that most electric lines and gas mains
are located, pursuant to easements and other rights, in public roads or on land
owned by others. Substantially all of Consumers' properties are subject to the
lien of its First Mortgage Bond Indenture. For additional information on
Consumers' properties see BUSINESS SEGMENTS -- Consumers Electric Utility
Operations -- Electric Utility Properties, and -- Consumers Gas Utility
Operations -- Gas Utility Properties, below.
For information on capital expenditures, see ITEM 7. CONSUMERS'
MANAGEMENT'S DISCUSSION AND ANALYSIS -- OUTLOOK and ITEM 8. FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA -- NOTE 10 OF CONSUMERS' NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS.
8
BUSINESS SEGMENTS
CMS ENERGY, CONSUMERS AND PANHANDLE FINANCIAL INFORMATION
For information with respect to operating revenue, net operating income,
identifiable assets and liabilities attributable to all of CMS Energy's business
segments and international and domestic operations, see ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA -- SELECTED FINANCIAL INFORMATION AND CMS
ENERGY'S CONSOLIDATED FINANCIAL STATEMENTS AND NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS.
For information with respect to the operating revenue, net operating
income, identifiable assets and liabilities attributable only to Consumers'
business segments, see ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA -- SELECTED FINANCIAL INFORMATION AND CONSUMERS' CONSOLIDATED FINANCIAL
STATEMENTS AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
For information with respect to the operating revenue, net operating
income, identifiable assets and liabilities attributable only to Panhandle's
business segments, see ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA -- PANHANDLE'S CONSOLIDATED FINANCIAL STATEMENTS AND NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS.
CONSUMERS' ELECTRIC UTILITY OPERATIONS
Based on the number of customers, Consumers' electric utility operations,
if independent, would be the thirteenth largest electric utility company in the
United States. Consumers' electric utility operations include the generation,
purchase, transmission, distribution and sale of electricity. At year-end 2001,
it served customers in 61 of the 68 counties of Michigan's lower peninsula.
Principal cities served include Battle Creek, Flint, Grand Rapids, Jackson,
Kalamazoo, Midland, Muskegon and Saginaw. Consumers' electric utility customer
base includes a mix of residential, commercial and diversified industrial
customers, the largest segment of which is the automotive industry. Consumers'
electric utility operations are not dependent upon a single customer, or even a
few customers, and the loss of any one or even a few of such customers is not
reasonably likely to have a material adverse effect on its financial condition.
Consumers' electric utility operations are seasonal. The summer months
usually increase demand for electric energy, principally due to the use of air
conditioners and other cooling equipment, thereby affecting revenues. In 2001
and 2000, total electric deliveries were 40 billion kWh and 41 billion kWh,
respectively. In 2001, electric sales totaled 39 billion kWh and retail open
access deliveries totaled 1 billion kWh. In 2000, electric sales totaled 40
billion kWh and retail open access deliveries totaled 1 billion kWh.
Consumers experienced a 2001 winter peak demand of 5,769 MW and a summer
peak demand of 8,289 MW. The summer peak of 8,289 MW was significantly higher
than the 2001 projection of 7,741 MW, and 10.8 percent higher than the previous
record peak of 7,460 MW reached in 1999. In 2001, based on the actual summer
peak, Consumers' power reserve, also called a reserve margin, was 7.4 percent
compared to 21 percent in 2000. Based on its summer 2001 forecast, Consumers
carried a 15.4 percent reserve margin. Consumers estimates that during the
summer of 2002, it will be able to satisfy its peak demand with a reserve margin
of approximately 17 percent from a combination of its owned electric generating
plants and electricity purchase contracts or options, as well as other
arrangements.
9
ELECTRIC UTILITY PROPERTIES: At December 31, 2001, Consumers' electric
generating system consists of the following:
2001 SUMMER NET 2001 NET
DEMONSTRATED GENERATION
SIZE AND YEAR CAPABILITY (THOUSANDS
NAME AND LOCATION (MICHIGAN) ENTERING SERVICE (KWHS) OF KWHS)
---------------------------- ---------------- --------------- ----------
COAL GENERATION
J H Campbell 1&2 -- West Olive............ 2 Units, 1962-1967 615,000 3,654,739
J H Campbell 3 -- West Olive.............. 1 Unit, 1980 765,140(a) 5,612,688
D E Karn -- Essexville.................... 2 Units, 1959-1961 515,000 3,611,668
B C Cobb -- Muskegon...................... 2 Units, 1956-1957 316,000 2,029,002
J R Whiting -- Erie....................... 3 Units, 1952-1953 326,000 2,119,458
J C Weadock -- Essexville................. 2 Units, 1955-1958 310,000 2,175,729
--------- ----------
Total coal generation....................... 2,847,140 19,203,284
--------- ----------
OIL/GAS GENERATION
B C Cobb -- Muskegon...................... 3 Units, 1999-2000 183,000 58,328
D E Karn -- Essexville.................... 2 Units, 1975-1977 1,276,000 928,427
--------- ----------
Total oil/gas generation.................... 1,459,000 986,755
--------- ----------
HYDROELECTRIC
Conventional Hydro Generation............. 13 Plants, 1907-1949 73,540 422,576
Ludington Pumped Storage.................. 6 Units, 1973 954,700(b) (553,135)(c)
--------- ----------
Total Hydroelectric......................... 1,028,240 (130,559)
--------- ----------
NUCLEAR GENERATION
Palisades -- South Haven.................. 1 Unit, 1971 760,000 2,325,720(d)
--------- ----------
GAS/OIL COMBUSTION TURBINE
Generation................................ 8 Plants, 1966-1999 346,800(e) 14,711
--------- ----------
Total owned generation...................... 6,441,180 22,399,911
========= ==========
PURCHASED AND INTERCHANGE POWER CAPACITY.... 1,644,180(f)
---------
Total....................................... 8,085,360
=========
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(a) Represents Consumers' share of the capacity of the J H Campbell 3, net of
6.69 percent (ownership interests of the Michigan Public Power Agency and
Wolverine Power Supply Cooperative, Inc.).
(b) Represents Consumers' share of the capacity of Ludington. Consumers and
Detroit Edison have 51 percent and 49 percent undivided ownership,
respectively, in the plant.
(c) Represents Consumers' share of net pumped storage generation. This facility
electrically pumps water during off-peak hours for storage to later
generate electricity during peak-demand hours.
(d) On June 20, 2001, the Palisades reactor was shut down so technicians could
inspect a small steam leak on a control rod drive assembly. The defective
components were replaced and the plant returned to service on January 21,
2002.
(e) Includes 1.8 MW of distributed diesel generation.
(f) Includes capacity from long-term power purchase contracts, including 1,240
MW of purchased contract capacity from the MCV Facility.
In 2001, Consumers purchased, through long-term purchase contracts,
options, spot market and other seasonal purchases, 3,160 MW of net capacity from
other power producers, which amounted to 38.1 percent of Consumers' total system
requirements, the largest of which was the MCV Partnership. A significant amount
of these purchases was due to the unavailability of the Palisades nuclear
generating plant during the second half of 2001.
10
A high voltage transmission system interconnects Consumers' electric
generating plants at many locations with transmission facilities of unaffiliated
systems including those of other utilities in Michigan and Indiana. The
interconnections permit a sharing of the reserve capacity of the connected
systems. This allows mutual assistance during emergencies and substantially
reduces investment in utility plant facilities. Consumers owns: a) 340 miles of
high voltage distribution radial lines operating at 120 kilovolts and above; b)
4,152 miles of subtransmission overhead lines operating at 23 kilovolts and 46
kilovolts; c) 16 subsurface miles of subtransmission underground lines operating
at 23 kilovolts and 46 kilovolts; d) 54,380 miles of electric distribution
overhead lines; e) 7,801 subsurface miles of underground distribution lines and
f) substations having an aggregate transformer capacity of 28,868,000
kilovoltamperes.
On April 1, 2001, Consumers transferred its investment in electric
transmission lines and substations to METC. METC owns: a) 4,288 miles of
overhead transmission lines operating at 120 kilovolts and above, and b)
substations having an aggregate transformer capacity of 12,015,660
kilovoltamperes. In October 2001, Consumers announced an agreement to sell METC
to a non-affiliated limited partnership whose general partner is a subsidiary of
Trans-Elect, Inc. Consumers, through METC will continue to own and operate the
transmission system until the companies meet all conditions of closing,
including approval of the transaction by various federal agencies. For
additional information on the status of the sale of the transmission assets, see
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- NOTE 5 OF CMS ENERGY'S
NOTES TO FINANCIAL STATEMENTS AND NOTE 2 OF CONSUMERS' NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS -- ELECTRIC RATE MATTERS -- TRANSMISSION.
FUEL SUPPLY: Consumers has four generating plant sites that use coal as a
fuel source and that constitute 87.5 percent of its baseload supply, the
capacity used to serve a constant level of customer demand. In 2001, these
plants produced a combined total of 19,203 million kWhs of electricity and
required 9.3 million tons of coal. On December 31, 2001, Consumers' coal
inventory amounted to approximately 48 days' supply. For additional information
on future sources of coal, see ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA -- NOTE 2 OF CONSUMERS' NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- OTHER
ELECTRIC UNCERTAINTIES -- COAL SUPPLY.
Consumers owns two nuclear power plants, Big Rock, located near Charlevoix,
Michigan and Palisades, located near South Haven, Michigan. In 1997, Consumers
ceased operating Big Rock. In May 2001, with the approval of the NRC, Consumers
transferred its authority to operate Palisades to NMC. During 2001, Palisades'
net generation was 2,326 million kWhs, constituting 10.4 percent of Consumers'
baseload supply. This low output was due to an outage during the latter half of
2001. Consumers currently has three contracts for uranium concentrates
sufficient to provide up to 100 percent of its fuel supply requirements for the
2003 period. Consumers also has contracts for conversion services and enrichment
services with quantity flexibility ranging up to 100 percent. If spot market
prices are below the contract price, Consumers will purchase only the minimum
amount of nuclear fuel required by the contracts. Conversely, if spot market
prices are above the contract prices, Consumers will purchase the maximum amount
of nuclear fuel allowed by the contracts to meet its requirements.
For the spring 2003 refueling outage, Consumers has purchased all of its
fuel supply requirements. Consumers also has contracts for nuclear fuel services
and for fabrication of nuclear fuel assemblies. The fabrication contract for
Palisades remains in effect for the next two reloads with options to extend the
contract for an additional two reloads. The fuel contracts are with major
private industrial suppliers of nuclear fuel and related services and with
uranium producers, converters and enrichers who participate in the world nuclear
fuel marketplace.
11
As shown below, Consumers generates electricity principally from coal and
nuclear fuel.
MILLIONS OF KWHS
------------------------------------------------
POWER GENERATED 2001 2000 1999 1998 1997
--------------- ---- ---- ---- ---- ----
Coal.............................................. 19,203 17,926 19,085 17,959 16,427
Nuclear........................................... 2,326(a) 5,724 5,105 5,364 5,970
Oil............................................... 331 645 809 520 258
Gas............................................... 670 400 441 302 80
Hydro............................................. 423 351 365 395 467
Net pumped storage................................ (553) (541) (476) (480) (477)
------ ------ ------ ------ ------
Total net generation.............................. 22,400 24,505 25,329 24,060 22,725
====== ====== ====== ====== ======
- -------------------------
(a) On June 20, 2001, the Palisades reactor was shut down so technicians could
inspect a small steam leak on a control rod drive assembly. The defective
components were replaced and the plant returned to service on January 21,
2002.
The cost of all fuels consumed, shown below, fluctuates with the mix of
fuel burned.
COST PER MILLION BTU
-----------------------------------------
FUEL CONSUMED 2001 2000 1999 1998 1997
------------- ---- ---- ---- ---- ----
Coal..................................................... $1.38 $1.34 $1.38 $1.45 $1.53
Oil...................................................... 4.02 3.30 2.69 2.73 2.97
Gas...................................................... 4.05 4.80 2.74 2.66 3.36
Nuclear.................................................. 0.39 0.45 0.52 0.50 0.57
All Fuels(a)............................................. 1.44 1.27 1.28 1.28 1.29
- -------------------------
(a) Weighted average fuel costs.
Pursuant to the Nuclear Waste Policy Act of 1982, the federal government
became responsible for the permanent disposal of spent nuclear fuel and
high-level radioactive waste by 1998. To date, the DOE has been unable to
arrange for storage facilities to meet this obligation and it does not expect
that in 2002 it will be able to receive spent nuclear fuel for storage. For
additional information on disposal of nuclear fuel see ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA -- NOTE 2 OF CMS ENERGY'S NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS and ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA -- NOTE 1 OF CONSUMERS' NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS. The amount of spent nuclear fuel discharged from the reactor to date
exceeds Palisades' temporary on-site storage pool capacity, and Consumers is
currently storing spent nuclear fuel in NRC-approved steel and concrete vaults,
known as "dry casks". Currently, three dry casks are available for future
storage. For a discussion relating to the NRC approval of dry casks and
Consumers' use of the dry casks, see ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA -- NOTE 5 OF CMS ENERGY'S NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS -- UNCERTAINTIES -- OTHER CONSUMERS ELECTRIC UTILITY UNCERTAINTIES
and ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- NOTE 2 OF CONSUMERS'
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- UNCERTAINTIES -- OTHER ELECTRIC
UNCERTAINTIES.
INSURANCE: Consumers maintains primary and excess nuclear property
insurance from NEIL, totaling $2.7 billion in recoverable limits for the
Palisades nuclear plant. Consumers also procured coverage from NEIL that would
partially cover the cost of replacement power during certain prolonged
accidental outages at Palisades.
Consumers retains the risk of loss to the extent of the insurance
deductibles and to the extent that its loss exceeds its policy limits. Because
NEIL is a mutual insurance company, Consumers could be subject to assessments
from NEIL up to $26.9 million in any policy year if insured losses in excess of
NEIL's maximum policyholders surplus occur at its, or any other member's,
nuclear facility.
Consumers maintains nuclear liability insurance for injuries and off-site
property damage resulting from the nuclear hazard at Palisades for up to
approximately $9.5 billion, the maximum insurance liability limits
12
established by the Price-Anderson Act. Congress enacted the Price-Anderson Act
to provide financial protection for persons who may be liable for a nuclear
accident or incident and persons who may be injured by a nuclear incident. The
Price-Anderson Act expires in August 2002 and is currently in the process of
reauthorization by Congress. It is possible that the Act will not be
reauthorized or changes may be made that significantly affect the insurance
provisions for nuclear licensees.
In October 2001, NEIL modified its coverage for acts of terrorism and
limited coverage for multiple acts occurring during a twelve-month period to a
maximum aggregate for all such acts of $3.24 billion, plus any additional
amounts available to NEIL from recoverable reinsurance, indemnity and other
sources of recovery. The aggregate amount of recovery would be allocated among
all claimants. The nuclear liability insurers for the Palisades and the Big Rock
nuclear plants also limit the aggregate amount of coverage for public liability
from terrorist acts to $200 million; however, the Price-Anderson Act provides
additional insurance coverage for amounts above these aggregate limits from the
nuclear liability insurers.
Insurance policy terms, limits and conditions are subject to change during
the year as Consumers renews its policies.
CONSUMERS' GAS UTILITY OPERATIONS
Based on the number of customers, Consumers' gas utility operations, if
independent, would be the 5th largest gas utility company in the United States.
Consumers' gas utility operations purchase, transport, store, distribute and
sell natural gas. As of December 31, 2001, it was authorized to provide service
in 54 of the 68 counties in Michigan's lower peninsula. Principal cities served
include Bay City, Flint, Jackson, Kalamazoo, Lansing, Pontiac and Saginaw, as
well as the suburban Detroit area, where nearly 900,000 of the gas customers are
located. Consumers' gas utility operations are not dependent upon a single
customer, or even a few customers, and the loss of any one or even a few of such
customers is not reasonably likely to have a material adverse effect on its
financial condition.
Consumers' gas utility operations are seasonal. Consumers and its wholly
owned subsidiary, Michigan Gas Storage, inject natural gas into storage during
the summer months of the year for use during the winter months when the demand
for natural gas is higher. Peak demand usually occurs in the winter due to
colder temperatures and the resulting increased demand for heating fuels. In
2001, total deliveries of natural gas sold by Consumers and by other sellers who
deliver natural gas through Consumers' pipeline and distribution network to
ultimate customers, including the MCV Partnership, totaled 367 bcf.
GAS UTILITY PROPERTIES: Consumers' gas distribution and transmission system
consists of 24,746 miles of distribution mains and 1,099 miles of transmission
lines throughout Michigan's lower peninsula. It owns and operates six compressor
stations with a total of 113,680 installed horsepower. Consumers has 11 gas
storage fields located across Michigan with an aggregate storage capacity of
221.3 bcf.
Michigan Gas Storage's transmission system consists of 521 miles of
pipelines within Michigan's lower peninsula. It owns and operates two compressor
stations with a total of 53,500 installed horsepower. Michigan Gas Storage has
three gas storage fields located in Osceola, Clare and Missaukee counties of
Michigan with an aggregate storage capacity of 109.5 bcf. In February 2002, the
FERC approved Michigan Gas Storage's application for a declaration of exemption
from provisions of the National Gas Act. Based on the application's approval,
the companies will begin the process of merging Michigan Gas Storage and its
facilities into Consumers.
GAS SUPPLY: Total 2001 purchases included 64 percent from United States
producers outside Michigan, 15 percent from Canadian producers and 8 percent
from Michigan producers. Authorized suppliers in the permanent gas customer
choice pilot program, which started in April 2001, supplied the remaining 13
percent of gas delivered by Consumers.
Consumers' firm transportation agreements, excluding agreements with
Michigan Gas Storage, are with ANR Pipeline Company, Great Lakes Gas
Transmission, L.P. and Trunkline. Consumers uses these agreements to deliver gas
to Michigan for ultimate deliveries to market. In total, Consumers' firm
transportation
13
arrangements are capable of carrying over 90 percent of Consumers' total gas
supply requirements. As of December 31, 2001, Consumers' portfolio of firm
transportation from pipelines to Michigan is as follows:
VOLUME
(DEKATHERMS/DAY) EXPIRATION
---------------- ----------
ANR Pipeline Company..................................... 10,000 December 2002
84,113 October 2003
Great Lakes Gas Transmission, L.P........................ 85,092 April 2004
Trunkline................................................ 336,375 October 2005
Consumers transports the balance of its required gas supply under
interruptible contracts. The amount of interruptible transportation service and
its use varies primarily with the price for such service and the availability
and price of the spot supplies being purchased and transported. Consumers' use
of interruptible transportation is generally in off-peak summer months and after
Consumers has fully utilized the services under the firm transportation
agreements.
NATURAL GAS TRANSMISSION
CMS Gas Transmission, formed in 1988, owns, develops and manages domestic
and international natural gas facilities. In 2001, CMS Gas Transmission's
operating revenue was $1,053 million. In 1999, CMS Energy expanded the
importance of this business segment with the acquisition of Panhandle. For
additional information on the acquisition of Panhandle, see ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA -- NOTE 1 OF PANHANDLE'S NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS -- CORPORATE STRUCTURE.
PANHANDLE: Panhandle Eastern Pipe Line, formed in Delaware in 1929, is a
wholly owned subsidiary of CMS Gas Transmission. In March 1999, CMS Energy
acquired Panhandle Eastern Pipe Line and its principal subsidiaries, Trunkline
and Pan Gas Storage, as well as Panhandle Eastern Pipe Line's affiliates,
Trunkline LNG and Panhandle Storage, from subsidiaries of Duke Energy.
Immediately following the acquisition, Trunkline LNG and Panhandle Storage
became wholly owned subsidiaries of Panhandle Eastern Pipe Line. In December
2001, Panhandle monetized the value of its Trunkline LNG business and the value
created by long-term contracts for capacity at the Trunkline LNG Lake Charles
terminal. The transaction included the formation of CMS Trunkline LNG Holdings
LLC which now owns 100 percent of Trunkline LNG. LNG Holdings is jointly owned
by a subsidiary of Panhandle Eastern Pipe Line and Dekatherm Investor Trust, an
unaffiliated entity. LNG Holdings' owners require unanimous consent over
significant governance issues, including, among others, issuance of additional
debt or equity, budgets, asset dispositions, and appointment of officers. Due to
Panhandle's lack of control of the joint venture, LNG Holdings and its $290
million of long-term debt is not consolidated in the financial statements of
Panhandle. For additional information, see ITEM 7. PANHANDLE'S MANAGEMENT'S
DISCUSSION AND ANALYSIS -- RESULTS OF OPERATIONS.
Panhandle is primarily engaged in the interstate transmission and storage
of natural gas. Panhandle operates a large natural gas pipeline network, which
provides customers in the Midwest and Southwest with a comprehensive array of
transportation services. Panhandle's major customers include 25 utilities
located primarily in the United States Midwest market area, which encompasses
large portions of Illinois, Indiana, Michigan, Missouri, Ohio and Tennessee.
In 2001, Panhandle's consolidated operating revenue was $513 million. Of
Panhandle's operating revenue, 74 percent was generated from transportation
services, 15 percent from LNG terminalling services, 8 percent from storage
services and 3 percent from other services. During 2001, sales to Proliance
Corporation, a nonaffiliated gas marketer, accounted for 15 percent of
Panhandle's consolidated revenues. Sales to subsidiaries of CMS Energy,
primarily Consumers, accounted for 15 percent of Panhandle's consolidated
revenues during 2001 and 12 percent during 2000 and 1999. No other customer
accounted for 10 percent or more of Panhandle's consolidated revenues during
2001, 2000 or 1999. Aggregate sales to Panhandle's top ten customers accounted
for 60%, 53% and 54% during 2001, 2000 and 1999, respectively. For additional
information, see ITEM 7. PANHANDLE'S MANAGEMENT'S DISCUSSION AND
ANALYSIS -- RESULTS OF OPERATIONS.
14
For the years 1997 to 2001, Panhandle's combined throughput was 1,279 TBtu,
1,141 TBtu, 1,139 TBtu, 1,374 TBtu and 1,335 TBtu, respectively. Beginning in
March 2000, the combined throughput includes Sea Robin's throughput. A majority
of Panhandle's revenue comes from long-term service agreements with local
distribution company customers. Panhandle also provides firm transportation
services under contract to gas marketers, producers, other pipelines, electric
power generators and a variety of end-users. In addition, the pipelines offer
both firm and interruptible transportation to customers on a short-term or
seasonal basis. Demand for gas transmission on Panhandle's pipeline systems is
seasonal, with the highest throughput and a higher portion of revenues occurring
during the colder period in the first and fourth quarters.
NATURAL GAS TRANSMISSION PROPERTIES: Domestic -- CMS Gas Transmission has a
total of 15,850 miles of pipeline in the United States, including 141 miles of
projects under construction, with a daily capacity of approximately 8 bcf.
Panhandle Eastern Pipe Line's portion of CMS Gas Transmission's natural gas
transmission system consists of four large diameter pipelines extending
approximately 1,300 miles from producing areas in the Anadarko Basin of Texas,
Oklahoma and Kansas through the states of Missouri, Illinois, Indiana, Ohio and
into Michigan. Trunkline's transmission system now includes 2 large diameter
pipelines which extend approximately 1,400 miles from the Gulf Coast areas of
Texas and Louisiana through the states of Arkansas, Mississippi, Tennessee,
Kentucky, Illinois and Indiana to a point on the Indiana-Michigan border.
At December 31, 2001, CMS Gas Transmission had processing capabilities of
approximately 700 MMcf per day of natural gas at eight locations in Michigan,
Oklahoma and Texas. In addition, CMS Gas Transmission has a hydrocarbon
fractionation plant in Michigan with a capacity of 30,000 barrels per day.
Through Panhandle, CMS Gas Transmission owns and operates 45 compressor
stations. It also has six gas storage fields located in Illinois, Kansas,
Louisiana, Michigan and Oklahoma with an aggregate storage capacity of 70 bcf.
CMS Gas Transmission has a 51 percent ownership interest in underground storage
caverns capable of storing 7 million barrels of natural gas liquids.
At December 31, 2001, CMS Gas Transmission operated 4,555 miles of gas
gathering systems with total capacity of approximately 1 bcf per day in
Michigan, Oklahoma, Texas and Wyoming.
CMS Gas Transmission owns a one-third interest in the Centennial Pipeline
joint venture, which will operate an interstate refined petroleum products
pipeline. In April 2001, Panhandle conveyed its 26 inch pipeline to Centennial.
CMS Gas Transmission, through Panhandle, also owns a one-third interest in
Guardian Pipeline LLC, which is constructing a 141 mile, 36 inch pipeline from
Illinois to southeastern Wisconsin for the transportation of natural gas. For
additional information, see Item 7. PANHANDLE'S MANAGEMENT'S DISCUSSION AND
ANALYSIS -- OUTLOOK.
International -- At December 31, 2001, CMS Gas Transmission has ownership
interests in the following pipelines:
LOCATION OWNERSHIP INTEREST (%) MILES OF PIPELINES
- -------- ---------------------- ------------------
Argentina................................................. 29.42 3,362
Argentina to Brazil....................................... 20.00 262
Argentina to Chile........................................ 50.00 707
Australia (Western Australia)............................. 40.00(a) 927
Australia (Western Australia)............................. 100.00 259
- -------------------------
(a) CMS Gas Transmission has a 45 percent interest in a consortium that
acquired an 88 percent interest in the pipeline.
In January 2002, CMS Gas Transmission completed the previously announced
sale of all of its ownership interest in the Atlantic Methanol Production
Company located in Equatorial Guinea.
Properties of certain CMS Gas Transmission subsidiaries are subject to
liens of creditors of the respective subsidiaries.
15
INDEPENDENT POWER PRODUCTION
CMS Generation, formed in 1986, invests in, acquires, develops, constructs
and operates non-utility power generation plants in the United States and
abroad. In 2001, the independent power production business segment's operating
revenue, which includes revenues from CMS Generation, CMS Operating, S.A., the
MCV Facility and the MCV Partnership, was $388 million. For additional
information, see ITEM 7. CMS ENERGY'S MANAGEMENT'S DISCUSSION AND
ANALYSIS -- INDEPENDENT POWER PRODUCTION RESULTS OF OPERATIONS.
INDEPENDENT POWER PRODUCTION PROPERTIES: As of December 31, 2001, CMS
Generation had ownership interests in operating power plants totaling 9,494
gross MW (4,423 net MW) throughout the United States and abroad. At December 31,
2001, additional plants totaling approximately 1,992 gross MW were under
construction or advanced development. In 2002, CMS Generation plans to complete
the restructuring of its operations by narrowing the scope of its existing
operations and commitments from four to two regions: the U.S. and the Middle
East/North Africa. In addition, it plans to sell designated assets and
investments that are under-performing, non-region focused and non-synergistic
with other CMS Energy business units. For additional information on CMS
Generation's restructuring see ITEM 7. CMS ENERGY'S MANAGEMENT'S DISCUSSION AND
ANALYSIS -- OUTLOOK -- DIVERSIFIED ENERGY OUTLOOK -- INDEPENDENT POWER
PRODUCTION OUTLOOK.
The following table details CMS Generation's interest in independent power
plants in the United States as well as abroad as of year end 2001 (excluding the
MCV facility and plants owned by CMS Operating, S.A. discussed further below):
OWNERSHIP INTEREST GROSS CAPACITY
LOCATION FUEL TYPE (%) (MW)
- -------- --------- ------------------ --------------
California.................................... Wood 37.8% 36
Connecticut................................... Scrap tire 100.0% 31
Maine......................................... Hydro 50.0% 4
Michigan...................................... Coal 50.0% 62
Michigan...................................... Natural gas 100.0% 160
Michigan...................................... Natural gas 100.0% 550
Michigan...................................... Natural gas 100.0% 224
Michigan...................................... Wood 50.0% 35
Michigan...................................... Wood 50.0% 39
New York...................................... Hydro 0.3% 14
North Carolina................................ Wood 50.0% 45
Oklahoma...................................... Natural gas 8.8% 124
-----
DOMESTIC...................................... 1,324
16
OWNERSHIP INTEREST GROSS CAPACITY
LOCATION FUEL TYPE (%) (MW)
- -------- --------- ------------------ --------------
Latin America................................. Various Various 844
Jamaica....................................... Diesel 41.2% 63
Venezuela..................................... Diesel 70.0% 150
Argentina..................................... Hydro 17.2% 120
Argentina..................................... Hydro 17.2% 1,200
Chile......................................... Natural gas 50.0% 555
Australia..................................... Coal 49.6% 2,000
India......................................... Diesel 49.0% 200
India......................................... Natural gas 33.2% 235
Philippines................................... Coal 47.5% 96
Philippines................................... Diesel 47.5% 50
Thailand...................................... Coal 66.24% 300
Ghana......................................... Light fuel oil 90.0% 224
Morocco....................................... Coal 50.0% 1,356
United Arab Emirates.......................... Natural gas 40.0% 777
-----
INTERNATIONAL................................. 8,170
TOTAL......................................... 9,494
=====
PROJECTS UNDER CONSTRUCTION/ADVANCED
DEVELOPMENT................................. 1,992
CMS Enterprises and CMS Generation, through CMS Operating, S.A., own a 128
MW natural gas power plant, and have 92.6 percent ownership interest in a 540 MW
natural gas power plant, each in Argentina.
CMS Midland owns 49 percent interest in the MCV Partnership, which was
formed to construct and operate the MCV Facility. The MCV Facility was sold to
five owner trusts and leased back to the MCV Partnership. CMS Holdings is a
limited partner in the FMLP, which is a beneficiary of one of these trusts. CMS
Holdings' indirect beneficial interest in the MCV Facility is 35 percent. The
MCV Facility has a net electrical generating capacity of approximately 1,500 MW.
CMS Generation has ownership interests in certain facilities such as Loy
Yang, Jorf Lasfar and El Chocon. The Loy Yang assets are owned in fee, but are
subject to the security interests of its lenders. CMS Energy is actively working
to sell its interest in the Loy Yang facility. The Jorf Lasfar facility is held
pursuant to a right of possession agreement with the Moroccan state-owned Office
National de l'Electricite. The El Chocon facility is held pursuant to a 30-year
possession agreement.
For information on capital expenditures, see ITEM 7. CMS ENERGY'S
MANAGEMENT'S DISCUSSION AND ANALYSIS -- CAPITAL RESOURCES AND LIQUIDITY AND ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- NOTE 5 OF CMS ENERGY'S NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS.
OIL AND GAS EXPLORATION AND PRODUCTION
CMS Oil and Gas, formed in 1967, conducts oil and gas exploration and
development operations in the United States, primarily the Permian Basin in
Texas and the Powder River Basin in Wyoming, and in the countries of Cameroon,
Congo, Colombia, Eritrea, Tunisia and Venezuela. In 2001, CMS Oil and Gas
achieved production levels of 8.9 million barrels of oil, condensate and plant
products and 29.9 bcf of gas. At January 1, 2002, CMS Oil and Gas's proven oil
and gas reserves total 390.1 million net equivalent barrels, consisting of 64.4
percent oil and condensate and 35.6 percent natural gas.
17
During 2001, CMS Oil and Gas participated with a working interest in
drilling wells as follows:
NUMBER OF
NUMBER OF WELLS SUCCESSFUL WELLS SUCCESS RATIO
----------------- ----------------- -----------------
TYPE OF WELL GROSS NET GROSS NET GROSS NET
- ------------ ----- --- ----- --- ----- ---
Exploratory................................ 5.0 3.4 2.0 1.3 40.0% 38.2%
Development................................ 551.0 320.2 551.0 320.2 100.0% 100.0%
Total............................... 556.0 323.6 553.0 321.5 99.5% 99.4%
The preceding table includes CMS Oil and Gas's participation in coal bed
methane gas wells in the Powder River Basin, where CMS Oil and Gas participated
in 443 wells (221.5 net) during 2001. In 2001, CMS Oil and Gas's operating
revenue was $212.3 million.
OIL AND GAS EXPLORATION AND PRODUCTION PROPERTIES: The following table
shows net oil and gas production by CMS Oil and Gas for the years 1999 through
2001:
2001 2000 1999
---- ---- ----
Oil and condensate (Mbbls)(a)............................... 8,488 6,980 7,288
Natural gas (MMcf)(a)....................................... 29,852 17,564 26,412
Plant products (Mbbls)(a)................................... 370 287 396
Reserves to annual production ratio
Oil (MMbbls).............................................. 28.4 14.7 15.2
Gas (bcf)................................................. 27.9 43.7 29.9
- -------------------------
(a) Revenue interest to CMS Oil and Gas.
The following table shows CMS Oil and Gas's undeveloped net acres of oil
and gas leasehold interests.
DECEMBER 31 2001 2000
- ----------- ---- ----
DOMESTIC
Wyoming..................................................... 182,972 177,408
Montana..................................................... 93,194 95,852
Texas (including offshore acreage)(a)....................... 67,279 44,372
Utah........................................................ 13,879 --
Louisiana................................................... 2,232 2,232
--------- ---------
Total domestic....................................... 359,556 319,864
--------- ---------
INTERNATIONAL
Venezuela................................................... 345,121 339,521
Colombia.................................................... 331,378 331,378
Cameroon.................................................... 300,139 183,636
Eritrea..................................................... 3,424,867 --
Equatorial Guinea(b)........................................ 209,806 209,806
Tunisia(c).................................................. 64,761 64,761
Congo....................................................... 10,422 17,364
--------- ---------
Total international.................................. 4,686,494 1,146,466
--------- ---------
Total net acres...................................... 5,046,050 1,466,330
========= =========
- -------------------------
(a) Does not include net undeveloped acreage of 19,496 in Texas in which CMS
Oil and Gas holds a contractual right to earn an interest by drilling as of
December 31, 2001.
(b) In January 2002, CMS Energy completed the previously announced sale of its
ownership interests in Equatorial Guinea to Marathon Oil Company. Included
in the sale were all of CMS Oil and Gas reserves in Equatorial Guinea and
CMS Gas Transmission's ownership interest in the related methanol plant.
18
(c) Does not include net undeveloped acreage of 1,110,962 in Tunisia in which
CMS Oil and Gas holds exclusive negotiating rights as of February 2002.
The following table shows CMS Oil and Gas's estimated proved reserves of
oil and gas for the years 1999 through 2001.
INTERNATIONAL DOMESTIC
------------------------------- --------------
SOUTH
TOTAL AFRICA AMERICA U.S.
--------------- -------------- ------------- --------------
OIL GAS OIL GAS OIL GAS OIL GAS
--- --- --- --- --- --- --- ---
(OIL IN MMBBLS AND NATURAL GAS IN BCF)
Estimated Proved Developed and
Undeveloped Reserves(a):
December 31, 1999 to 2000........... 116.9 788.1 69.1 583.9 45.9 -- 1.9 204.2
Revisions and other changes...... (6.4) (7.3) (2.0) (2.6) (4.6) -- 0.2 (4.7)
Extensions and discoveries....... 27.7 172.2 20.8 102.0 1.3 7.9 5.6 62.3
Acquisitions of reserves......... -- -- -- -- -- -- -- --
Sales of reserves................ (24.3) (167.5) -- -- (23.5) -- (0.8) (167.5)
Production....................... (7.3) (17.6) (3.6) (3.9) (3.2) (0.9) (0.5) (12.8)
----- ------ ----- ----- ----- ---- ---- ------
December 31, 2000 to 2001........... 106.6 767.9 84.3 679.4 15.9 7.0 6.4 81.5
Revisions and other changes...... 4.5 4.2 3.7 2.3 0.6 (0.7) 0.2 2.6
Extensions and discoveries....... 148.5 91.5 142.4 66.0 0.3 -- 5.8 25.5
Acquisitions of reserves......... -- -- -- -- -- -- -- --
Sales of reserves................ -- -- -- -- -- -- -- --
Production....................... (8.4) (29.9) (5.3) (17.1) (2.4) (1.2) (0.7) (11.6)
----- ------ ----- ----- ----- ---- ---- ------
December 31, 2001(b)................ 251.2 833.7 225.1 730.6 14.4 5.1 11.7 98.0
===== ====== ===== ===== ===== ==== ==== ======
Estimated Proved Developed
Reserves(a):
December 31, 1998................... 50.6 448.8 31.7 251.0 17.5 -- 1.4 197.8
December 31, 1999................... 74.5 652.7 50.9 460.9 21.8 -- 1.8 191.8
December 31, 2000................... 94.1 748.2 80.8 679.4 10.8 7.0 2.5 61.8
December 31, 2001................... 244.2 814.8 225.1 730.6 12.1 5.1 7.0 79.1
- -------------------------
(a) The government license in Venezuela is an oil service contract whereby CMS
Oil and Gas is paid a fee per barrel for oil discovered, lifted, and
delivered to Maraven S.A., a subsidiary of Petroleos de Venezuela S.A.
Additionally, CMS Oil and Gas receives a fee for reimbursement of certain
capital expenditures. The volumes presented represent actual production
with respect to which CMS Oil and Gas is paid a per barrel fee.
(b) Includes the proved reserves of 207 MMbbls of oil and 699.4 bcf of natural
gas sold on January 3, 2002.
Properties of certain CMS Oil and Gas subsidiaries are also subject to
liens of creditors of the respective subsidiaries.
MARKETING, SERVICES AND TRADING
CMS MST provides gas, oil, and electric marketing, risk management and
energy management services to industrial, commercial, utility and municipal
energy users throughout the United States and abroad. CMS MST has grown
dramatically since its inception in 1996. CMS Energy intends to use CMS MST to
focus on wholesale customers such as municipals, cooperative electric companies
and industrial and commercial customers. In 2001, CMS MST marketed approximately
750 bcf of natural gas, 51,790 GWh of electricity, 33 million barrels of crude
oil and 11 million barrels of natural gas liquids annually. From 1997 through
2001, CMS MST also performed 300 energy management services projects. At
December 31, 2001, CMS MST had more than 10,300 customers, transported gas on
more than 40 gas pipelines and was active in most of the 50 states and Canada.
In 2001, CMS MST's operating revenue was $4.0 billion. For additional
information, see ITEM 7. CMS ENERGY'S
19
MANAGEMENT'S DISCUSSION AND ANALYSIS -- MARKETING, SERVICES AND TRADING RESULTS
OF OPERATIONS.
INTERNATIONAL ENERGY DISTRIBUTION
In October 2001, CMS announced its plan to discontinue its international
energy distribution business. CMS also announced its plans to discontinue all
new development outside North America, which includes closing all non-US
development offices, except for exploration and production projects and prior
commitments in the Middle East. For additional information, see ITEM 7 -- CMS
ENERGY'S MANAGEMENT'S DISCUSSION AND ANALYSIS -- OUTLOOK.
SALES BETWEEN BUSINESS SEGMENTS
CMS Energy's sales between business segments for the years ended December
31 were as follows:
YEARS ENDED DECEMBER 31 2001 2000 1999
----------------------- ---- ---- ----
(MILLIONS)
Oil and Gas Exploration and Production...................... $ 32 $ 24 $ 45
Natural Gas Transmission.................................... 367 177 69
Marketing, Services and Trading............................. 295 176 73
CMS ENERGY, CONSUMERS AND PANHANDLE REGULATION
CMS Energy and Consumers are public utility holding companies that are
exempt from registration under PUHCA. CMS Energy, Consumers, Panhandle and their
subsidiaries are subject to regulation by various federal, state, local and
foreign governmental agencies, including those specifically described below.
MICHIGAN PUBLIC SERVICE COMMISSION
Consumers is subject to the MPSC's jurisdiction, which regulates public
utilities in Michigan with respect to retail utility rates, accounting, utility
services, certain facilities and various other matters. The MPSC also has, or
will have, rate jurisdiction over several limited partnerships in which CMS Gas
Transmission has ownership interests. These partnerships own, or will own, and
operate intrastate gas transmission pipelines.
The Attorney General, ABATE, and the MPSC staff typically intervene in MPSC
electric and gas related proceedings concerning Consumers. For many years,
almost every significant MPSC order affecting Consumers has been appealed.
Certain appeals from the MPSC orders are pending in the Court of Appeals.
RATE PROCEEDINGS: In 1996, the MPSC issued orders that established the
electric authorized rate of return on common equity at 12.25 percent and the gas
authorized rate of return on common equity at 11.6 percent.
MPSC REGULATORY AND MICHIGAN LEGISLATIVE CHANGES: State regulation of the
retail electric and gas utility businesses is in the process of undergoing
significant changes. In 2000, the Michigan Legislature enacted the Customer
Choice Act. Pursuant to the Customer Choice Act, as of January 2002, all
electric customers have their choice of buying generation service from an
alternative electric supplier. The Customer Choice Act also imposes rate
reductions, rate freezes and rate caps. For a description and additional
information regarding the Customer Choice Act, see ITEM 8. FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA -- NOTE 5 OF CMS ENERGY'S NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS, and ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- NOTE 2 OF
CONSUMERS' NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
As a result of regulatory changes in the natural gas industry, Consumers
transports the natural gas commodity that is sold to some customers by
competitors like gas producers, marketers and others. From April 1, 1998, to
March 31, 2001, Consumers' implemented a statewide experimental gas customer
choice pilot program that allowed up to 300,000 residential, commercial and
industrial retail gas sales customers to choose their gas supplier and froze the
rates Consumers' was permitted to charge for the service of distributing gas to
its customers.
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Beginning April 1, 2001, Consumers established a permanent gas customer
choice program that allows up to 600,000 of Consumers' gas customers to select
an alternative gas commodity supplier. By 2003, all of Consumers' gas customers
will be eligible to select an alternative gas commodity supplier. Also on April
1, 2001, pursuant to the permanent gas customer choice program, Consumers
returned to a GCR mechanism that allows it to recover from its customers all
prudently incurred costs to purchase the natural gas commodity and transport it
to Consumers' facilities. For additional information on gas customer choice
programs see ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- NOTE 5 OF
CMS ENERGY'S NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, and ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA -- NOTE 2 OF CONSUMERS' NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS.
FEDERAL ENERGY REGULATORY COMMISSION
FERC has limited jurisdiction over several independent power plants in
which CMS Generation has ownership interests, as well as over CMS MST. FERC also
has more comprehensive jurisdiction over Panhandle Eastern Pipe Line, Pan Gas
Storage, Trunkline, Trunkline LNG and Sea Robin as natural gas companies within
the meaning of the Natural Gas Act. FERC jurisdiction relates, among other
things, to the acquisition, operation and disposal of assets and facilities and
to the service provided and rates charged. Some of Consumers' gas business is
also subject to regulation by FERC, including a blanket transportation tariff
pursuant to which Consumers can transport gas in interstate commerce.
FERC has authority to regulate rates and charges for transportation or
storage of natural gas in interstate commerce, as well as those for gas, sold by
a natural gas company in interstate commerce for resale. FERC also has authority
over the construction and operation of pipeline and related facilities utilized
in the transportation and sale of natural gas in interstate commerce, including
the extension, enlargement or abandonment of service using such facilities.
Panhandle Eastern Pipe Line, Trunkline Gas Company, Sea Robin, Trunkline LNG,
and Pan Gas Storage hold certificates of public convenience and necessity issued
by the FERC, authorizing them to construct and operate the pipelines, facilities
and properties now in operation for which such certificates are required, and to
transport and store natural gas in interstate commerce.
FERC also regulates certain operation aspects of Consumers' electric
operations including: compliance with FERC accounting rules; transmission of
electric energy; wholesale rates; transfers of certain facilities; and corporate
mergers and issuance of securities. FERC is currently soliciting comments on
whether it should exercise jurisdiction over power marketers like CMS MST and
require them to follow FERC's uniform system of accounts and seek authorization
for issuance of securities and assumption of liabilities. CMS Energy has no way
of determining how FERC will decide this issue.
The Federal Power Act grants independent power producers and electricity
marketers "direct access" to the interstate electric transmission systems owned
by electric utilities and requires all electric utilities to offer transmission
services to all market participants on a non-discriminatory basis under tariffs
approved by the FERC. For a discussion of the effect of certain FERC orders on
Consumers, see ITEM 7. CMS ENERGY'S MANAGEMENT'S DISCUSSION AND
ANALYSIS -- OUTLOOK -- CONSUMERS' ELECTRIC BUSINESS OUTLOOK and ITEM 7.
CONSUMERS' MANAGEMENT'S DISCUSSION AND ANALYSIS -- OUTLOOK -- ELECTRIC BUSINESS
OUTLOOK. For a discussion of the effect of certain FERC orders on Panhandle see
ITEM 7. PANHANDLE'S MANAGEMENT'S DISCUSSION AND ANALYSIS -- OTHER MATTERS and
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- NOTE 3 OF PANHANDLE'S
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
NUCLEAR REGULATORY COMMISSION
Under the Atomic Energy Act of 1954, as amended, and the Energy
Reorganization Act of 1974, Consumers is subject to the jurisdiction of the NRC
with respect to the design, construction, operation and decommissioning of its
nuclear power plants. Consumers is also subject to NRC jurisdiction with respect
to certain other uses of nuclear material. These and other matters concerning
Consumers' nuclear plants are more fully discussed in ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA -- NOTES 2 AND 5 OF CMS
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ENERGY'S CONSOLIDATED FINANCIAL STATEMENTS, and ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA -- NOTES 1 AND 2 OF CONSUMERS' CONSOLIDATED FINANCIAL
STATEMENTS.
OTHER REGULATION
The Secretary of Energy regulates the importation and exportation of
natural gas and has delegated various aspects of this jurisdiction to the DOE's
Office of Fossil Fuels.
Panhandle is also subject to the Natural Gas Pipeline Safety Act of 1968,
which regulates gas pipeline safety requirements. Consumers and Panhandle are
also subject to the Hazardous Liquid Pipeline Safety Act of 1979, which
regulates oil and petroleum pipelines.
CMS ENERGY, CONSUMERS AND PANHANDLE ENVIRONMENTAL COMPLIANCE
CMS Energy, Consumers and Panhandle and their subsidiaries are subject to
various federal, state and local regulations for environmental quality,
including air and water quality, waste management, zoning and other matters. For
additional information concerning environmental matters, see ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA -- NOTE 5 OF CMS ENERGY'S NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS -- UNCERTAINTIES -- CONSUMERS' ELECTRIC
UTILITY CONTINGENCIES and ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA -- NOTE 2 OF CONSUMERS' NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS -- UNCERTAINTIES -- ELECTRIC CONTINGENCIES. For additional
information on Panhandle's environmental matters, see ITEM 7. PANHANDLE'S
MANAGEMENT'S DISCUSSION AND ANALYSIS -- OTHER ENVIRONMENTAL MATTERS and ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- NOTE 10 OF PANHANDLE'S NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS -- COMMITMENTS AND CONTINGENCIES.
Consumers installed and is currently installing modern emission controls at
its electric generating plants and converted electric generating units to burn
cleaner fuels. Consumers expects that the cost of future environmental
compliance, especially compliance with clean air laws, will be significant
because of EPA regulations regarding nitrogen oxide and particulate-related
emissions. These regulations will require Consumers to make significant capital
expenditures. For the preliminary estimates of these capital expenditures to
reduce nitrogen oxide-related emissions see ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA -- NOTE 5 OF CMS ENERGY'S NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS UNCERTAINTIES -- CONSUMERS ELECTRIC UTILITY CONTINGENCIES -- and NOTE
2 OF CONSUMERS' NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS -- UNCERTAINTIES -- ELECTRIC CONTINGENCIES.
President Bush recently announced the Clear Skies and Global Climate change
Initiatives. This multi-pollutant strategy is intended to reduce emissions of
nitrogen oxides, sulfur dioxide and mercury by about 70 percent in stages by
2018. The expectation is that the affected utility sources would be able to look
at the total emission picture and select a control strategy that would achieve
the target reductions at a lower cost than would be possible under the piecemeal
approach embodied in the current regulatory structure.
Consumers is in the process of closing older ash disposal areas at two
plants. Construction, operation, and closure of a modern solid waste disposal
area for ash can be expensive, because of strict federal and state requirements.
In order to significantly reduce ash field closure costs, Consumers has worked
with others to use bottom ash and fly ash as part of temporary and final cover
for ash disposal areas instead of native materials in cases where such use of
bottom ash and fly ash is compatible with environmental standards. To reduce
disposal volumes, Consumers sells coal ash for use as a filler for asphalt, for
incorporation into concrete products and for other environmentally compatible
uses. The EPA has announced its intention to develop new nationwide standards
for ash disposal areas. Consumers intends to work through industry groups to
help ensure that any such regulations require only the minimum cost necessary to
adhere to standards that are consistent with protection of the environment. In
2001, capital expenditures by Consumers for environmental protection additions
were $202 million. Consumers estimates 2002 expenditures for this program at
$140 million.
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Consumers has PCB in some of its electrical equipment, as do most electric
utilities. During routine maintenance activities, Consumers identified PCB as a
component in certain paint, grout and sealant materials at the Ludington Pumped
Storage facility. Consumers removed and replaced part of the PCB material.
Consumers proposed a plan to the EPA to deal with the remaining materials and is
waiting on a response from the EPA.
Certain environmental regulations affecting CMS Energy, Consumers and
Panhandle include, but are not limited to, the Clean Air Act Amendments of 1990
and Superfund. Superfund can require any individual or entity that may have
owned or operated a disposal site, as well as transporters or generators of
hazardous substances that were sent to such site, to share in remediation costs
for the site.
Consumers', CMS Energy's and Panhandle's current insurance coverages do not
extend to certain environmental clean-up costs, such as claims for air
pollution, some past PCB contamination and for some long-term storage or
disposal of pollutants.
For discussion of environmental matters involving Panhandle, including
possible liability and capital costs, see ITEM 7. PANHANDLE'S MANAGEMENT'S
DISCUSSION AND ANALYSIS -- OTHER MATTERS -- ENVIRONMENTAL MATTERS and ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- NOTE 10 OF PANHANDLE'S NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS -- COMMITMENTS AND CONTINGENCIES. Panhandle
does not anticipate that compliance with federal, state and local provisions
regulating the discharge of materials into the environment, or otherwise
protecting the environment will have a material adverse effect on the
competitive position, consolidated results of operations or financial position
of Panhandle.
CMS ENERGY, CONSUMERS AND PANHANDLE COMPETITION
ELECTRIC COMPETITION
Consumers' electric utility business experiences competition, actual and
potential, from many sources, both in the wholesale and retail markets, and in
electric generation, electric delivery, and retail services.
In the wholesale electricity markets, Consumers competes with other
wholesale suppliers, marketers and brokers. Electric competition in the
wholesale markets increased significantly since 1996 due to FERC Order 888.
However, wholesale for retail transactions by Consumers generated an immaterial
amount of Consumers' 2001 revenues from electric utility operations. Consumers
does not believe future loss of wholesale for retail sales to be significant. In
most instances, the customers will continue to be transmission customers even if
they cease to be generation customers.
A significant increase in retail electric competition is now possible with
the passage of the Customer Choice Act and the availability of retail open
access. The Customer Choice Act required Consumers to open up to 750 MW of its
electric customer power supply requirement to competition during 2001. As of
January 1, 2002, the Consumer Choice Act also gave all electric customers the
right to buy generation service from an alternative electric supplier. To the
extent that they do, the Michigan Public Service Commission has adopted a
mechanism pursuant to the Customer Choice Act to provide for recovery of
stranded costs. The company cannot determine the total load that may be lost to
competitor suppliers, nor whether the stranded cost recovery mechanism adopted
by the MPSC will fully offset the associated margin loss.
In addition to retail electric customer choice, Consumers also has
competition or potential competition from: 1) the threat of customers relocating
outside Consumers' service territory; 2) the possibility of municipalities
owning or operating competing electric delivery systems; 3) customer
self-generation; and 4) adjacent municipal utilities that extend lines to
customers near service territory boundaries. Consumers addresses this
competition primarily through offering rate discounts, providing additional
services and insistence upon compliance with MPSC and FERC rules.
Consumers offers non-commodity retail services to electric customers in an
effort to offset costs. Consumers faces competition from many sources, including
energy management services companies, other utilities, contractors, and retail
merchandisers.
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CMS Energy's marketing, services and trading business segment, which is a
non-utility electric subsidiary, faces competition from marketers, brokers,
financial management firms, energy management firms, and other utilities.
CMS Energy's independent power production business segment, another
non-utility electric subsidiary, faces competition from generators, marketers
and brokers, as well as lower power prices on the wholesale market.
For additional information concerning electric competition, see ITEM 7. CMS
ENERGY'S MANAGEMENT'S DISCUSSION AND ANALYSIS -- OUTLOOK -- CONSUMERS' ELECTRIC
UTILITY BUSINESS OUTLOOK and ITEM 7. CONSUMERS MANAGEMENT'S DISCUSSION AND
ANALYSIS -- OUTLOOK -- ELECTRIC BUSINESS OUTLOOK.
GAS COMPETITION
Competition has existed for several years, and is likely to increase, in
various aspects of Consumers' gas utility business. Competition traditionally
comes from alternate fuels and energy sources, such as propane, oil, and
electricity. Increasingly, competition comes from other suppliers of the natural
gas commodity.
Changes in regulation have resulted in increased competition from other
sellers of natural gas for sale of the gas commodity to Consumers' customers. As
a result of the regulatory changes that separated (unbundled) the transportation
and storage of natural gas from the sale of natural gas by interstate pipelines
and Michigan gas distributors, Consumers offers unbundled services
(transportation and some storage) to its larger end-use customers. Additionally,
to prepare for the unbundled retail market, Consumers conducted an experimental
gas customer choice program that, through March 2001, allowed 300,000
residential, commercial, and industrial retail gas sales customers to choose an
alternative gas supplier in direct competition with Consumers as a supplier of
the gas commodity. In April 2001, Consumers implemented a permanent gas choice
program that allows all gas customers to select an alternate gas supplier by
April 2003.
CMS Energy's non-utility gas subsidiaries face significant competition from
other gas pipeline companies, gas producers, gas storage companies, brokers and
marketers and competition from other fuels such as oil and coal.
For additional information concerning gas competition, see Panhandle
Competition below, ITEM 7. CMS ENERGY'S MANAGEMENT DISCUSSION AND
ANALYSIS -- OUTLOOK, ITEM 7. CONSUMERS' MANAGEMENT'S DISCUSSION AND
ANALYSIS -- OUTLOOK and ITEM 7. PANHANDLE'S MANAGEMENT'S DISCUSSION AND
ANALYSIS -- OUTLOOK.
PANHANDLE COMPETITION
Panhandle's interstate pipelines compete with other 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. Panhandle competes directly
with Alliance Pipeline LP, ANR Pipeline Company, Natural Gas Pipeline Company of
America, Northern Border Pipeline Company, Texas Gas Transmission Corporation,
Northern Natural Gas Company and Vector Pipeline in the Midwest market area.
Natural gas competes with other forms of energy available to Panhandle's
customers and end-users, including electricity, coal and fuel oils. The primary
competitive factor is price. Changes in the availability or price of natural gas
and other forms of energy, the level of business activity, conservation,
legislation and governmental regulations, the capability to convert to
alternative fuels, and other factors, including weather and natural gas storage
levels, affect the demand for natural gas in the areas served by Panhandle.
EMPLOYEES
CMS ENERGY
As of December 31, 2001, CMS Energy and its subsidiaries, including
Consumers and Panhandle, had 11,510 full-time equivalent employees of whom
11,343 are full-time employees and 83 full-time equivalent
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employees associated with the part-time work force. Included in the total are
3,908 employees who are covered by union contracts.
CONSUMERS
As of December 31, 2001, Consumers and its subsidiaries had 8,467 full-time
equivalent employees of whom 8,310 are full-time employees and 72 full-time
equivalent employees associated with the part-time work force. Included in the
total are 3,627 full-time operating, maintenance and construction employees of
Consumers who are represented by the Union. Consumers and the Union negotiated a
collective bargaining agreement that became effective as of June 1, 2000 and
will continue in full force and effect until June 1, 2005.
PANHANDLE
At December 31, 2001, Panhandle had 1,131 full-time equivalent employees.
Of these employees, 254 were represented by the Paper, Allied-Industrial
Chemical and Energy Workers International Union, AFL-CIO, CLC.
CMS ENERGY, CONSUMERS AND PANHANDLE FORWARD-LOOKING STATEMENTS CAUTIONARY
FACTORS AND UNCERTAINTIES.
INTERNATIONAL OPERATIONS
CMS Energy, through certain of its Enterprises subsidiaries, has made
substantial international investments in approximately 20 countries. These
international investments in electric generating facilities, oil and gas
exploration, production and processing facilities, natural gas pipelines and
electric distribution systems face a number of risks inherent in acquiring,
developing and owning these types of facilities. CMS Energy believes that its
subsidiaries maintain traditional insurance, similar to comparable companies in
the same line of business, for the various risk exposures including political
risk insurance in certain high risk countries, from possible nationalization or
expropriation and inability to convert or transfer currency, incidental to CMS
Energy's respective businesses. Notably, all insurance is subject to terms and
conditions that might not fully compensate a loss. Further due to increasingly
restrictive insurance markets, partly as a result of terrorist attacks of
September 11, 2001, it is anticipated that insurance, particularly terrorism and
sabotage coverages, will be difficult or impossible to maintain on all
investments.
Although CMS Energy maintains insurance for various risks, CMS Energy is
exposed to some risks that include local political and economic factors over
which it has no control. CMS Energy, through its Enterprises subsidiaries, may
incur risk exposures such as changes in foreign governmental and regulatory
policies (including changes in industrial regulation and control and changes in
taxation), changing political conditions and international monetary
fluctuations. Particularly, international investments of the type CMS Energy is
making are subject to the risk that they may be expropriated or that the
required agreements, licenses, permits and other approvals may be changed or
terminated in violation of their terms. Also, the local foreign currency may be
devalued or the conversion of the currency may be restricted or prohibited or
other actions, such as increases in taxes, royalties or import duties, may be
taken which adversely affect the value and the recovery of our investment. In
some of these cases, the investment may have to be abandoned or disposed of at a
loss. These factors could significantly adversely affect the financial results
of the affected subsidiary and CMS Energy's financial position and results of
operations.
UNCERTAINTIES
Specific uncertainties are described in ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA -- NOTE 5 OF CMS ENERGY'S NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS, NOTE 2 OF CONSUMERS' NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, and
NOTE 3 and NOTE 10 OF PANHANDLE'S NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Certain risks are described in ITEM 7. CMS ENERGY'S MANAGEMENT'S DISCUSSION AND
ANALYSIS -- MARKET RISK INFORMATION and ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA -- NOTE 10 OF CMS ENERGY'S NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS and in ITEM 7. CONSUMERS' MANAGEMENT'S DISCUSSION AND
ANALYSIS -- DERIVATIVES AND HEDGES.
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The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements to encourage such disclosures without the
threat of litigation, if those statements are identified as forward-looking and
are accompanied by meaningful, cautionary statements identifying important
factors that could cause the actual results to differ materially from those
projected in the statement. Forward-looking statements give our expectations or
forecasts of future events. You can identify these statements by the fact that
they do not relate strictly to historical or current facts. Forward-looking
statements have been and will be made in this Form 10-K and in our other written
documents (such as press releases, visual presentations, and securities
disclosure documents) and oral presentations (such as analyst conference calls).
Such statements are based on management's beliefs as well as assumptions made
by, and information currently available to management. When used in our
documents or oral presentations, we intend the words "anticipate", "believe",
"estimate", "expect", "forecast", "intend", "objective", "plan", "possible",
"potential", "project" "projection" and variations of such words and similar
expressions to target forward-looking statements that involve risk and
uncertainty.
Any or all of our forward-looking statements in oral or written statements
or in other publications may turn out to be wrong. They can be affected by
inaccurate assumptions or by known or unknown risks and uncertainties. Many such
factors will be important in determining our actual future results.
Consequently, we cannot guarantee any forward-looking statement.
In addition to any assumptions and other factors referred to specifically
in connection with such forward-looking statements, there are numerous factors
that could cause our actual results to differ materially from those contemplated
in any forward-looking statements. Such factors include our inability to predict
and/or control:
- The efficient sale of non-strategic and under-performing international
assets and discontinuation of our international energy distribution
systems;
- Achievement of operating synergies and revenue enhancements;
- Capital and financial market conditions, including current price of our
common stock, interest rates and availability of financing, marketing
perceptions of the energy industry, our company, or any of our
subsidiaries, our, or any of our subsidiaries', securities ratings, and
currency exchange controls;
- Market perception of the energy industry, our company or any of our
subsidiaries;
- Securities ratings;
- Currency fluctuations and exchange controls;
- Factors affecting utility and diversified energy operations such as
unusual weather conditions, catastrophic weather-related damage,
unscheduled generation outages, maintenance or repairs, unanticipated
changes to fossil fuel, nuclear fuel or gas supply costs or availability
due to higher demand, shortages, transportation problems or other
developments, environmental incidents, or electric transmission or gas
pipeline system constraints;
- Electric transmission or gas pipeline system constraints;
- International, national, regional and local economic, competitive and
regulatory conditions and developments;
- Adverse regulatory or legal decisions, including environmental laws and
regulations;
- Federal regulation of electric sales and transmission of electricity
including re-examination by Federal regulators of the market-based sales
authorizations by which CMS subsidiaries participate in wholesale power
markets without price restrictions and proposals by FERC to change the
way it currently lets subsidiaries of CMS and other public utilities and
natural gas companies interact with each other;
- Energy markets, including the timing and extent of unanticipated changes
in commodity prices for oil, coal, natural gas, natural gas liquids,
electricity and certain related products due to lower or higher demand,
shortages, transportation problems or other developments;
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- The increased competition caused by FERC approval of new pipeline and
pipeline expansion projects that transport large additional volumes of
natural gas to the Midwestern United States from Canada, which could
reduce volumes of gas transported by our natural gas transmission
businesses or cause them to lower rates in order to meet competition;
- Potential disruption, expropriation or interruption of facilities or
operations due to accidents, war and terrorism or political events and
the ability to get or maintain insurance coverage for such events;
- Nuclear power plant performance, decommissioning, policies, procedures,
incidents, and regulation, including the availability of spent nuclear
fuel storage;
- Technological developments in energy production, delivery and usage;
- Changes in financial or regulatory accounting principles or policies;
- The timing and success of business development efforts;
- Cost and other effects of legal and administrative proceedings,
settlements, investigations and claims;
- Limitations on our ability to control the development or operation of
projects in which our subsidiaries have a minority interest;
- Disruptions in the normal commercial insurance and surety bond markets
that may increase costs or reduce traditional insurance coverage,
particularly terrorism and sabotage insurance and performance bonds,
following the September 11, 2001 terrorist attacks in the United States
and the Enron Bankruptcy;
- Other business or investment considerations that may be disclosed from
time to time in CMS Energy's, Consumers' or Panhandle's SEC filings or in
other publicly disseminated written documents; and
- Other uncertainties, which are difficult to predict and many of which are
beyond our control.
CMS Energy, Consumers, Panhandle and their affiliates undertake no
obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise. The foregoing review of
factors pursuant to the Private Securities Litigation Reform Act should not be
construed as exhaustive or as any admission regarding the adequacy of our
disclosures prior to the effective date of the Act. Certain risk factors are
detailed from time to time in our various public filings. You are advised,
however to consult any further disclosures we make on related subjects in our
reports to the SEC. In particular, you should read the discussion in the section
entitled "Forward-Looking Statements" in our most recent reports to the SEC on
Form 10-Q or Form 8-K filed subsequent to this Form 10-K.
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EXECUTIVE OFFICERS
As of March 1, 2002
CMS ENERGY
NAME AGE POSITION PERIOD
---- --- -------- ------
William T. McCormick, Jr............. 57 Chairman of the Board, Chief Executive
Officer of CMS Energy 2001-Present
Chairman of the Board of Consumers 2001-Present
Chairman of the Board and Chief Executive
Officer of Enterprises 2001-Present
Chairman of the Board, President and Chief
Executive Officer of CMS Energy 2000-2001
Chairman of the Board and President of
Consumers 2000-2001
Chairman of the Board, President and Chief
Executive Officer of Enterprises 2000-2001
Chairman of the Board and Chief Executive
Officer of CMS Energy 1987-2000
Chairman of the Board of Enterprises 1987-2000
Chairman of the Board of Consumers 1985-2000
David W. Joos........................ 48 President and Chief Operating Officer of
CMS Energy 2001-Present
President and Chief Operating Officer of
Consumers 2001-Present
President and Chief Operating Officer of
CMS Enterprises 2001-Present
Executive Vice President and Chief
Operating Officer -- Electric of CMS
Energy 2000-2001
Executive Vice President and Chief
Operating Officer -- Electric of
Enterprises 2000-2001
President and Chief Executive
Officer -- Electric of Consumers 1997-2001
Executive Vice President and Chief
Operating Officer -- Gas of CMS Energy 2000-2001
Executive Vice President and Chief
Operating Officer -- Gas of Enterprises 2000-2001
Senior Vice President of Enterprises 1998-2000
Executive Vice President and Chief
Operating Officer -- Electric of
Consumers 1994-1997
Alan M. Wright....................... 56 Executive Vice President, Chief Financial
Officer and Chief Administrative Officer of
CMS Energy 2000-Present
Executive Vice President, Chief Financial
Officer and Chief Administrative Officer
of Consumers 2000-Present
Executive Vice President and Chief
Financial Officer of Enterprises 2000-Present
Senior Vice President and Chief Financial
Officer of CMS Energy 1998-2000
Senior Vice President and Chief Financial
Officer of Enterprises 1998-2000
Senior Vice President, Chief Financial
Officer and Treasurer of Enterprises 1994-1998
Senior Vice President, Chief Financial
Officer and Treasurer of CMS Energy 1994-1998
Senior Vice President and Chief Financial
Officer of Consumers 1993-2000
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NAME AGE POSITION PERIOD
---- --- -------- ------
William J. Haener.................... 60 Chairman of the Board-Panhandle Eastern
Pipe Line Company 2001-Present
Executive Vice President and Chief
Operating Officer -- Gas of CMS Energy 2000-Present
Executive Vice President and Chief
Operating Officer -- Gas of CMS
Enterprises 2000-Present
Senior Vice President of Enterprises 1998-2000
President and Chief Executive Officer of
CMS Gas Transmission 1994-Present
Rodger A. Kershner................... 53 Senior Vice President, General Counsel and
Secretary of CMS Energy 2002-Present
Senior Vice President and Secretary of
Consumers 2002-Present
Senior Vice President and General Counsel
of CMS Energy 1996-2001
Senior Vice President of Enterprises 1999-Present
Senior Vice President and General Counsel
of Enterprises 1996-1999
Preston D. Hopper.................... 51 Senior Vice President, Chief Accounting
Officer and Controller of CMS Energy 1996-Present
Senior Vice President and Chief Accounting
Officer of Enterprises 1997-Present
Senior Vice President and Controller of
Enterprises 1996-1997
Carl L. English...................... 55 President and Chief Executive
Officer -- Gas of Consumers 2000-Present
Vice President of Consumers 1990-2000
Frank Johnson........................ 54 President and Chief Executive Officer of
CMS Electric and Gas 2000-Present
Vice President and Chief Operating Officer
of CMS Electric and Gas 2000
Vice President of CMS Electric and Gas 1996-2000
Senior Vice President of Consumers 2001-Present
Bradley W. Fischer................... 55 President and Chief Executive Officer of
CMS Oil and Gas 1998-Present
Vice President of CMS Oil and Gas 1997-1998
Christopher A. Helms*................ 47 President and Chief Executive Officer of
Panhandle Eastern Pipe Line 2000-Present
President and Chief Operating Officer of
Panhandle Eastern Pipe Line 1999-2000
Tamela W. Pallas**................... 44 President and Chief Executive Officer of
CMS MST 2002-Present
President and Chief Operating Officer of
CMS MST 1999-2001
David G. Mengebier***................ 44 Senior Vice President of CMS Energy 2001-Present
Senior Vice President of Consumers 2001-Present
Vice President of CMS Energy 1999-2001
Vice President of Consumers 1999-2001
29
NAME AGE POSITION PERIOD
---- --- -------- ------
Thomas W. Elward..................... 53 President and Chief Executive Officer of
CMS Generation Co. 2002-Present
Senior Vice President of CMS Enterprises 2002
Senior Vice President of CMS Generation Co. 1998-2002
Vice President of CMS Generation Co. 1990-1998
John G. Russell****.................. 44 Executive Vice President and President and
Chief Executive Officer -- Electric of
Consumers 2001-Present
Senior Vice President of Consumers 2000-2001
Vice President of Consumers 1999-2000
- -------------------------
* Mr. Helms has served as President and Chief Operating Officer of Panhandle
Eastern Pipe Line since March 1999. From 1993 through March 1999, Mr.
Helms served as Director of Corporate Development and Vice President of
Corporate Affairs of Duke Energy Corporation.
** From February 2002, Ms. Pallas has served as President and Chief Executive
Officer of CMS MST. Ms. Pallas served as President and Chief Operating
Officer of CMS MST from November 1999 to February 2002. From 1997 until
November 1999, Ms. Pallas served as Senior Vice President of Reliant
Energy. From 1992 until 1997, Ms. Pallas was employed by Basis Energy as a
Senior Vice President.
*** Mr. Mengebier has served as Senior Vice President of CMS Energy and
Consumers since 2001, after receiving a promotion from his position in both
companies as Vice President, which he had held since 1999. From 1997 to
1999, Mr. Mengebier served as Executive Director of Federal Governmental
Affairs for CMS Enterprises.
**** Mr. Russell has served as Executive Vice President and President and Chief
Executive Officer -- Electric of Consumers since October 2001. From
December 2000 until October 2001, Mr. Russell served as Senior Vice
President of Consumers. From October 1999 until December 2000, Mr. Russell
served as Vice President of Consumers. From July 1997 until October 1999,
Mr. Russell served as Manager -- Electric Customer Operations of Consumers.
The present term of office of each of the executive officers extends to the
first meeting of the Board of Directors after the next annual election of
Directors of CMS Energy (scheduled to be held on May 24, 2002).
There are no family relationships among executive officers and directors of
CMS Energy.
CONSUMERS
NAME AGE POSITION PERIOD
---- --- -------- ------
William T. McCormick, Jr............. 57 See the information under CMS Energy's
Executive Officers section above.
David W. Joos........................ 48 See the information under CMS Energy's
Executive Officers section above.
William J. Haener.................... 60 See the information under CMS Energy's
Executive Officers section above.
Alan M. Wright....................... 56 See the information under CMS Energy's
Executive Officers section above.
Dennis DaPra......................... 59 Senior Vice President of Consumers 2001-Present
Vice President and Controller of
Consumers 1991-2001
Carl L. English...................... 55 See the information under CMS Energy's
Executive Officers section above.
Robert A. Fenech..................... 54 Senior Vice President of Consumers 1997-Present
Vice President of Consumers 1994-1997
Frank Johnson........................ 54 See the information under CMS Energy's
Executive Officers section above.
30
NAME AGE POSITION PERIOD
---- --- -------- ------
Rodger A. Kershner................... 53 See the information under CMS Energy's
Executive Officers section above.
David G. Mengebier................... 44 See the information under CMS Energy's
Executive Officers section above.
David A. Mikelonis................... 53 Senior Vice President and General
Counsel of Consumers 1988-Present
Paul N. Preketes..................... 52 Senior Vice President of Consumers 2000-Present
Vice President of Consumers 1994-2000
John G. Russell...................... 44 See the information under CMS Energy's
Executive Officers section above.
Glenn P. Barba....................... 36 Controller 2001-Present
The present term of office of each of the executive officers extends to the
first meeting of the Board of Directors after the next annual election of
Directors of Consumers (scheduled to be held on May 24, 2002).
There are no family relationships among executive officers and directors of
Consumers.
31
ITEM 2. PROPERTIES.
A description of CMS Energy, Consumers and Panhandle properties is
contained in ITEM 1. BUSINESS -- Consumers -- Consumers Properties -- General;
BUSINESS -- BUSINESS SEGMENTS -- Consumers Electric Utility -- Electric Utility
Properties; Consumers Gas Utility -- Gas Utility Properties; Natural Gas
Transmission -- Natural Gas Transmission Properties; Independent Power
Production -- Independent Power Production Properties; Oil and Gas Exploration
and Production -- Oil and Gas Exploration and Production Properties;
International Energy Distribution -- International Energy Distribution
Properties, all of which are incorporated by reference herein.
ITEM 3. LEGAL PROCEEDINGS.
CMS Energy, Consumers, Panhandle and some of their subsidiaries and
affiliates are parties to certain routine lawsuits and administrative
proceedings incidental to their businesses involving, for example, claims for
personal injury and property damage, contractual matters, various taxes, and
rates and licensing. Reference is made to the ITEM 1. BUSINESS -- CMS ENERGY,
CONSUMERS AND PANHANDLE REGULATION, as well as to each of CMS Energy's,
Consumers' and Panhandle's ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS and CMS
Energy's, Consumers' and Panhandle's ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA -- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS included herein
for additional information regarding various pending administrative and judicial
proceedings involving regulatory, operating and environmental matters.
CMS ENERGY
OXFORD TIRE RECYCLING LITIGATION: For a discussion of Oxford Tire Recycling
litigation, see CMS Energy's ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA -- NOTE 5 OF CMS ENERGY'S NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS -- UNCERTAINTIES.
CMS ENERGY, CONSUMERS AND PANHANDLE
ENVIRONMENTAL MATTERS: CMS Energy, Consumers, Panhandle and their
subsidiaries and affiliates are subject to various federal, state and local laws
and regulations relating to the environment. Several of these companies have
been named parties to various actions involving environmental issues. Based on
their present knowledge and subject to future legal and factual developments,
CMS Energy, Consumers and Panhandle believe that it is unlikely that these
actions, individually or in total, will have a material adverse effect on their
financial condition. See CMS Energy's, Consumers' and Panhandle's ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS; and CMS Energy's, Consumers' and
Panhandle's ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
CMS ENERGY
During the fourth quarter of 2001, CMS Energy did not submit any matters to
vote of security holders.
CONSUMERS
During the fourth quarter of 2001, Consumers did not submit any matters to
vote of security holders.
32
PART II
ITEM 5. MARKET FOR CMS ENERGY'S, CONSUMERS' AND PANHANDLE'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
CMS ENERGY
Market prices for CMS Energy's Common Stock and related security holder
matters are contained in ITEM 7. CMS ENERGY'S MANAGEMENT'S DISCUSSION AND
ANALYSIS -- RECAPITALIZATION and ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA -- CMS ENERGY'S QUARTERLY FINANCIAL AND COMMON STOCK INFORMATION, which is
incorporated by reference herein. At February 28, 2002, the number of registered
shareholders totaled 65,739.
CONSUMERS
Consumers' common stock is privately held by its parent, CMS Energy, and
does not trade in the public market. In February, May, August, and November
2001, Consumers paid $66 million, $30 million, $39 million and $55 million in
cash dividends, respectively, on its common stock. In January, May, August,
November and December 2000, Consumers paid $79 million, $30 million, $17
million, $61 million and $58 million in cash dividends, respectively, on its
common stock.
PANHANDLE
Panhandle's common stock is privately held by its parent, CMS Gas
Transmission, and does not trade in the public market. In February, May, August,
and November 2001, Panhandle paid $29 million, $10 million, $11 million, and $11
million in cash dividends, respectively, on its common stock to CMS Gas
Transmission. In April, June, September and December 2000, Panhandle paid $30
million, $9 million, $15 million and $11 million in cash dividends,
respectively, on its common stock to CMS Gas Transmission.
ITEM 6. SELECTED FINANCIAL DATA.
CMS ENERGY
Selected financial information is contained in ITEM 8. FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA -- CMS ENERGY'S SELECTED FINANCIAL INFORMATION, which is
incorporated by reference herein.
CONSUMERS
Selected financial information is contained in ITEM 8. FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA -- CONSUMERS' SELECTED FINANCIAL INFORMATION, which is
incorporated by reference herein.
33
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
CMS ENERGY
Management's discussion and analysis of financial condition and results of
operations is contained in ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA -- CMS ENERGY'S MANAGEMENT'S DISCUSSION AND ANALYSIS, which is incorporated
by reference herein.
CONSUMERS
Management's discussion and analysis of financial condition and results of
operations is contained in ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA -- CONSUMERS' MANAGEMENT'S DISCUSSION AND ANALYSIS, which is incorporated
by reference herein.
PANHANDLE
Management's discussion and analysis of financial condition and results of
operations is contained in ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA -- PANHANDLE'S MANAGEMENT'S DISCUSSION AND ANALYSIS, which is incorporated
by reference herein.
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK.
CMS ENERGY
Quantitative and Qualitative Disclosures About Market Risk is contained in
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- CMS ENERGY'S MANAGEMENT'S
DISCUSSION AND ANALYSIS -- RESULTS OF OPERATIONS -- MARKET RISK INFORMATION,
which is incorporated by reference herein.
CONSUMERS
Quantitative and Qualitative Disclosures About Market Risk is contained in
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- CONSUMERS' MANAGEMENT'S
DISCUSSION AND ANALYSIS -- OTHER MATTERS -- MARKET RISK INFORMATION, which is
incorporated by reference herein.
PANHANDLE
Quantitative and Qualitative Disclosures About Market Risk is contained in
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- PANHANDLE'S MANAGEMENT'S
DISCUSSION AND ANALYSIS -- OTHER MATTERS -- MARKET RISK INFORMATION, which is
incorporated by reference herein.
34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to Financial Statements:
PAGE
----
CMS ENERGY
Selected Financial Information.............................. CMS-2
Management's Discussion and Analysis........................ CMS-4
Consolidated Statements of Income........................... CMS-28
Consolidated Statements of Cash Flows....................... CMS-30
Consolidated Balance Sheets................................. CMS-32
Consolidated Statements of Preferred Stock.................. CMS-34
Consolidated Statements of Common Stockholders' Equity...... CMS-35
Notes to Consolidated Financial Statements.................. CMS-37
Report of Independent Public Accountants.................... CMS-88
Quarterly Financial and Common Stock Information............ CMS-89
CONSUMERS ENERGY
Selected Financial Information.............................. CE-2
Management's Discussion and Analysis........................ CE-3
Consolidated Statements of Income........................... CE-18
Consolidated Statements of Cash Flows....................... CE-19
Consolidated Balance Sheets................................. CE-21
Consolidated Statements of Long-Term Debt................... CE-23
Consolidated Statements of Preferred Stock.................. CE-24
Consolidated Statements of Common Stockholder's Equity...... CE-25
Notes to Consolidated Financial Statements.................. CE-26
Report of Independent Public Accountants.................... CE-55
Quarterly Financial Information............................. CE-56
PANHANDLE EASTERN PIPE LINE COMPANY
Management's Discussion and Analysis........................ PE-2
Consolidated Statements of Income........................... PE-7
Consolidated Statements of Cash Flows....................... PE-8
Consolidated Balance Sheets................................. PE-9
Consolidated Statements of Common Stockholder's Equity...... PE-10
Notes to Consolidated Financial Statements.................. PE-11
Report of Independent Public Accountants.................... PE-26
35
(This page intentionally left blank)
36
[CMS ENERGY LOGO]
2001 FINANCIAL STATEMENTS
CMS-1
CMS ENERGY CORPORATION
SELECTED FINANCIAL INFORMATION
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Operating revenue (in millions)............ ($) 9,597 8,739(a) 5,926(a) 5,141 4,781
Consolidated net income (in millions)...... ($) (545) 36 277 285 244
Average common shares outstanding (in
thousands)
CMS Energy............................... 130,758 113,128 110,140 102,446 96,144
Class G.................................. -- -- -- 8,333 8,015
Earnings per average common share
CMS Energy -- Basic...................... ($) (4.17) 0.32 2.18(b) 2.65 2.39
-- Diluted.................... ($) (4.17) 0.32 2.17(b) 2.62 2.37
Class G -- Basic and Diluted.......... ($) -- -- 4.21(b) 1.56 1.84
Cash from operations (in millions)......... ($) 417 453 917 516 624
Capital expenditures, excluding
acquisitions, capital lease additions and
DSM (in millions)........................ ($) 1,262 1,032 1,124 1,295 678
Total assets (in millions)................. ($) 17,102 17,251(a) 15,462 11,310 9,508
Long-term debt, excluding current
maturities (in millions)................. ($) 6,923 6,770 6,428 4,726 3,272
Non-current portion of capital leases (in
millions)................................ ($) 60 54 88 105 75
Total preferred stock (in millions)........ ($) 44 44 44 238 238
Total Trust Preferred Securities (in
millions)................................ ($) 1,214 1,089 1,119 393 393
Cash dividends declared per common share
CMS Energy............................... ($) 1.46 1.46 1.39 1.26 1.14
Class G.................................. ($) -- -- 0.99 1.27 1.21
Market price of common stock at year-end
CMS Energy............................... ($) 24.03 31.69 31.19 48.44 44.06
Class G.................................. ($) -- -- 24.56(c) 25.25 27.13
Book value per common share at year-end
CMS Energy............................... ($) 14.21 19.48 21.17 19.61 16.84
Class G.................................. ($) -- -- -- 11.46 10.91
Return on average common equity............ (%) (25.6) 1.5 11.8 14.2 14.7
Return on assets........................... (%) (0.2) 3.3(a) 5.3 5.5 5.6
Number of employees at year-end (full-time
equivalents)............................. 11,510 11,652 11,462 9,710 9,682
ELECTRIC UTILITY STATISTICS
Sales (billions of kWh).................. 39.6 41.0 41.0 40.0 37.9
Customers (in thousands)................. 1,712 1,691 1,665 1,640 1,617
Average sales rate per kWh............... (c) 6.65 6.56 6.54 6.50 6.57
GAS UTILITY STATISTICS
Sales and transportation deliveries
(bcf)................................. 367 410 389 360 420
Customers (in thousands)(d).............. 1,630 1,611 1,584 1,558 1,533
Average sales rate per mcf............... ($) 5.34 4.39 4.52 4.56 4.44
DIVERSIFIED ENERGY STATISTICS
CMS Energy's share of unconsolidated
revenue (in millions):
Independent power production.......... ($) 704 837 802 761 621
Natural gas transmission.............. ($) 239 171 130 67 51
Marketing, services and trading....... ($) 1,183 1,157 524 291 202
Independent power production sales
(millions of kWh)..................... 19,212 21,379 20,478 19,017 13,126
CMS-2
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Gas pipeline throughput (bcf)............ 1,555 1,586(a) 1,141 253 226
Gas managed and marketed for end users
(bcf)................................. 750 615 470 366 243
Electric power marketed (millions of
kWh).................................. 51,790 37,781 3,709 6,973 900
EXPLORATION AND PRODUCTION STATISTICS
Sales (net equivalent MMbbls)............ 13.8 10.2 12.1 12.1 11.4
Proved reserves (net equivalent
MMbbls)............................... 390.1 234.6 248.2 182.6 152.0
Proved reserves added (net equivalent
MMbbls)............................... 169.0 48.8 77.7 42.7 29.9
Finding cost per net equivalent barrel... ($) 1.33 2.63 1.94 3.35 2.38
- -------------------------
(a) Certain prior year amounts were restated for comparative purposes.
(b) 1999 earnings per average common share includes allocation of the premium
on redemption of Class G Common Stock of $(.26) per CMS Energy basic share,
$(.25) per CMS Energy diluted share and $3.31 per Class G basic and diluted
share.
(c) Reflects closing price at the October 25, 1999 exchange date.
(d) Excludes off-system transportation customers.
CMS-3
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 Michigan's
Lower Peninsula. Enterprises, through subsidiaries, including Panhandle and its
subsidiaries, is engaged in several domestic and international diversified
energy businesses including: natural gas transmission, storage and processing;
independent power production; oil and gas exploration and production; and energy
marketing, services and trading.
This MD&A refers to, and in some sections specifically incorporates by
reference, CMS Energy's Notes to Consolidated Financial Statements and should be
read in conjunction with such Consolidated Financial Statements and Notes. This
Annual Report and other written and oral statements that CMS Energy may make
contain forward-looking statements as defined by the Private Securities
Litigation Reform Act of 1995. CMS Energy's intentions with the use of the words
"anticipates," "believes," "estimates," "expects," "intends," and "plans," and
variations of such words and similar expressions, are solely to identify
forward-looking statements that involve risk and uncertainty. These
forward-looking statements are subject to various factors that could cause CMS
Energy's actual results to differ materially from the results anticipated in
such statements. CMS Energy has no obligation to update or revise
forward-looking statements regardless of whether new information, future events
or any other factors affect the information contained in such statements. CMS
Energy does, however, discuss certain risk factors, uncertainties and
assumptions in this MD&A and in Item 1 of this Form 10-K in the section entitled
"Forward-Looking Statements Cautionary Factors and Uncertainties" and in various
public filings it periodically makes with the SEC. CMS Energy designed this
discussion of potential risks and uncertainties, which is by no means
comprehensive, to highlight important factors that may impact CMS Energy's
business and financial outlook. This Annual Report also describes material
contingencies in CMS Energy's Notes to Consolidated Financial Statements, and
CMS Energy encourages its readers to review these Notes.
RESULTS OF OPERATIONS
CMS ENERGY CONSOLIDATED EARNINGS
During 2001, CMS Energy announced significant changes in its business
strategy designed to strengthen its balance sheet, provide more transparent and
predictable future earnings and reduce its business risk by focusing future
business growth primarily in North America. In connection with the change in
business strategy and associated plans to sell non-strategic and
under-performing assets, CMS Energy recorded $683 million of after-tax
write-downs in recognition of completed and planned divestitures, reduced asset
valuations and loss contracts. These write-downs included: a $185 million charge
related to discontinuation of CMS Energy's energy distribution unit in South
America; a $286 million charge related to energy development projects and
international investments in recognition of the reduced net recoverable value or
sale of these investments; a $130 million charge related to the DIG plant power
supply contract with the Ford/Rouge complex, due to higher than expected fuel
and operating costs; and a $82 million charge related to Consumers' purchase
power agreement with the MCV for additional underrecoveries through September
2007. After September 2007, the PPA terms require Consumers to pay MCV
Partnership capacity and energy charges that the MPSC has authorized for
recovery from electric customers. For CMS Energy's business units, the after-tax
write-down of $498 million, excluding the discontinued operations, is comprised
of: $91 million for the oil and gas exploration and production unit; $28 million
for the natural gas transmission, storage and processing business; $275 million
for independent power production; $94 million for Consumers; and $10 million for
others.
Other non-recurring charges included in results of operations for 2001 are
$18 million related to premiums on early debt retirement, $18 million from the
translation of Argentine peso-denominated monetary assets and liabilities at
December 31, 2001, and $11 million representing the cumulative effect of a
change in accounting for purchased power options.
In 2000, after evaluating the expected future cash flows of its investment
in Loy Yang, and as a result of being unable to attract a reasonable offer for
Loy Yang at that time, CMS Energy determined that a loss in value
CMS-4
had occurred. Consequently, an impairment loss was recorded on the carrying
amount of the equity investment in Loy Yang of $268 million after-tax. This loss
does not include $168 million cumulative net foreign currency translation losses
due to unfavorable changes in exchange rates, which, in accordance with SFAS No.
52, will not be realized until there has been a sale, full liquidation, or other
disposition of CMS Energy's investment in Loy Yang, all of which are currently
being pursued but may not occur in 2002.
Also in 2000, CMS Energy adopted the provisions of the SEC's SAB No. 101
summarizing the SEC staff's views on revenue recognition policies based upon
existing generally accepted accounting principles. In SAB No. 101, the SEC staff
indicated the oil and gas exploration and production industry's long-standing
practice of recording inventories at their net realizable amount at the time of
production was inappropriate. Consequently, in conforming to the interpretations
of SAB No. 101, CMS Energy implemented a change in the recording of these oil
and gas exploration and production inventories as of January 1, 2000. The
cumulative effect of this one-time non-cash accounting change decreased 2000
earnings by $7 million ($5 million, net of tax) or $.04 per share of CMS Energy
Common Stock.
In 1999, CMS Energy recorded losses of $49 million after-tax relating to
its investments in Nitrotec. After reviewing the business alternatives and
strategic outlook for its investments in Nitrotec, CMS Energy determined that
the probability of recovering any portion of its investments was unlikely.
Accordingly, CMS Energy recorded losses in 1999 equal to the carrying amount of
its investments.
In October 1999, CMS Energy exchanged approximately 6.1 million shares of
CMS Energy Common Stock for all of the approximately 8.7 million outstanding
shares of Class G Common Stock. Each Class G Common Stock shareholder received a
15 percent premium for each Class G share held. The adjusted value of all Class
G Common Stock was then exchanged for an equivalent value of CMS Energy Common
Stock. The exchange reduced CMS Energy's basic and diluted earnings per share by
$.26 and $.25, respectively, and increased Class G's basic and diluted earnings
per share by $3.31. The per share allocation did not affect CMS Energy's net
income for 1999 or for future periods.
The following table depicts CMS Energy's Results of Operations before and
after the effects of the above-mentioned events of 2001, 2000 and 1999.
YEARS ENDED DECEMBER 31 2001 2000 1999
- ----------------------- ---- ---- ----
IN MILLIONS, EXCEPT PER
SHARE AMOUNTS
CONSOLIDATED NET INCOME (LOSS).............................. $ (545) $ 36 $ 277
Net Income (Loss) Attributable to CMS Energy Common Stock... (545) 36 269
Net Income Attributable to Class G Common Stock............. -- -- 8
CONSOLIDATED NET INCOME (LOSS) OF CMS ENERGY
Earnings Before Non-Recurring Items......................... $ 185 $ 246 $ 305
Effects of Loss Contracts................................. (212) -- --
Effects of Reduced Asset Valuations....................... (249) (268) (49)
Asset Sales............................................... (37) 60 27
Discontinued Operations................................... (185) 3 (14)
Extraordinary Item........................................ (18) -- --
Argentine Monetary Adjustment............................. (18) -- --
Cumulative Effect of Change in Accounting for Purchased
Power Options.......................................... (11) -- --
Cumulative Effect of Change in Accounting for
Inventories............................................ -- (5) --
------ ------ ------
Net Income (Loss) Attributable to CMS Energy Common
Stock................................................. $ (545) $ 36 $ 269
====== ====== ======
CMS-5
YEARS ENDED DECEMBER 31 2001 2000 1999
- ----------------------- ---- ---- ----
IN MILLIONS, EXCEPT PER
SHARE AMOUNTS
BASIC EARNINGS PER AVERAGE COMMON SHARE OF CMS ENERGY
Earnings Per Share Before Non-Recurring Items............... $ 1.41 $ 2.21 $ 2.77
Effects of Loss Contracts................................. (1.62) -- --
Effects of Reduced Asset Valuations....................... (1.90) (2.37) (0.45)
Asset Sales............................................... (0.28) 0.50 .25
Discontinued Operations................................... (1.41) 0.02 (.13)
Extraordinary Item........................................ (0.14) -- --
Argentine Monetary Adjustment............................. (0.14) -- --
Cumulative Effect of Change in Accounting for Purchased
Power Options.......................................... (0.09) -- --
Cumulative Effect of Change in Accounting for
Inventories............................................ -- (0.04) --
Effects of Class G Common Stock Exchange.................. -- -- (0.26)
------ ------ ------
Earnings (Loss) Per Share After Non-Recurring Items.... $(4.17) $ .32 $ 2.18
====== ====== ======
DILUTED EARNINGS PER AVERAGE COMMON SHARE OF CMS ENERGY
Earnings Per Share Before Non-Recurring Items............... $ 1.41 $ 2.21 $ 2.73
Effects of Loss Contracts................................. (1.62) -- --
Effects of Reduced Asset Valuations....................... (1.90) (2.37) (0.43)
Asset Sales............................................... (0.28) 0.50 .24
Discontinued Operations................................... (1.41) 0.02 (.12)
Extraordinary Item........................................ (0.14) -- --
Argentine Monetary Adjustment............................. (0.14) -- --
Cumulative Effect of Change in Accounting for Purchased
Power Options.......................................... (0.09) -- --
Cumulative Effect of Change in Accounting for
Inventories............................................ -- (0.04) --
Effects of Class G Common Stock Exchange.................. -- -- (0.25)
------ ------ ------
Earnings (Loss) Per Share After Non-Recurring Items.... $(4.17) $ .32 $ 2.17
====== ====== ======
For the year 2001, the decrease in earnings before write-downs and other
non-recurring charges as compared to 2000, resulted primarily from increased
power supply costs associated with the unplanned outage at Palisades, reduced
gas deliveries resulting from milder temperatures during the heating seasons,
the year-long impact of an economic slowdown throughout Michigan and lower
earnings from the independent power production business, partially offset by
increased earnings from the oil and gas exploration and production and
marketing, services and trading diversified energy businesses.
For the year 2000, the decrease in consolidated net income as compared to
1999, before the effects of losses on investments in Loy Yang and Nitrotec and
after the cumulative effect of the change in accounting for inventories,
resulted from decreased earnings from the electric and gas utilities and higher
interest expense principally related to the Panhandle acquisition. Increased
earnings from CMS Energy's diversified energy businesses, including the natural
gas transmission business, primarily as a result of the Panhandle acquisition;
the independent power production business; the oil and gas exploration and
production business; the international energy distribution business; and the
marketing, services and trading business, partially offset these earnings
decreases. Gains on the sale of non-strategic and non-performing assets also
partially offset the earnings decreases.
For further information, see the individual results of operations for each
CMS Energy business segment in this MD&A.
CMS-6
CONSUMERS' ELECTRIC UTILITY RESULTS OF OPERATIONS
ELECTRIC PRETAX OPERATING INCOME:
YEARS ENDED DECEMBER 31 2001 2000 CHANGE 2000 1999 CHANGE
- ----------------------- ---- ---- ------ ---- ---- ------
IN MILLIONS
Pretax Operating Income............................ $339 $481 $(142) $481 $494 $(13)
==== ==== ===== ==== ==== ====
Reasons for the change:
Electric deliveries................................ $ 19 $ 12
Power supply costs and related revenue............. (109) (50)
Rate decrease...................................... (35) (22)
Other operating expenses........................... (9) 33
Non-commodity revenue.............................. (8) 14
----- ----
Total change....................................... $(142) $(13)
===== ====
ELECTRIC DELIVERIES: For the year 2001, electric deliveries, including
transactions with other electric utilities, were 39.6 billion kWh, a decrease of
1.4 billion kWh or 3.5 percent from 2000. Although total deliveries for 2001
were below the 2000 level, increased deliveries to the higher margin residential
and commercial sectors, more than offset the impact of reduced deliveries to the
lower margin industrial sector. All deliveries in 2001 reflect the year-long
impact of an economic slowdown throughout Michigan. For the year 2000, electric
deliveries were 41 billion kWh, similar to 1999.
POWER SUPPLY COSTS AND RELATED REVENUE: For the year 2001, lower overall
sales produced a decrease in fuel related revenues. Nevertheless, power supply
costs increased as a result of the purchase of greater quantities of
higher-priced electricity to offset the loss of generation resulting from the
six month unscheduled Palisades outage that ended in January 2002. For the year
2000, the increase in power supply costs was also due to unscheduled plant
outages at other generating facilities.
For the years 2001 and 2000 respectively, Consumers purchased $66 million
and $51 million of electric call options to purchase electricity to ensure a
reliable source of power supply during the summer months. As a result of
periodic excess daily capacity, certain call options were sold for $2 million
and $1 million in the years 2001 and 2000, respectively. The remaining call
options were either exercised or expired. Consumers accounted for the costs
relating to the expired call options and the income received from the sale of
call options, as purchased power supply costs.
RATE DECREASE AND OTHER OPERATING EXPENSES: In June 2000, Consumers' retail
rates were frozen and a five percent residential rate decrease was implemented
to comply with the Customer Choice Act. As a result, 2001 reflects a full year
impact of this rate decrease. Other operating expenses increased in 2001 due to
higher operating and maintenance costs. This increase in expense was
significantly offset by reduced amortization expense, as permitted by MPSC
orders resulting from the Customer Choice Act. Consumers temporarily suspended
amortization of the securitized assets pending the issuance of securitization
bonds in November 2001. The year 2000 reflects a half-year impact of the rate
decrease along with a decrease in other operating expenses due to lower
operating and maintenance costs.
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CONSUMERS' GAS UTILITY RESULTS OF OPERATIONS
GAS PRETAX OPERATING INCOME:
YEARS ENDED DECEMBER 31 2001 2000 CHANGE 2000 1999 CHANGE
- ----------------------- ---- ---- ------ ---- ---- ------
IN MILLIONS
Pretax Operating Income................ $99 $98 $ 1 $98 $132 $(34)
=== === ==== === ==== ====
Reasons for the change:
Gas commodity and related revenue...... 44 (64)
Gas wholesale and retail services...... 8 4
Operation and maintenance.............. (30) 11
Gas deliveries......................... (21) 17
General taxes and depreciation......... -- (2)
---- ----
Total change........................... $ 1 $(34)
==== ====
For the year 2001 as compared to 2000, the gas commodity cost and related
revenues increased primarily as a result of the absence of a $45 million
regulatory liability recorded in 2000 that did not exist in 2001. This liability
was due to the increased cost of gas, which was significantly above the
commodity rate being collected from Consumers' gas customers. The recording of
this $45 million liability reduced revenue for the year 2000. Since April 2001,
Consumers is back on a fully recoverable GCR factor, which results in no gain or
loss on the commodity portion of the tariff rate. Wholesale and retail services
increased, principally due to growth in the appliance service plan program.
Operation and maintenance cost increases reflect additional focus on customer
reliability and service. Gas delivery revenues reflect a significant decrease
due to warmer temperatures compared to the 2000 heating season and a reduction
due to the economic slowdown in 2001. Gas system deliveries, including
miscellaneous transportation, totaled 367 bcf, a decrease of 43 bcf or 10
percent compared with 2000.
For the year 2000 as compared to 1999, the gas commodity cost and related
revenue decreased primarily as a result of recording the regulatory liability
related to increased gas costs in 2000. The increase in gas costs were
significantly above the gas commodity rate being collected from Consumers' gas
customers. Operation and maintenance cost decreased due to control of employee
benefit costs. System deliveries, including miscellaneous transportation,
totaled 410 bcf, an increase of 21 bcf or five percent compared with 1999. The
increased deliveries reflect colder temperatures during the fourth quarter of
2000.
NATURAL GAS TRANSMISSION RESULTS OF OPERATIONS
PRETAX OPERATING INCOME: For the year 2001, pretax operating income,
excluding write-downs, decreased $20 million (9 percent) from the prior year due
primarily to higher operating expenses and lower international project results.
The decrease was partially offset by a 13 percent increase in LNG shipments (62
shipments compared to 55) and improved gas gathering and processing operations.
For the year 2000, pretax operating income, excluding the 1999 effects of
the Nitrotec write-down, increased $79 million (53 percent) from the comparable
period in 1999. The increase primarily reflects full year 2000 earnings from
Panhandle and Sea Robin, which CMS Energy acquired in March 1999 and March 2000,
respectively, increased earnings from a more than 100 percent increase in LNG
shipments compared to 1999, and increased earnings from domestic gas gathering
and processing operations.
INDEPENDENT POWER PRODUCTION RESULTS OF OPERATIONS
PRETAX OPERATING INCOME: For the year 2001, pretax operating income,
excluding the effects of the investment write-downs, unsuccessful development
costs, and the recognition of the DIG loss contract reserve, decreased $71
million (37 percent) from the comparable period in 2000, reflecting the sale of
power plants in 2000, construction delays at the DIG plant that led to increased
costs for steam generation, and a gain recorded in 2000 on the restructuring of
a power supply contract. These changes were partially offset by the earnings
benefits from the expansion of the Jorf Lasfar facility coupled with the
facility's improved operating performance, the
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operation of additional units at a new African facility and the absence of
operating losses in 2001 from the investment in Loy Yang, which was written off
in the fourth quarter of 2000.
For the year 2000, pretax operating income, excluding the effects of the
Loy Yang write-down, increased $32 million (18 percent) from the comparable
period in 1999. This increase primarily reflects a full year of earnings
benefits from a new African facility and an Asian facility that commenced
operations in the third quarter of 1999, increased earnings from the expansion
of the Jorf Lasfar facility in 2000, and the restructuring of a power supply
contract. These increases were partially offset by decreased earnings from
domestic plants primarily due to the sale of the Lakewood plant in May 2000, a
scheduled reduction in operating fees, and the write-off of unsuccessful
development costs.
OIL AND GAS EXPLORATION AND PRODUCTION RESULTS OF OPERATIONS
PRETAX OPERATING INCOME: For the year 2001, pretax operating income,
excluding write-downs, increased $43 million (139 percent) from the comparable
period in 2000 due to higher oil and gas commodity prices and increased
production from Equatorial Guinea and Powder River properties. These increases
were partially offset by lower production due to the sale of Michigan and
Ecuador properties and higher operating, exploration, and general and
administrative expenses.
For the year 2000, pretax operating income increased $14 million (82
percent) from the comparable period in 1999. The increase reflects higher
realized commodity prices, increased production from Venezuelan properties,
increased production from new core areas, including West Texas and Powder River
properties, and lower operating expenses, including decreased exploration,
depreciation, depletion and amortization expenses. These increases were
partially offset by increased general and administrative expenses and reduced
earnings from Michigan and Ecuador properties, which were sold in March 2000 and
June 2000, respectively.
MARKETING, SERVICES AND TRADING RESULTS OF OPERATIONS
PRETAX OPERATING INCOME: For the year 2001, pretax operating income
increased $57 million (407 percent) from the comparable period in 2000. The
increase reflects higher gas (750 bcf vs. 615 bcf) and electric (51,790 GWh vs.
37,781 GWh) marketed volumes and average gas margins, the mark-to-market value
from origination of long term power contracts, net of reserves, and higher
earnings of the energy management services business, partially offset by reduced
net wholesale power trading activity and higher operating expenses.
For the year 2000, pretax operating income increased $10 million from the
comparable period in 1999. The increase reflects increased earnings from
wholesale gas trading, increased LNG sales, and earnings from an energy
management services business acquired in late 1999. The volumes of marketed
natural gas and power traded increased 31 percent and 919 percent, respectively.
Partially offsetting these increases were lower power trading margins, primarily
due to cooler than normal summer weather in Michigan, and increased operating
expenses as the business continues to expand its trading and marketing
activities and increase its customer base.
INTERNATIONAL ENERGY DISTRIBUTION RESULTS OF OPERATIONS
In the third quarter of 2001, CMS Energy discontinued the operations of the
international energy distribution segment of its business. For more information,
see Note 3, Discontinued Operations, incorporated by reference herein.
CRITICAL ACCOUNTING POLICIES
The results of operations, as presented above, are based on the application
of generally accepted U.S. accounting principles. The application of these
principles often requires management to make certain judgments, assumptions and
estimates that may result in different financial presentations. CMS Energy
believes that certain accounting principles are critical in terms of
understanding its financial statements. These principles include the use of
estimates for long-lived assets, equity method investments and long-term
obligations, accounting for derivatives and financial instruments,
mark-to-market accounting, and international operations and foreign currency.
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USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
judgments, estimates and assumptions that affect the reported amounts of assets
and liabilities, disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Certain accounting principles require subjective
and complex judgments used in the preparation of financial statements.
Accordingly, a different financial presentation could result depending on the
judgment, estimates or assumptions that are used. Such estimates and
assumptions, include, but are not specifically limited to: depreciation,
amortization, interest rates, discount rates, future commodity prices,
mark-to-market valuations, investment returns, volatility in the price of CMS
Energy Common Stock, impact of new accounting standards, international economic
policy, future costs associated with long-term contractual obligations, future
compliance costs associated with environmental regulations and continuing
creditworthiness of counterparties. Actual results could materially differ from
those estimates.
Periodically, in accordance with SFAS No. 121 and APB Opinion No. 18,
long-lived assets and equity method investments of CMS Energy and its
subsidiaries are evaluated to determine whether conditions, other than those of
a temporary nature, indicate that the carrying value of an asset may not be
recoverable. Management bases its evaluation on impairment indicators such as
the nature of the assets, future economic benefits, domestic and foreign state
and federal regulatory and political environments, historical or future
profitability measurements, as well as other external market conditions or
factors that may be present. If such indicators are present or other factors
exist that indicate that the carrying value of the asset may not be recoverable,
CMS Energy determines whether impairment has occurred through the use of an
undiscounted cash flows analysis of assets at the lowest level for which
identifiable cash flows exist. If impairment, other than a temporary nature, has
occurred, CMS Energy recognizes a loss for the difference between the carrying
value and the estimated fair value of the asset. The fair value of the asset is
measured using discounted cash flow analysis or other valuation techniques. The
analysis of each long-lived asset is unique and requires management to use
certain estimates and assumptions that are deemed prudent and reasonable for a
particular set of circumstances. Of CMS Energy's total assets, valued at $17
billion at December 31, 2001, approximately 60 to 65 percent represent the
carrying value of long-lived assets and equity method investments that are
subject to this type of analysis. If future market, political or regulatory
conditions warrant, CMS Energy and its subsidiaries may be subject to similar
write-downs in future periods. Conversely, if market, political or regulatory
conditions improve, accounting standards prohibit the reversal of previous
write-downs.
CMS Energy has recently recorded write-downs of non-strategic or
under-performing long-lived assets as a result of implementing a new strategic
direction. CMS Energy is pursuing the sale of all of these non-strategic and
under-performing assets, including some assets that were not determined to be
impaired. Upon the sale of these assets, the proceeds realized may be materially
different from the remaining carrying value of these assets. Even though these
assets have been identified for sale, management cannot predict when, nor make
any assurances that, these asset sales will occur.
Similarly, the recording of estimated liabilities for contingent losses,
including estimated losses on long-term obligations, within the financial
statements is guided by the principles in SFAS No. 5 that require a company to
record estimated liabilities in the financial statements when it is probable
that a loss will be incurred in the future as a result of a current event, and
the amount can be reasonably estimated. Management uses cash flow valuation
techniques similar to those described above to estimate contingent losses on
long-term contracts.
CMS Energy has recently recorded estimates of projected losses related to
specific long-term contracts such as Consumers' power purchase agreement with
MCV and the DIG plant power supply contract with the Ford/ Rouge complex. Actual
results achieved upon performance under the terms of the contracts may be
materially different than current estimates.
ACCOUNTING FOR DERIVATIVE AND FINANCIAL INSTRUMENTS
DERIVATIVE INSTRUMENTS: CMS Energy uses the criteria in SFAS No. 133, as
amended and interpreted, to determine if certain contracts must be accounted for
as derivative instruments. The rules for determining whether
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a contract meets the criteria for derivative accounting are numerous and
complex. As a result, significant judgment is required to determine whether a
contract requires derivative accounting, and similar contracts can sometimes be
accounted for differently.
The types of contracts CMS Energy currently accounts for as derivative
instruments are interest rate swaps and locks, foreign currency exchange
contracts, certain electric call options, and gas fuel call options and swaps.
CMS Energy does not account for electric capacity and energy contracts, gas
supply contracts, coal supply contracts, or purchase orders for numerous supply
items as derivatives.
If a contract must be accounted for as a derivative instrument, the
contract is recorded as either an asset or a liability in the financial
statements at the fair value of the contract. Any difference between the
recorded book value and the fair value is reported either in earnings or other
comprehensive income depending on certain qualifying criteria. The recorded fair
value of the contract is then adjusted quarterly to reflect any change in the
market value of the contract.
In order to value the contracts that are accounted for as derivative
instruments, CMS Energy uses a combination of market quoted prices and
mathematical models. Option models require various inputs, including forward
prices, volatilities, interest rates and exercise periods. Changes in forward
prices or volatilities could significantly change the calculated fair value of
the call option contracts. The models used by CMS Energy have been tested
against market quotes to ensure consistency between model outputs and market
quotes. At December 31, 2001, CMS Energy assumed an interest rate of 4.5 percent
in calculating the fair value of its electric call options.
For derivative instruments to qualify for hedge accounting under SFAS No.
133, the hedging relationship must be formally documented at inception and be
highly effective in achieving offsetting cash flows or offsetting changes in
fair value attributable to the risk being hedged. If hedging a forecasted
transaction, the forecasted transaction must be probable. If a derivative
instrument, used as a cash flow hedge, is terminated early because it is
probable that a forecasted transaction will not occur, any gain or loss as of
such date is immediately recognized in earnings. If a derivative instrument,
used as a cash flow hedge, is terminated early for other economic reasons, any
gain or loss as of the termination date is deferred and recorded when the
forecasted transaction affects earnings.
FINANCIAL INSTRUMENTS: CMS Energy accounts for its investments in debt and
equity securities in accordance with SFAS No. 115. As such, debt and equity
securities can be classified into one of three categories: held-to-maturity,
trading, or available-for-sale securities. CMS Energy's investments in equity
securities are classified as available-for-sale securities and are reported at
fair value with any unrealized gains or losses resulting from changes in fair
value excluded from earnings and reported in equity as part of other
comprehensive income. Unrealized gains or losses resulting from changes in the
fair value of Consumers' nuclear decommissioning investments are reported in
accumulated depreciation. The fair value of these investments is determined from
quoted market prices.
MARK-TO-MARKET ACCOUNTING
CMS MST's trading activities are accounted for under the mark-to-market
method of accounting. Under mark-to-market accounting, energy-trading contracts
are reflected at fair market value, net of reserves, with unrealized gains and
losses recorded as an asset or liability in the consolidated balance sheets.
These assets and liabilities are affected by the timing of settlements related
to these contracts, current-period changes from newly originated transactions
and the impact of price movements. Changes in fair values are recognized as
revenues in the consolidated statements of income in the period in which the
changes occur. Market prices used to value outstanding financial instruments
reflect management's consideration of, among other things, closing exchange and
over-the-counter quotations. In certain of these markets, long-term contract
commitments may extend beyond the period in which market quotations for such
contracts are available. The lack of long-term pricing liquidity requires the
use of mathematical models to value these commitments under the accounting
method employed. These mathematical models utilize historical market data to
forecast future elongated pricing curves, which are used to value the
commitments that reside outside of the liquid market quotations. Realized cash
returns on these commitments may vary, either positively or negatively, from the
results estimated through application of
CMS-11
forecasted pricing curves generated through application of the mathematical
model. CMS Energy believes that its mathematical models utilize state-of-the-art
technology, pertinent industry data and prudent discounting in order to forecast
certain elongated pricing curves. These market prices are adjusted to reflect
the potential impact of liquidating the company's position in an orderly manner
over a reasonable period of time under present market conditions.
In connection with the market valuation of its energy commodity contracts,
CMS Energy maintains reserves for credit risks based on the financial condition
of counterparties. Counterparties in its trading portfolio consist principally
of financial institutions and major energy trading companies. The
creditworthiness of these counterparties may impact overall exposure to credit
risk, either positively or negatively; however, CMS Energy maintains credit
policies that management believes minimize overall credit risk with regard to
its counterparties. Determination of the credit quality of its counterparties is
based upon a number of factors, including credit ratings, financial condition,
and collateral requirements. When applicable, CMS Energy employs standardized
agreements that allow for netting of positive and negative exposures associated
with a single counterparty. Based on these policies, its current exposures and
its credit reserves, CMS Energy does not anticipate a material adverse effect on
its financial position or results of operations as a result of counterparty
nonperformance.
The following tables provide a summary of the fair value of CMS Energy's
energy commodity contracts as of December 31, 2001.
IN MILLIONS
Fair value of contracts outstanding as of December 31,
2000...................................................... $ 16
Contracts realized or otherwise settled during the
period(a)................................................. (6)
Fair value of new contracts when entered into during the
period.................................................... 52
Changes in fair value attributable to changes in valuation
techniques and assumptions................................ 12
Other changes in fair value(b).............................. 34
----
Fair value of contracts outstanding as of December 31,
2001...................................................... $108
====
FAIR VALUE OF CONTRACTS AT DECEMBER 31, 2001
------------------------------------------------------------------
TOTAL MATURITY LESS MATURITY MATURITY MATURITY IN
SOURCE OF FAIR VALUE FAIR VALUE THAN 1 YEAR 1 TO 3 YEARS 4 TO 5 YEARS EXCESS OF 5 YEARS
- -------------------- ---------- ------------- ------------ ------------ -----------------
IN MILLIONS
Prices actively quoted............. $ 59 $32 $21 $ 5 $ 1
Prices provided by other external
sources.......................... 17 1 4 9 3
Prices based on models and other
valuation methods................ 32 3 11 11 7
---- --- --- --- ---
Total.............................. $108 $36 $36 $25 $11
==== === === === ===
- -------------------------
(a) Reflects value of contracts, included in December 31, 2000 values, that
expired during 2001.
(b) Reflects changes in price and net increase/decrease in size of forward
positions as well as changes to mark-to-market reserve accounts.
INTERNATIONAL OPERATIONS AND FOREIGN CURRENCY
CMS Energy, through its subsidiaries and affiliates, has acquired
investments in energy-related projects throughout the world. As a result of the
recently announced change in business strategy, CMS Energy has begun divesting
its non-strategic or under-performing foreign investments. One goal of the new
business strategy is to have approximately 90 percent of CMS Energy's total
assets in North American investments. As of December 31, 2001, CMS Energy's
international investments represent approximately 20 percent of total assets and
less than 9 percent of operating revenues.
BALANCE SHEET: CMS Energy's subsidiaries and affiliates whose functional
currency is other than the U.S. Dollar translate their assets and liabilities
into U.S. Dollars at the exchange rates in effect at the end of the fiscal
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period. The revenue and expense accounts of such subsidiaries and affiliates are
translated into U.S. Dollars at the average exchange rate during the period. The
gains or losses that result from this process, and gains and losses on
intercompany foreign currency transactions that are long-term in nature that CMS
Energy does not intend to settle in the foreseeable future, are reflected as a
component of stockholders' equity in the consolidated balance sheets as "Foreign
Currency Translation" in accordance with the accounting guidance provided in
SFAS No. 52. As of December 31, 2001, the cumulative Foreign Currency
Translation reduced stockholders' equity by $295 million.
INCOME STATEMENT: For subsidiaries operating in highly inflationary
economies or that meet the U.S. functional currency criteria outlined in SFAS
No. 52, the U.S. Dollar is deemed to be the functional currency. Gains and
losses that arise from exchange rate fluctuations on transactions denominated in
a currency other than the U.S. Dollar, except those that are hedged, are
included in determining net income.
Argentina: In January 2002, the Republic of Argentina enacted the Law of
Public Emergency and Foreign Exchange System. This law, among other things,
repeals the fixed exchange rate of one U.S. Dollar to one Argentina Peso,
converts all Dollar-denominated utility tariffs and energy contract obligations
into Pesos at the same one-to-one exchange rate and directs the President of
Argentina to renegotiate such tariffs. Because the convertibility of the Peso
was temporarily suspended at December 31, 2001, CMS Energy used the first
subsequently available, free-floating exchange rate of 1.65 Pesos per Dollar on
January 11, 2002, as required by SFAS No. 52, to record an $18 million loss
resulting from the translation of Peso-denominated monetary assets and
liabilities.
In February 2002, the Republic of Argentina issued additional decrees that
required all monetary obligations (including current debt and future contract
payment obligations) denominated in foreign currencies to be converted into
Pesos. These February decrees also allow the Argentine judiciary essentially to
rewrite private contracts denominated in Dollars or other foreign currencies if
the parties cannot agree on how to share equitably the impact of the conversion
of their contract payment obligations into Pesos.
The exchange rate on March 28, 2002 was 2.945 Pesos to the Dollar. While
CMS Energy management cannot predict the most likely average or end-of-period
Peso to Dollar exchange rates for 2002, the following table contains
management's current estimates of the impacts at various currency exchange rates
that the changes in Argentine laws, the currency devaluation and other recent
events in Argentina could have on CMS Energy's results of operation and
financial condition. Amounts are calculated assuming that the exchange rates
remain constant throughout the year.
"Initial net income adjustments" reflects changes in the value of
Peso-denominated monetary assets (such as receivables) and liabilities of
Argentina-based subsidiaries that would continue to use the Dollar as functional
currency. "Operating income adjustments" reflects lower net project revenues
resulting from the conversion to Pesos of utility tariffs and energy contract
obligations that were previously calculated in Dollars. "Operating income
adjustments" are divided between Argentine investments that CMS Energy currently
intends to retain and those investments it intends to sell. Investments in the
latter category eventually may be classified as discontinued operations in CMS
Energy's financial statements. "Reductions to stockholders' equity" reflects the
potential effects of recording a change in functional currency from the Dollar
to the Peso, as well as the reduction due to the effects of lower net income on
retained earnings.
The amounts below represent increases from previous estimates based upon
further examination of relevant accounting provisions of SFAS No. 52. The
amounts are only estimates; further reductions to income and stockholders'
equity could occur as a result of reduced asset valuations. Management is
continuing to assess the impacts that the changing laws and regulations (and the
resulting effective expropriation of CMS Energy's
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investments) could have on CMS Energy's results of operations and its
approximate $700 million investment in Argentina.
EXCHANGE RATE OF PESOS TO ONE DOLLAR 1.65 3.00 4.00
------------------------------------ ---- ---- ----
IN MILLIONS, EXCEPT PER SHARE DATA
Income Statement:
Initial net income adjustments.............................. $ -- $ (7) $ (9)
Operating income adjustments (cents per share)
Retained investments...................................... $(0.11) $(0.20) $(0.23)
Investments held for sale................................. $(0.09) $(0.14) $(0.15)
Balance Sheet:(a)
Reductions to stockholders' equity.......................... $ (300) $ (450) $ (475)
- -------------------------
(a) Includes the potential effects of recording a change in functional
currency.
Australia: In 2000, an impairment loss of $329 million ($268 million
after-tax) was realized on the carrying amount of the investment in Loy Yang.
This loss does not include $168 million cumulative net foreign currency
translation losses due to unfavorable changes in the exchange rates, which, in
accordance with SFAS No. 52, will not be realized until there has been a sale,
full liquidation, or other disposition of CMS Energy's investment in Loy Yang,
all of which are currently being pursued but may not occur in 2002.
HEDGING STRATEGY: CMS Energy uses forward exchange and option contracts 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 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 the 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 are inversely correlated
with the losses and gains, respectively, on the assets and liabilities being
hedged.
Foreign currency adjustments for other CMS Energy international investments
in Thailand, Venezuela, Ghana, India and the Philippines were immaterial due to
relatively stable exchange rates, minimal investment amounts, or such
adjustments were not applicable due to U.S. functional currency classifications
of the foreign investments. These countries are excluded in the hedging
portfolio due to a lack of forward markets, relatively stable exchange rates and
minimal amounts of investment.
NEW ACCOUNTING STANDARDS
In addition to the identified critical accounting policies discussed above,
future results will be affected by a number of new accounting standards that
recently have been issued.
SFAS NO. 141, BUSINESS COMBINATIONS: SFAS No. 141, issued in July 2001,
requires that all business combinations initiated after June 30, 2001, be
accounted for under the purchase method; use of the pooling-of-interests method
is no longer permitted. The adoption of SFAS No. 141, effective July 1, 2001,
will result in CMS Energy accounting for any future business combinations under
the purchase method of accounting, but will not change the method of accounting
used in previous business combinations.
SFAS NO. 142, GOODWILL AND OTHER INTANGIBLE ASSETS: SFAS No. 142, also
issued in July 2001, requires that goodwill and other intangible assets no
longer be amortized to earnings, but instead be reviewed for impairment on an
annual basis. The amortization of goodwill ceased upon adoption of the standard.
At December 31, 2001, the amount of unamortized goodwill was $811 million.
Accumulated amortization was approximately $69 million as of December 31, 2001.
The provisions of SFAS No. 142 require adoption as of January 1, 2002 for
calendar year entities. CMS Energy is currently studying the effects of the new
standard, but cannot predict at this time if any amounts will be recognized as
impairments of goodwill or other intangible assets.
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SFAS NO. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS: Issued by the
FASB in August 2001, the provisions of SFAS No. 143 require adoption as of
January 1, 2003. The standard requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which the
obligation is incurred. When the liability is initially recorded, the entity
capitalizes a cost by increasing the carrying amount of the related long-lived
asset. Over time, the liability is accreted to its present value each period,
and the capitalized cost is depreciated over the useful life of the related
asset. Upon settlement of the liability, an entity either settles the obligation
for its recorded amount or incurs a gain or loss upon settlement. CMS Energy is
currently studying the effects of the new standard, but has yet to quantify the
effects of adoption on its financial statements.
SFAS NO. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED
ASSETS: This new standard was issued by the FASB in October 2001, and supersedes
SFAS No. 121. The accounting model for long-lived assets to be disposed of by
sale applies to all long-lived assets, including discontinued operations, and
replaces the provisions of APB Opinion No. 30 for the disposal of segments of a
business. SFAS No. 144 requires that those long-lived assets be measured at the
lower of carrying amount or fair value less cost to sell, whether reported in
continuing operations or in discontinued operations. Therefore, discontinued
operations will no longer be measured at net realizable value or include amounts
for operating losses that have not yet occurred. SFAS No. 144 also broadens the
reporting of discontinued operations to include all components of an entity with
operations that can be distinguished from the rest of the entity and which
components will be eliminated from the ongoing operations of the entity in a
disposal transaction. The adoption of SFAS No. 144, effective January 1, 2002,
will result in CMS Energy accounting for any future impairments or disposals of
long-lived assets under the foregoing provisions, but will not change the
accounting principles used in previous asset impairments or disposals.
DERIVATIVES IMPLEMENTATION GROUP ISSUES: In December 2001, the FASB issued
revised guidance for DIG Statement No. C15 and, in October 2001, issued final
guidance for DIG Statement No. C16. These issues are effective April 1, 2002,
however early application is permitted for DIG Statement No. C15, and CMS Energy
chose to implement the effects of this issue as of December 31, 2001. Upon
initial adoption of the revised guidance in DIG Statement No. C15, CMS Energy
recorded an $11 million, net of tax, cumulative effect adjustment as a decrease
to earnings. CMS Energy has completed its study of DIG Statement No. C16, and
has determined that this issue will not affect the accounting for its fuel
supply contracts. For detailed information about these accounting changes, see
Note 10, Risk Management Activities and Financial Instruments, incorporated by
reference herein.
CAPITAL RESOURCES AND LIQUIDITY
CASH POSITION, INVESTING AND FINANCING
CMS Energy's primary ongoing source of cash is dividends and other
distributions from subsidiaries. In 2001, Consumers paid $189 million in common
dividends and Enterprises paid $470 million in common dividends and other
distributions to CMS Energy. In February 2002, Consumers paid a $55 million
common dividend to CMS Energy. 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. For 2001 and 2000,
consolidated cash from operations after interest charges totaled $417 million
and $453 million, respectively. The $36 million decrease in cash from operations
resulted primarily from decreases in accounts payable and accrued expenses, an
increase in inventories and other temporary changes in working capital items due
to timing of cash receipts and payments. These uses of cash were partially
offset by an increase in distributions from related parties and a decrease in
accounts receivable. CMS Energy uses cash derived from its operating activities
primarily to maintain and expand its diversified energy 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: For 2001 and 2000, CMS Energy's consolidated net cash
used in investing activities totaled $1,126 million and $867 million,
respectively. The $259 million increased use of cash as compared to
CMS-15
2000, primarily reflects a reduction of $519 million from the sales of assets,
partially offset by the proceeds from the LNG monetization of $235 million. CMS
Energy's expenditures during 2001 for its utility and diversified energy
businesses were $768 million and $690 million, respectively, compared to $550
million and $873 million, respectively, during 2000.
FINANCING ACTIVITIES: For 2001 and 2000, CMS Energy's net cash provided by
financing activities totaled $716 million and $464 million, respectively. The
$252 million increase in cash resulted primarily from an increase in the
proceeds from notes, bonds, and other long-term debt ($783 million), a decrease
in the retirement of Trust Preferred Securities ($250 million) and a significant
reduction in the amount of CMS Energy Common Stock repurchased ($123 million).
These changes were partially offset by an increase in the retirement of notes
and other long-term debt ($701 million), a decrease in proceeds from Trust
Preferred Securities ($95 million) and a decrease in proceeds from changes in
notes payable ($121 million). The following table summarizes securities issued
during 2001:
DISTRIBUTION/ PRINCIPAL
MONTH ISSUED MATURITY INTEREST RATE AMOUNT USE OF PROCEEDS
------------ -------- ------------- --------- ---------------
IN MILLIONS
CMS ENERGY
GTN Series F............. (1) (1) 8.16% $ 277 General corporate purposes
Common Stock............. February n/a 10.0 shares 296 Repay debt and general
corporate purposes
Common Stock............. (2) n/a 1.7 shares 43 General corporate purposes
Senior Notes............. March 2011 8.50% 350 Repay debt and general
corporate purposes
Senior Notes............. July 2008 8.90% 269 Repay debt and general
corporate purposes
------
Subtotal................. $1,235
------
CONSUMERS
Trust Preferred
Securities............. May 2031 9.00% $ 125 General corporate purposes
Senior Notes............. September 2006 6.25% 350 General corporate purposes
Securitization Bonds..... November (3) (3) 469 Repay debt and retire equity
------
$ 944
------
PANHANDLE
Senior Notes............. December 2006 7.25% $ 75 General corporate purposes
------
Total.................... $2,254
======
- -------------------------
(1) GTNs are issued from time to time with varying maturity dates. The rate
shown herein is a weighted average interest rate.
(2) CMS Energy Common Stock is issued from time to time in conjunction with the
stock purchase plan and various employee savings and stock incentive plans
of CMS Energy.
(3) The Securitization Bonds mature at different times over a period of 14
years and have a weighted average interest rate of 5.3 percent.
In 2001, CMS Energy paid $189 million in cash dividends to holders of CMS
Energy Common Stock. In February 2002, a quarterly dividend of $.365 per share,
or $49 million in the aggregate, was paid to holders of CMS Energy Common Stock.
OTHER INVESTING AND FINANCING MATTERS: At December 31, 2001, the book value
per share of CMS Energy Common Stock was $14.21.
CMS Energy has $750 million of Senior Credit Facilities consisting of a
$450 million one-year revolving credit facility maturing in June 2002 and a $300
million three-year revolving credit facility maturing in
CMS-16
June 2004. At December 31, 2001, the total amount available under the Senior
Credit Facilities was $448 million. CMS Energy also has $22 million of unsecured
lines of credit as anticipated sources of funds to finance working capital
requirements and to pay for capital expenditures between long-term financings.
At December 31, 2001, the full amount of the unsecured lines of credit was
borrowed. For further information, see Note 7, Long-Term Debt, incorporated by
reference herein.
In January 2002, CMS Energy completed the sale of all of its ownership
interests in Equatorial Guinea for $993 million and used the proceeds primarily
to reduce debt, consistent with its business strategy to strengthen its balance
sheet. CMS Energy plans to continue to pursue the sale of targeted assets
throughout 2002. Even though assets have been identified for sale, management
cannot predict when, nor make assurances regarding the value of the
consideration to be received or even that these sales will occur.
At March 15, 2002, CMS Energy had an aggregate $1.4 billion in securities
registered for future issuance.
Consumers has $300 million credit facilities, $215 million aggregate lines
of credit and a $450 million trade receivable sale program in place as
anticipated sources of funds to fulfill its currently expected capital
expenditures. For detailed information about this source of funds, see Note 6,
Short-Term Financings, incorporated by reference herein.
The following information on CMS Energy's contractual obligations,
commercial commitments and off-balance sheet financings is provided to collect
information in a single location so that a picture of liquidity and capital
resources is readily available.
CONTRACTUAL OBLIGATIONS: The following table provides a summary of the
contractual obligations of CMS Energy as of December 31, 2001. The table
includes cash obligations related to long-term debt, notes payable, lease
obligations, sales of accounts receivable and other unconditional purchase
obligations incurred as a result of normal operations. Unconditional purchase
obligations represent normal business operating contracts used to assure
adequate supply of and minimize exposure to market price fluctuations.
COMMITMENT EXPIRATION
----------------------------------------------------
YEARS ENDING DECEMBER 31 TOTAL 2002 2003 2004 2005 2006 AND LATER
- ------------------------ ----- ---- ---- ---- ---- --------------
IN MILLIONS
On-balance sheet:
Current and Long-Term Debt............. $ 7,890 $ 967 $ 793 $1,171 $468 $ 4,491
Notes Payable.......................... 416 416 -- -- -- --
Capital Lease Obligations (a).......... 86 21 17 13 12 23
Off-balance sheet:
Operating Lease Obligations............ 254 33 30 28 25 138
Sale of Accounts Receivable............ 334 334 -- -- -- --
Unconditional Purchase Obligations..... 18,578 1,312 1,117 959 953 14,237
- -------------------------
(a) Includes imputed interest of $12 million.
Consumers has long-term power purchase agreements with various generating
plants including the MCV Facility. These contracts require monthly capacity
payments based on the plants' availability or deliverability. These payments are
approximately $48 million per month for year 2002, which includes $33 million
related to the MCV Facility. If a plant is not available to deliver electricity
to Consumers, then Consumers would not be obligated to make the capacity payment
until the plant could deliver. See Electric Utility Results of Operations above,
Note 5, Uncertainties, "Power Supply Costs" and "The Midland Cogeneration
Venture", and Note 18, Summarized Financial Information of Significant Related
Energy Supplier, for further information concerning power supply costs. See Note
2, Summary of Significant Accounting Policies and Other Matters, "Related-Party
Transactions" for additional details concerning related party transactions.
CMS-17
COMMERCIAL COMMITMENTS: CMS Energy, Enterprises, and their subsidiaries
have guaranteed payment of obligations, through guarantees, indemnities and
letters of credit, of unconsolidated affiliates and related parties
approximating $1.9 billion as of December 31, 2001, as summarized below.
COMMITMENT EXPIRATION
----------------------------------------------
YEARS ENDING DECEMBER 31 TOTAL 2002 2003 2004 2005 2006 AND LATER
- ------------------------ ----- ---- ---- ---- ---- --------------
IN MILLIONS
Off-balance sheet:
Guarantees..................................... $1,486 $ 25 $-- $-- $-- $1,461
Indemnities.................................... 208 35 5 -- 36 132
Letters of Credit.............................. 222 124 80 18 -- --
Included in the amounts shown above, Enterprises, in the ordinary course of
its business, has guaranteed contracts of CMS MST that contain certain schedule
and performance requirements. As of December 31, 2001, the actual amount of
financial exposure covered by these guarantees and indemnities was $805 million.
Management monitors and approves these obligations and believes it is unlikely
that CMS Energy would be required to perform or otherwise incur any material
losses associated with these guarantees.
OFF-BALANCE SHEET ARRANGEMENTS: CMS Energy, through its subsidiary
companies, has equity investments in partnerships and joint ventures in which
they have a minority ownership interest. At December 31, 2001, CMS Energy's
proportionate share of unconsolidated debt associated with these investments was
$2.9 billion. This unconsolidated debt is non-recourse to CMS Energy and is not
included in the amount of long-term debt that appears on CMS Energy's
Consolidated Balance Sheets.
In December 2001, Panhandle entered into a joint venture transaction that
created CMS Trunkline LNG Holdings, LLC, which owns 100 percent of Trunkline
LNG. LNG Holdings is jointly owned by a subsidiary of Panhandle Eastern Pipe
Line and Dekatherm Investor Trust, an unaffiliated entity. Panhandle initially
contributed its interest in Trunkline LNG to the joint venture. LNG Holdings
then raised $30 million from the issuance of equity to Dekatherm Investor Trust
and $290 million from bank loans. Due to Panhandle's lack of control of the
joint venture, LNG Holdings is not consolidated in the financial statements of
Panhandle and therefore, the debt of the LNG Holdings is not on Panhandle's or
CMS Energy's balance sheet at December 31, 2001.
CAPITAL EXPENDITURES
CMS Energy estimates that capital expenditures, including new lease
commitments and investments in new business developments through partnerships
and unconsolidated subsidiaries, will total $2.9 billion during the years 2002
through 2004. These estimates are prepared for planning purposes and are subject
to revision. CMS Energy expects to satisfy a substantial portion of the capital
expenditures with cash from operations. CMS Energy will continue to evaluate
capital markets in 2002 as a potential source for financing its subsidiaries'
investing activities. CMS Energy estimates capital expenditures by business
segment over the next three years as follows:
YEARS ENDING DECEMBER 31 2002 2003 2004
- ------------------------ ---- ---- ----
IN MILLIONS
Consumers electric utility(a)(b)............................ $448 $405 $ 440
Consumers gas utility(a).................................... 174 165 150
Natural gas transmission.................................... 186 140 140
Independent power production................................ 35 25 85
Oil and gas exploration and production...................... 75 170 175
Marketing, services and trading............................. 8 15 5
Other....................................................... 24 10 5
---- ---- ------
$950(c) $930(c) $1,000(c)
==== ==== ======
- -------------------------
(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.
CMS-18
(b) These amounts include estimates for capital expenditures that may be
required by recent revisions to the Clean Air Act's national air quality
standards. For further information see Note 5, Uncertainties -- Electric
Environmental Matters.
(c) These amounts exclude expenditures associated with the Trunkline LNG
terminal expansion, for which an application was filed with the FERC on
December 26, 2001, estimated at $25 million in 2002, $81 million in 2003
and $49 million in 2004.
For further explanation of CMS Energy's planned investments for the years
2002 through 2004, see the Outlook section below.
MARKET RISK INFORMATION
CMS Energy is exposed to market risks including, but not limited to,
changes in interest rates, currency exchange rates, commodity prices and equity
security prices. CMS Energy's derivative activities are subject to the direction
of the Executive Oversight Committee, which is comprised of certain members of
CMS Energy's senior management, and its Risk Committee, which is comprised of
CMS Energy business unit managers and chaired by the CMS Chief Risk Officer. The
purpose of the risk management policy is to measure and limit CMS Energy's
overall energy commodity risk by implementing an enterprise-wide policy across
all CMS Energy business units. This allows CMS Energy to maximize the use of
hedges among its business units before utilizing derivatives with external
parties. The role of the Risk Committee is to review the corporate commodity
position and ensure that net corporate exposures are within the economic risk
tolerance levels established by the Board of Directors. Management employs
established policies and procedures to manage its risks associated with market
fluctuations, including the use of various derivative instruments such as
futures, swaps, options and forward contracts. When management uses these
derivative instruments, it intends that an opposite movement in the value of the
hedged item would offset any losses incurred on the derivative instruments.
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: CMS Energy is exposed to market fluctuations in the
price of natural gas, oil, electricity, coal, natural gas liquids and other
commodities. CMS Energy employs established policies and procedures to manage
these risks using various commodity derivatives, including futures contracts,
options and swaps (which require a net cash payment for the difference between a
fixed and variable price), for both trading and non-trading purposes. The prices
of these energy commodities can fluctuate because of, among other things,
changes in the supply of and demand for those commodities. To minimize adverse
price changes, CMS Energy also hedges certain inventory and purchases and sales
contracts. Based on a sensitivity analysis, CMS Energy estimates that if energy
commodity prices average 10 percent higher or lower, pretax operating income for
the subsequent twelve months would increase or decrease by $6.3 million and $6.9
million, respectively. These hypothetical 10 percent shifts in quoted commodity
prices would not have had a material impact on CMS Energy's consolidated
financial position or cash flows as of December 31, 2001. The analysis does not
quantify short-term exposure to hypothetically adverse price fluctuations in
inventories.
Consumers enters into, for purposes other than trading, electricity and gas
fuel-for-generation call options and swap contracts. The electric call options
are used to protect against risk due to fluctuations in the market price of
electricity and to ensure a reliable source of capacity to meet its customers'
electric needs. The gas fuel-for-generation call options and swap contracts are
used to protect generation activities against risk due to fluctuations in the
market price of natural gas.
As of December 31, 2001 and 2000, the fair value based on quoted future
market prices of electricity-related call option and swap contracts was $15
million and $126 million, respectively. At December 31, 2001 and 2000,
CMS-19
assuming a hypothetical 10 percent adverse change in market prices, the
potential reduction in fair value associated with these contracts would be $3
million and $16 million, respectively. As of December 31, 2001 and 2000,
Consumers had an asset of $48 million and $86 million, respectively, related to
premiums incurred for electric call option contracts. Consumers' maximum
exposure associated with the call option contracts is limited to the premiums
incurred.
INTEREST RATE RISK: CMS Energy is exposed to interest rate risk resulting
from the issuance of fixed-rate and variable-rate debt, including interest rate
risk associated with Trust Preferred Securities, and from interest rate swaps
and interest rate lock agreements. CMS Energy uses a combination of fixed-rate
and variable-rate debt, as well as interest rate swaps and rate locks to manage
and mitigate interest rate risk exposure when deemed appropriate, based upon
market conditions. CMS Energy employs these strategies to attempt to provide and
maintain the lowest cost of capital. At December 31, 2001, the carrying amounts
of long-term debt and Trust Preferred Securities were $6.9 billion and $1.2
billion, respectively, with corresponding fair values of $6.8 billion and $1.1
billion, respectively. Based on a sensitivity analysis at December 31, 2001, CMS
Energy estimates that if market interest rates average 10 percent higher or
lower, earnings before income taxes for the subsequent twelve months would
decrease or increase, respectively, by approximately $7 million. In addition,
based on a 10 percent adverse shift in market interest rates, CMS Energy would
have an exposure of approximately $382 million to the fair value of its
long-term debt and Trust Preferred Securities if it had to refinance all of its
long-term fixed-rate debt and Trust Preferred Securities. CMS Energy does not
intend to refinance its fixed-rate debt and Trust Preferred Securities in the
near term and believes that any adverse change in interest rates would not have
a material effect on CMS Energy's consolidated financial position as of December
31, 2001.
The fair value of CMS Energy's floating to fixed interest rate swaps at
December 31, 2001, with a notional amount of $295 million, was $11 million,
which represents the amount CMS Energy would pay to settle. The swaps mature at
various times through 2006 and are designated as cash flow hedges for accounting
purposes.
The fair value of CMS Energy's fixed to floating interest rate swaps at
December 31, 2001, with a notional amount of $200 million, was $1 million, which
represents the amount CMS Energy would pay to settle. The swaps mature at
various times through 2005 and are designated as fair value hedges for
accounting purposes.
CURRENCY EXCHANGE RISK: CMS Energy is exposed to currency exchange risk
arising from investments in foreign operations as well as various international
projects in which CMS Energy has an equity interest and which have debt
denominated in U.S. Dollars. CMS Energy uses forward exchange, option contracts
and other risk mitigating instruments to hedge currency exchange rates. The
impact of the hedges on the investments in foreign operations is reflected in
other comprehensive income as a component of foreign currency translation
adjustment. For 2001, the mark-to-market adjustment for hedging was $9 million
of the total net foreign currency translation adjustment of $41 million. Based
on a sensitivity analysis at December 31, 2001, a 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 December 31,
2001, but would result in a net cash settlement of approximately $15 million.
The estimated fair value of the foreign exchange hedges at December 31, 2001,
was $35 million, which represents the amount CMS would receive upon settlement.
In January 2002, the Argentine government repealed the 1991 convertibility
law that established a fixed exchange rate of one U.S. Dollar to one Argentine
Peso. CMS Energy will continue to closely monitor events in Argentina and will
pursue enforceability of all U.S. Dollar denominated contracts. For further
information, see Note 5, Uncertainties, Argentina Economic Emergency,
incorporated by reference herein.
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 securities prices
would not have a material effect on CMS Energy's consolidated financial
position, results of operations or cash flows as of December 31, 2001.
For a discussion of accounting policies related to derivative transactions,
see Note 10, Risk Management Activities and Financial Instruments, incorporated
by reference herein.
CMS-20
OUTLOOK
CMS Energy's vision is to be an integrated energy company with a strong
asset base, supplemented with an active marketing, services and trading
capability. CMS Energy intends to integrate the skills and assets of its
business units to obtain optimal returns and to provide expansion opportunities.
To achieve this vision, CMS Energy announced in October 2001 significant
changes in its business strategy in order to strengthen its balance sheet,
provide more transparent and predictable future earnings, and lower its business
risk by focusing its future business growth primarily in North America.
Specifically, CMS Energy announced its plans to sell or optimize non-strategic
and under-performing international assets and discontinue its international
energy distribution business. CMS Energy also announced its plans to discontinue
all new development outside North America, which includes closing all non-U.S.
development offices, except for exploration and production projects and prior
commitments in the Middle East.
Consistent with this refocused business strategy, CMS Energy has pursued
the sale of non-strategic and under-performing assets and the optimization of
retained assets. In November 2001, a special purpose consolidated subsidiary of
Consumers issued $469 million of Securitization Bonds, which are asset-backed
bonds with a higher credit rating than Consumers conventional corporate bonds.
In December 2001, CMS Energy completed a previously announced $320 million
monetization of its Trunkline LNG business and the value created by long-term
contracts for capacity at the Trunkline LNG Lake Charles, Louisiana terminal. In
January 2002, CMS Energy completed the sale of its assets in Equatorial Guinea,
Africa, for $993 million. The majority of the net proceeds from these
transactions were used to retire debt of CMS Energy, Consumers and Panhandle.
Upon the sale of additional non-strategic and under-performing assets, the
proceeds realized may be materially different than the book value of those
assets. Even though these assets have been identified for sale, management
cannot predict when, nor make any assurances that, these asset sales will occur.
CMS Energy anticipates, however, that the sales, if any, will result in
additional cash proceeds that will be used to retire additional debt of CMS
Energy, Consumers and/or Panhandle.
Consistent with changes in its business strategy, CMS Energy will continue
to sharpen its geographic focus on key growth areas where it already has
significant investments and opportunities. As a result, CMS Energy's focus will
be in North America, particularly in the United States' central corridor, and in
certain existing international operations including commitments in the Middle
East. At the plan's completion, approximately 90% of CMS Energy's assets are
expected to be in North America.
CMS Energy is currently evaluating longer-term growth initiatives,
including acquisitions and joint ventures in CMS Energy's North American
diversified energy businesses, and expanded and new North American LNG
regasification terminals.
DIVERSIFIED ENERGY OUTLOOK
NATURAL GAS TRANSMISSION OUTLOOK: CMS Energy seeks to build on Panhandle's
position as a leading United States interstate natural gas pipeline system and
its significant ownership interest in and operation of the nation's largest
operating LNG receiving terminal through expansion and optimal utilization of
its existing facilities and construction of new facilities. By providing
additional transportation, storage and other asset-based value-added services to
customers such as gas-fueled power plants, local distribution companies,
industrial and end-users, marketers and others, CMS Energy expects to expand its
natural gas pipeline business. Panhandle has a one-third interest in Guardian
Pipeline LLC, which is currently constructing a 141-mile, 36 inch pipeline from
Illinois to southeastern Wisconsin for the transportation of natural gas
beginning late 2002. Upon completion of the project, Trunkline will operate and
maintain the pipeline. Panhandle also has a one-third interest in the Centennial
Pipeline Company which is converting an existing 720-mile, 26 inch pipeline
extending from the U.S. Gulf Coast to Illinois for the transportation of
interstate refined petroleum products. The pipeline is expected to begin full
commercial service in April 2002.
In May 2001, Trunkline LNG signed an agreement with BG LNG Services that
provides for a 22-year contract, beginning January 2002, for all the uncommitted
capacity at the Lake Charles facility. The 22-year contract, in conjunction with
new rates effective January 2002, will result in reduced revenues for Trunkline
LNG
CMS-21
from 2001 levels but less earnings volatility. In October 2001, Trunkline LNG
announced the planned expansion of the Lake Charles, Louisiana LNG facility to
approximately 1.2 bcf per day of send out capacity, up from its current send out
capacity of 630 million cubic feet per day. The terminal's storage capacity will
also be expanded to 9 bcf from its current storage capacity of 6.3 bcf. Assuming
FERC approval, the expanded facility is planned to be in operation in early
2005. The expansion expenditures are currently expected to be funded by
Panhandle loans to CMS Trunkline LNG Holdings, which will be sourced by
repayments by CMS Capital to Panhandle on its outstanding note receivable. In
late December, Panhandle completed a previously announced $320 million
monetization of the Trunkline LNG business and the value created by long-term
contracts for capacity at the facility. The joint venture transaction will
result in a reduced share of Trunkline LNG's income and distributions being
received by Panhandle due to the service of debt on the books of the joint
venture as well as a reduced equity ownership in the project, partially offset
by lower consolidated interest expense due to Panhandle debt being retired with
the proceeds generated by the transaction.
In October 2001, CMS Energy and Sempra Energy announced an agreement to
jointly develop a major new LNG receiving terminal to bring much-needed natural
gas supplies into northwestern Mexico and southern California. The plant will be
located on the Pacific Coast, north of Ensenada, Baja California, Mexico. As
currently planned, it will have a send out capacity of approximately 1 bcf per
day of natural gas through a new 40-mile pipeline between the terminal and
existing pipelines in the region. The terminal will be operated and maintained
by a joint operating company with majority oversight by Panhandle upon its
completion, which is expected in 2006.
In April 2001, FERC approved Trunkline's rate settlement without
modification. The settlement resulted in Trunkline reducing its maximum rates in
May 2001. The reduction is expected to reduce revenues by approximately $2
million annually.
INDEPENDENT POWER PRODUCTION OUTLOOK: CMS Energy's independent power
production subsidiary plans to complete the restructuring of its operations
during 2002 by narrowing the scope of its existing operations and commitments
from four regions to two regions: the U.S. and the Middle East/North Africa. In
addition, its plans include selling designated assets and investments that are
under-performing, non-region focused and non-synergistic with other CMS Energy
business units. The independent power production business unit will continue to
optimize the operations and management of its remaining portfolio of assets in
order to contribute to CMS Energy's earnings and to maintain its reputation for
solid performance in the construction and operation of power plants. CMS Energy
is actively pursuing the sale, full liquidation, or other disposition of several
of its designated assets and investments, but management cannot predict when,
nor make any assurances that, these asset and investment sales will occur.
OIL AND GAS EXPLORATION AND PRODUCTION OUTLOOK: CMS Energy seeks to
optimize its significant natural gas exploration, development and production
properties in North America. CMS Energy also seeks to explore for, or acquire,
natural gas reserves in North America where integrated development opportunities
exist with other CMS Energy businesses involved in gathering, processing and
pipeline activities. CMS Energy plans to further explore and develop its oil and
gas assets in the Republic of Congo, Eritrea, Tunisia, Cameroon, Colombia and
Venezuela.
In January 2002, CMS Energy completed the sale of its ownership interests
in Equatorial Guinea to Marathon Oil Company for approximately $993 million.
Included in the sale were all of CMS Oil and Gas' oil and gas reserves in
Equatorial Guinea and CMS Gas Transmission's ownership interest in the related
methanol plant.
MARKETING, SERVICES AND TRADING OUTLOOK: CMS Energy intends to use its
marketing, services and trading business to focus on customers such as LDC's,
municipals, cooperative electric companies, and industrial and commercial
businesses in selected locations in North America. CMS Energy's marketing and
trading business also intends to contract for use of significant gas
transportation and storage assets as well as energy and generating capacity in
North America to provide a platform for wholesale marketing, trading, and
physical arbitrage. CMS Energy also seeks to continue developing importing and
marketing opportunities for LNG. CMS Energy plans to capitalize on favorable
market conditions for energy performance contracting by expanding its services
business in selected markets.
CMS-22
Recent events related to very large market makers in the energy trading
market have raised concerns about liquidity in this market. Management cannot
predict what effect these events may have on the liquidity of the trading
markets in the short-term, but believes the markets will be stable and grow over
the long term.
UNCERTAINTIES: The results of operations and financial position of CMS
Energy's diversified energy businesses may be affected by a number of trends or
uncertainties that have, or CMS Energy reasonably expects could have, a material
impact on income from continuing operations, cash flows as well as balance sheet
and credit improvement. Such trends and uncertainties include: 1) the ability to
sell or optimize assets or businesses in accordance with its financial plan; 2)
the international monetary fluctuations, particularly in Argentina, as well as
Brazil and Australia; 3) the changes in foreign laws, governmental and
regulatory policies that could significantly reduce the tariffs charged and
revenues recognized by certain foreign investments; 4) the imposition of stamp
taxes on certain South American contracts that could significantly increase
project expenses; 5) the effects of changing regulatory and accounting-related
matters resulting from current events; 6) the increased competition in the
market for transmission of natural gas to the Midwest causing pressure on prices
charged by Panhandle; and 7) the ability of CMS MST to improve its credit
standing, which is an important component of future business growth and
expansion opportunities.
Since the September 11, 2001 terrorist attack in the United States, CMS
Energy has increased security at substantially all facilities and
infrastructure, and will continue to evaluate security on an ongoing basis. CMS
Energy may be required to comply with federal and state regulatory security
measures promulgated in the future. As a result, CMS Energy anticipates that
increased operating costs related to security after September 11, 2001 could be
significant. It is not certain that any additional costs will be recovered in
Consumers' or Panhandle's rates.
Rouge Steel Company, with whom DIG has contracted to sell steam for
industrial use and purchase blast furnace gas as fuel at prices significantly
less than the cost of natural gas, is considering altering certain of its
operational processes as early as mid-2004. These alterations could have an
adverse operational and financial impact on DIG by significantly reducing Rouge
Steel Company's demands for steam from DIG and its ability to provide DIG with
economical blast furnace gas. However, these alterations may result in
additional electric sales to Rouge Steel Company. CMS Energy is currently
assessing these potential operational and financial impacts and DIG is
evaluating alternatives to its current contractual arrangements with Rouge Steel
Company, but CMS Energy cannot predict the ultimate outcome of these matters at
this time.
For further information, see Note 5, Uncertainties.
CONSUMERS' ELECTRIC UTILITY BUSINESS OUTLOOK
GROWTH: Over the next five years, Consumers expects electric deliveries
(including both full service sales and delivery service to customers who choose
to buy generation service from an alternative electric supplier) to grow at an
average rate of approximately two percent per year based primarily on a steadily
growing customer base. This growth rate reflects a long-range expected trend of
growth. Growth from year to year may vary from this trend due to customer
response to abnormal weather conditions and changes in economic conditions
including, utilization and expansion of manufacturing facilities.
COMPETITION AND REGULATORY RESTRUCTURING: Regulatory changes and other
developments have resulted and will continue to result in increased competition
in the electric business. Generally, increased competition threatens Consumers'
share of the market for generation services and can reduce profitability.
Competition is increasing as a result of the introduction of retail open access
in the state of Michigan pursuant to the enactment of Michigan's Customer Choice
Act, and therefore, alternative electric suppliers for generation services have
entered Consumers' market. The Customer Choice Act allows all electric customers
to have the choice of buying electric generation service from an alternative
electric supplier as of January 1, 2002. To the extent Consumers experiences
"net" Stranded Costs as a result of customers switching to an alternative
electric supplier, the Customer Choice Act provides for the recovery of such
related "net" Stranded Costs through a surcharge that would be paid by those
customers that choose to switch to an alternative electric supplier.
CMS-23
Stranded and Implementation Costs: The Customer Choice Act allows for the
recovery by an electric utility of the cost of implementing the act's
requirements and "net" Stranded Costs, without defining the term. The act
directs the MPSC to establish a method of calculating "net" Stranded Costs and
of conducting related true-up adjustments. In December 2001, the MPSC adopted a
methodology for calculating "net" Stranded Costs as the shortfall between (a)
the revenue needed to cover the costs associated with fixed generation assets,
generation-related regulatory assets, and capacity payments associated with
purchase power agreements and (b) the revenues received from retail and
wholesale customers under existing rates available to cover those revenue needs.
According to the MPSC, "net" Stranded Costs are to be recovered from retail open
access customers through a Stranded Cost surcharge. Even though the MPSC ruled
that the Stranded Cost surcharge to be in effect on January 1, 2002 for the
recovery of "net" Stranded Costs for calendar year 2000 for Consumers is zero,
the MPSC also indicated that the "net" Stranded Costs for 2000 would be subject
to further review in the context of its subsequent determinations of "net"
Stranded Costs for 2001 and later years. The MPSC authorized Consumers to use
deferred accounting to recognize the future recovery of assets determined to be
stranded by application of the MPSC's methodology. Consumers is seeking a
rehearing and clarification of the methodology adopted, and will be making
future "net" Stranded Cost filings with the MPSC in March or April of 2002. The
outcome of these proceedings before the MPSC is uncertain at this time.
Between 1999 and 2001, Consumers filed applications with the MPSC for the
recovery of electric utility restructuring implementation costs of $75 million,
incurred between 1997 and 2000. Consumers received final orders that granted
recovery of $41 million of restructuring implementation costs for the years 1997
through 1999, and disallowed recovery of $10 million, based upon a conclusion
that this amount did not represent costs incremental to costs already reflected
in rates. Consumers expects to receive a final order for the 2000 restructuring
implementation costs in 2002. In the orders received for the years 1997 through
1999, the MPSC also ruled that it reserved the right to undertake another review
of the total restructuring implementation costs depending upon the progress and
success of the retail open access program and ruled that due to the rate freeze
imposed by the Customer Choice Act, it was premature to establish a cost
recovery method for the allowable costs. For the year 2001, Consumers incurred,
and deferred as a regulatory asset, an additional $8 million in implementation
costs for which an application for recovery will be filed with the MPSC in 2002.
In addition, Consumers has recorded as a regulatory asset $9 million for the
cost of money associated with restructuring implementation costs. Consumers
believes the restructuring implementation costs and the associated cost of money
are fully recoverable in accordance with the Customer Choice Act; however,
Consumers cannot predict the amounts the MPSC will approve as recoverable costs.
Rate Caps: The Customer Choice Act imposes certain limitations on rates
that could result in Consumers being unable to collect customer rates sufficient
to fully recover its cost of conducting business. Some of these costs may be
beyond Consumers' ability to control. In particular, if Consumers needs to
purchase power supply from wholesale suppliers during the period when retail
rates are frozen or capped, the rate restrictions imposed by the Customer Choice
Act may make it impossible for Consumers to fully recover the cost of purchased
power through the rates it charges its customers. As a result, it is not certain
that Consumers can maintain its profit margins in its electric utility business
during the period of the rate freeze or rate caps.
Industrial Contracts: In response to industry restructuring efforts,
Consumers entered into multi-year electric supply contracts with certain of its
largest industrial customers to provide electricity to certain of their
facilities at specially negotiated prices. The MPSC approved these special
contracts as part of its phased introduction to competition. During the period
from 2001 through 2005, either Consumers or these industrial customers can
terminate or restructure some of these contracts. As of December 2001, neither
Consumers nor any of its industrial customers have terminated or restructured
any of these contracts, but some contracts have expired by their terms.
Outstanding contracts involve approximately 510 MW of customer power supply
requirements. Consumers cannot predict the ultimate financial impact of changes
related to these power supply contracts, or whether additional contracts will be
necessary or advisable.
Code of Conduct: In December 2000, as a result of the passage of the
Customer Choice Act, the MPSC issued a new code of conduct that applies to
electric utilities and alternative electric suppliers. The code of conduct seeks
to prevent cross-subsidization, information sharing and preferential treatment
between a utility's regulated and unregulated services. The new code of conduct
is broadly written, and as a result could affect
CMS-24
Consumers' retail gas business, the marketing of unregulated services and
equipment to customers in Michigan, and internal transfer pricing between
Consumers' departments and affiliates. The new code of conduct was recently
reaffirmed without substantial modification, and will become operationally
effective after the MPSC reviews and approves a utility's compliance plans and
requests for waivers. Consumers appealed the MPSC orders related to the code of
conduct and sought a stay of the orders until the appeal was complete; however,
the request for a stay was denied. Consumers has filed a compliance plan in
accordance with the code of conduct, and has sought waivers to the code of
conduct with respect to utility activities that provide approximately $50
million in annual revenues that may be restricted. The full impact of the new
code of conduct on Consumers' business will remain uncertain until the appellate
courts issue definitive rulings or the MPSC rules on the waivers.
Energy Policy: Uncertainty exists with respect to the enactment of a
national comprehensive energy policy, specifically federal electric industry
restructuring legislation. A variety of bills introduced in Congress in recent
years have sought to change existing federal regulation of the industry. If the
federal government enacts a comprehensive energy policy or legislation
restructuring the electric industry, then that legislation could potentially
affect or even supercede state regulation.
Transmission: In 1999, in part because of the provisions of certain policy
pronouncements by the FERC designed to encourage utilities to either transfer
operating control of their transmission facilities to an RTO or sell their
transmission facilities to an independent company, Consumers joined a coalition
of companies known as the Alliance companies for the purpose of creating a
FERC-approved RTO. In December 2001, the FERC denied the RTO plan submitted by
the Alliance companies and ordered the Alliance companies to explore membership
in the Midwest ISO, whose RTO plan was approved by the FERC. Membership in the
Midwest ISO could potentially increase Consumers' costs during the period of the
rate freeze or rate caps where Consumers could not raise retail electric rates
in Michigan. Consumers and METC are evaluating their options regarding RTO
membership as a result of the December 2001 FERC order.
In January 2001, the FERC granted Consumers' application to transfer
ownership and control of its electric transmission facilities to METC, and in
April 2001 the transfer took place. In October 2001, Consumers executed an
agreement to sell METC for approximately $290 million, depending on the final
date of the sale, to MTH, a non-affiliated limited partnership whose general
partner is a subsidiary of Trans-Elect, Inc. Certain of Trans-Elect's officers
and directors are former officers and directors of CMS Energy, Consumers and
certain of their subsidiaries, but all had left the employment of such
affiliates prior to the period when the transaction was discussed internally and
negotiated with purchasers. Trans-Elect, Inc. submitted the winning bid to
purchase METC through a competitive bidding process, and the transaction is
subject to approval by various federal agencies. Consumers is not providing any
financial or credit support to Trans-Elect, Inc. in connection with the purchase
of METC. Proceeds from the sale of METC will be used to improve Consumers'
balance sheet. Consumers chose to sell its transmission facilities as a form of
compliance with Michigan's Customer Choice Act and FERC Order No. 2000 rather
than own and invest in an asset that it cannot control. After selling its
transmission facilities, Consumers anticipates a reduction in after-tax earnings
of approximately $6 million and $14 million in 2002 and 2003, respectively, as a
result of the loss in revenue associated with wholesale and retail open access
customers that would buy services directly from MTH and the loss of a return on
the transmission assets upon the sale of METC to MTH. Under the agreement with
MTH, and subject to certain additional RTO surcharges, transmission rates
charged to Consumers will be fixed at current levels until December 2005, and
will be subject to FERC ratemaking thereafter. Consumers, through METC, will
continue to own and operate the transmission system until the companies meet all
conditions of closing, including approval of the transaction by the FERC. In
February 2002, MTH and Consumers received conditional approval of the
transaction from the FERC. Consumers and Trans-Elect, Inc. have petitioned for
rehearing to resolve certain remaining issues. Trans-Elect, Inc. has also
submitted filings to the FERC designed to bring it into the Midwest ISO and to
establish rates to be charged over the Trans-Elect, Inc. owned system. Final
regulatory approvals and operational transfer are expected to take place in the
first or second quarter of 2002; however, Consumers can make no assurances as to
when or whether the transaction will be completed. For further information, see
Note 5, Uncertainties, "Electric Rate Matters -- Transmission Business."
CMS Energy cannot predict the outcome of these electric
industry-restructuring issues on its financial position, liquidity, or results
of operations.
CMS-25
PERFORMANCE STANDARDS: In July 2001, the MPSC proposed electric
distribution performance standards applicable to Consumers and other Michigan
distribution utilities. The proposal would establish standards related to
restoration after an outage, safety, and customer relations. Failure to meet the
proposed performance standards would result in customer bill credits. Consumers
submitted comments to the MPSC. In December 2001, the MPSC issued an order
stating its intent to initiate a formal rulemaking proceeding to develop and
adopt performance standards. Consumers will continue to participate in this
process. Consumers cannot predict the outcome of the proposed performance
standards or the likely effect, if any, on Consumers.
For further information and material changes relating to the rate matters
and restructuring of the electric utility industry, see Note 2, Summary of
Significant Accounting Policies and Other Matters, and Note 5, Uncertainties,
"Electric Rate Matters -- Electric Restructuring" and "Electric Rate
Matters -- Electric Proceedings."
NUCLEAR MATTERS: In June 2001, an unplanned outage began at Palisades that
negatively affected power supply costs in the third and fourth quarter of 2001.
On June 20, 2001, the Palisades reactor was shut down so technicians could
inspect a small steam leak on a control rod drive assembly. In August 2001,
Consumers completed an expanded inspection that included all similar control rod
drive assemblies and elected to completely replace the defective components. In
December 2001, installation of the new components was completed and the plant
returned to service on January 21, 2002. For further information and material
changes relating to nuclear matters, see Note 5, Uncertainties, "Other Electric
Uncertainties -- Nuclear Matters."
UNCERTAINTIES: Several electric business trends or uncertainties may affect
Consumers' financial results and condition. These trends or uncertainties have,
or Consumers reasonably expects could have, a material impact on net sales,
revenues, or income from continuing electric operations. Such trends and
uncertainties include: 1) the need to make additional capital expenditures and
increase operating expenses for compliance with the Clean Air Act; 2)
environmental liabilities arising from various federal, state and local
environmental laws and regulations, including potential liability or expenses
relating to the Michigan Natural Resources and Environmental Protection Acts and
Superfund; 3) uncertainties relating to the storage and ultimate disposal of
spent nuclear fuel and the successful operation of the Palisades plant by NMC;
4) electric industry restructuring issues, including those described above; 5)
Consumers' ability to meet peak electric demand requirements at a reasonable
cost, without market disruption, and initiatives undertaken to reduce exposure
to electric price increases for purchased power; 6) the restructuring of the
MEPCC and the termination of joint merchant operations with Detroit Edison; 7)
Consumers' ability to sell wholesale power at market-based rates; 8) the
recovery of electric restructuring implementation costs; 9) sufficient reserves
for OATT rate refunds; and 10) the effects of derivative accounting and
potential earnings volatility. For detailed information about these trends or
uncertainties, see Note 5, Uncertainties.
CONSUMERS' GAS UTILITY BUSINESS OUTLOOK
GROWTH: Over the next five years, Consumers anticipates gas deliveries,
including gas customer choice deliveries (excluding transportation to the MCV
Facility and off-system deliveries), to grow at an average of about one percent
per year based primarily on a steadily growing customer base. Actual gas
deliveries in future periods may be affected by abnormal weather, alternative
electric costs, changes in competitive and economic conditions, and the level of
natural gas consumption per customer.
GAS RATE CASE: In June 2001, Consumers filed an application with the MPSC
seeking a distribution service rate increase. Contemporaneously with this
filing, Consumers requested partial and immediate relief in the annual amount of
$33 million. In October 2001, Consumers revised its filing to reflect lower
operating costs and is now requesting a $133 million annual distribution service
rate increase. In December 2001, the MPSC authorized a $15 million annual
interim increase in distribution service revenues. In February 2002, Consumers
revised its filing to reflect lower estimated gas inventory prices and revised
depreciation expense and is now requesting a $105 million distribution service
rate increase. For further information, see Note 5, Uncertainties "Gas Rate
Case".
UNBUNDLING STUDY: In July 2001, the MPSC directed gas utilities under its
jurisdiction to prepare and file an unbundled cost of service study. The purpose
of the study is to allow parties to advocate or oppose the
CMS-26
unbundling of the following services: metering, billing information,
transmission, balancing, storage, backup and peaking, and customer turn-on and
turn-off services. Unbundled services could be separately priced in the future
and made subject to competition by other providers. The subject is likely to
remain the topic of further study by the utilities in 2002 and under further
consideration by the MPSC. CMS Energy cannot predict the outcome of unbundling
costs on its financial results and conditions.
UNCERTAINTIES: Several gas business trends or uncertainties may affect
Consumers' financial results and conditions. These trends or uncertainties have,
or Consumers reasonably expects could have, a material impact on net sales,
revenues, or income from continuing gas operations. Such trends and
uncertainties include: 1) potential environmental costs at a number of sites,
including sites formerly housing manufactured gas plant facilities; 2) future
gas industry restructuring initiatives; 3) any initiatives undertaken to protect
customers against gas price increases; and 4) market and regulatory responses to
increases in gas costs. For further information about these uncertainties, see
Note 5, Uncertainties.
CONSUMERS' OTHER OUTLOOK
ENERGY-RELATED SERVICES: Consumers offers a variety of energy-related
services to retail customers that focus on appliance maintenance, home safety,
commodity choice and assistance to customers purchasing heating, ventilation and
air conditioning equipment. Consumers continues to look for additional growth
opportunities in providing energy-related services to its customers. The ability
to offer all or some of these services and other utility related revenue
generating services, which provide approximately $50 million in annual revenues,
may be restricted by the new code of conduct issued by the MPSC as discussed
above in Electric Business Outlook, "Competition and Regulatory
Restructuring -- Code of Conduct."
PENSION AND OPEB COSTS: Consumers provides post retirement benefits under
its Pension Plan, and post retirement health and life benefits under its OPEB
plan to substantially all its employees. Pension and OPEB plan assets, net of
contributions, have reduced in value from the previous year due to a downturn in
the equities market. As a result, Consumers expects to see an increase in
pension and OPEB expense levels over the next few years unless market
performance improves. Consumers anticipates pension expense and OPEB expense to
rise in 2002 by approximately $10 million and $20 million, respectively, over
2001 expenses. For pension expense, this increase is due to underperformance of
pension assets during the past two years, forecasted increases in pay and added
service, decline in the interest rate used to value the liability of the plan,
and expiration of the transition gain amortization. For OPEB expense, the
increase is due to the trend of rising health care costs, the market return on
plan assets being below expected levels and a lower discount rate, based on
recent economic conditions, used to compute the benefit obligation. Health care
cost decreases gradually under the assumptions used in the OPEB plan from
current levels through 2009; however, Consumers cannot predict the impact that
interest rates or market returns will have on pension and OPEB expense in the
future. For further information, see Note 13, Retirement Benefits.
OTHER MATTERS
CHANGE IN PAID PERSONAL ABSENCES PLAN: During the first and third quarters
of 2000, Consumers implemented the results of a change in its paid personal
absences plan, in part due to provisions of a new union labor contract. The
change resulted in employees receiving the benefit of paid personal absence
immediately at the beginning of each fiscal year, rather than earning it in the
previous year. The change for non-union employees affected the first quarter of
2000. The change for union employees affected the third quarter of 2000. The
total effect of these one-time changes decreased operating expenses by $16
million collectively, and increased earnings, net of tax, by $6 million in the
first quarter and $4 million in the third quarter.
CMS-27
CMS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31
--------------------------
2001 2000 1999
---- ---- ----
IN MILLIONS
OPERATING REVENUE
Electric utility.......................................... $2,631 $2,676 $2,667
Gas utility............................................... 1,338 1,196 1,156
Natural gas transmission.................................. 1,053 906 785
Independent power production.............................. 388 503 390
Oil and gas exploration and production.................... 212 136 98
Marketing, services and trading........................... 3,953 3,294 799
Other..................................................... 22 28 31
------ ------ ------
9,597 8,739 5,926
------ ------ ------
OPERATING EXPENSES
Operation
Fuel for electric generation........................... 355 408 406
Purchased and interchange power -- Marketing, services
and trading........................................... 1,462 1,457 108
Purchased and interchange power........................ 500 428 319
Purchased power -- related parties..................... 539 555 560
Cost of gas sold -- Marketing, services and trading.... 2,112 1,734 700
Cost of gas sold....................................... 1,259 967 846
Other operating expenses............................... 1,417 1,018 987
------ ------ ------
7,644 6,567 3,926
Maintenance............................................... 263 295 213
Depreciation, depletion and amortization.................. 530 605 575
General taxes............................................. 231 240 237
Loss contracts and reduced asset valuations............... 628 329 84
------ ------ ------
9,296 8,036 5,035
------ ------ ------
PRETAX OPERATING INCOME (LOSS)
Electric utility.......................................... 339 481 494
Gas utility............................................... 99 98 132
Natural gas transmission.................................. 207 227 148
Independent power production.............................. 121 192 160
Oil and gas exploration and production.................... 74 31 17
Marketing, services and trading........................... 71 14 4
Other..................................................... 18 (11) 20
Loss contracts and reduced asset valuations............... (628) (329) (84)
------ ------ ------
301 703 891
------ ------ ------
OTHER INCOME (DEDUCTIONS)
Accretion expense......................................... (37) (33) (27)
Gain on asset sales, net of foreign currency translation
losses of $25 in 2000.................................. 11 84 42
Other, net................................................ 15 12 34
------ ------ ------
(11) 63 49
------ ------ ------
EARNINGS BEFORE INTEREST AND TAXES.......................... 290 766 940
------ ------ ------
FIXED CHARGES
Interest on long-term debt................................ 573 591 502
Other interest............................................ 58 38 62
Capitalized interest...................................... (38) (48) (41)
Preferred dividends....................................... 2 2 6
Preferred securities distributions........................ 96 93 56
------ ------ ------
691 676 585
------ ------ ------
CMS-28
YEARS ENDED DECEMBER 31
--------------------------
2001 2000 1999
---- ---- ----
IN MILLIONS
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
AND MINORITY INTERESTS.................................... (401) 90 355
INCOME TAXES (BENEFITS)..................................... (73) 50 63
MINORITY INTERESTS.......................................... 3 2 1
------ ------ ------
INCOME (LOSS) FROM CONTINUING OPERATIONS.................... (331) 38 291
DISCONTINUED OPERATIONS, NET OF TAX BENEFIT OF $12.......... (185) 3 (14)
------ ------ ------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE AND EXTRAORDINARY ITEM............... (516) 41 277
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND TREATMENT OF INVENTORY, NET OF TAX
BENEFITS OF $6 AND $2, RESPECTIVELY....................... (11) (5) --
------ ------ ------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM..................... (527) 36 277
EXTRAORDINARY ITEM, NET OF TAX BENEFIT OF $10............... (18) -- --
------ ------ ------
CONSOLIDATED NET INCOME (LOSS).............................. $ (545) $ 36 $ 277
====== ====== ======
IN MILLIONS,
EXCEPT PER SHARE AMOUNTS
CMS ENERGY
NET INCOME (LOSS)
Net Income (Loss) Attributable to Common Stock......... $ (545) $ 36 $ 269
Premium on Redemption of Class G Stock................. -- -- (28)
------ ------ ------
Net Income (Loss) Available to Common Stock............ $ (545) $ 36 $ 241
====== ====== ======
BASIC EARNINGS (LOSS) PER AVERAGE COMMON SHARE
Income (Loss) from Continuing Operations............... $(2.76) $ 0.30 $ 2.44
Income (Loss) from Discontinued Operations............. (1.41) 0.02 --
------ ------ ------
Net Income (Loss) Attributable to Common Stock......... $(4.17) $ 0.32 $ 2.44
Premium on Redemption of Class G Stock................. -- -- (0.26)
------ ------ ------
Net Income (Loss) Available to Common Stock............ $(4.17) $ 0.32 $ 2.18
====== ====== ======
DILUTED EARNINGS (LOSS) PER AVERAGE COMMON SHARE
Income (Loss) from Continuing Operations............... $(2.76) $ 0.30 $ 2.42
Income (Loss) from Discontinued Operations............. (1.41) 0.02 --
------ ------ ------
Net Income (Loss) Attributable to Common Stock......... $(4.17) $ 0.32 $ 2.42
Premium on Redemption of Class G Stock................. -- -- (0.25)
------ ------ ------
Net Income (Loss) Available to Common Stock............ $(4.17) $ 0.32 $ 2.17
====== ====== ======
DIVIDENDS DECLARED PER COMMON SHARE....................... $ 1.46 $ 1.46 $ 1.39
CLASS G
NET INCOME
Net Income Attributable to Common Stock................ $ -- $ -- $ 8
Premium on Redemption of Class G Stock................. -- -- 28
------ ------ ------
Net Income Available to Common Stock................... $ -- $ -- $ 36
====== ====== ======
BASIC EARNINGS PER AVERAGE COMMON SHARE
Net Income Attributable to Common Stock................ $ -- $ -- $ 0.90
Premium on Redemption of Class G Stock................. -- -- 3.31
------ ------ ------
Net Income Available to Common Stock................... $ -- $ -- $ 4.21
====== ====== ======
DILUTED EARNINGS PER AVERAGE COMMON SHARE
Net Income Attributable to Common Stock................ $ -- $ -- $ 0.90
Premium on Redemption of Class G Stock................. -- -- 3.31
------ ------ ------
Net Income Available to Common Stock................... $ -- $ -- $ 4.21
====== ====== ======
DIVIDENDS DECLARED PER COMMON SHARE....................... $ -- $ -- $ 0.99
------ ------ ------
The accompanying notes are an integral part of these statements.
CMS-29
CMS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
-----------------------------
2001 2000 1999
---- ---- ----
IN MILLIONS
CASH FLOWS FROM OPERATING ACTIVITIES
Consolidated net income (loss)............................ $ (545) $ 36 $ 277
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation, depletion and amortization (includes
nuclear decommissioning of $6, $39 and $50,
respectively)......................................... 524 637 595
Loss contracts and reduced asset valuations (Note 4)... 628 329 84
Discontinued operations (Note 3)....................... 185 (3) (14)
Capital lease and debt discount amortization........... 20 34 35
Accretion expense...................................... 37 33 27
Accretion income....................................... -- (2) (4)
Distributions from related parties in excess of (less
than) earnings........................................ 58 (171) (45)
Cumulative effect of accounting change................. 11 7 --
Gain on sale of assets, net of foreign currency
translation losses.................................... (11) (84) (42)
Changes in assets and liabilities:
Decrease (increase) in accounts receivable........... 68 (398) (268)
Increase in inventories.............................. (353) (54) (5)
Increase (decrease) in accounts payable and accrued
expenses............................................ (94) 181 300
Increase in deferred income taxes and investment tax
credit.............................................. 135 8 10
Change in Regulatory obligation -- gas choice........ (24) 33 --
Decrease (increase) in currency translation
adjustment.......................................... (41) (147) 28
Increase in derivative/hedging capital............... (26) -- --
Change in postretirement benefits, net............... (81) 60 22
Changes in other assets and liabilities.............. (74) (46) (83)
------- ------- -------
Net cash provided by operating activities.............. 417 453 917
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under capital
lease)................................................. (1,262) (1,032) (1,124)
Investments in partnerships and unconsolidated
subsidiaries........................................... (173) (344) (380)
Cost to retire property, net.............................. (75) (56) (93)
Investments in nuclear decommissioning trust funds........ (6) (39) (50)
Proceeds from nuclear decommissioning trust funds......... 29 37 43
Acquisition of companies, net of cash acquired............ -- (74) (1,938)
Proceeds from LNG monetization............................ 235 -- --
Proceeds from sale of property............................ 110 629 69
Other..................................................... 16 12 (91)
------- ------- -------
Net cash used in investing activities.................. (1,126) (867) (3,564)
------- ------- -------
CMS-30
YEARS ENDED DECEMBER 31
-----------------------------
2001 2000 1999
---- ---- ----
IN MILLIONS
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes, bonds and other long-term debt....... 1,847 1,064 2,836
Proceeds from trust preferred securities.................. 125 220 726
Issuance of common stock.................................. 339 332 90
Retirement of bonds and other long-term debt.............. (1,392) (691) (499)
Retirement of trust preferred securities.................. -- (250) --
Retirement of common stock................................ -- (16) (2)
Retirement of preferred stock............................. -- -- (194)
Repurchase of common stock................................ (6) (129) --
Payment of common stock dividends......................... (189) (167) (163)
Payment of capital lease obligations...................... (20) (32) (19)
Increase (decrease) in notes payable, net................. 12 133 (97)
------- ------- -------
Net cash provided by financing activities.............. 716 464 2,678
------- ------- -------
NET INCREASE IN CASH AND TEMPORARY CASH INVESTMENTS......... 7 50 31
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD.... 182 132 101
------- ------- -------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD.......... $ 189 $ 182 $ 132
======= ======= =======
OTHER CASHFLOW ACTIVITIES AND NON-CASH INVESTING AND
FINANCING ACTIVITIES WERE:
CASH TRANSACTIONS
Interest paid (net of amounts capitalized)................ $ 577 $ 563 $ 424
Income taxes paid (net of refunds)........................ (60) -- 59
NON-CASH TRANSACTIONS
Nuclear fuel placed under capital leases.................... $ 13 $ 4 $ 6
Other assets placed under capital lease................... 21 15 14
Common stock issued to retire Class G Common Stock........ -- -- 217
Assumption of debt........................................ -- -- 305
All highly liquid investments with an original maturity of three months or less
are considered cash equivalents.
The accompanying notes are an integral part of these statements.
CMS-31
CMS ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
------------------
2001 2000
---- ----
IN MILLIONS
ASSETS
PLANT AND PROPERTY (AT COST)
Electric utility.......................................... $ 7,661 $ 7,241
Gas utility............................................... 2,593 2,503
Natural gas transmission.................................. 2,271 2,191
Oil and gas properties (successful efforts method)........ 849 630
Independent power production.............................. 916 398
International energy distribution......................... 228 258
Other..................................................... 113 101
------- -------
14,631 13,322
Less accumulated depreciation, depletion and
amortization........................................... 6,833 6,252
------- -------
7,798 7,070
Construction work-in-progress............................. 564 761
------- -------
8,362 7,831
------- -------
INVESTMENTS
Independent power production.............................. 718 924
Natural gas transmission.................................. 501 436
Midland Cogeneration Venture Limited Partnership.......... 300 290
First Midland Limited Partnership......................... 253 245
Other..................................................... 123 121
------- -------
1,895 2,016
------- -------
CURRENT ASSETS
Cash and temporary cash investments at cost, which
approximates market.................................... 189 182
Accounts receivable, notes receivable and accrued revenue,
less allowances of $17 in 2001 and $15 in 2000......... 681 914
Accounts receivable -- Marketing, services and trading,
less allowances of $14 in 2001 and $3 in 2000.......... 683 526
Inventories at average cost
Gas in underground storage............................. 587 297
Materials and supplies................................. 174 124
Generating plant fuel stock............................ 52 46
Price risk management assets.............................. 461 1,097
Deferred income taxes..................................... -- 39
Prepayments and other..................................... 206 278
------- -------
3,033 3,503
------- -------
NON-CURRENT ASSETS
Regulatory Assets
Securitization costs................................... 717 709
Postretirement benefits................................ 209 232
Abandoned Midland project.............................. 12 22
Other.................................................. 167 168
Price risk management assets.............................. 424 350
Goodwill, net............................................. 811 891
Nuclear decommissioning trust funds....................... 581 611
Notes receivable -- related parties....................... 177 155
Notes receivable.......................................... 134 150
Other..................................................... 580 613
------- -------
3,812 3,901
------- -------
TOTAL ASSETS................................................ $17,102 $17,251
======= =======
The accompanying notes are an integral part of these statements.
CMS-32
DECEMBER 31
------------------
2001 2000
---- ----
IN MILLIONS
STOCKHOLDERS' INVESTMENT AND LIABILITIES
CAPITALIZATION
Common stockholders' equity............................... $ 1,890 $ 2,361
Preferred stock of subsidiary............................. 44 44
Company-obligated convertible Trust Preferred Securities
of subsidiaries(a)..................................... 694 694
Company-obligated mandatorily redeemable preferred
securities of Consumer's subsidiaries(a)............... 520 395
Long-term debt............................................ 6,923 6,770
Non-current portion of capital leases..................... 60 54
------- -------
10,131 10,318
------- -------
MINORITY INTERESTS.......................................... 86 88
------- -------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases...... 981 707
Notes payable............................................. 416 403
Accounts payable.......................................... 547 614
Accounts payable -- Marketing, services and trading....... 574 410
Accrued interest.......................................... 163 159
Accrued taxes............................................. 125 309
Accounts payable -- related parties....................... 62 70
Price risk management liabilities......................... 381 1,068
Deferred income taxes..................................... 51 --
Other..................................................... 510 521
------- -------
3,810 4,261
------- -------
NON-CURRENT LIABILITIES
Deferred income taxes..................................... 773 749
Postretirement benefits................................... 333 437
Deferred investment tax credit............................ 102 110
Regulatory liabilities for income taxes, net.............. 276 246
Price risk management liabilities......................... 352 341
Power loss contract reserves.............................. 354 54
Gas supply contract obligations........................... 287 304
Other..................................................... 598 343
------- -------
3,075 2,584
------- -------
Commitments and Contingencies (Notes 2, 4, 5, 14 and 18)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES.............. $17,102 $17,251
======= =======
- -------------------------
(a) For further discussion, see Note 8 to the Consolidated Financial
Statements.
CMS-33
CMS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF PREFERRED STOCK
OPTIONAL
REDEMPTION
DECEMBER 31 SERIES PRICE 2001 2000 2001 2000
- ----------- ------ ---------- ---- ---- ---- ----
NUMBER OF SHARES IN MILLIONS
CONSUMERS' PREFERRED STOCK
Cumulative, $100 par value, authorized
7,500,000 shares, ...................... $4.16 $103.25 68,451 68,451 $ 7 $ 7
with no mandatory redemption............ 4.50 110.00 373,148 373,148 37 37
--- ---
TOTAL PREFERRED STOCK........................ $44 $44
=== ===
The accompanying notes are an integral part of these statements.
CMS-34
CMS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31 2001 2000 1999 2001 2000 1999
- ----------------------- ---- ---- ---- ---- ---- ----
NUMBER OF SHARES IN THOUSANDS IN MILLIONS
COMMON STOCK
At beginning and end of period......... $ 1 $ 1 $ 1
------- ------ ------
OTHER PAID-IN CAPITAL -- CMS ENERGY
At beginning of period................. 121,201 116,038 108,104 2,936 2,749 2,452
Redemption of affiliate's preferred
stock............................... -- -- -- -- -- (2)
Common stock repurchased............... (232) (6,600) -- (5) (129) --
Common stock reacquired................ (11) (259) (61) (1) (16) (2)
Common stock issued.................... 11,681 11,538 1,823 332 321 83
Common stock reissued.................. 350 484 39 7 11 1
Exchange of Class G common stock....... -- -- 6,133 -- -- 217
------- ------- ------- ------- ------ ------
At end of period.................. 132,989 121,201 116,038 3,269 2,936 2,749
------- ------- ------- ------- ------ ------
OTHER PAID-IN CAPITAL -- CLASS G
At beginning of period................. -- -- 8,453 -- -- 142
Common stock reacquired................ -- -- -- -- -- --
Common stock issued.................... -- -- 257 -- -- 6
Redemption of common stock............. -- -- (8,710) -- -- (148)
------- ------- ------- ------- ------ ------
At end of period.................. -- -- -- -- -- --
------- ------- ------- ------- ------ ------
REVALUATION CAPITAL
Investments
At beginning of period.............. (2) 3 (9)
Unrealized gain (loss) on
investments(a).................... (2) (5) 12
------- ------ ------
At end of period.................. (4) (2) 3
------- ------ ------
Derivative Instruments
At beginning of period(b)........... 7 -- --
Unrealized gain (loss) on derivative
instruments(a).................... (26) -- --
Reclassification adjustments
included in consolidated net
income (loss)(a).................. (7) -- --
------- ------ ------
At end of period.................. (26) -- --
------- ------ ------
FOREIGN CURRENCY TRANSLATION
At beginning of period................. (254) (108) (136)
Change in foreign currency translation
realized from asset sale(a)......... -- 25 --
Change in foreign currency
translation(a)...................... (41) (171) 28
------- ------ ------
At end of period.................. (295) (254) (108)
------- ------ ------
RETAINED EARNINGS (DEFICIT)
At beginning of period................. (320) (189) (234)
Consolidated net income (loss)(a)...... (545) 36 277
Redemption of Class G common stock..... -- -- (69)
Common stock dividends declared:
CMS Energy.......................... (190) (167) (154)
Class G............................. -- -- (9)
------- ------ ------
At end of period.................. (1,055) (320) (189)
------- ------ ------
TOTAL COMMON STOCKHOLDERS' EQUITY........ $ 1,890 $2,361 $2,456
======= ====== ======
CMS-35
YEARS ENDED DECEMBER 31 2001 2000 1999 2001 2000 1999
- ----------------------- ---- ---- ---- ---- ---- ----
NUMBER OF SHARES IN THOUSANDS IN MILLIONS
(a) DISCLOSURE OF COMPREHENSIVE INCOME
(LOSS):
Revaluation capital
Investments
Unrealized gain (loss) on
investments, net of tax of
$1, 3, and $(6)
respectively................. $ (2) $ (5) $ 12
Derivative Instruments
Unrealized gain (loss) on
derivative instruments, net
of tax of $10, $--, and $--,
respectively................. (26) -- --
Reclassification adjustments
included in consolidated net
income, net of tax of $3,
$--, and $--, respectively... (7) -- --
Foreign currency translation........ (41) (146) 28
Consolidated net income (loss)...... (545) 36 277
------- ------ ------
Total Consolidated Comprehensive
Income (Loss).................. $ (621) $ (115) $ 317
======= ====== ======
- -------------------------
(b) Year ended December 31, 2001 reflects the cumulative change in accounting
principle, net of $(7) tax (Note 10).
The accompanying notes are an integral part of these statements.
CMS-36
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1: CORPORATE STRUCTURE
CMS Energy is the parent holding company of Consumers and Enterprises.
Consumers is a combination electric and gas utility company serving Michigan's
Lower Peninsula. Enterprises, through subsidiaries, including Panhandle and its
subsidiaries, is engaged in several domestic and international diversified
energy businesses including: natural gas transmission, storage and processing;
independent power production; oil and gas exploration and production; and energy
marketing, services and trading.
2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of CMS Energy, Consumers and Enterprises and their majority-owned
subsidiaries. Investments in affiliated companies where CMS Energy has the
ability to exercise significant influence, but not control are accounted for
using the equity method. Intercompany transactions and balances have been
eliminated.
USE OF ESTIMATES: The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
The recording of estimated liabilities for contingent losses within the
financial statements is guided by the principles in SFAS No. 5. SFAS No. 5
requires a company to record estimated liabilities in the financial statements
when it is probable that a loss will be paid in the future as a result of a
current event, and that amount can be reasonably estimated. CMS Energy has used
this accounting principle to record estimated liabilities discussed in Note 5,
Uncertainties.
GAS INVENTORY: Consumers uses the weighted average cost method for valuing
working gas inventory. Beginning October 2000, gas inventory also includes
recoverable cushion gas. Consumers records nonrecoverable cushion gas in the
appropriate gas utility plant account. Consumers stores gas inventory in its
underground storage facilities.
PLANT AND PROPERTY: Plant and Property, including improvements, is stated
at cost. Construction-related labor and material costs, as well as indirect
construction costs such as engineering and interest costs, are capitalized.
Property repairs, minor property replacements and maintenance are charged to
maintenance expense as incurred. When depreciable plant and property maintained
by CMS Energy's regulated operations are retired or sold, the original cost plus
cost of removal (net of salvage credits), is charged to accumulated
depreciation. Consumers bases depreciation provisions for utility property on
straight-line and units-of-production rates approved by the MPSC. For 2001, 2000
and 1999, the composite depreciation rate for electric utility property was 3.1
percent, 3.1 percent and 3.0 percent, respectively. For 2001, 2000 and 1999, the
composite rate for gas utility property was 4.4 percent annually. For 2001, 2000
and 1999, the composite rate for other property was 11.2 percent, 10.7 percent,
and 8.6 percent, respectively. Other nonutility depreciable property is
amortized over its estimated useful life; gains and losses on asset sales are
recognized at the time of sale.
CMS Oil and Gas follows the successful efforts method of accounting for its
investments in oil and gas properties. CMS Oil and Gas capitalizes, as incurred,
the costs of property acquisitions, successful exploratory wells, all
development costs, and support equipment and facilities. It expenses
unsuccessful exploratory wells when they are determined to be non-productive.
CMS Oil and Gas also charges to expense, as incurred, production costs,
overhead, and all exploration costs other than exploratory drilling. CMS Oil and
Gas determines depreciation, depletion and amortization of proved oil and gas
properties on a field-by-field basis using the units-of-production method over
the life of the remaining proved reserves.
CMS-37
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
GOODWILL: Goodwill represents the excess of the purchase price over the
fair value of the net assets of acquired companies and is amortized using the
straight-line method principally over 40 years. The carrying amount of goodwill
is reviewed annually using undiscounted cash flows for the businesses acquired
over the remaining amortization periods. At December 31, 2001, no goodwill
impairments existed. Accumulated amortization of goodwill at December 31, 2001
and 2000 was $69 million and $49 million, respectively. CMS Energy adopted SFAS
No. 142, effective January 1, 2002, and is currently evaluating the provisions
of the new standard to determine if any impairment charges will be necessary.
IMPAIRMENT OF INVESTMENTS AND LONG-LIVED ASSETS: In accordance with APB
Opinion No. 18 and SFAS No. 121, CMS Energy evaluates the potential impairment
of its investments in projects and other long-lived assets, including goodwill,
based on various analyses, including the projection of undiscounted cash flows,
whenever events or changes in circumstances indicate that the carrying amount of
the assets may not be recoverable. If the carrying amount of the investment or
asset exceeds the amount of the expected future undiscounted cash flows, an
impairment loss is recognized and the investment or asset is written down to its
estimated fair value. For additional information, see Note 4, Unusual
Charges/Items.
REVENUE RECOGNITION POLICY: Revenues from deliveries of electricity and the
transportation and storage of natural gas are recognized as services are
provided. Revenues on sales of marketed electricity, natural gas, and other
energy products, as well as natural gas and LNGs, are recognized at delivery.
Revenues on sales of oil and natural gas produced are recognized when production
occurs, a sale is completed, and the risk of loss transfers to a third-party
purchaser. Mark-to-market changes in the fair value of energy trading contracts
are recognized as revenues in the periods in which the changes occur.
CHANGE IN METHOD OF ACCOUNTING FOR INVENTORIES: In 2000, CMS Energy adopted
the provisions of the SAB No. 101 summarizing the SEC staff's views on revenue
recognition policies based upon existing generally accepted accounting
principles. As a result, the oil and gas exploration and production industry's
long-standing practice of recording inventories at their net realizable amount
at the time of production was viewed as inappropriate. Rather, inventories
should be presented at the lower of cost or market. Consequently, in conforming
to the interpretations of SAB No. 101, CMS Energy implemented a change in the
recording of these oil and gas exploration and production inventories as of
January 1, 2000. In accordance with the provisions of SAB No. 101, prior year
financial results are not required to be restated. The cumulative effect of this
one-time non-cash accounting change decreased 2000 income by $7 million, or $5
million, net of tax, or $.04 per basic and diluted share of CMS Energy Common
Stock. The pro forma effect on prior years' consolidated net income of
retroactively recording inventories as if the new method of accounting had been
in effect for all periods is not material.
EARNINGS PER SHARE: Basic and diluted earnings per share are based on the
weighted average number of shares of common stock and potential common stock
outstanding during the period. Potential common stock, for purposes of
determining diluted earnings per share, includes the effects of dilutive stock
options and convertible securities. The effect of such potential common stock is
computed using the treasury stock method or the if-converted method, as
applicable.
UNAMORTIZED DEBT PREMIUM, DISCOUNT AND EXPENSE: CMS Energy amortizes
premiums, discounts and expenses incurred in connection with the issuance of
presently outstanding long-term debt over the terms of the respective issues.
For the regulated portions of CMS Energy's businesses, if debt is refinanced,
CMS Energy amortizes any unamortized premiums, discounts and expenses over the
term of the new debt, as allowed under regulated utility accounting.
ACCRETION INCOME AND EXPENSE: In 1991, the MPSC allowed Consumers to
recover a portion of its abandoned Midland investment over a 10-year period, but
did not allow Consumers to earn a return on that amount. Consumers reduced the
recoverable investment to the present value of the future recoveries. During the
recovery period, Consumers adjusts the unrecovered asset to its present value.
It reflects this adjustment as
CMS-38
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
accretion income. Conversely, in 1992 and 2001, Consumers recorded a loss for
the present value of its estimated future underrecoveries of power supply costs
resulting from purchases from the MCV Partnership. It now recognizes accretion
expense annually to reflect the time value of money on the recorded loss.
CMS MST has entered into prepaid sales arrangements to provide natural gas
to various entities over periods of up to 12 years at predetermined price
levels. CMS MST has established a liability for these outstanding obligations
equal to the discounted present value of the contracts, and has hedged its
exposures under these arrangements. At December 31, 2001 and 2000, the amounts
recorded as liabilities on the Consolidated Balance Sheets totaled $287 million
and $304 million, respectively, and are guaranteed by Enterprises. As CMS MST
fulfills its obligations under the contracts, CMS Energy records an adjustment
to the outstanding obligation through accretion expense.
NUCLEAR FUEL COST: Consumers amortizes nuclear fuel cost to fuel expense
based on the quantity of heat produced for electric generation. Through November
2001, Consumers expensed the interest on leased nuclear fuel as it was incurred.
Effective December 2001, Consumers no longer leases its nuclear fuel.
For nuclear fuel used after April 6, 1983, Consumers charges disposal costs
to nuclear fuel expense, recovers these costs through electric rates, and then
remits them to the DOE quarterly. Consumers elected to defer payment for
disposal of spent nuclear fuel burned before April 7, 1983. As of December 31,
2001, Consumers has a recorded liability to the DOE of $135 million, including
interest, which is payable upon the first delivery of spent nuclear fuel to the
DOE. Consumers recovered through electric rates the amount of this liability,
excluding a portion of interest. In 1997, a federal court decision has confirmed
that the DOE was to begin accepting deliveries of spent nuclear fuel for
disposal by January 31, 1998. Subsequent litigation in which Consumers and
certain other utilities participated has not been successful in producing more
specific relief for the DOE's failure to comply.
In July 2000, the DOE reached a settlement agreement with one utility to
address the DOE's delay in accepting spent fuel. The DOE may use that settlement
agreement as a framework that it could apply to other nuclear power plants;
however, certain other utilities are challenging the validity of the settlement.
Additionally, there are two court decisions that support the right of utilities
to pursue damage claims in the United States Court of Claims against the DOE for
failure to take delivery of spent fuel. A number of utilities have commenced
litigation in the Court of Claims. Consumers is evaluating its options with
respect to its contract with the DOE.
NUCLEAR PLANT DECOMMISSIONING: In 2001, Consumers collected $6 million from
its electric customers for the decommissioning of its Palisades nuclear plant.
Amounts collected from electric retail customers and deposited in trusts
(including trust earnings) are credited to accumulated depreciation. In March
2001, Consumers filed updated decommissioning cost estimates for Big Rock and
Palisades that were $340 million and $739 million in 2000 dollars, respectively.
Using the inflation factors presented in the filing to the MPSC to escalate the
estimated decommissioning costs to 2001 dollars, the Big Rock and Palisades
estimated decommissioning costs are $346 million and $752 million, 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. On December 31, 2000, Big Rock trusts
were fully funded per the March 22, 1999 MPSC order and Consumers discontinued
depositing funds in the trust. The December 16, 1999 MPSC order set the annual
decommissioning surcharge for Palisades at $6 million a year. In December 2000,
the NRC extended the Palisades' operating license to March 2011 and the impact
of this extension was included as part of Consumers' March filing with the MPSC.
Consumers is required to file the next "Report on the Adequacy of the Existing
Annual Provision for Nuclear Plant Decommissioning" (Report) with the MPSC by
March 31, 2004.
In 1997, Big Rock closed permanently and plant decommissioning began.
Consumers estimates that the Big Rock site will be returned to a natural state
by the end of 2012 if the DOE begins removing the spent nuclear fuel by 2010.
For 2001, Consumers incurred costs of $28 million that were charged to the
accumulated depreciation
CMS-39
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
reserve for decommissioning and withdrew $29 million from the Big Rock nuclear
decommissioning trust fund. In total, Consumers has incurred costs of $190
million that have been charged to the accumulated depreciation reserve for
decommissioning and withdrew $179 million from the Big Rock nuclear
decommissioning trust fund. These activities had no material impact on net
income. At December 31, 2001, Consumers is the beneficiary of the investment in
nuclear decommissioning trust funds of $149 million for Big Rock.
In 1996, Consumers and several wholesale electric customers entered into
five-year contracts that fixed their contribution to nuclear decommissioning
costs for the term. Since that time, the total estimated decommissioning costs
for Big Rock increased substantially over the estimates used to calculate the
decommissioning costs in the wholesale contracts. As a result of a reduction in
decommissioning trust earnings in August 2001, along with the higher estimated
costs of decommissioning, Consumers, in September 2001, expensed approximately
$5 million related to this issue to recognize the unrecoverable portion of Big
Rock decommissioning costs associated with these customers.
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. Palisades' current NRC license will
expire in 2011 and the trust funds were estimated to have accumulated $921
million, at that time, assuming currently approved MPSC surcharge levels.
Consumers estimates that at the time Palisades is fully decommissioned in the
year 2049, the trust funds will have provided $2.5 billion, including trust
earnings, to pay for the anticipated expenditures over the entire
decommissioning period. At December 31, 2001, Consumers is the beneficiary of
the investment in the MPSC nuclear decommissioning trust funds of $423 million
for Palisades. In addition, at December 31, 2001, Consumers has a FERC
decommissioning trust fund with a balance of approximately $8 million.
RECLASSIFICATIONS: During 2001, CMS Energy entered into several energy
trading contracts with counterparties. The impact of these transactions
increased operating revenue with a corresponding increase in operating expenses.
During the fourth quarter of 2001, it was determined that under SFAS No. 133 and
related interpretations, these transactions should have been recorded on a net
basis. First, second and third quarter operating revenue and operating expenses
have been restated from the amounts previously reported to reflect these
transactions on a net basis. There was no impact on previously reported
consolidated net income.
CMS Energy has reclassified certain prior year amounts for comparative
purposes. These reclassifications did not affect consolidated net income for the
years presented.
RELATED-PARTY TRANSACTIONS: In 2001, 2000 and 1999, Consumers paid $55
million, $51 million, and $52 million, respectively, for electric generating
capacity and energy generated by that capacity from affiliates of Enterprises.
Affiliates of CMS Energy sold, stored and transported natural gas and provided
other services to the MCV Partnership totaling $49 million, $54 million, and $37
million for 2001, 2000 and 1999. For additional discussion of related-party
transactions with the MCV Partnership and the FMLP, see Notes 5 and 18. Other
related-party transactions are immaterial.
UTILITY REGULATION: Consumers accounts for the effects of regulation based
on the regulated utility accounting standard SFAS No. 71. As a result, the
actions of regulators affect when Consumers recognizes revenues, expenses,
assets and liabilities.
In March 1999, Consumers received MPSC electric restructuring orders and as
a result discontinued application of SFAS No. 71 for the electric supply portion
of its business. Discontinuation of SFAS No. 71 for the generation portion of
Consumers' business resulted in Consumers reducing the carrying value of its
Palisades plant-related assets by approximately $535 million and establishing a
regulatory asset for a corresponding amount. According to current accounting
standards, Consumers can continue to carry its electric supply-related
regulatory assets if legislation or an MPSC rate order allows the collection of
cash flows to recover these regulatory assets from its regulated transmission
and distribution customers. As of December 31, 2001,
CMS-40
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Consumers had a net investment in electric supply facilities of $1.319 billion
included in electric plant and property. See Note 5, Uncertainties, "Electric
Rate Matters - Electric Restructuring."
SFAS No. 121 imposes strict criteria for retention of regulatory-created
assets by requiring that such assets be probable of future recovery at each
balance sheet date. Management believes these assets are probable of future
recovery.
The following regulatory assets (liabilities), which include both current
and non-current amounts, are reflected in the Consolidated Balance Sheets. These
costs are expected to be recovered through rates over periods of up to 14 years.
DECEMBER 31
----------------
2001 2000
---- ----
IN MILLIONS
Securitization costs (Note 5)............................... $ 717 $ 709
Postretirement benefits (Note 13)........................... 228 251
Electric Restructuring Implementation Plan.................. 82 75
Manufactured gas plant sites (Note 5)....................... 70 63
Abandoned Midland project................................... 12 22
Income taxes (Note 11)...................................... 6 24
Unamortized nuclear costs................................... -- 6
DSM -- deferred costs....................................... -- 6
Other....................................................... 15 18
------ ------
Total regulatory assets..................................... $1,130 $1,174
====== ======
Income taxes (Note 11)...................................... $ (282) $ (270)
Gas customer choice......................................... (9) (33)
Other....................................................... -- (6)
------ ------
Total regulatory liabilities................................ $ (291) $ (309)
====== ======
In October 2000, Consumers received an MPSC order authorizing Consumers to
securitize certain regulatory assets up to $469 million, net of tax, see Note 5,
Uncertainties, "Electric Rate Matters -- Electric Restructuring". Accordingly,
in December 2000, Consumers established a regulatory asset for Securitization
costs of $709 million, before tax, that had previously been recorded in other
regulatory asset accounts. As a result, regulatory assets totaling $709 million
were transferred to the regulatory asset Securitization costs accounts. In order
to prepare the Securitization assets for sale in November 2001, issuance fees of
$10 million and $1 million were incurred in 2001 and 2000, respectively, and
capitalized as a part of Securitization costs. These costs represent the
increase in Securitization costs between periods. These issuance costs will be
amortized each month for up to fourteen years, which approximated $2 million in
2001. The components of the Securitization costs are illustrated below.
DECEMBER 31
------------
2001 2000
---- ----
IN MILLIONS
Unamortized nuclear costs................................... $405 $405
Postretirement benefits..................................... 84 84
Income taxes................................................ 203 203
Uranium enrichment facility................................. 16 16
Other....................................................... 9 1
---- ----
Total securitized regulatory assets......................... $717 $709
==== ====
CMS-41
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
IMPLEMENTATION OF SFAS NO. 133: Effective January 1, 2001, CMS Energy
adopted SFAS No. 133. The new standard requires CMS Energy to recognize at fair
value on the balance sheet, as assets or liabilities, all contracts that meet
the definition of a derivative instrument. The standard also requires CMS Energy
to record all changes in fair value directly in earnings unless the derivative
instrument meets certain qualifying hedge criteria, in which case, the changes
in fair value would be reflected in other comprehensive income. CMS Energy
determines fair value based upon quoted market prices and mathematical models
using current and historical pricing data. The ineffective portion, if any, of
all hedges are recognized in earnings.
CMS Energy believes that the majority of its contracts, power purchase
agreements and gas transportation contracts qualify for the normal purchases and
sales exception of SFAS No. 133 and are not subject to the accounting rules for
derivative instruments. CMS Energy uses derivative instruments that require
derivative accounting, to limit its exposures to electricity and gas commodity
price risk. The interest rate and foreign currency exchange contracts met the
requirements for hedge accounting under SFAS No. 133 and CMS Energy recorded the
changes in the fair value of these contracts in other comprehensive income.
The financial statement impact of recording the SFAS No. 133 transition
adjustment on January 1, 2001 is as follows:
IN MILLIONS
-----------
Fair value of derivative assets............................. $35
Fair value of derivative liabilities........................ 14
Increase in accumulated other comprehensive income, net of
tax....................................................... 7
Upon initial adoption of the standard including adjustments for subsequent
guidance, CMS Energy recorded a $7 million, net of tax, cumulative effect
adjustment as an increase in accumulated other comprehensive income. This
adjustment relates to the difference between the fair value and recorded book
value of contracts related to gas call options, gas fuel for generation swap
contracts, and interest rate swap contracts that qualified for hedge accounting
prior to the initial adoption of SFAS No. 133 and Consumers' proportionate share
of the effects of adopting SFAS No. 133 related to its equity investment in the
MCV Partnership. Based on the pretax initial transition adjustment of $20
million recorded in accumulated other comprehensive income at January 1, 2001,
Consumers reclassified to earnings $12 million as a reduction to the cost of
gas, $1 million as a reduction to the cost of power supply, $2 million as an
increase in interest expense and $8 million as an increase in other revenues for
the twelve months ended December 31, 2001. CMS Energy recorded $12 million as an
increase in interest expense during 2001, which includes the $2 million of
additional interest expense at Consumers. The difference between the initial
transition adjustment and the amounts reclassified to earnings represents an
unrealized loss in the fair value of the derivative instruments since January 1,
2001, resulting in a decrease of other comprehensive income.
As of December 31, 2001, Consumers had a total of $8 million, net of tax,
recorded as an unrealized loss in other comprehensive income related to its
proportionate share of the effects of derivative accounting related to its
equity investment in the MCV Partnership. Consumers expects to reclassify this
loss as a decrease to other operating revenue during the next 12 months, if this
value remains.
At adoption of the standard on January 1, 2001, derivative and hedge
accounting for certain utility industry contracts, particularly electric call
option contracts and option-like contracts, and contracts subject to Bookouts
was uncertain. Consumers accounted for these types of contracts as derivatives
that qualified for the normal purchase exception of SFAS No. 133 and, therefore,
did not record these contracts on the balance sheet at fair value. In June and
December 2001, the FASB issued guidance that resolved the accounting for these
contracts. As a result, on July 1, 2001, Consumers recorded a $3 million, net of
tax, cumulative effect adjustment as an unrealized loss decreasing accumulated
other comprehensive income, and on December 31, 2001, recorded an $11 million,
net of tax, cumulative effect adjustment as a decrease to earnings. These
adjustments relate to the difference between the fair value and the recorded
book value of electric call option contracts.
FOREIGN CURRENCY TRANSLATION: CMS Energy's subsidiaries and affiliates
whose functional currency is other than the U.S. Dollar translate their assets
and liabilities into U.S. Dollars at the current exchange rates in
CMS-42
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
effect at the end of the fiscal period. The revenue and expense accounts of such
subsidiaries and affiliates are translated into U.S. Dollars at the average
exchange rates that prevailed during the period. The gains or losses that result
from this process, and gains and losses on intercompany foreign currency
transactions that are long-term in nature, and which CMS Energy does not intend
to settle in the foreseeable future, are shown in the stockholders' equity
section of the balance sheet. For subsidiaries operating in highly inflationary
economies, the U.S. Dollar is considered to be the functional currency, and
transaction gains and losses are included in determining net income. Gains and
losses that arise from exchange rate fluctuations on transactions denominated in
a currency other than the functional currency, except those that are hedged, are
included in determining net income. For the year ended 2001, the change in the
foreign currency translation adjustment decreased equity by $41 million, net of
after-tax hedging proceeds.
During 2000, the Australian Dollar experienced a significant devaluation
relative to the U.S. Dollar, declining from .6567 to the Dollar at December 31,
1999 to an average of .5588 to the Dollar for the year ended December 31, 2000.
This devaluation resulted in significant foreign currency translation losses
during 2000 that are recorded within common stockholder's equity. CMS Energy
recorded $104 million of non-cash foreign currency translation losses on its
investments in Australian affiliates during 2000.
ACQUISITIONS: In March 1999, CMS Energy, through a subsidiary, acquired
Panhandle from Duke Energy for a cash payment of $1.9 billion and existing
Panhandle debt of $300 million. CMS Energy used the purchase method of
accounting to account for the acquisition and, accordingly, included the results
of operations of Panhandle for the period from March 29, 1999 in the
accompanying consolidated financial statements. Assets acquired and liabilities
assumed are recorded at their fair values. CMS Energy allocated the excess
purchase price over the fair value of net assets acquired of approximately $800
million to goodwill and amortizes this amount on a straight-line basis over 40
years. Effective January 1, 2002, the remaining goodwill balance will not be
amortized, but will be subject to annual impairment testing in accordance with
SFAS No. 142.
EXTRAORDINARY LOSS: Cash proceeds received from the sale of CMS Energy's
interest in Equatorial Guinea in 2002, and from the LNG monetization in 2001,
were used to retire existing debt. As a result, the cost associated with the
early extinguishment of debt, $18 million, net of tax, was reflected as an
extraordinary loss in 2001 in the Consolidated Statements of Income.
CAPITALIZED INTEREST: SFAS No. 34 requires capitalization of interest on
certain qualifying assets that are undergoing activities to prepare them for
their intended use. SFAS No. 34 limits the capitalization of interest for the
period to the actual interest cost that is incurred and prohibits imputing
interest costs on any equity funds. The nonregulated portions of CMS Energy are
subject to these rules.
OTHER: For significant accounting policies regarding risk management
activities and financial instruments, see Note 10; income taxes, see Note 11;
executive incentive compensation, see Note 12; and retirement benefits, see Note
13.
3: DISCONTINUED OPERATIONS
In September 2001, management recommended and the Board of Directors
approved, a plan to discontinue the operations of the International Energy
Distribution segment. Incorporated in 1996, CMS Electric and Gas had been formed
to purchase, invest in and operate gas and electric distribution systems
worldwide and currently, has significant ownership interests in electric
distribution companies located in Brazil and Venezuela. CMS Energy is actively
seeking a buyer for the assets of CMS Electric and Gas, and although the timing
of this sale is difficult to predict, nor can it be assured, management expects
the sale to occur within one year.
CMS-43
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following summarizes the balance sheet information of the discontinued
operations:
DECEMBER 31
---------------
2001 2000(A)
---- -------
IN MILLIONS
Assets
Accounts receivable, net.................................. $ 44 $ 35
Materials and supplies.................................... 8 6
Property, plant and equipment, net........................ 27 231
Goodwill.................................................. 40 50
Deferred taxes............................................ 23 --
Other..................................................... 38 72
---- ----
$180 $394
---- ----
Liabilities
Accounts payable.......................................... $ 19 $ 16
Current and long-term debt................................ 4 7
Accrued taxes............................................. 25 (1)
Minority interest......................................... 21 58
Other..................................................... 21 15
---- ----
$ 90 $ 95
---- ----
- -------------------------
(a) For year ended December 31, 2000, total assets included assets of EDEERSA,
which was subsequently sold, of $291 million. Total liabilities included
debt and other liabilities of EDEERSA of $81 million and $30 million,
respectively.
Revenues from such operations were $145 million and $264 million for the
year ended December 31, 2001 and 2000, respectively. In accordance with APB
Opinion No. 30, the net losses of the operation are included in the consolidated
statements of income under "discontinued operations". The pre-tax loss recorded
for the year ended December 31, 2001 on the anticipated sale of the operation
was $195 million, which included a reduction in asset values, a provision for
anticipated closing costs and operating losses until disposal, and a portion of
CMS Energy's interest expense. Interest expense was allocated to the operation
based on its ratio of total capital to that of CMS Energy. See table below for
income statement components of the discontinued operations.
DECEMBER 31
-------------
2001 2000
---- ----
IN MILLIONS
Discontinued operations:
Income (loss) from discontinued operations, net of taxes
of $0.4................................................ $ (2) $3
Loss on disposal of discontinued operations, including
provision of $0.1 for operating losses during phase-out
period, net of tax benefit of $12......................... (183) --
----- --
Total....................................................... $(185) $3
===== ==
4: UNUSUAL CHARGES/ITEMS
DIG LOSS CONTRACT: In 1998, DIG, which operates the Dearborn Industrial
Generation complex, a 710 MW combined cycle facility constructed primarily to
fulfill the contract requirements, executed Electric Sales Agreements with Ford
Motor Company, Rouge Industries and certain other Ford and Rouge affiliates that
require DIG to deliver up to 300 MWs of electricity at pre-determined prices for
a fifteen year term beginning in June 2000. As a result of continued plant
construction delays, the majority of the DIG project did not achieve commercial
operation until the third quarter of 2001. At that time, DIG entered into
long-term natural gas fuel contracts that fixed portions of the anticipated fuel
requirements related to the electricity contracts and defined an operational
model that reasonably reflects the expected economics of the project and the
contracts involved.
CMS-44
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Based on this operational model, CMS Energy determined the estimated costs to
perform under the electric contracts using an incremental-cost (net of revenues)
approach. Using this approach, CMS Energy estimated that the incremental costs
to provide electricity under the Electric Sales Agreements exceeded the
anticipated revenues to be earned over the life of the contracts by $200
million. Accordingly, in 2001, CMS Energy recorded a reserve for the loss on
these contracts of $200 million ($130 million after-tax, or $.99 per basic and
diluted share) in "Loss contracts and reduced asset valuations" on the
Consolidated Statements of Income. As of December 31, 2001, the remaining value
of the liability associated with the loss totaled $194 million.
MCV LOSS CONTRACT: In 1992, Consumers recognized a loss for the present
value of the estimated future underrecoveries of power costs under the PPA based
on MPSC cost recovery orders. Consumers continually evaluates the adequacy of
the PPA liability for future underrecoveries. These evaluations consider
management's assessment of operating levels at the MCV Facility through 2007,
along with certain other factors including MCV related costs that are included
in Consumers' frozen retail rates. During the third quarter of 2001, in
connection with Consumers' long-term electric supply planning, management
reviewed the PPA liability assumptions related to increased expected long-term
dispatch of the MCV Facility and increased MCV related costs. As a result, in
September 2001, Consumers increased the PPA liability by $126 million ($82
million, after-tax, or $.63 per basic and diluted share), which appears on the
Consolidated Statements of Income in the caption "Loss contracts and reduced
asset valuations". Management believes that, following the increase, the PPA
liability adequately reflects the present value of the PPA's future effect on
Consumers. At December 31, 2001 and 2000, the remaining after-tax present value
of the estimated future PPA liability associated with the loss totaled $119
million and $44 million, respectively. For further discussion on the impact of
the frozen PSCR, see Note 5, Uncertainties -- Electric Rate Matters.
VALUATION LOSSES: Implementation of a new strategic direction for CMS
Energy has resulted in assets and development projects that have been identified
by the business units as non-strategic or under-performing. These assets include
both domestic and foreign electric power plants, gas processing facilities,
exploration and production assets and certain equity method and other
investments. CMS Energy has written off the carrying value of the development
projects that will no longer be pursued. In addition, management evaluated the
operating assets for impairment in accordance with the provisions of SFAS No.
121 for asset projects and APB Opinion No. 18 for equity investments. Based on
this evaluation, certain of these assets were determined to be impaired.
Reductions in asset valuations, recognized in 2001, related to these write-downs
were $302 million ($234 million, after tax, or $1.79 per basic and diluted
share), to reflect the excess of the carrying value of these assets over their
fair value. The charges are reflected in the Consolidated Statements of Income
under the caption "Loss contracts and reduced asset valuations".
CMS Energy is pursuing the sale of all of these non-strategic and
under-performing assets, including those that were not determined to be
impaired. Upon the sale of these assets, the proceeds realized may be materially
different than the remaining book value of these assets. Even though these
assets have been identified for sale, management cannot predict when, nor make
assurances regarding the value of consideration to be received or that these
sales will occur.
OTHER CHARGES: The total of other charges recognized in 2001 were $25
million ($15 million, after tax, or $.11 per basic and diluted share) that
consisted of the following items:
In 1996, Consumers filed new OATT transmission rates with the FERC for
approval. Certain interveners contested these rates, and hearings were held
before an ALJ in 1998. During 1999, the ALJ rendered an initial decision, which
if upheld by the FERC, would ultimately reduce Consumers' OATT rates and require
Consumers to refund, with interest, any over-collections for past services.
Consumers, since that time has been reserving a portion of revenues billed to
customers under these OATT rates. At the time of the initial decision, Consumers
believed that certain issues would be decided in its favor, and that a
relatively quick order would be issued by the FERC regarding this matter.
However, due to changes in regulatory interpretations, Consumers believes that a
successful resolution of certain issues is less likely. As a result, in
September 2001, Consumers reserved an
CMS-45
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
additional $12 million, including interest, to fully reflect its estimate of the
financial impacts of the initial decision. Consumers expects that its reserve
levels for future transmission service will be sufficient to satisfy its
estimated refund obligation.
In 1996, Consumers and several wholesale electric customers entered into
five-year contracts that fixed their contribution to nuclear decommissioning
costs for the term. Since that time, the total estimated decommissioning costs
for Big Rock increased substantially over the estimates used to calculate the
decommissioning costs in the wholesale contracts. As a result of a reduction in
decommissioning trust earnings in August 2001, along with the higher estimated
costs of decommissioning, Consumers, in September 2001, expensed approximately
$5 million related to this issue to recognize the unrecoverable portion of Big
Rock decommissioning costs associated with these customers.
Panhandle recorded a lower of cost or market adjustment of $7 million in
the third quarter of 2001, reducing its current gas inventory to market value.
ARGENTINE MONETARY ADJUSTMENT: As of December 31, 2001, CMS Energy had
investments in Argentina of approximately $700 million. Essentially all
operations in Argentina use the U.S. Dollar as their functional currency. In
January 2002, the Argentine government repealed the 1991 convertibility law that
established a fixed exchange rate of one U.S. Dollar to one Argentine Peso.
Since exchangeability between the two currencies was temporarily suspended at
the balance sheet date, CMS Energy used the first subsequently available,
free-floating exchange rate of 1.65 Pesos per Dollar on January 11, 2002, as
required by SFAS No. 52, and recorded an $18 million loss ($.14 per basic and
diluted share) resulting from translation of Argentine Peso-denominated monetary
assets and liabilities at December 31, 2001.
ASSET SALES: The "Asset Sales" caption in the following table includes $44
million for U.S. taxes on certain unrepatriated earnings of CMS Oil and Gas
foreign entities. These earnings became subject to U.S. taxes upon the sale of
Equatorial Guinea assets of CMS Oil and Gas. Combined with the other items,
asset sales represent a $37 million loss, net of tax ($.28 per basic and diluted
share), reflected in the Consolidated Statements of Income.
CHANGE IN ACCOUNTING FOR PURCHASED POWER OPTIONS: In December 2001, the
FASB issued revised guidance regarding derivative accounting for electric call
option contracts and option-like contracts. The revised guidance amends the
criteria to be used to determine if derivative accounting is required. Consumers
re-evaluated its electric call option and option-like contracts and determined
that under the revised guidance additional contracts require derivative
accounting. Therefore, as of December 31, 2001, upon initial adoption of the
revised guidance for these contracts, Consumers recorded a $17 million ($11
million, net of tax, or $.09 per basic and diluted share) cumulative effect
adjustment as a decrease to earnings. This adjustment relates to the difference
between the fair value and the recorded book value of these electric option
contracts. Consumers will record any change in fair value subsequent to December
31, 2001 directly in earnings, which could cause earnings volatility.
EARLY DEBT EXTINGUISHMENT: Cash proceeds received from the sale of CMS
Energy's interest in Equatorial Guinea in 2002, and from the LNG monetization in
2001, were used primarily to retire existing debt. As a result, the cost
associated with the early extinguishment of debt, $27 million ($18 million, net
of tax, or $.14 per basic and diluted share) was reflected as an extraordinary
loss in 2001 in the Consolidated Statements of Income.
CMS-46
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of the unusual items and charges recognized by CMS Energy
business segments in 2001 are as follows:
PRE-TAX AFTER-TAX
BUSINESS SEGMENT IMPACT IMPACT
- ---------------- ------- ---------
IN MILLIONS
Loss Contracts:
Independent Power Production.............................. $200 $130
Consumers Electric Utility................................ 126 82
---- ----
Total Loss Contracts........................................ 326 212
---- ----
Valuation Losses:
Natural Gas Transmission.................................. 43 28
Independent Power Production.............................. 188 145
Oil and Gas Exploration & Production...................... 49 47
Corporate................................................. 20 13
Consumers Energy.......................................... 2 1
---- ----
Total Valuation Losses...................................... 302 234
---- ----
Loss Contracts and Reduced Asset Valuations:................ $628 $446
---- ----
Other Charges:
Consumers Energy.......................................... 18 11
Panhandle................................................. 7 4
---- ----
Total Other Charges......................................... 25 15
---- ----
Argentine Monetary Adjustment
Natural Gas Transmission.................................. 10 10
Independent Power Production.............................. 8 8
---- ----
Total Argentine Monetary Adjustment......................... 18 18
---- ----
Asset Sales:
Oil and Gas Exploration & Production...................... -- 44
International Energy Distribution......................... (11) (7)
Corporate................................................. 1 1
Miscellaneous Diversified Energy.......................... (1) (1)
---- ----
Total Asset Sales........................................... (11) 37
---- ----
Change in Accounting for Purchased Power Options
Consumers Energy.......................................... 17 11
---- ----
Total Change in Accounting for Purchased Power Options...... 17 11
---- ----
Early Debt Extinguishment
Natural Gas Transmission.................................. 27 18
---- ----
Total Early Debt Extinguishment............................. 27 18
---- ----
Grand Total................................................. $704 $545
==== ====
LOY YANG WRITE-DOWN: In the first quarter of 2000, CMS Energy announced its
intention to sell its 50 percent ownership interest in Loy Yang, retained the
services of investment bankers to assist in the sales process, and solicited
bids from potential buyers for CMS Energy's interest in Loy Yang. As a result of
being unable to attract a reasonable offer for Loy Yang by the end of November
2000, and after re-evaluating the expected future cash flows from this
investment, including the continuing unfavorable electric market prices in
Victoria, Australia, management determined in the fourth quarter of 2000 that
the carrying amount of the equity
CMS-47
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
investment in Loy Yang was not recoverable. Consequently, in accordance with the
provisions of APB Opinion No. 18, CMS Energy determined that there has been a
loss in value of the investment and an impairment loss on the carrying amount of
the investment has been realized.
This impairment loss is reflected under the caption "Loss contracts and
asset revaluations" on the Consolidated Statement of Income in 2000 as a pretax
charge of $329 million ($268 million after-tax, or $2.37 per share). This loss
does not include cumulative net foreign currency translation losses of $168
million due to unfavorable changes in exchange rates, which, in accordance with
SFAS No. 52, will not be realized until there has been a sale, full liquidation
or other disposition of CMS Energy's investment in Loy Yang. CMS Energy is
continuing to review its business alternatives for its investment in Loy Yang,
including future financing and operating alternatives, the nature and extent of
CMS Energy's future involvement and the potential for an ultimate sale of its
interest in the future. CMS Energy has not established a deadline for any of
these alternatives.
NITROTEC WRITE-DOWN: In 1999, CMS Gas Transmission wrote off the carrying
amounts of investments in Nitrotec, a proprietary gas processing company which
has patents for its helium removal and nitrogen rejection processes for
purifying natural gas. This write-off occurred after determining that it was
unlikely CMS Gas Transmission would recover any portion of its investments. The
write-off of these investments is reflected under the caption "Loss contracts
and asset revaluations" on the Consolidated Statement of Income in 1999 as a
pretax charge of $84 million ($49 million after-tax, or $.45 and $.43 per basic
and diluted share, respectively).
5: UNCERTAINTIES
CONSUMERS' ELECTRIC UTILITY CONTINGENCIES
ELECTRIC ENVIRONMENTAL MATTERS: Consumers is subject to costly and
increasingly stringent environmental regulations. Consumers expects that the
cost of future environmental compliance, especially compliance with clean air
laws, will be significant.
Clean Air -- In 1997, the EPA introduced new regulations regarding the
standard for ozone and particulate-related emissions that were the subject of
litigation. The United States Supreme Court determined that the EPA has the
power to revise the standards but that the EPA implementation plan was not
lawful. In 1998, the EPA Administrator issued final regulations requiring the
state of Michigan to further limit nitrogen oxide emissions. The EPA has also
issued additional final regulations regarding nitrogen oxide emissions that
require certain generators, including some of Consumers' electric generating
facilities, to achieve the same emissions rate as that required by the 1998
plan. These regulations will require Consumers to make significant capital
expenditures estimated between $530 million and $570 million, calculated in year
2001 dollars. Much of the future expenditures are for retrofit post-combustion
technology. Cost estimates have been developed, in part, by independent
contractors with expertise in this field. The estimates are dependent on
regulatory outcome, market forces associated with emission reduction, and with
regional and national economic conditions. As of December 2001, Consumers has
incurred $296 million in capital expenditures to comply with these regulations
and anticipates that the remaining capital expenditures will be incurred between
2002 and 2004. At some point after 2004, if new environmental standards for
multi-pollutants become effective, Consumers may need additional capital
expenditures to comply with the standards. Consumers is unable to estimate the
additional capital expenditures required until the proposed standards are
further defined. Beginning January 2004, an annual return of and on these types
of capital expenditures, to the extent they are above depreciation levels, are
expected to be recoverable, subject to an MPSC prudency hearing, in future
rates.
These and other required environmental expenditures, if not recovered in
Consumers rates, may have a material adverse effect upon Consumers' financial
condition and results of operations.
Cleanup and Solid Waste -- Under the Michigan Natural Resources and
Environmental Protection Act, Consumers expects that it will ultimately incur
investigation and remedial action costs at a number of sites. Consumers believes
that these costs will be recoverable in rates under current ratemaking policies.
CMS-48
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Consumers is a potentially responsible party at several contaminated sites
administered under Superfund. Superfund liability is joint and several. Along
with Consumers, many other creditworthy, potentially responsible parties with
substantial assets cooperate with respect to the individual sites. Based upon
past negotiations, Consumers estimates that its share of the total liability for
the known Superfund sites will be between $2 million and $9 million. As of
December 31, 2001, Consumers had accrued the minimum amount of the range for its
estimated Superfund liability.
In October 1998, during routine maintenance activities, Consumers
identified PCB as a component in certain paint, grout and sealant materials at
the Ludington Pumped Storage facility. Consumers removed and replaced part of
the PCB material. In April 2000, Consumers proposed a plan to deal with the
remaining materials and is awaiting a response from the EPA.
CONSUMERS' ELECTRIC UTILITY RATE MATTERS
ELECTRIC RESTRUCTURING: In June 2000, the Michigan Legislature passed
electric utility restructuring legislation known as the Customer Choice Act.
This act: 1) permits all customers to exercise choice of electric generation
suppliers by January 1, 2002; 2) cuts residential electric rates by five
percent; 3) freezes all electric rates through December 31, 2003, and
establishes a rate cap for residential customers through at least December 31,
2005, and a rate cap for small commercial and industrial customers through at
least December 31, 2004; 4) allows for the use of low-cost Securitization bonds
to refinance Stranded Costs as a means of offsetting the earnings impact of the
five percent residential rate reduction; 5) establishes a market power supply
test that may require the transfer of control of a portion of generation
resources in excess of that required to serve firm retail sales requirements (a
requirement with which Consumers believes itself to be in compliance with at
this time); 6) requires Michigan utilities to join a FERC-approved RTO or divest
their interest in transmission facilities to an independent transmission owner;
7) requires the joint expansion of available transmission capability by
Consumers, Detroit Edison and American Electric Power by at least 2,000 MW by
June 5, 2002; 8) allows for the deferred recovery of an annual return of and on
capital expenditures in excess of depreciation levels incurred during and before
the rate cap period; and 9) allows for the recovery of "net" Stranded Costs and
implementation costs incurred as a result of the passage of the act. Consumers
is highly confident that it will meet the conditions of items 5 and 7 above,
prior to the earliest rate cap termination dates specified in the act. Failure
to do so could result in an extension of the rate caps to as late as December
31, 2013. As of December 31, 2001, Consumers spent $26 million on the required
expansion of transmission capabilities. Consumers anticipates it could spend up
to an additional $9 million in 2002, until Consumers sells METC to MTH, as
discussed below under "Transmission."
In October 2000 and January 2001, the MPSC issued orders that authorized
Consumers to issue Securitization bonds. Securitization typically involves the
issuance of asset backed bonds with a higher credit rating than conventional
utility corporate financing. The orders authorized Consumers to securitize
approximately $469 million in qualified costs, which were primarily regulatory
assets plus recovery of the Securitization expenses. Securitization is expected
to result in lower interest costs and a longer amortization period for the
securitized assets, that would offset the majority of the revenue impact of the
five percent residential rate reduction of approximately $22 million in 2000 and
$49 million on an annual basis thereafter that Consumers was required to
implement by the Customer Choice Act. The orders direct Consumers to apply any
cost savings in excess of the five percent residential rate reduction to rate
reductions for non-residential customers and reductions in Stranded Costs for
retail open access customers after the bonds are sold. Excess savings are
currently estimated to be approximately $13 million annually.
In November 2001, Consumers Funding LLC, a special purpose consolidated
subsidiary of Consumers formed to issue the bonds, issued $469 million of
Securitization bonds, Series 2001-1. The Securitization bonds mature at
different times over a period of up to 14 years and have an average interest
rate of 5.3 percent. The last expected maturity date is October 20, 2015. Net
proceeds from the sale of the Securitization bonds after issuance
CMS-49
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
expenses were approximately $460 million. The net proceeds were used by
Consumers to buy back $164 million of its common stock from its parent, CMS
Energy. Beginning in December 2001, and completed in March 2002, the remainder
of these proceeds were used to pay down long-term debt. CMS Energy used the $164
million received from Consumers to pay down its own short-term debt.
Consumers and Consumers Funding LLC will recover the repayment of
principal, interest and other expenses relating to the issuance of the bonds
through a securitization charge and a tax charge that began in December 2001.
These charges are subject to an annual true-up until one year prior to the last
expected bond maturity date, and no more than quarterly thereafter. Current
electric rates design covers these charges, and there will be no impact on rates
for most of Consumers' electric customers until the rate freeze imposed under
the Customer Choice Act expires. Securitization charges collected will be
remitted to a trustee for the Securitization bonds and are not available to
Consumers' creditors.
Regulatory assets are normally amortized over their period of regulated
recovery. Beginning January 1, 2001, the amortization of the approved regulatory
assets being securitized as qualified costs was deferred, which effectively
offset the loss in revenue in 2001 resulting from the five percent residential
rate reduction. In December 2001, after the Securitization bonds were sold, the
amortization was re-established based on a schedule that is the same as the
recovery of the principal amounts of the securitized qualified costs. In 2002,
the amortization amount is expected to be approximately $31 million and the
securitized assets will be fully amortized by the end of 2015.
In 1998, Consumers submitted a plan for electric retail open access to the
MPSC and in March 1999 the MPSC issued orders that generally supported the plan.
Implementation began in September 1999. The Customer Choice Act states that
orders issued by the MPSC before the date of this act that; 1) allow electric
customers to choose their supplier; 2) authorize recovery of "net" Stranded
Costs and implementation costs; and 3) confirm any voluntary commitments of
electric utilities, are in compliance with this act and enforceable by the MPSC.
In September 2000, as required by the MPSC, Consumers once again filed tariffs
governing its retail open access program and addressed revisions appropriate to
comply with the Customer Choice Act. In December 2001, the MPSC approved revised
retail open access service tariffs. The revised tariffs establish the rates,
terms, and conditions under which retail customers will be permitted to choose
an alternative electric supplier for generation services. The tariffs are
effective January 1, 2002, and in general do not require any significant
modifications in the existing retail open access program. The terms of the
tariff allow retail open access customers, upon thirty days notice to Consumers,
to return to Consumers' generation service at current tariff rates. Consumers
may not have sufficient, reasonably priced, capacity to meet the additional
demand needs of returning retail open access customers, and may be forced to
purchase electricity on the spot market at prices higher than it could recover
from its customers.
POWER SUPPLY COSTS: During periods when electric demand is high, the cost
of purchasing electricity on the spot market can be substantial. To reduce
Consumers' exposure to the fluctuating cost of electricity, and to ensure
adequate supply to meet demand, Consumers intends to maintain sufficient
generation and to purchase electricity from others to create a power supply
reserve, also called a reserve margin, of approximately 15 percent. The reserve
margin provides Consumers with additional power supply above its anticipated
peak power supply demands. It also allows Consumers to provide reliable service
to its electric service customers and to protect itself against unscheduled
plant outages and unanticipated demand. For the summers 2002 and 2003, as it has
in previous summers, Consumers is planning for a reserve margin of 15 percent.
The actual reserve margin needed will depend primarily on summer weather
conditions, the level of retail open access requirements being served by others
during the summer, and any unscheduled plant outages. As of February 2002,
alternative electric suppliers are providing generation services to customers
with 309 MW of demand.
To reduce the risk of high electric prices during peak demand periods and
to achieve its reserve margin target, Consumers employs a strategy of purchasing
electric call option contracts for the physical delivery of electricity during
the months of June through September. The cost of these electric call option
contracts for 2001
CMS-50
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
was approximately $66 million. Consumers expects to use a similar strategy in
the future, but cannot predict the cost of this strategy at this time. As of
December 31, 2001, Consumers had purchased or had commitments to purchase
electric call option contracts covering the estimated reserve margin requirement
for the summer 2002 and partially covering the estimated reserve margin
requirements for summers 2003 through 2008, and has recorded an asset of $48
million for these call options, of which $10 million pertains to 2002.
In 1996, as a result of the FERC's efforts to move the electric industry in
Michigan to competition, Detroit Edison gave Consumers the required four-year
contractual notice of its intent to terminate the agreements under which the
companies had jointly operated the MEPCC. Detroit Edison and Consumers
restructured and continued certain parts of the MEPCC control area and joint
transmission operations, but expressly excluded any merchant operations
(electricity purchasing, sales, and dispatch operations). The former joint
merchant operations began operating independently on April 1, 2001. The
termination of joint merchant operations with Detroit Edison has opened Detroit
Edison and Consumers to wholesale market competition as individual companies.
Consumers cannot predict the long-term financial impact of terminating these
joint merchant operations with Detroit Edison.
Prior to 1998, the PSCR process provided for the reconciliation of actual
power supply costs with power supply revenues. This process assured recovery of
all reasonable and prudent power supply costs actually incurred by Consumers,
including the actual cost of fuel for electric generation, and purchased and
interchange power. In 1998, as part of the electric restructuring efforts, the
MPSC suspended the PSCR process through December 31, 2001. Under the suspension,
the MPSC would not grant adjustment of customer rates through 2001. As a result
of the rate freeze imposed by the Customer Choice Act, the current rates will
remain in effect for all customers until at least December 31, 2003 and
therefore the PSCR process remains suspended. Therefore, changes in power supply
costs as a result of fluctuating electric prices will not be reflected in rates
charged to Consumers' customers during the rate freeze period.
Consumers is authorized by the FERC to sell electricity at wholesale market
prices. In authorizing sales at market prices, the FERC considers several
factors, including the extent to which the seller possesses "market power" as a
result of the seller's dominance of generation resources and surplus generation
resources in adjacent wholesale markets. In order to continue to be authorized
to sell at market prices, Consumers filed a traditional market dominance
analysis in October 2001. In November 2001, the FERC issued an order modifying
the method to be used to determine an entity's degree of market power. Due,
however, to several reliability issues brought before the FERC regarding this
order, the FERC has issued a stay of the order. If the modified market power
test in the order is not amended, Consumers cannot be certain at this time if it
will be granted authorization to continue to sell wholesale electricity at
market-based prices and may be limited to charging prices no greater than its
cost-based rates. A final decision about the proposed assessment method is not
expected for several months.
TRANSMISSION: In 1999, the FERC issued Order No. 2000 that strongly
encouraged utilities like Consumers to either transfer operating control of
their transmission facilities to an RTO or sell their transmission facilities to
an independent company. In addition, in June 2000, the Michigan legislature
passed Michigan's Customer Choice Act, which contains a requirement that
utilities transfer the operating authority of transmission facilities to an
independent company or divest the facilities.
In 1999, Consumers and four other electric utility companies joined
together to form a coalition known as the Alliance companies for the purpose of
creating a FERC-approved RTO. In December 2001, the FERC denied the RTO plan
submitted by the Alliance companies and ordered the Alliance companies to
explore membership in the Midwest ISO, whose RTO plan was approved by the FERC.
Membership in the Midwest ISO could potentially increase Consumers' costs during
the period of the rate freeze or rate caps where Consumers could not raise
retail electric rates in Michigan. Consumers and METC are evaluating their
options regarding RTO membership as a result of the December 2001 FERC order.
In October 2000, Consumers filed a request with the FERC to transfer
ownership and control of its electric transmission facilities to METC. This
request was granted in January 2001. In December 2000, the MPSC issued
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CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
an order authorizing an anticipated sale or ownership transfer of Consumers'
electric transmission facilities. In April 2001, the transfer of the electric
transmission facilities to METC took place.
In October 2001, in compliance with Michigan's Customer Choice Act, and in
conformance with FERC Order No. 2000, Consumers executed an agreement to sell
METC for approximately $290 million, depending upon the final date of the sale,
to MTH, a non-affiliated limited partnership whose general partner is a
subsidiary of Trans-Elect, Inc. Certain of Trans-Elect's officers and directors
are former officers and directors of CMS Energy, Consumers and certain of their
subsidiaries, but all had left the employment of such affiliates prior to the
period when the transaction was discussed internally and negotiated with
purchasers. Trans-Elect, Inc. submitted the winning bid to purchase METC through
a competitive bidding process, and the transaction is subject to approval by
various federal agencies. Consumers is not providing any financial or credit
support to Trans-Elect, Inc. in connection with the purchase of METC. Proceeds
from the sale of METC will be used to improve Consumers' balance sheet.
Consumers, through, METC will continue to own and operate the system until the
companies meet all conditions of closing, including approval of the transaction
by the FERC. In February 2002, MTH and Consumers received conditional approval
of the transaction from the FERC. Consumers and Trans-Elect, Inc. have
petitioned for rehearing to resolve certain remaining issues. Trans-Elect, Inc.
has also submitted filings to the FERC designed to bring it into the Midwest ISO
and to establish rates to be charged over the Trans-Elect, Inc. owned system.
Final regulatory approvals and operational transfer are expected to take place
in the first or second quarter of 2002; however, Consumers can make no
assurances as to when or whether the transaction will be completed. After the
sale, Consumers will continue to maintain the system under a long-term contract
with MTH.
Consumers chose to sell its transmission facilities as a form of compliance
with Michigan's Customer Choice Act and FERC Order No. 2000 rather than own and
invest in an asset that it cannot control. After selling its transmission
facilities, Consumers anticipates a reduction in after-tax earnings of
approximately $6 million and $14 million in 2002 and 2003, respectively, as a
result of the loss in revenue associated with wholesale and retail open access
customers that would buy services directly from MTH and the loss of a return on
the transmission assets upon the sale of METC to MTH.
Under the agreement with MTH, and subject to additional RTO surcharges,
transmission rates charged to Consumers will be fixed at current levels until
December 31, 2005, and will be subject to FERC ratemaking thereafter. MTH will
complete the capital program to expand the transmission system's capability to
import electricity into Michigan, as required by the Customer Choice Act.
In the past, when IPPs connected to transmission systems they paid a fee
that was used by transmission companies to offset capital costs incurred to
connect the IPP to the transmission system and provide the system upgrades
needed as a result of the interconnection. In order to promote competition in
the electric generation market, the FERC recently issued an order that requires
the system upgrade portion of the fee to be refunded to IPPs over time as
transmission service is taken. As a result, transmission companies no longer
have the benefit of lowering their capital costs for transmission system
upgrades. This has resulted in METC recording a $30 million liability for a
refund to IPPs.
In June 2001, the Michigan South Central Power Agency and the Michigan
Public Power Agency filed suit against Consumers and METC in a Michigan circuit
court. The suit sought to prevent the sale or transfer of transmission
facilities without first binding a successor to honor the municipal agencies'
ownership interests, contractual agreements and rights that preceded the
transfer of the transmission facilities to METC. In August 2001, the parties
reached two settlements. The settlements were approved by the Michigan circuit
court and were amended in February 2002 to assure that closing could occur if
all conditions to closing are satisfied. The circuit court has retained
jurisdiction over the matter and should dismiss the lawsuit after closing.
ELECTRIC PROCEEDINGS: In 1997, ABATE filed a complaint with the MPSC. The
complaint alleged that Consumers' electric earnings are more than its authorized
rate of return and sought an immediate reduction in
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Consumers' electric rates that approximated $189 million annually. As a result
of the rate freeze imposed by the Customer Choice Act, the MPSC issued an order
in June 2000 dismissing the ABATE complaint. In July 2000, ABATE filed a
rehearing petition with the MPSC, which was denied in October 2001. This
proceeding is now final.
The Customer Choice Act allows for the recovery by an electric utility of
the cost of implementing the act's requirements and "net" Stranded Costs,
without defining the term. The act directs the MPSC to establish a method of
calculating "net" Stranded Costs and of conducting related true-up adjustments.
In December 2001, the MPSC adopted a methodology for calculating "net" Stranded
Costs as the shortfall between (a) the revenue needed to cover the costs
associated with fixed generation assets, generation-related regulatory assets,
and capacity payments associated with purchase power agreements and (b) the
revenues received from retail and wholesale customers under existing rates
available to cover those revenue needs. According to the MPSC, "net" Stranded
Costs are to be recovered from retail open access customers through a Stranded
Cost surcharge. Even though the MPSC ruled that the Stranded Cost surcharge to
be in effect on January 1, 2002 for the recovery of "net" Stranded Costs for
calendar year 2000 for Consumers is zero, the MPSC also indicated that the "net"
Stranded Costs for 2000 would be subject to further review in the context of its
subsequent determinations of "net" Stranded Costs for 2001 and later years. The
MPSC authorized Consumers to use deferred accounting to recognize the future
recovery of assets determined to be stranded by application of the MPSC's
methodology. Consumers is seeking a rehearing and clarification of the
methodology adopted, and will be making future "net" Stranded Cost filings with
the MPSC in March or April of 2002. The outcome of these proceedings before the
MPSC is uncertain at this time.
Between 1999 and 2001, Consumers filed applications with the MPSC for the
recovery of electric utility restructuring implementation costs of $75 million,
incurred between 1997 and 2000. Consumers received final orders that granted
recovery of $41 million of restructuring implementation costs for the years 1997
through 1999, and disallowed recovery of $10 million, based upon a conclusion
that this amount did not represent costs incremental to costs already reflected
in rates. Consumers expects to receive a final order for the 2000 restructuring
implementation costs in 2002. In the orders received for the years 1997 through
1999, the MPSC also ruled that it reserved the right to undertake another review
of the total restructuring implementation costs depending upon the progress and
success of the retail open access program, and ruled that due to the rate freeze
imposed by the Customer Choice Act, it was premature to establish a cost
recovery method for the allowable costs. For the year 2001, Consumers incurred,
and deferred as a regulatory asset, an additional $8 million in implementation
costs for which an application for recovery will be filed with the MPSC in 2002.
In addition, Consumers has recorded a regulatory asset of $9 million for the
cost of money associated with restructuring implementation costs. Consumers
believes the restructuring implementation costs and the associated cost of money
are fully recoverable in accordance with the Customer Choice Act; however,
Consumers cannot predict the amounts the MPSC will approve as recoverable costs.
In 1996, Consumers filed new OATT transmission rates with the FERC for
approval. Certain interveners contested these rates, and hearings were held
before an ALJ in 1998. During 1999, the ALJ rendered an initial decision, which
if upheld by the FERC, would ultimately reduce Consumers' OATT rates and require
Consumers to refund, with interest, any over-collections for past services.
Consumers, since that time has been reserving a portion of revenues billed to
customers under these OATT rates. At the time of the initial decision, Consumers
believed that certain issues would be decided in its favor, and that a
relatively quick order would be issued by the FERC regarding this matter.
However, due to changes in regulatory interpretations, Consumers believes that a
successful resolution of certain issues is less likely. As a result, in
September 2001, Consumers reserved an additional $12 million, including
interest, to fully reflect its estimate of the financial impacts of the initial
decision. Consumers expects that its reserve levels for future transmission
service will be sufficient to satisfy its estimated refund obligation.
CMS-53
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
YEARS ENDED
DECEMBER 31
--------------------
2001 2000 1999
---- ---- ----
IN MILLIONS
Pretax operating income..................................... $36 $56 $49
Income taxes and other...................................... 11 18 15
--- --- ---
Net income.................................................. $25 $38 $34
=== === ===
Power Supply Purchases from the MCV Partnership -- Consumers' annual
obligation to purchase capacity from the MCV Partnership is 1,240 MW through the
termination of the PPA in 2025. The PPA requires Consumers to pay, based on the
MCV Facility's availability, a levelized average capacity charge of 3.77 cents
per kWh, a fixed energy charge, and a variable energy charge based primarily on
Consumers' average cost of coal consumed for all kWh delivered. Since January 1,
1993, the MPSC has permitted Consumers to recover capacity charges averaging
3.62 cents per kWh for 915 MW, plus a substantial portion of the fixed and
variable energy charges. Since January 1, 1996, the MPSC has also permitted
Consumers to recover capacity charges for the remaining 325 MW of contract
capacity with an initial average charge of 2.86 cents per kWh increasing
periodically to an eventual 3.62 cents per kWh by 2004 and thereafter. However,
due to the current freeze of Consumers' retail rates that the Customer Choice
Act requires, the capacity charge for the 325 MW is now frozen at 3.17 cents per
kWh. After September 2007, the PPA's terms require Consumers to pay the MCV
Partnership capacity and energy charges that the MPSC has authorized for
recovery from electric customers.
In 1992, Consumers recognized a loss for the present value of the estimated
future underrecoveries of power supply costs under the PPA based on MPSC cost
recovery orders. Consumers continually evaluates the adequacy of the PPA
liability for future underrecoveries. These evaluations consider management's
assessment of operating levels at the MCV Facility through 2007 along with
certain other factors including MCV related costs that are included in
Consumers' frozen retail rates. During the third quarter of 2001, in connection
with Consumers' long-term electric supply planning, management reviewed the PPA
liability assumptions related to increased expected long-term dispatch of the
MCV Facility and increased MCV related costs. As a result, in September 2001,
Consumers increased the PPA liability by $126 million. Management believes that,
following the increase, the PPA liability adequately reflects the present value
of the PPA's future affect on Consumers. At December 31, 2001 and 2000, the
remaining after-tax present value of the estimated future PPA liability
associated with the loss totaled $119 million and $44 million, respectively. For
further discussion on the impact of the frozen PSCR, see "Electric Rate Matters"
in this Note.
In March 1999, Consumers and the MCV Partnership reached an agreement
effective January 1, 1999, that capped availability payments to the MCV
Partnership at 98.5 percent. If the MCV Facility generates electricity at
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CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the maximum 98.5 percent level during the next five years, Consumers' after-tax
cash underrecoveries associated with the PPA could be as follows:
2002 2003 2004 2005 2006
---- ---- ---- ---- ----
IN MILLIONS
Estimated cash underrecoveries at 98.5%, net of tax......... $37 $37 $36 $36 $36
In February 1998, the MCV Partnership appealed the January 1998 and
February 1998 MPSC orders related to electric utility restructuring. At the same
time, MCV Partnership filed suit in the United States District Court in Grand
Rapids seeking a declaration that the MPSC's failure to provide Consumers and
MCV Partnership a certain source of recovery of capacity payments after 2007
deprived MCV Partnership of its rights under the Public Utilities Regulatory
Policies Act of 1978. In July 1999, the District Court granted MCV Partnership's
motion for summary judgment. The Court permanently prohibited enforcement of the
restructuring orders in any manner that denies any utility the ability to
recover amounts paid to qualifying facilities such as the MCV Facility or that
precludes the MCV Partnership from recovering the avoided cost rate. The MPSC
appealed the Court's order to the 6th Circuit Court of Appeals in Cincinnati. In
June 2001, the 6th Circuit overturned the lower court's order and dismissed the
case against the MPSC. The appellate court determined that the case was
premature and concluded that the qualifying facilities needed to wait until 2008
for an actual factual record to develop before bringing claims against the MPSC
in federal court. The MCV Partnership has requested rehearing of the appellate
court's order.
NUCLEAR MATTERS: In May 2001, Palisades received its annual performance
review in which the NRC stated that Palisades operated in a manner that
preserved public health and safety. The NRC classified all inspection findings
to have very low safety significance. At the time of the annual performance
review, the NRC had planned to conduct only baseline inspections at the facility
through May 31, 2002. The NRC, however, conducted an inspection to oversee the
Palisades June 2001 through January 2002 unplanned outage, which is discussed in
more detail below.
The amount of spent nuclear fuel discharged from the reactor to date
exceeds Palisades' temporary on-site storage pool capacity. Consequently,
Consumers is using NRC-approved steel and concrete vaults, commonly known as
"dry casks", for temporary on-site storage. As of December 31, 2001, Consumers
had loaded 18 dry casks with spent nuclear fuel at Palisades. Palisades will
need to load additional dry casks by 2004 in order to continue operation.
Palisades currently has three empty storage-only dry casks on-site, with storage
pad capacity for up to seven additional loaded dry casks. Consumers anticipates
that licensed transportable dry casks for additional storage, along with more
storage pad capacity, will be available prior to 2004.
In February 2000, Consumers submitted an analysis to the NRC that shows
that the NRC's current screening criteria for reactor vessel embrittlement at
Palisades will not be met until 2014. In December 2000, the NRC issued an
amendment revising the operating license for Palisades and extending the
expiration date to March 2011, with no restrictions related to reactor vessel
embrittlement.
In 2000, Consumers made an equity investment and entered into an operating
agreement with NMC. NMC was formed in 1999 by four utilities to operate and
manage the nuclear generating plants owned by these utilities. Consumers
benefits by consolidating expertise, cost control and resources among all of the
nuclear plants being operated on behalf of the NMC member companies.
In November 2000, Consumers requested approval from the NRC to transfer
operating authority for Palisades to NMC and the request was granted in April
2001. The formal transfer of authority from Consumers to NMC took place in May
2001. Consumers retains ownership of Palisades, its 789 MW output, the current
and future spent fuel on site, and ultimate responsibility for the safe
operation, maintenance and decommissioning of the plant. Under the agreement
that transferred operating authority of the plant to NMC, salaried Palisades'
employees became NMC employees on July 1, 2001. Union employees work under the
supervision of NMC
CMS-55
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
pursuant to their existing labor contract as Consumers' employees. With
Consumers as a partner, NMC currently has responsibility for operating eight
units with 4,500 MW of generating capacity in Wisconsin, Minnesota, Iowa and
Michigan. As a result of the equity ownership in NMC, Consumers may be exposed
to additional financial impacts from the operation of all of those units.
On June 20, 2001, the Palisades reactor was shut down so technicians could
inspect a small steam leak on a control rod drive assembly. There was no risk to
the public or workers. In August 2001, Consumers completed an expanded
inspection that included all similar control rod drive assemblies and elected to
completely replace the defective components. Installation of the new components
was completed in December 2001 and the plant returned to service on January 21,
2002. Consumers' capital expenditures for the components and their installation
was approximately $31 million.
From the start of the June 20th outage through the end of 2001, the impact
on net income of replacement power supply costs associated with the outage was
approximately $59 million. Subsequently, in January 2002, the impact on 2002 net
income was $5 million.
Consumers maintains insurance against property damage, debris removal,
personal injury liability and other risks that are present at its nuclear
facilities. Consumers also maintains coverage for replacement power supply costs
during prolonged accidental outages at Palisades. Insurance would not cover such
costs during the first 12 weeks of any outage, but would cover most of such
costs during the next 52 weeks of the outage, followed by reduced coverage to 80
percent for 110 additional weeks. The June 2001 through January 2002 Palisades
outage, however, was not an insured event. If certain covered losses occur at
its own or other nuclear plants similarly insured, Consumers could be required
to pay maximum assessments of $26.9 million in any one year to NEIL; $88 million
per occurrence under the nuclear liability secondary financial protection
program, limited to $10 million per occurrence in any year; and $6 million if
nuclear workers claim bodily injury from radiation exposure. Consumers considers
the possibility of these assessments to be remote. NEIL limits its coverage from
multiple acts of terrorism during a twelve-month period to a maximum aggregate
of $3.24 billion, allocated among the claimants, plus recoverable reinsurance,
indemnity and other sources. The nuclear liability insurers for Palisades and
Big Rock also limit the amount of their coverage for liability from terrorist
acts to $200 million. This could affect the amount of loss coverage for
Consumers should multiple acts of terrorism occur. The Price Anderson Act
expires on August 1, 2002 and is currently in the process of reauthorization by
the U. S. Congress. It is possible that the Price Anderson Act will not be
reauthorized or changes may be made that significantly affect the insurance
provisions for nuclear plants.
COMMITMENTS FOR FUTURE PURCHASES: Consumers enters into a number of
unconditional purchase obligations that represent normal business operating
contracts. These contracts are used to assure an adequate supply of goods and
services necessary for the operation of its business and to minimize exposure to
market price fluctuations. Consumers believes that these future costs are
prudent and reasonably assured of recovery in future rates.
Coal Supply: Consumers has entered into coal supply contracts with various
suppliers for its coal-fired generating stations. Under the terms of these
agreements, Consumers is obligated to take physical delivery of the coal and
make payment based upon the contract terms. Consumers' current contracts have
expiration dates that range from 2002 to 2004, and total an estimated $269
million. Long-term coal supply contracts account for approximately 60 to 85
percent of Consumers annual coal requirements. In 2001, coal purchases totaled
$255 million of which $197 million (71 percent of the tonnage requirement) was
under long-term contract. Consumers supplements its long-term contracts with
spot-market purchases.
Power Supply, Capacity and Transmission: As of December 31, 2001, Consumers
had future unrecognized commitments to purchase power supply and transmission
services under fixed price forward contracts for the years 2002 and 2003
totaling $26 million. Consumers also had commitments to purchase capacity and
energy under long-term power purchase agreements with various generating plants
including the MCV Facility. These
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CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
contracts require monthly capacity payments based on the plants' availability or
deliverability. These payments for the years 2002 through 2033 total an
estimated $17 billion, undiscounted, which includes $13 billion related to the
MCV Facility. This amount may vary depending upon plant availability and fuel
costs. If a plant were not available to deliver electricity to Consumers, then
Consumers would not be obligated to make the capacity payment until the plant
could deliver. For further information, see "The Midland Cogeneration Venture"
for information concerning power purchases from the MCV Facility.
DERIVATIVE ACTIVITIES: Consumers' electric business uses purchased electric
call option contracts to meet its regulatory obligation to serve, which requires
providing a physical supply of electricity to customers, and to manage electric
cost and to ensure a reliable source of capacity during periods of peak demand.
On January 1, 2001, upon initial adoption of SFAS No. 133, derivative and hedge
accounting for certain utility industry contracts, particularly electric call
option contracts and option-like contracts, and contracts subject to Bookouts
was uncertain. Consumers accounted for these types of contracts as derivatives
that qualified for the normal purchase exception of SFAS No. 133 and, therefore,
did not record these contracts on the balance sheet at fair value. In June 2001,
the FASB issued guidance that effectively resolved the accounting for these
contracts as of July 1, 2001. Consumers evaluated its option and option-like
contracts and determined that the majority of these contracts qualified for the
normal purchase exception of SFAS No. 133; however, certain electric call option
contracts were required to be accounted for as derivatives. On July 1, 2001,
upon initial adoption of the standard for these contracts, Consumers recorded a
$3 million, net of tax, cumulative effect adjustment as an unrealized loss
decreasing accumulated other comprehensive income. This adjustment relates to
the difference between the fair value and the recorded book value of these
electric call option contracts. The adjustment to accumulated other
comprehensive income relates to electric call option contracts that qualified
for cash flow hedge accounting prior to the initial adoption of SFAS No. 133.
After July 1, 2001, these contracts will not qualify for hedge accounting under
SFAS No. 133 and, therefore, Consumers will record any change in fair value
subsequent to July 1, 2001 directly in earnings, which could cause earnings
volatility. The initial amount recorded in other comprehensive income will be
reclassified to earnings as the forecasted future transactions occur or the call
options expire. The majority of these contracts expired in the third quarter
2001 and the remaining contracts will expire in 2002. As of December 31, 2001,
$2 million, net of tax, was reclassified to earnings as part of cost of power
supply. The remainder is expected to be reclassified to earnings in the third
quarter of 2002.
In December 2001, the FASB issued revised guidance regarding derivative
accounting for electric call option contracts and option-like contracts. The
revised guidance amends the criteria to be used to determine if derivative
accounting is required. Consumers re-evaluated its electric call option and
option-like contracts and determined that under the revised guidance additional
contracts require derivative accounting. Therefore, as of December 31, 2001,
upon initial adoption of the revised guidance for these contracts, Consumers
recorded an $11 million, net of tax, cumulative effect adjustment as a decrease
to earnings. This adjustment relates to the difference between the fair value
and the recorded book value of these electric call option contracts. Consumers
will record any change in fair value subsequent to December 31, 2001 directly in
earnings, which could cause earnings volatility.
Consumers' electric business also uses purchased gas call option and gas
swap contracts to hedge against price risk due to the fluctuations in the market
price of gas used as fuel for generation of electricity. These contracts are
financial contracts that will be used to offset increases in the price of
probable forecasted gas purchases. These contracts are designated as cash flow
hedges and, therefore, Consumers will record any change in the fair value of
these contracts in other comprehensive income until the forecasted transaction
occurs. Once the forecasted gas purchases occur, the net gain or loss on these
contracts will be reclassified to earnings and recorded as part of the cost of
power supply. These contracts have been highly effective in achieving offsetting
cash flows of future gas purchases, and no component of the gain or loss was
excluded from the assessment of the hedge's effectiveness. As a result, for the
year ended December 31, 2001, no net gain or loss has been recognized in
earnings as a result of hedge ineffectiveness. These contracts expired in
December 2001.
CMS-57
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSUMERS' GAS UTILITY CONTINGENCIES
GAS ENVIRONMENTAL MATTERS: Under the Michigan Natural Resources and
Environmental Protection Act, Consumers expects that it will ultimately incur
investigation and remedial action costs at a number of sites. These include 23
former manufactured gas plant facilities, which were operated by Consumers for
some part of their operating lives, including sites in which it has a partial or
no current ownership interest. Consumers has completed initial investigations at
the 23 sites. For sites where Consumers has received site-wide study plan
approvals, it will continue to implement these plans. It will also work toward
closure of environmental issues at sites as studies are completed. Consumers has
estimated its costs related to further investigation and remedial action for all
23 sites using the Gas Research Institute-Manufactured Gas Plant Probabilistic
Cost Model. The estimated total costs are between $82 million and $113 million;
these estimates are based on discounted 2001 costs and follow EPA recommended
use of discount rates between 3 and 7 percent for this type of activity.
Consumers expects to recover a significant portion of these costs through
insurance proceeds and through MPSC approved rates charged to its customers. As
of December 31, 2001, Consumers has an accrued liability of $57 million, (net of
$25 million of expenditures incurred to date), and a regulatory asset of $70
million. Any significant change in assumptions, such as an increase in the
number of sites, different remediation techniques, nature and extent of
contamination, and legal and regulatory requirements, could affect Consumers'
estimate of remedial action costs. The MPSC currently allows Consumers to
recover $1 million of manufactured gas plant facilities environmental clean-up
costs annually. Consumers defers and amortizes, over a period of ten years,
manufactured gas plant facilities environmental clean-up costs above the amount
currently being recovered in rates. Additional rate recognition of amortization
expense cannot begin until after a prudency review in a future general gas rate
case. Consumers' position in the current general gas rate case is that all
manufactured gas plant facilities environmental clean-up expenditures for years
1998 through 2002 are prudent.
CONSUMERS' GAS UTILITY RATE MATTERS
GAS RESTRUCTURING: From April 1, 1998 to March 31, 2001, Consumers
conducted an experimental gas customer choice pilot program that froze gas
distribution and GCR rates through the period. On April 1, 2001, a permanent gas
customer choice program commenced under which Consumers returned to a GCR
mechanism that allows it to recover from its bundled customers all prudently
incurred costs to purchase the natural gas commodity and transport it to
Consumers for ultimate distribution to customers.
GAS COST RECOVERY: As part of a settlement agreement approved by the MPSC
in July 2001, Consumers agreed not to bill a price in excess of $4.69 per mcf of
natural gas under the GCR factor mechanism through March 2002. This agreement is
not expected to affect Consumers' earnings outlook because Consumers recovers
from customers the amount that it actually pays for natural gas in the
reconciliation process. The settlement does not affect Consumers' June 2001
request to the MPSC for a distribution service rate increase. The MPSC also
approved a methodology to adjust bills for market price increases quarterly
without returning to the MPSC for approval. In December 2001, Consumers filed
its GCR Plan for the period April 2002 through March 2003. Consumers is
requesting authority to bill a GCR factor up to $3.50 per mcf for this period.
GAS RATE CASE: In June 2001, Consumers filed an application with the MPSC
seeking a distribution service rate increase. Consumers is seeking a 12.25%
authorized return on equity. Contemporaneously with this filing, Consumers
requested partial and immediate relief in the annual amount of $33 million. The
relief is primarily for higher carrying costs on more expensive natural gas
inventory than is currently included in rates. In October 2001, Consumers
revised its filing to reflect lower operating costs and requested a $133 million
annual distribution service rate increase. In December 2001, the MPSC authorized
a $15 million annual interim increase in distribution service rate revenues. The
order authorizes Consumers to apply the interim increase on its gas sales
customers' bills for service effective December 21, 2001. The increase is under
bond and subject to refund if the final rate increase is less than the interim
rate increase. In February 2002, Consumers revised its filing to reflect lower
estimated gas inventory prices and revised depreciation expense and is now
requesting a $105 million
CMS-58
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
annual distribution service rate increase. If the MPSC approves Consumers' total
request, then Consumers could bill an additional amount of approximately $4.78
per month, representing a 7.7 percent increase in the typical residential
customer's average monthly bill.
OTHER GAS UNCERTAINTIES
COMMITMENTS FOR GAS SUPPLIES: Consumers contracts to purchase gas and
transportation from various suppliers for its natural gas business. These
contracts have expiration dates that range from 2002 to 2005. Consumers' 2001
gas requirements totaled 229 bcf at a cost of $962 million. As of the end of
2001, Consumers expected gas requirements for 2002 are 205 bcf of which 54
percent is covered by existing contracts.
PANHANDLE MATTERS
REGULATORY MATTERS: Effective August 1996, Trunkline placed into effect a
general rate increase, subject to refund. In September 1999, Trunkline filed a
FERC settlement agreement to resolve certain issues in this proceeding. FERC
approved this settlement in February 2000 and required refunds of approximately
$2 million that were made in April 2000, with supplemental refunds of $1.3
million in June 2000. In January 2001, Trunkline filed a settlement that
included the remaining issues in this proceeding. In April 2001, the FERC
approved Trunkline's uncontested settlement, without modification. As part of
the settlement, Trunkline reduced its maximum rates in May 2001 and made the
remaining refunds totaling approximately $8 million in June 2001.
In conjunction with a FERC order issued in September 1997, FERC required
certain natural gas producers to refund previously collected Kansas ad-valorem
taxes to interstate natural gas pipelines, including Panhandle Eastern Pipe
Line. FERC ordered these pipelines to refund these amounts to their customers.
In June 2001, Panhandle Eastern Pipe Line filed a proposed settlement with the
FERC which was supported by most of the customers and affected producers. In
October 2001, the FERC approved that settlement. The settlement provided for a
resolution of the Kansas ad-valorem tax matter on the Panhandle Eastern Pipe
Line system for a majority of refund amounts. Certain producers and the state of
Missouri elected to not participate in the settlement. At December 31, 2001 and
December 31, 2000, accounts receivable included $8 million and $59 million,
respectively, due from natural gas producers, and other current liabilities
included $11 million and $59 million, respectively, for related obligations.
Amounts collected and amounts refunded in the fourth quarter 2001 were $31
million and $27 million, respectively; including $3 million refunded to Michigan
Gas Storage. Remaining amounts collected but not refunded are subject to refund
pending resolution of issues remaining in the FERC docket and Kansas intrastate
proceeding.
In March 2001, Trunkline received FERC approval to abandon 720 miles of its
26-inch diameter pipeline that extends from Longville, Louisiana to Bourbon,
Illinois. This filing was in conjunction with a plan for Centennial Pipeline to
convert the line from natural gas transmission service to a refined products
pipeline, expected to be in service by March 2002. Panhandle owns a one-third
interest in a newly formed joint venture, along with TEPPCO Partners LP and
Marathon Ashland Petroleum LLC. Effective April 2001, the 26-inch pipeline was
conveyed to Centennial and the book value of the asset, including related
goodwill, is now reflected in Investments on the Consolidated Balance Sheet.
In July 2001, Panhandle Eastern Pipe Line filed a settlement with customers
on Order 637 matters to resolve issues including capacity release and imbalance
penalties, among others. On October 12, 2001 and December 19, 2001 FERC issued
orders approving the settlement, with modifications. The settlement changes
became final effective February 1, 2002. Management believes that this matter
will not have a material adverse effect on consolidated results of operations or
financial position.
In August 2001, an offer of settlement of Trunkline LNG rates sponsored
jointly by Trunkline LNG, BG LNG Services and Duke LNG Sales was filed with the
FERC and was approved on October 11, 2001. The
CMS-59
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
settlement was placed into effect on January 1, 2002. This will result in
reduced revenues for Trunkline LNG from 2001 levels but less volatility due to a
22-year contract with BG LNG Services.
For a number of years, Panhandle has sought refunds from the State of
Kansas concerning certain corporate income tax issues for the years 1981 through
1984. On January 25, 2002, the Kansas Supreme Court entered an order affirming a
previous Board of Tax Court finding that Panhandle was entitled to refunds which
with interest total approximately $26 million. Pursuant to the provisions of the
purchase agreement between CMS Energy and a subsidiary of Duke Energy, Duke
retains the benefits of any tax refunds or liabilities for periods prior to the
date of the sale of Panhandle to CMS Energy.
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. Panhandle
communicated with the EPA and appropriate state regulatory agencies on these
matters. Under the terms of the sale of Panhandle to CMS Energy, a subsidiary of
Duke Energy is obligated to complete the Panhandle clean-up programs at certain
agreed-upon sites and to indemnify against certain future environmental
litigation and claims. Panhandle expects these clean-up programs to continue for
several years. The Illinois EPA included Panhandle Eastern Pipe Line and
Trunkline, together with other non-affiliated parties, in a cleanup of former
waste oil disposal sites in Illinois. Prior to a partial cleanup by the EPA, a
preliminary study estimated the cleanup costs at one of the sites to be between
$5 million and $15 million. The State of Illinois contends that Panhandle
Eastern Pipe Line's and Trunkline's share for the costs of assessment and
remediation of the sites, based on the volume of waste sent to the facilities,
is 17.32 percent. Management believes that the costs of cleanup, if any, will
not have a material adverse impact on Panhandle's financial position, liquidity,
or results of operations.
AIR QUALITY CONTROL: In 1998, the EPA issued a final rule on regional ozone
control that requires revised SIPS for 22 states, including five states in which
Panhandle operates. This EPA ruling was challenged in court by various states,
industry and other interests, including the INGAA, an industry group to which
Panhandle belongs. In March 2000, the court upheld most aspects of the EPA's
rule, but agreed with INGAA's position and remanded to the EPA the sections of
the rule that affected Panhandle. Based on the court's decision, most of the
states subject to the rule submitted their SIP revisions in October 2000.
However, the EPA must revise the section of the rule that affected Panhandle's
facilities. Panhandle expects the EPA to make this section of the rule effective
in 2002 and expects the future costs to range from $13 million to $29 million
for capital improvements to comply.
In 1997, the Illinois Environmental Protection Agency initiated an
enforcement proceeding relating to alleged air quality permit violations at
Panhandle's Glenarm Compressor Station. On November 15, 2001 the Illinois
Pollution Control Board approved an order imposing a penalty of $850 thousand,
plus fees and cost reimbursements of $116 thousand. Under terms of the sale of
Panhandle to CMS Energy, a subsidiary of Duke Energy was obligated to indemnify
Panhandle against this environmental penalty. The state issued a permit in
February of 2002 requiring the installation of certain capital improvements at
the facility at a cost of approximately $3 million. It is expected that the
capital improvements will occur in 2002 and 2003.
OTHER UNCERTAINTIES
CMS GENERATION-OXFORD TIRE RECYCLING: In 1999, the California Regional
Water Control Board of the State of California named CMS Generation as a
potentially responsible party for the cleanup of the waste from a fire that
occurred in September 1999 at the Filbin tire pile. The tire pile was maintained
as fuel for an adjacent power plant owned by Modesto Energy Limited Partnership.
Oxford Tire Recycling of Northern California, Inc., a subsidiary of CMS
Generation until 1995, owned the Filbin tire pile. CMS Generation has not owned
an interest in Oxford Tire Recycling of Northern California, Inc. or Modesto
Energy Limited Partnership since 1995. In
CMS-60
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2000, the California Attorney General filed a complaint against the potentially
responsible parties for cleanup of the site and assessed penalties for violation
of the California Regional Water Control Board order. The parties have reached a
settlement with the state, which the court approved, pursuant to which we must
pay $6 million, $2 million of which CMS Energy had already paid.
In connection with this fire, several class action lawsuits were filed
claiming that the fire resulted in damage to the class and that management of
the site caused the fire. CMS Generation believes these cases are without merit
and intends to vigorously defend against them. CMS Generation's primary
insurance carrier has agreed to defend and indemnify CMS Generation for a
portion of defense costs up to the policy limits. CMS is currently in settlement
negotiations regarding the private toxic tort lawsuit.
DEARBORN INDUSTRIAL GENERATION: In October 2001, Duke/Fluor Daniel (DFD)
presented DIG with a change order to their construction contract and filed an
action in Michigan state court claiming damages in the amount of $110 million,
plus interest and costs, which DFD states represents the cumulative amount owed
by DIG for delays DFD believes DIG caused and for prior change orders that DIG
previously rejected. DFD also filed a construction lien for the $110 million.
DIG, in addition to drawing down on three letters of credit totaling $30 million
that it obtained from DFD has filed an arbitration claim against DFD asserting
in excess of an additional $75 million in claims against DFD. The judge in the
Michigan State Court case entered an order staying DFD's prosecution of its
claims in the court case and permitting the arbitration to proceed. CMS Energy
believes the claims are without merit and will continue to vigorously contest
them, but any change order costs ultimately paid would be capitalized as a
project construction cost.
Ford Motor Company and Rouge Steel Company, the customers of the DIG
facility, continue to be in discussion with DIG regarding several commercial
issues that have arisen between the parties.
CMS OIL AND GAS: In 1999, a former subsidiary of CMS Oil and Gas, Terra
Energy Ltd., was sued by Star Energy, Inc. and White Pines Enterprises LLC in
the 13th Judicial Circuit Court in Antrim County, Michigan, on grounds, among
others, that Terra violated oil and gas lease and other agreements by failing to
drill wells it had committed to drill. Among the defenses asserted by Terra were
that the wells were not required to be drilled and the claimant's sole remedy
was termination of the oil and gas lease. During the trial, the judge declared
the lease terminated in favor of White Pines. The jury then awarded Star Energy
and White Pines $8 million in damages. Terra has filed an appeal. CMS Energy
believes Terra has meritorious grounds for either reversal of the judgment or
reduction of damages. CMS Energy has an indemnification obligation in favor of
the purchaser of its Michigan properties with respect to this litigation.
OTHER: CMS Energy and Enterprises, including subsidiaries, have guaranteed
payment of obligations, through letters of credit and surety bonds, of
unconsolidated affiliates and related parties approximating $1.9 billion as of
December 31, 2001.
Additionally, Enterprises, in the ordinary course of business, has
guarantees in place for contracts of CMS MST that contain certain schedule and
performance requirements. As of December 31, 2001, the actual amount of
financial exposure covered by these guarantees was $805 million. This amount
excludes the guarantees associated with CMS MST's natural gas sales arrangements
totaling $287 million, which are recorded as liabilities on the Consolidated
Balance Sheet at December 31, 2001. Management monitors and approves these
obligations and believes it is unlikely that CMS Energy or Enterprises would be
required to perform or otherwise incur any material losses associated with the
above obligations.
Certain CMS Gas Transmission and CMS Generation affiliates in Argentina
received notice from various Argentine provinces claiming stamp taxes and
associated penalties and interest arising from various gas transportation
transactions. Although these claims total approximately $75 million, the
affiliates and CMS Energy believe the claims are without merit and will continue
to vigorously contest them.
CMS-61
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Gary Adams, formerly the largest shareholder of Continental Gas, now CMS
Field Services, commenced arbitration in connection with the decline in the
value of CMS shares he received in exchange for his Continental shares. In
November 2001, the arbitrator awarded Adams Affiliates, Inc. and Cottonwood
Partnership $2 million in rescissory damages and interest (claimants were
seeking over $16 million) and $1 million in attorneys' fees (reasonable
attorneys' fees must be awarded in a successful Blue Sky Act claim, but the
arbitrator reduced the amount being sought by claimants by 40%).
Adams et al, also filed a separate action against the individual defendants
Messrs. Hopper, Haener, Wright, Fryling and McCormick and the Directors (except
Mr. Way) in Wayne County Circuit Court, which the court dismissed with prejudice
on February 4, 2002, pursuant to an order entered by stipulation.
CMS Generation does not currently expect to incur significant capital costs
at its power facilities for compliance with current U.S. environmental
regulatory standards.
In addition to the matters disclosed in this Note, Consumers, Panhandle 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.
ARGENTINA ECONOMIC EMERGENCY: In January 2002, the Republic of Argentina
enacted the Law of Public Emergency and Foreign Exchange System. This law, among
other things, repeals the fixed exchange rate of one U.S. Dollar to one
Argentina Peso, converts all Dollar-denominated utility tariffs and energy
contract obligations into Pesos at the same one-to-one exchange rate, and
directs the President of Argentina to renegotiate such tariffs. Because
convertibility of the Peso was temporarily suspended at December 31, 2001, CMS
Energy used the first subsequently available, free-floating exchange rate of
1.65 Pesos per Dollar on January 11, 2002, as required by SFAS No. 52, to record
an $18 million loss resulting from the translation of Peso-denominated monetary
assets and liabilities.
In February 2002, the Republic of Argentina issued additional decrees that
required all monetary obligations (including current debt and future contract
payment obligations) denominated in foreign currencies to be converted into
Pesos. These February decrees also allow the Argentine judiciary essentially to
rewrite private contracts denominated in Dollars or other foreign currencies if
the parties cannot agree on how to share equitably the impact of the conversion
of their contract payment obligations into Pesos.
The exchange rate on March 28, 2002 was 2.945 Pesos to the Dollar. While
CMS Energy management cannot predict the most likely average or end-of-period
Peso to Dollar exchange rates for 2002, the following table contains
management's current estimates of the impacts at various currency exchange rates
that the changes in Argentine laws, the currency devaluation and other recent
events in Argentina could have on CMS Energy's results of operation and
financial condition. Amounts are calculated assuming that the exchange rates
remain constant throughout the year.
"Initial net income adjustments" reflects changes in the value of
Peso-denominated monetary assets (such as receivables) and liabilities of
Argentina-based subsidiaries that would continue to use the Dollar as functional
currency. "Operating income adjustments" reflects lower net project revenues
resulting from the conversion to Pesos of utility tariffs and energy contract
obligations that were previously calculated in Dollars. "Operating income
adjustments" are divided between Argentine investments that CMS Energy currently
intends to retain and those investments it intends to sell. Investments in the
latter category eventually may be classified as discontinued operations in CMS
Energy's financial statements. "Reductions to stockholders' equity" reflects the
potential
CMS-62
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
effects of recording a change in functional currency from the Dollar to the
Peso, as well as the reduction due to the effects of lower net income on
retained earnings.
The amounts below represent increases from previous estimates based upon
further examination of relevant accounting provisions of SFAS No. 52. The
amounts are only estimates; further reductions to income and stockholders'
equity could occur as a result of reduced asset valuations. Management is
continuing to assess the impacts that the changing laws and regulations (and the
resulting effective expropriation of CMS Energy's investments) could have on CMS
Energy's results of operations and its approximate $700 million investment in
Argentina.
EXCHANGE RATE OF PESOS TO ONE DOLLAR 1.65 3.00 4.00
- ------------------------------------ ---- ---- ----
IN MILLIONS, EXCEPT PER SHARE DATA
Income Statement:
Initial net income adjustments.............................. $ -- $ (7) $ (9)
Operating income adjustments (cents per share)
Retained investments...................................... $(0.11) $(0.20) $(0.23)
Investments held for sale................................. $(0.09) $(0.14) $(0.15)
Balance Sheet(a):
Reductions to stockholders' equity.......................... $ (300) $ (450) $ (475)
- -------------------------
(a) Includes the potential effects of recording a change in functional currency.
ENRON BANKRUPTCY: On December 2, 2001, Enron Corporation, along with
certain of its affiliates, filed a voluntary petition for Chapter 11
reorganization. Consumers, CMS MS&T, CMS Field Services, CMS Panhandle and three
affiliates in which MS&T owns a 50% interest had contracts with various Enron
affiliates at that time. CMS Energy has terminated all gas, power, liquids,
petroleum products, and financial contracts with the various Enron affiliates,
and exercised all applicable rights of setoff. Enron, creditors of Enron, or
others may challenge the actions taken by CMS Energy to terminate the contracts
and exercise rights of setoff. These parties may also challenge CMS Energy's
calculations of the value attributed to certain contracts and the return by
Enron of a cash margin previously posted by CMS Energy pursuant to these
contracts. CMS Energy believes that the contracts it terminated constitute
either forward contracts or swap agreements, for which the Federal Bankruptcy
Code provides special rights of termination and setoff, and that the return of
the cash margin is permitted under the Federal Bankruptcy Code and other laws.
CAPITAL EXPENDITURES: CMS Energy estimates capital expenditures, including
investments in unconsolidated subsidiaries and new lease commitments, of $950
million for 2002, $930 million for 2003 and $1.0 billion for 2004. These amounts
exclude expenditures associated with the LNG terminal expansion for which an
application was filed with the FERC on December 26, 2001, estimated at $25
million in 2002, $81 million in 2003 and $49 million in 2004.
6: SHORT-TERM FINANCINGS
AUTHORIZATION: At December 31, 2001, Consumers had FERC authorization to
issue or guarantee through June 2002, up to $1.4 billion of short-term
securities outstanding at any one time. Consumers also had remaining FERC
authorization to issue through June 2002 up to $250 million and $570 million of
long-term securities for refinancing or refunding purposes and for general
corporate purposes, respectively.
In October 2001, FERC granted Consumers' August 2001 request for
authorization of up to $500 million of First Mortgage Bonds to be issued as
collateral for the outstanding short-term securities. Further, in November 2001,
FERC granted Consumers' August 2001 request for authorization of an additional
$500 million of long-term securities for general corporate purposes and up to an
additional $500 million of First Mortgage Bonds to be issued solely as security
for the long-term securities.
CMS-63
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SHORT-TERM FINANCINGS: Consumers has an unsecured $300 million credit
facility maturing in July 2002 and unsecured lines of credit aggregating $215
million. These facilities are available to finance seasonal working capital
requirements and to pay for capital expenditures between long-term financings.
At December 31, 2001, a total of $416 million was outstanding at a weighted
average interest rate of 2.7 percent, compared with $403 million outstanding at
December 31, 2000, at a weighted average interest rate of 7.4 percent.
Consumers currently has in place a $450 million trade receivables sale
program. At December 31, 2001 and 2000, receivables sold under the program
totaled $334 million and $325 million, respectively. Accounts receivable and
accrued revenue in the Consolidated Balance Sheets have been reduced to reflect
receivables sold.
7: LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31
----------------
INTEREST RATE(%) MATURITY 2001 2000
---------------- -------- ---- ----
IN MILLIONS
CMS ENERGY
Senior Notes....................................... 8.125 2002 $ 350 $ 350
7.625 2004 180 180
6.750 2004 300 300
9.875 2007 500 500
8.900 2008 269 --
7.500 2009 480 480
8.000 2011 -- 250
8.500 2011 350 --
8.375 2013 150 150
------ ------
2,579 2,210
General Term Notes
Series A......................................... 7.897(a) 2002-2010 31 110
Series B......................................... 8.072(a) 2002-2010 14 107
Series C......................................... 7.878(a) 2002-2010 58 127
Series D......................................... 6.985(a) 2002-2010 168 191
Series E......................................... 7.761(a) 2002-2010 391 397
Series F......................................... 8.156(a) 2002-2010 288 11
------ ------
950 943
Extendible Tenor Rate Adjusted Securities.......... 7.000 2005 180 180
Senior Credit Facility............................. 2002-2004 167 400
Lines of Credit.................................... 2002 22 29
Other.............................................. 10 --
------ ------
379 609
CONSUMERS ENERGY
First Mortgage Bonds............................... 6.375 2003 300 300
7.375 2023 208 263
------ ------
508 563
Senior Notes....................................... (c) 2001 -- 125
(d) 2002 100 100
6.250 2006 332 --
6.375 2008 159 250
6.200 2008 250 250
6.875 2018 180 225
CMS-64
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31
----------------
INTEREST RATE(%) MATURITY 2001 2000
---------------- -------- ---- ----
IN MILLIONS
6.500 2018 141 200
6.500 2028 143 145
------ ------
1,305 1,295
Securitization Bonds............................... 2005-2016 469 --
Long-Term Bank Loans............................... 2002-2003 184 190
Nuclear Fuel Disposal.............................. (b) 135 130
Pollution Control Revenue Bonds.................... 5.100 2010-2018 126 126
Other.............................................. 8 --
------ ------
922 446
PANHANDLE
Senior Notes....................................... 7.875 2004 100 100
6.125 2004 292 300
7.250 2006 75 --
6.500 2009 182 200
8.250 2010 60 100
7.950 2023 99 100
7.200 2024 63 100
7.000 2029 215 300
------ ------
1,086 1,200
OTHER.............................................. 197 184
Principal Amount Outstanding....................... 7,926 7,450
Current Amounts.................................... (967) (649)
Net Unamortized Discount........................... (36) (31)
------ ------
Total Long-Term Debt............................... $6,923 $6,770
====== ======
- -------------------------
(a) Represents the weighted average interest rate at December 31, 2001.
(b) Maturity date uncertain (see Note 2 -- Summary of Significant Accounting
Policies and Other Matters -- Nuclear Fuel Cost).
(c) The notes bear interest at a floating rate reset each quarter based upon
LIBOR plus .60%.
(d) The notes bear interest at a floating rate reset each quarter based upon
LIBOR plus .98%.
The scheduled maturities of long-term debt and improvement fund obligations
are as follows: $967 million in 2002, $793 million in 2003, $1,171 million in
2004, $468 million in 2005 and $4,491 million in 2006 and thereafter.
CMS ENERGY
CMS Energy's $750 million Senior Credit Facilities consist of a $450
million one-year revolving credit facility, maturing in June 2002 and a $300
million three-year revolving credit facility, maturing in June 2004.
Additionally, CMS Energy has unsecured lines of credit in an aggregate amount of
$22 million. As of December 31, 2001, $302 million was outstanding under the
Senior Credit Facilities, including $135 million letters of credit, and $22
million was outstanding under the unsecured lines of credit.
In March 2001, CMS Energy sold $350 million aggregate principal amount of
8.50 percent senior notes due 2011. Net proceeds from the sale were
approximately $337 million. CMS Energy used the net proceeds to reduce
borrowings under the Senior Credit Facilities and for general corporate
purposes.
CMS-65
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In July 2001, CMS Energy sold $269 million aggregate principal amount of
8.9 percent senior notes due 2008. Net proceeds from the sale of approximately
$262 million were used to repay the $250 million aggregate principal amount of
8.0 percent Reset Put Securities due 2011, which were called at par by Banc of
America Securities LLC, and to pay the related call option of approximately $12
million.
In July 2001, CMS Energy called $240 million of GTNs at interest rates
ranging from 7.75% to 8.375% using funds available under CMS Energy's Senior
Credit Facilities at a lower borrowing cost.
CONSUMERS
LONG-TERM FINANCINGS: In September 2001, Consumers sold $350 million
aggregate principal amount of 6.25 percent senior notes, maturing in September
2006. Net proceeds from the sale were $347 million. Consumers used the net
proceeds to reduce borrowings on various lines of credit and on a revolving
credit facility.
In November 2001, Consumers Funding LLC, a special purpose subsidiary of
Consumers, issued $469 million of Securitization Bonds, Series 2001-1. The
Securitization Bonds mature at different times over a period of up to 14 years
and have a weighted average interest rate of 5.3 percent.
In March 2002, Consumers sold $300 million principal amount of six percent
senior notes, maturing in March 2005. Net proceeds from the sale were $299
million. Consumers used the net proceeds to replace a first mortgage bond that
was to mature in 2003.
FIRST MORTGAGE BONDS: Consumers secures its First Mortgage Bonds by a
mortgage and lien on substantially all of its property. Consumers' ability to
issue and sell securities is restricted by certain provisions in its First
Mortgage Bond Indenture, its Articles of Incorporation and the need for
regulatory approvals to meet appropriate federal law.
OTHER: Consumers has a total of $126 million of long-term pollution control
revenue bonds outstanding, secured by first mortgage bonds and insurance
policies. These bonds had a weighted average interest rate of 2.8 percent at
December 31, 2001.
PANHANDLE
In December 2001, Panhandle entered into a transaction that created CMS
Trunkline LNG Holdings, LLC which now owns 100 percent of Trunkline LNG. LNG
Holdings is now jointly owned by a subsidiary of Panhandle Eastern Pipe Line and
Dekatherm Investor Trust, an unaffiliated entity. This transaction monetized the
value of Trunkline LNG and the value created by the 22-year BG contract. As part
of this monetization transaction, Panhandle received proceeds of approximately
$310 million, of which $75 million was in the form of 7.25% senior notes, due
2006, payable to LNG Holdings. The remainder of the proceeds was used to retire
$189 million of senior notes with various maturity dates. In addition, Panhandle
recorded a deferred credit of $183 million on the balance sheet at December 31,
2001, which represents a commitment by Panhandle to reinvest the proceeds to
finance the LNG expansion project. Due to Panhandle's lack of control over LNG
Holdings, LNG Holdings is not consolidated in the financial statements of
Panhandle and thus, the debt of LNG Holdings is not on Panhandle's balance sheet
at December 31, 2001.
CMS OIL AND GAS
CMS Oil and Gas has a $150 million floating rate revolving credit facility
that matures in May 2002. At December 31, 2001, the amount utilized under the
credit facility was $110 million, with another $5 million securing a letter of
credit. CMS Oil and Gas used the proceeds from the Equatorial Guinea sale to
repay outstanding borrowings on January 3, 2002.
CMS-66
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8: CAPITALIZATION
CMS ENERGY
The authorized capital stock of CMS Energy consists of 250 million shares
of CMS Energy Common Stock and 10 million shares of CMS Energy Preferred Stock,
$.01 par value.
In February 2000, the Board of Directors approved a stock repurchase
program whereby CMS Energy could reacquire up to 10 million shares of CMS Energy
Common Stock. From February through April 2000, CMS Energy repurchased
approximately 6.6 million shares for $129 million. In September 2001, CMS Energy
repurchased 232,000 shares for approximately $5 million. CMS Energy does not
anticipate the repurchase of any significant shares in the near term while
attempting to strengthen its balance sheet.
In August 2000, CMS Energy and CMS Trust III, a Delaware statutory business
trust established by CMS Energy, sold 8.8 million units of 7.25 percent Premium
Equity Participating Securities. Each security consists of a trust preferred
security of CMS Energy Trust III maturing in four years and a contract requiring
the purchase, no later than August 2003, of CMS Energy Common Stock at a rate
that adjusts for the market price at the time of conversion. Net proceeds from
the sale totaled $213 million. CMS Energy used the net proceeds, along with $37
million from the Senior Credit Facility, to redeem the Trust Preferred
Securities of the CMS RHINOS Trust.
In October 2000, CMS Energy sold 11 million new shares of CMS Energy Common
Stock and used the net proceeds of approximately $305 million primarily to repay
borrowings under the Senior Credit Facility. CMS Energy used the remaining
amounts to repay various lines of credit.
In February 2001, CMS Energy sold 10 million shares of CMS Energy Common
Stock. CMS Energy used the net proceeds of approximately $296 million to repay
borrowings under the Senior Credit Facilities.
COMPANY-OBLIGATED PREFERRED SECURITIES: CMS Energy and Consumers each have
wholly-owned statutory business trusts that are consolidated with the respective
parent company. CMS Energy and Consumers created their respective trusts for the
sole purpose of issuing Trust Preferred Securities. In each case, the primary
asset of the trust is a note or debenture of the parent company. The terms of
the Trust Preferred Security parallel the terms of the related parent company
note or debenture. The terms, rights and obligations of the Trust Preferred
Security and related note or debenture are also defined in the related indenture
through which the note or debenture was issued, the parent guarantee of the
related Trust Preferred Security and the declaration of trust for the particular
trust. All of these documents together with their related note or debenture and
Trust Preferred Security constitute a full and unconditional guarantee by the
parent company of the trust's obligations under the Trust Preferred Security. In
addition to the similar provisions previously discussed, specific terms of the
securities follow:
AMOUNT
CMS ENERGY OUTSTANDING
TRUST AND SECURITIES ----------- EARLIEST
DECEMBER 31 RATE(%) 2001 2000 MATURITY REDEMPTION
- -------------------- ------- ---- ---- -------- ----------
IN MILLIONS
CMS Energy Trust I(a)............................. 7.75 $173 $173 2027 2001
CMS Energy Trust II(b)............................ 8.75 301 301 2004 --
CMS Energy Trust III(c)........................... 7.25 220 220 2004 --
---- ----
Total Amount Outstanding.......................... $694 $694
==== ====
- -------------------------
(a) Represents Quarterly Income Preferred Securities that are convertible into
1.2255 shares of CMS Energy Common Stock (equivalent to a conversion price
of $40.80). CMS Energy may cause conversion rights to expire on or after
July 2001.
CMS-67
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(b) Represents Adjustable Convertible Preferred Securities that include 0.125
percent annual contract payments for the stock purchase contract that
obligates the holder to purchase not more than 1.2121 and not less than
.7830 shares of CMS Energy Common Stock in July 2002.
(c) Represents Premium Equity Participating Security Units in which holders are
obligated to purchase a variable number of shares of CMS Energy Common
Stock by August 2003.
AMOUNT
CONSUMERS ENERGY COMPANY OUTSTANDING
TRUST AND SECURITIES ----------- EARLIEST
DECEMBER 31 RATE(%) 2001 2000 MATURITY REDEMPTION
- ------------------------ ------- ---- ---- -------- ----------
IN MILLIONS
Consumers Power Company Financing I, Trust
Originated Preferred Securities................. 8.36 $100 $100 2015 2000
Consumers Energy Company Financing II, Trust
Originated Preferred Securities................. 8.20 120 120 2027 2002
Consumers Energy Company Financing III, Trust
Originated Preferred Securities................. 9.25 175 175 2029 2004
Consumers Energy Company Financing IV, Trust
Preferred Securities............................ 9.00 125 -- 2031 2006
---- ----
Total Amount Outstanding.......................... $520 $395
==== ====
In March 2002, Consumers reduced its outstanding debt to Consumers Power
Company Financing I, Trust Obligated Preferred Securities by $30 million.
OTHER: Under its most restrictive debt covenant, CMS Energy could pay $729
million in common dividends at December 31, 2001.
CONSUMERS
Under the provisions of its Articles of Incorporation, Consumers had $233
million of unrestricted retained earnings available to pay common dividends at
December 31, 2001. In January 2002, Consumers declared a $55 million common
dividend which was paid in February 2002.
CMS-68
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9: EARNINGS PER SHARE AND DIVIDENDS
The following table presents a reconciliation of the numerators and
denominators of the basic and diluted earnings per share computations.
COMPUTATION OF EARNINGS PER SHARE:
2001 2000 1999
---- ---- ----
IN MILLIONS, EXCEPT PER SHARE AMOUNTS
NET INCOME APPLICABLE TO BASIC AND DILUTED EPS
Consolidated Net Income..................................... $ (545) $ 36 $ 277
====== ====== ======
CMS Energy:
Net Income Attributable to Common Stocks -- Basic......... $ (545)(f) $ 36(e) $ 241(a)
Add conversion of 7.75% Trust Preferred Securities (net of
tax)................................................... --(c) --(c) 9
------ ------ ------
Net Income Attributable to Common Stocks -- Diluted....... $ (545) $ 36 $ 250(a)
====== ====== ======
Class G:
Basic and Diluted......................................... $ -- $ -- $ 36(a)(b)
====== ====== ======
AVERAGE COMMON SHARES OUTSTANDING APPLICABLE TO BASIC AND
DILUTED EPS
CMS Energy:
Average Shares -- Basic................................... 130.8 113.1 110.1
Add conversion of 7.75% Trust Preferred Securities........ --(c) --(c) 4.3
Stock options............................................. --(d) --(d) 0.3
------ ------ ------
Average Shares -- Diluted................................. 130.8 113.1 114.7
====== ====== ======
Class G:
Average Shares Basic and Diluted.......................... -- -- 8.6(b)
====== ====== ======
EARNINGS PER AVERAGE COMMON SHARE
CMS Energy:
Basic..................................................... $(4.17)(f) $ 0.32(e) $ 2.18(a)
Diluted................................................... $(4.17)(f) $ 0.32(e) $ 2.17(a)
====== ====== ======
Class G:
Basic and Diluted......................................... $ -- $ -- $ 4.21(a)(b)
====== ====== ======
- -------------------------
(a) Reflects the reallocation of net income and earnings per share as a result
of the premium on exchange of Class G Common Stock. As a result, CMS
Energy's basic and diluted earnings per share were reduced $.26 and $.25,
respectively, and Class G's basic and diluted earnings per share were
increased $3.31.
(b) From January 1, 1999 to October 25, 1999.
(c) The effects of converting the 7.75% Trust Preferred Securities were not
included in the computation of diluted earnings per share because to do so
would have been antidilutive.
(d) Shares of outstanding stock options were not included in the computation of
diluted earnings per share because to do so would have been antidilutive.
(e) Includes the cumulative effect of accounting change for exploration and
production inventories, which decreased net income by $5 million, or $.04
per basic and diluted share of CMS Energy Common Stock.
(f) Includes the cumulative effect of accounting change for purchased power
options, extraordinary item, and discontinued operations, which decreased
net income by $11 million, or $0.09 per basic and diluted share,
CMS-69
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
$18 million, or $0.14 per basic and diluted share, and $185 million, or
$1.41 per basic and diluted share, respectively.
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. Earnings per share attributable to all
classes of Common Stock from January 1, 1999 to October 25, 1999 reflect the
performance of the gas distribution, storage and transportation business
currently conducted by 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 of Class G Common Stock 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.
In February, May, August and November 2001, CMS Energy paid dividends of
$.365 per share on CMS Energy Common Stock. In February 2002, CMS Energy paid a
quarterly dividend of $.365 per share on CMS Energy Common Stock.
10: RISK MANAGEMENT ACTIVITIES AND FINANCIAL INSTRUMENTS
The objective of the CMS Energy risk management policy is to analyze,
manage and coordinate the identified risk exposures of the individual business
segments and to exploit the presence of internal hedge opportunities that exist
among its diversified business segments. CMS Energy, on behalf of its regulated
and non-regulated subsidiaries, utilizes a variety of derivative instruments for
both trading and non-trading purposes and executes these transactions with
external parties through its marketing subsidiary, CMS MST. These derivative
instruments include futures contracts, swaps, options and forward contracts to
manage exposure to fluctuations in commodity prices, interest rates and foreign
exchange rates. In order for derivative instruments to qualify for hedge
accounting under SFAS No. 133, the hedging relationship must be formally
documented at inception and be highly effective in achieving offsetting cash
flows or offsetting changes in fair value attributable to the risk being hedged.
Derivative instruments contain credit risk if the counterparties, including
financial institutions and energy marketers, fail to perform under the
agreements. CMS Energy minimizes such risk by performing financial credit
mitigation programs including, among other things, using publicly available
credit ratings of such counterparties, internally developed statistical models
for credit scoring and use of internal hedging programs to minimize exposure to
external counterparties. No material nonperformance is expected.
COMMODITY DERIVATIVES: Prior to January 1, 2001, CMS Energy accounted for
its non-trading commodity contracts as hedges and deferred any changes in the
market value and gains/losses resulting from settlements until the hedged
transaction was completed. As of January 1, 2001, commodity contracts are now
accounted for in accordance with the requirements of SFAS No. 133, as amended
and interpreted, and may or may not qualify for hedge accounting treatment
depending on the characteristics of each contract.
Consumers' electric business uses purchased electric call option contracts
to meet its regulatory obligation to serve, which requires providing a physical
supply of electricity to customers, and to manage electric cost and to ensure a
reliable source of capacity during periods of peak demand. On January 1, 2001,
upon initial adoption of SFAS No. 133, derivative and hedge accounting for
certain utility industry contracts, particularly electric call option contracts
and option-like contracts, and contracts subject to Bookouts was uncertain.
Consumers accounted for these types of contracts as derivatives that qualified
for the normal purchase exception of SFAS No. 133 and, therefore, did not record
these contracts on the balance sheet at fair value. In June 2001, the FASB
issued guidance that effectively resolved the accounting for these contracts as
of July 1, 2001. Consumers
CMS-70
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
evaluated its option and option-like contracts and determined that the majority
of these contracts qualified for the normal purchase exception of SFAS No. 133;
however, certain electric call option contracts were required to be accounted
for as derivatives. On July 1, 2001, upon initial adoption of the standard for
these contracts, Consumers recorded a $3 million, net of tax, cumulative effect
adjustment as an unrealized loss decreasing accumulated other comprehensive
income. This adjustment relates to the difference between the current fair value
and the recorded book value of these electric call option contracts. The
adjustment to accumulated other comprehensive income relates to electric call
option contracts that qualified for cash flow hedge accounting prior to the
initial adoption of SFAS No. 133. After July 1, 2001, these contracts will not
qualify for hedge accounting under SFAS No. 133 and, therefore, Consumers will
record any change in fair value subsequent to July 1, 2001 directly in earnings,
which could cause earnings volatility. The initial amount recorded in other
comprehensive income will be reclassified to earnings as the forecasted future
transactions occur or the call options expire. The majority of these contracts
expired in the third quarter 2001 and the remaining contracts will expire in
2002. As of December 31, 2001, $2 million, net of tax, was reclassified to
earnings as part of cost of power supply. The remainder is expected to be
reclassified to earnings in the third quarter of 2002.
In December 2001, the FASB issued revised guidance regarding derivative
accounting for electric call option contracts and option-like contracts. The
revised guidance amends the criteria to be used to determine if derivative
accounting is required. Consumers reevaluated its electric call option and
option-like contracts and determined that under the revised guidance additional
contracts require derivative accounting. Therefore, as of December 31, 2001,
upon initial adoption of the revised guidance for these contracts, Consumers
recorded an $11 million, net of tax, cumulative effect adjustment as a decrease
to earnings. This adjustment relates to the difference between the current fair
value and the recorded book value of these electric call option contracts.
Consumers will record any change in fair value subsequent to December 31, 2001
directly in earnings, which could cause earnings volatility.
Consumers' electric business also uses purchased gas call option and gas
swap contracts to hedge against price risk due to the fluctuations in the market
price of gas used as fuel for generation of electricity. These contracts are
financial contracts that will be used to offset increases in the price of
probable forecasted gas purchases. These contracts are designated as cash flow
hedges and, therefore, Consumers will record any change in the fair value of
these contracts in other comprehensive income until the forecasted transaction
occurs. Once the forecasted gas purchases occur, the net gain or loss on these
contracts will be reclassified to earnings and recorded as part of the cost of
power supply. These contracts have been highly effective in achieving offsetting
cash flows of future gas purchases, and no component of the gain or loss was
excluded from the assessment of the hedge's effectiveness. As a result, for the
year ended December 31, 2001, no net gain or loss has been recognized in
earnings as a result of hedge ineffectiveness. These contracts expired in
December 2001.
CMS Energy, through its subsidiary CMS MST, engages in trading activities.
CMS MST manages any open positions within certain guidelines that limit its
exposure to market risk and requires timely reporting to management of potential
financial exposure. These guidelines include statistical risk tolerance limits
using historical price movements to calculate daily value at risk measurements.
CMS MST's trading activities are accounted for under the mark-to-market method
of accounting. Under mark-to-market accounting, energy-trading contracts are
reflected at fair market value, net of reserves, with unrealized gains and
losses recorded as an asset or liability in the consolidated balance sheets.
These assets and liabilities are affected by the timing of settlements related
to these contracts; current-period changes from newly originated transactions
and the impact of price movements. Changes in fair values are recognized as
revenues in the consolidated statements of income in the period in which the
changes occur. Market prices used to value outstanding financial instruments
reflect management's consideration of, among other things, closing exchange and
over-the-counter quotations. In certain of these markets, long-term contract
commitments may extend beyond the period in which market quotations for such
contracts are available. The lack of long-term pricing liquidity requires the
use of mathematical models to value these commitments under the accounting
method employed. These mathematical models utilize historical market data to
forecast future elongated pricing curves, which are used to value the
commitments that reside outside of the liquid market quotations. Realized cash
returns on these commitments may vary, either positively
CMS-71
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
or negatively, from the results estimated through application of forecasted
pricing curves generated through application of the mathematical model. CMS
Energy believes that its mathematical models utilize state-of-the-art
technology, pertinent industry data and prudent discounting in order to forecast
certain elongated pricing curves. These market prices are adjusted to reflect
the potential impact of liquidating the company's position in an orderly manner
over a reasonable period of time under present market conditions.
In connection with the market valuation of its energy commodity contracts,
CMS Energy maintains reserves for credit risks based on the financial condition
of counterparties. Counterparties in its trading portfolio consist principally
of financial institutions and major energy trading companies. The
creditworthiness of these counterparties may impact overall exposure to credit
risk, either positively or negatively; however, with regard to its
counterparties, CMS Energy maintains credit policies that management believes
minimize overall credit risk. Determination of the credit quality of its
counterparties is based upon a number of factors, including credit ratings,
financial condition, and collateral requirements. When applicable, CMS Energy
employs standardized agreements that allow for netting of positive and negative
exposures associated with a single counterparty. Based on these policies, its
current exposures and its credit reserves, CMS Energy does not anticipate a
material adverse effect on its financial position or results of operations as a
result of counterparty nonperformance.
At December 31, 2001, CMS MST has recorded a net asset of $108 million, net
of reserves, related to the unrealized mark-to-market gains on existing
arrangements. For 2001 and 2000, CMS MST reflected $61 million and $8 million,
respectively, of mark-to-market revenues, net of reserves, primarily from newly
originated long-term power sales contracts and wholesale gas trading
transactions.
The following tables provide a summary of the fair value of CMS Energy's
energy commodity contracts as of December 31, 2001.
IN MILLIONS
Fair value of contracts outstanding as of December 31,
2000...................................................... $ 16
Contracts realized or otherwise settled during the
period(a)................................................. (6)
Fair value of new contracts when entered into during the
period.................................................... 52
Changes in fair value attributable to changes in valuation
techniques and assumptions................................ 12
Other changes in fair value(b).............................. 34
----
Fair value of contracts outstanding as of December 31,
2001...................................................... $108
====
FAIR VALUE OF CONTRACTS AT DECEMBER 31, 2001
--------------------------------------------------------------------------------
TOTAL MATURITY LESS MATURITY MATURITY MATURITY IN
SOURCE OF FAIR VALUE FAIR VALUE THAN 1 YEAR 1 TO 3 YEARS 4 TO 5 YEARS EXCESS OF 5 YEARS
- -------------------- ---------- ------------- ------------ ------------ -----------------
IN MILLIONS
Prices actively quoted....... $ 59 $32 $21 $ 5 $ 1
Prices provided by other
external sources........... 17 1 4 9 3
Prices based on models and
other valuation methods.... 32 3 11 11 7
---- --- --- --- ---
Total........................ $108 $36 $36 $25 $11
==== === === === ===
- -------------------------
(a) Reflects value of contracts, included in December 31, 2000 values, that
expired during 2001.
(b) Reflects changes in price and net increase/decrease in size of forward
positions as well as changes to mark-to-market reserve accounts.
FLOATING TO FIXED INTEREST RATE SWAPS: CMS Energy and its subsidiaries
enter into floating to fixed interest rate swap agreements to reduce the impact
of interest rate fluctuations. These swaps are designated as cash flow hedges
and the difference between the amounts paid and received under the swaps is
accrued and
CMS-72
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
recorded as an adjustment to interest expense over the term of the agreement.
Changes in the fair value of these swaps are recorded in accumulated other
comprehensive income until the swaps are terminated. As of December 31, 2001,
these swaps had a negative fair value of $11 million that if sustained, will be
reclassified to earnings as the swaps are settled on a quarterly basis. No
ineffectiveness was recognized during 2001 under the requirements of SFAS No.
133.
Notional amounts reflect the volume of transactions but do not represent
the amount exchanged by the parties to the financial instruments. Accordingly,
notional amounts do not necessarily reflect CMS Energy's exposure to credit or
market risks. As of December 31, 2001 and 2000, the weighted average interest
rate associated with outstanding swaps was approximately 5.9 percent and 6.8
percent, respectively.
FLOATING TO FIXED NOTIONAL MATURITY FAIR UNREALIZED
INTEREST RATE SWAPS AMOUNT DATE VALUE GAIN (LOSS)
- ------------------- -------- -------- ----- -----------
IN MILLIONS
December 31, 2001.................................. $ 295 2002-2006 $(11) $(2)
December 31, 2000.................................. $1,086 2001-2006 $ (9) $(9)
FIXED TO FLOATING INTEREST RATE SWAPS: CMS Energy monitors its debt
portfolio mix of fixed and variable rate instruments and from time to time
enters into fixed to floating rate swaps to maintain the optimum mix of fixed
and floating rate debt. These swaps are designated as fair value hedges and any
realized gains or losses in the fair value are amortized to earnings after the
termination of the hedge instrument over the remaining life of the hedged item.
The outstanding swaps as of December 31, 2001, had a negative fair value of $1
million that were recognized on the consolidated balance sheets as a derivative
liability. No ineffectiveness was recognized during 2001 under the requirements
of SFAS No. 133.
Amortization of gains on swaps that were terminated in 2001 was
approximately $1 million that was recorded as an adjustment to interest expense.
Notional amounts reflect the volume of transactions but do not represent
the amount exchanged by the parties to the financial instruments. Accordingly,
notional amounts do not necessarily reflect CMS Energy's exposure to credit or
market risks. As of December 31, 2001, the weighted average interest rate
associated with outstanding debt was approximately 7.5 percent.
FIXED TO FLOATING NOTIONAL MATURITY FAIR UNREALIZED
INTEREST RATE SWAPS AMOUNT DATE VALUE GAIN (LOSS)
- ------------------- -------- -------- ----- -----------
IN MILLIONS
December 31, 2001................................... $200 2004-2005 $ (1) $ (1)
December 31, 2000................................... -- -- -- --
FOREIGN EXCHANGE DERIVATIVES: CMS Energy uses forward exchange and option
contracts 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
estimated fair value of the foreign exchange and option contracts at December
31, 2001 and 2000 was $1 million and $10 million, respectively; representing the
amount CMS Energy would pay upon settlement.
Foreign exchange contracts outstanding as of December 31, 2001 had a total
notional amount of $50 million related to investments in Brazil. The Brazilian
contracts mature during 2002 and have a weighted average transaction rate of
approximately 2.58 Brazilian real to the U.S. Dollar.
CMS-73
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The notional amount of the outstanding foreign exchange contracts at
December 31, 2000 was $546 million consisting of $21 million, $75 million, and
$450 million for Australian, Brazilian and Argentine, respectively. All of these
contracts have expired.
FINANCIAL INSTRUMENTS: The carrying amounts of cash, short-term investments
and current liabilities approximate their fair values due to their short-term
nature. The estimated fair values of long-term investments are based on quoted
market prices or, in the absence of specific market prices, on quoted market
prices of similar investments or other valuation techniques. Judgment may also
be required to interpret market data to develop certain estimates of fair value.
Accordingly, the estimates determined as of December 31, 2001 and 2000 are not
necessarily indicative of the amounts that may be realized in current market
exchanges. The carrying amounts of all long-term investments in financial
instruments, except for those as shown below, approximate fair value.
YEARS ENDED DECEMBER 31
--------------------------------------------------------------------------------
2001 2000
------------------------------------- -------------------------------------
CARRYING FAIR UNREALIZED CARRYING FAIR UNREALIZED
COST VALUE GAIN (LOSS) COST VALUE GAIN (LOSS)
-------- ----- ----------- -------- ----- -----------
IN MILLIONS
Long-Term Debt(a).............. $6,923 $6,770 $(153) $6,770 $6,567 $(203)
Preferred Stock and Trust
Preferred Securities......... 1,258 1,169 (89) 1,133 1,083 (50)
Available-for-Sale Securities:
Nuclear Decommissioning(b)..... $ 467 $ 581 $ 114 $ 480 $ 611 $ 131
SERP........................... 52 56 4 50 59 9
Trading Securities:
Investments.................. $ 3 $ 7 $ 4 $ 4 $ 9 $ 5
- -------------------------
(a) Settlement of long-term debt is generally not expected until maturity.
(b) Unrealized gains and losses on nuclear decommissioning investments are
classified in accumulated depreciation.
CMS Energy transferred $85 million of investment securities from the
available-for-sale category into the trading category, and correspondingly,
reflected $14 million of unrealized gains in consolidated net income for the
year ended December 31, 1999.
11: INCOME TAXES
CMS Energy and its subsidiaries file a consolidated federal income tax
return. Income taxes are generally allocated based on each company's separate
taxable income. CMS Energy and Consumers practice full deferred tax accounting
for temporary differences, but federal income taxes have not been recorded on
the undistributed earnings of international subsidiaries where CMS Energy
intends to permanently reinvest those earnings. Upon distribution, those
earnings may be subject to both U.S. income taxes (adjusted for foreign tax
credits or deductions) and withholding taxes payable to various foreign
countries. It is not practical to estimate the amount of unrecognized deferred
income taxes or withholding taxes on undistributed earnings.
CMS-74
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CMS Energy used ITC to reduce current income taxes payable, and amortizes
ITC over the life of the related property. Any AMT paid generally becomes a tax
credit that CMS Energy can carry-forward indefinitely to reduce regular tax
liabilities in future periods when regular taxes paid exceed the tax calculated
for AMT. The significant components of income tax expense (benefit) consisted
of:
YEARS ENDED DECEMBER 31
-------------------------
2001 2000 1999
---- ---- ----
IN MILLIONS
Current income taxes
Federal and other......................................... $(231) $ 24 $40
State and local........................................... 7 4 2
Foreign................................................... (3) 45 12
----- ---- ---
(227) 73 54
Deferred income taxes
Federal................................................... 102(a) (48)(b) 21
State..................................................... 3 11 4
Foreign................................................... 29 30 (6)
----- ---- ---
134 (7) 19
Deferred ITC, net........................................... (8) (8) (9)
----- ---- ---
$(101) $ 58 $64
===== ==== ===
- -------------------------
(a) Includes ($12) million for 2001 discontinued operations and losses on
disposition of discontinued operations, ($10) million for extraordinary
item, and ($6) million for change in derivative accounting.
(b) Includes $(2) million for 2000 change in exploration and production
inventory accounting.
The principal components of CMS Energy's deferred tax assets (liabilities)
recognized in the balance sheet are as follows:
DECEMBER 31
------------------
2001 2000
---- ----
IN MILLIONS
Property.................................................... $ (817) $ (714)
Securitization costs........................................ (194) (185)
Unconsolidated investments.................................. (101) (112)
Postretirement benefits..................................... (76) (88)
Abandoned Midland project................................... (4) (8)
Employee benefit obligations (includes postretirement
benefits of $106 and $129)................................ 134 174
AMT carryforward............................................ 182 136
Power purchases............................................. 64 24
Regulatory liabilities...................................... 105 86
Other....................................................... (61) (18)
------- -------
$ (768) $ (705)
Valuation allowances........................................ (57) (5)
------- -------
$ (824) $ (710)
======= =======
Gross deferred tax liabilities.............................. $(1,379) $(1,734)
Gross deferred tax assets................................... 555 1,024
------- -------
$ (824) $ (710)
======= =======
CMS-75
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The actual income tax expense differs from the amount computed by applying
the statutory federal tax rate of 35% to income before income taxes as follows:
YEARS ENDED DECEMBER 31
--------------------------
2001 2000 1999
---- ---- ----
IN MILLIONS
Consolidated net income before preferred dividends
Domestic.................................................. $(326) $ 208 $187
Foreign................................................... (217) (170) 96
----- ----- ----
(543) 38 283
Income tax expense.......................................... (101)(a) 58(a) 64
(644) 96 347
Statutory federal income tax rate........................... x 35% x 35% x 35%
----- ----- ----
Expected income tax expense................................. (225) 34 121
Increase (decrease) in taxes from:
Capitalized overheads previously flowed through............. 2 5 5
Differences in book and tax depreciation not previously
deferred.................................................. 21 22 19
Impact of foreign taxes, tax rates and credits.............. 37 24 15
Write-off of Loy Yang and Nitrotec Investments.............. -- 53 (6)
Asset sales................................................. -- (5) --
Discontinued operations..................................... 26 -- --
Undistributed earnings of international subsidiaries........ (55) (67) (45)
Repatriated earnings of international subsidiaries.......... 44 1 1
ITC amortization/adjustments................................ (8) (8) (8)
Section 29 fuel tax credits................................. -- (3) (12)
Valuation allowances, net................................... 52 -- (10)(b)
State and Local income taxes, net of federal benefit........ 6 11 5
Reversal of income tax accruals............................. (2) (9) (21)
Other, net.................................................. 1 -- --
----- ----- ----
$(101) $ 58 $ 64
===== ===== ====
Effective tax rate.......................................... 15.7% 60.4% 18.4%
- -------------------------
(a) Includes ($12) million for 2001 discontinued operations and losses on
disposition of discontinued operations, ($10) million for 2001
extraordinary item, ($6) million for 2001 change in derivative accounting
and ($2) million for 2000 change in property tax accounting.
(b) Benefit realization of preacquisition carryforwards (1998).
12: EXECUTIVE INCENTIVE COMPENSATION
Under CMS Energy's Performance Incentive Stock Plan, restricted shares of
Common Stock as well as stock options and stock appreciation rights relating to
Common Stock may be granted to key employees based on their contributions to the
successful management of CMS Energy and its subsidiaries. Awards under the plan
may consist of any class of Common Stock. Certain plan awards are subject to
performance-based business criteria. The plan reserves for award not more than
five percent of Common Stock outstanding on January 1 each year, less (i) the
number of shares of restricted Common Stock awarded and (ii) Common Stock
subject to options granted under the plan during the immediately preceding four
calendar years. The number of shares of restricted Common Stock awarded under
this plan cannot exceed 20 percent of the aggregate number of shares reserved
for award. Any forfeitures of shares previously awarded will increase the number
of shares available to be awarded
CMS-76
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
under the plan. At December 31, 2001, awards of up to 2,321,094 shares of CMS
Energy Common Stock may be issued.
Restricted shares of Common Stock are outstanding shares with full voting
and dividend rights. These awards vest over five years at the rate of 25 percent
per year after two years. The restricted shares are subject to achievement of
specified levels of total shareholder return and are subject to forfeiture if
employment terminates before vesting. If performance objectives are exceeded,
the plan provides additional awards. Restricted shares vest fully if control of
CMS Energy changes, as defined by the plan. At December 31, 2001, 608,438 of the
787,985 shares of restricted CMS Energy Common Stock outstanding are subject to
performance objectives.
Under the plan, stock options and stock appreciation rights relating to
Common Stock are granted with an exercise price equal to the closing market
price on each grant date. Some options may be exercised upon grant; some vest
over five years at the rate of 25 percent per year beginning at the end of the
first year and others vest over three years at a rate of 33 1/3 percent per year
after one year. All options expire up to ten years and one month from date of
grant. In 1999, all outstanding Class G Common Stock and options were converted
to CMS Energy Common Stock and options at an exchange rate of .7041 per Class G
Common Stock or option held. The original vesting or exercise period was
retained for all converted shares or options. The status of the restricted stock
granted to CMS Energy's key employees under the Performance Incentive Stock Plan
and options granted under the plan follows.
RESTRICTED
STOCK OPTIONS
---------- -----------------------------
NUMBER NUMBER WEIGHTED-AVERAGE
OF SHARES OF SHARES EXERCISE PRICE
--------- --------- ----------------
CMS ENERGY COMMON STOCK:
Outstanding at January 1, 1999........................... 861,744 1,709,792 $32.07
Granted................................................ 284,364 1,137,912 $39.23
Converted from Class G................................. 6,060 19,503 $32.62
Exercised or Issued.................................... (172,916) (258,267) $29.44
Forfeited.............................................. (95,123) -- --
Expired................................................ -- (78,900) $39.58
-------- --------- ------
Outstanding at December 31, 1999......................... 884,129 2,530,040 $35.33
Granted................................................ 246,250 878,630 $17.96
Exercised or Issued.................................... (134,173) (185,600) $17.36
Forfeited.............................................. (209,779) -- --
Expired................................................ -- (164,884) $34.58
-------- --------- ------
Outstanding at December 31, 2000......................... 786,427 3,058,186 $31.47
Granted................................................ 266,500 1,036,000 $30.21
Exercised or Issued.................................... (82,765) (150,174) $19.11
Forfeited.............................................. (182,177) -- --
Expired................................................ -- (31,832) $35.10
-------- --------- ------
Outstanding at December 31, 2001......................... 787,985 3,912,180 $31.58
======== ========= ======
CMS-77
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 2001:
NUMBER OF WEIGHTED- WEIGHTED-
SHARES AVERAGE AVERAGE
OUTSTANDING REMAINING LIFE EXERCISE PRICE
Range of Exercise Prices ----------- -------------- --------------
CMS ENERGY COMMON STOCK:
$17.00 -- $22.69....................................... 799,146 7.09 years $18.21
$22.78 -- $30.63....................................... 615,576 5.23 years $28.10
$31.04 -- $31.04....................................... 805,000 9.22 years $31.04
$33.11 -- $39.06....................................... 1,118,552 7.11 years $37.79
$41.44 -- $44.06....................................... 573,906 6.92 years $42.60
$17.00 -- $44.06....................................... 3,912,180 7.21 years $31.58
The weighted average fair value of options granted for CMS Energy Common
Stock was $6.43 in 2001, $2.04 in 2000, and $5.93 in 1999. Fair value is
estimated using the Black-Scholes model, a mathematical formula used to value
options traded on securities exchanges, with the following assumptions:
YEARS ENDED DECEMBER 31
---------------------------
2001 2000 1999
---- ---- ----
CMS ENERGY COMMON STOCK OPTIONS
Risk-free interest rate..................................... 4.77% 6.56% 5.65%
Expected stock-price volatility............................. 30.59% 27.25% 16.81%
Expected dividend rate...................................... $.365 $.365 $.365
Expected option life (years)................................ 4.2 4.1 4.5
CMS Energy applies APB Opinion No. 25 and related interpretations in
accounting for the Performance Incentive Stock Plan. Since stock options are
granted at market price, no compensation cost has been recognized for stock
options granted under the plan. The net compensation cost charged against income
for restricted stock was $1 million in 2001, $2 million in 2000, and $12 million
in 1999. If compensation cost for stock options had been determined in
accordance with SFAS No. 123, CMS Energy's consolidated net income and earnings
per share would have been as follows:
YEARS ENDED DECEMBER 31
--------------------------------
PRO FORMA AS REPORTED
-------------- --------------
2000 2001 2000 2001
---- ---- ---- ----
IN MILLIONS, EXCEPT PER
SHARE AMOUNTS
Consolidated Net Income..................................... $ (549) $ 35 $ (545) $ 36
Earnings Per Average Common Share
Basic.................................................. (4.20) .31 (4.17) .32
Diluted................................................ (4.20) .31 (4.17) .32
13: RETIREMENT BENEFITS
CMS Energy and its subsidiaries provide retirement benefits under a number
of different plans, including certain health care and life insurance benefits
under OPEB, benefits to certain management employees under SERP, and benefits to
substantially all its employees under a trusteed, non-contributory, defined
benefit Pension Plan of Consumers and CMS Energy, and a defined contribution
401(k) plan.
Amounts presented below for the Pension Plan include amounts for employees
of CMS Energy and nonutility affiliates which were not distinguishable from the
plan's total assets.
CMS-78
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Weighted-Average Assumptions:
YEARS ENDED DECEMBER 31
------------------------------------------------------
PENSION & SERP OPEB
------------------------ ------------------------
2001 2000 1999 2001 2000 1999
---- ---- ---- ---- ---- ----
Discount rate..................................... 7.25% 7.75% 7.75% 7.25% 7.75% 7.75%
Expected long-term rate of return on plan
assets:......................................... 9.75% 9.75% 9.25%
Union........................................... -- -- -- 9.75% 9.75% 7.00%
Non-Union....................................... -- -- -- 6.00% 6.00% 7.00%
Rate of compensation increase:
Pension -- to age 45............................ 5.25% 5.25% 5.25%
-- age 45 to assumed retirement......... 3.75% 3.75% 3.75%
SERP.............................................. 5.50% 5.50% 5.50%
Retiree health care costs at December 31, 2001 are based on the assumption
that costs would increase 7.5 percent in 2001 with a gradual decrease to 5.5
percent in 2009 and thereafter.
Net Pension Plan, SERP and OPEB costs consist of:
YEARS ENDED DECEMBER 31
--------------------------------------------
PENSION & SERP OPEB
-------------------- --------------------
2001 2000 1999 2001 2000 1999
---- ---- ---- ---- ---- ----
IN MILLIONS
Service cost........................................... $ 39 $ 33 $ 34 $ 16 $ 14 $ 15
Interest expense....................................... 88 82 71 62 56 47
Expected return on plan assets......................... (98) (92) (84) (41) (35) (24)
Amortization of:
Prior service cost................................... 8 6 4 (1) -- --
Net transition (asset) obligation.................... (5) (5) (5) -- -- --
Other................................................ (1) (2) -- 1 (2) (1)
Ad hoc retiree increase................................ -- -- 3 -- -- --
---- ---- ---- ---- ---- ----
Net periodic benefit cost.............................. $ 31 $ 22 $ 23 $ 37 $ 33 $ 37
==== ==== ==== ==== ==== ====
The health care cost trend rate assumption significantly affects the
amounts reported. A one percentage point change in the assumed health care cost
trend assumption would have the following effects:
ONE PERCENTAGE ONE PERCENTAGE
POINT INCREASE POINT DECREASE
-------------- --------------
IN MILLIONS
Effect on total service and interest cost components........ $ 13 $ (11)
Effect on accumulated postretirement benefit obligation..... 133 (111)
CMS-79
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The funded status of CMS Energy's Pension Plan, SERP and OPEB plans is
reconciled with the liability recorded at December 31 as follows:
PENSION PLAN SERP OPEB
------------------ -------------- ----------------
2001 2000 2001 2000 2001 2000
---- ---- ---- ---- ---- ----
IN MILLIONS
Benefit obligation, January 1................ $1,081 $ 971 $ 58 $ 53 $ 815 $ 736
Service cost................................. 36 30 3 3 16 14
Interest cost................................ 83 78 5 4 62 56
Plan amendments.............................. -- 54 -- -- (17) --
Actuarial loss (gain)........................ 96 25 8 (1) 116 44
Benefits paid................................ (101) (77) (1) (1) (36) (35)
------ ------ ---- ---- ----- -----
Benefit obligation, December 31.............. $1,195 $1,081 $ 73 $ 58 $ 956 $ 815
------ ------ ---- ---- ----- -----
Plan assets at fair value, January 1......... $ 994 $1,094 $ -- $ -- $ 473 $ 432
Actual return on plan assets................. (113) (23) -- -- (21) (16)
Company contribution......................... 65 -- 1 1 57 57
Business combinations........................ -- -- -- -- -- --
Actual benefits paid......................... (101) (77) (1) (1) (1) --
------ ------ ---- ---- ----- -----
Plan assets at fair value, December 31....... $ 845(a) $ 994(a) $ -- $ -- $ 508 $ 473
------ ------ ---- ---- ----- -----
Benefit obligation less than (in excess of)
plan assets................................ $ (350) $ (87) $(73) $(58) $(448) $(342)
Unrecognized:
Net (gain) loss from experience different
than assumed............................ 235 (71) 12 4 197 20
Prior service cost......................... 68 76 1 1 (16) --
Net transition (asset)..................... -- (5) -- -- -- --
Other...................................... (7) (9) -- -- -- --
------ ------ ---- ---- ----- -----
Recorded liability........................... $ (54) $ (96) $(60) $(53) $(267) $(322)
====== ====== ==== ==== ===== =====
- -------------------------
(a) Primarily stocks and bonds, including $126 million in 2001 and $166 million
in 2000 of CMS Energy Common Stock.
SERP benefits are paid from a trust established in 1988. SERP is not a
qualified plan under the Internal Revenue Code, and as such, earnings of the
trust are taxable and trust assets are included in consolidated assets. At
December 31, 2001 and 2000, trust assets were $56 million and $59 million,
respectively, and were classified as other noncurrent assets. The accumulated
benefit obligation for SERP was $45 million in 2001 and $39 million in 2000.
Contributions to the 401(k) plan are invested in CMS Energy Common Stock.
Amounts charged to expense for this plan were $26 million in 2001, $24 million
in 2000 and $20 million in 1999.
Beginning January 1, 1986, the amortization period for the Pension Plan's
unrecognized net transition asset is 16 years. Prior service costs are amortized
on a straight-line basis over the average remaining service period of active
employees.
CMS Energy and its subsidiaries adopted SFAS No. 106, effective as of the
beginning of 1992 and Consumers recorded a liability of $466 million for the
accumulated transition obligation and a corresponding regulatory asset for
anticipated recovery in utility rates (see Note 2, Utility Regulation). The MPSC
authorized recovery of the electric utility portion of these costs in 1994 over
18 years and the gas utility portion in 1996 over 16 years.
CMS-80
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14: LEASES
CMS Energy, Consumers, and Enterprises lease various assets, including
vehicles, rail cars, aircraft, construction equipment, computer equipment, and
buildings. In November 2001, Consumers' nuclear fuel capital leasing arrangement
expired upon mutual agreement by the lessor and Consumers. At termination of the
lease, Consumers paid the lessor $48 million, which was the lessor's remaining
investment at that time. Consumers has both full-service and net leases, the
latter of which requires Consumers to pay for taxes, maintenance, operating
costs, and insurance.
Minimum rental commitments under CMS Energy's non-cancelable leases at
December 31, 2001 were:
CAPITAL OPERATING
LEASES LEASES
------- ---------
IN MILLIONS
2002........................................................ $21 $ 33
2003........................................................ 17 30
2004........................................................ 13 28
2005........................................................ 12 25
2006........................................................ 11 22
2007 and thereafter......................................... 12 116
--- ----
Total minimum lease payments................................ 86 $254
====
Less imputed interest....................................... 12
---
Present value of net minimum lease payments................. 74
Less current portion........................................ 14
---
Noncurrent portion.......................................... $60
===
Consumers recovers lease charges from customers and accordingly charges
payments for its capital and operating leases to operating expense. For the
years ended December 31, 2001, 2000, and 1999, operating lease charges,
including charges to clearing and other accounts, were $30 million, $34 million,
and $35 million, respectively.
For the years ended December 31, 2001, 2000 and 1999, capital lease
expenses were $30 million, $42 million and $42 million. Included in these
amounts for the years ended 2001, 2000 and 1999 are nuclear fuel lease expenses
of $9 million, $22 million and $23 million, respectively.
In April 2001, Consumers Campus Holdings entered into a lease agreement for
the construction of an office building to be used as the main headquarters for
Consumers in Jackson, Michigan. Consumers' current headquarters building leases
expire in June 2003. The lessor has committed to fund up to $70 million for
construction of the building. Consumers is acting as the construction agent of
the lessor for this project. During construction, the lessor has a maximum
recourse of 89.9 percent against Consumers in the unlikely event of certain
defaults. For several other remote events of default, primarily bankruptcy or
intentional misapplication of funds, there could be full recourse for the
amounts expended by the lessor at that time. The agreement is a seven-year lease
term with payments commencing upon completion of construction, which is
projected for March 2003. Consumers Campus Holdings has the right to acquire the
property at any time during the life of the agreement. At the end of the lease
term, Consumers Campus Holdings has the option to renew the lease, purchase the
property, or return the property and assist the lessor in the sale of the
building. The return option obligates Consumers Campus Holdings to pay the
lessor an amount equal to the outstanding debt associated with the building.
This lease is classified as an operating lease. Estimated minimum lease
commitments, assuming an investment of $70 million, based on LIBOR at the
inception of the lease, under this non-cancelable operating lease would be
CMS-81
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
approximately $5 million each year from 2003 through 2007 and a total of $52
million for the remainder of the lease. Actual lease payments will depend upon
final total construction costs and LIBOR rates.
15: JOINTLY OWNED UTILITY FACILITIES
Consumers is responsible for providing its share of financing for the
jointly owned utility facilities. Consumers includes in operating expenses the
direct expenses of the joint plants. The following table indicates the extent of
Consumers' investment in jointly owned utility facilities:
NET ACCUMULATED
INVESTMENT DEPRECIATION
------------ ------------
DECEMBER 31 2001 2000 2001 2000
- ----------- ---- ---- ---- ----
IN MILLIONS
Campbell Unit 3 -- 93.3 percent............................. $279 $291 $312 $299
Ludington -- 51 percent..................................... 76 100 88 105
Transmission facilities -- various.......................... 37 31 40 17
Distribution lines -- various............................... 10 0 0 0
16: 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; and marketing, services
and trading.
CMS Energy's reportable segments are strategic business units organized and
managed by the nature of the products and services each provides. Management
evaluates performance based on the pretax operating income of each segment,
excluding the effects of the loss contracts and reduced asset valuations, as
shown in Note 4. The electric utility segment consists of regulated activities
associated with the generation, transmission and distribution of electricity in
the state of Michigan through its subsidiary, Consumers Energy. The gas utility
segment consists of regulated activities associated with the transportation,
storage and distribution of natural gas in the state of Michigan through its
subsidiary, Consumers Energy. Independent power production invests in, acquires,
develops, constructs and operates non-utility power generation plants in the
United States and abroad. The oil and gas exploration and production segment
conducts oil and gas exploration and development operations in the United
States, primarily the Permian Basin in Texas and the Powder River Basin in
Wyoming and in the countries of Cameroon, Colombia, Congo, Tunisia and
Venezuela. Natural gas transmission owns, develops, and manages domestic and
international natural gas facilities. The marketing, services and trading
segment provides gas, oil, and electric marketing, risk management and energy
management services to industrial, commercial, utility and municipal energy
users throughout the United States and abroad. Revenues from a land development
business fall below the quantitative thresholds for reporting and have never met
any of the quantitative thresholds for determining reportable segments.
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
CMS-82
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
consolidated pretax operating income by segment. Other financial data for
reportable segments and geographic area are as follows:
REPORTABLE SEGMENTS
YEARS ENDED DECEMBER 31
-----------------------------
2001 2000 1999
---- ---- ----
IN MILLIONS
Depreciation, Depletion and Amortization
Electric utility.......................................... $ 219 $ 311 $ 315
Gas utility............................................... 118 113 107
Natural gas transmission.................................. 100 91 68
Independent power production.............................. 34 44 35
Oil and gas exploration and production.................... 48 37 44
Marketing, services and trading........................... 6 5 3
Other..................................................... 5 4 3
------- ------- -------
$ 530 $ 605 $ 575
======= ======= =======
Identifiable Assets
Electric utility(a)....................................... $ 5,454 $ 5,231 $ 4,675
Gas utility(a)............................................ 2,197 1,780 1,731
Natural gas transmission.................................. 3,727 3,836 3,526
Independent power production.............................. 2,673 2,753 3,076
Oil and gas exploration and production.................... 761 636 659
Marketing, services and trading........................... 1,625 2,032 367
Other..................................................... 665 983 1,428
------- ------- -------
$17,102 $17,251 $15,462
======= ======= =======
Capital Expenditures(b)
Electric utility.......................................... $ 623 $ 430 $ 385
Gas utility............................................... 145 120 120
Natural gas transmission.................................. 271 276 2,216
Independent power production.............................. 147 452 392
Oil and gas exploration and production.................... 219 141 151
Marketing, services and trading........................... 9 11 42
Other..................................................... 44 67 99
------- ------- -------
$ 1,458 $ 1,497 $ 3,405
======= ======= =======
Investments in Equity Method Investees
Natural gas transmission.................................. $ 501 $ 436 $ 369
Independent power production.............................. 1,271 1,459 1,437
Marketing, services and trading........................... 29 32 27
Other..................................................... 94 89 163
------- ------- -------
$ 1,895 $ 2,016 $ 1,996
======= ======= =======
CMS-83
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31
-----------------------------
2001 2000 1999
---- ---- ----
IN MILLIONS
Earnings from Equity Method Investees(c)
Natural gas transmission.................................. $ 2 $ 24 $ 20
Independent power production.............................. 157 166 119
Marketing, services and trading........................... 12 9 3
Other..................................................... 4 4 6
------- ------- -------
$ 175 $ 203 $ 148
======= ======= =======
Geographic Areas(d)
PRETAX
OPERATING OPERATING IDENTIFIABLE
REVENUE INCOME ASSETS
--------- --------- ------------
2001
United States............................................. $9,100 $272 $14,441
International............................................. 497 29 2,661
2000
United States............................................. $8,218 $780 $13,992
International............................................. 521 (77) 3,259
1999
United States............................................. $5,560 $740 $11,699
International............................................. 366 151 3,763
- -------------------------
(a) Amounts include an attributed portion of Consumers' other common assets to
both the electric and gas utility businesses.
(b) Includes electric restructuring implementation plan, capital leases for
nuclear fuel, purchase of nuclear fuel and other assets and electric DSM
costs. Amounts also include an attributed portion of Consumers' capital
expenditures for plant and equipment common to both the electric and gas
utility businesses.
(c) These amounts are included in operating revenue in the Consolidated
Statements of Income.
(d) Revenues are attributed to countries based on location of customers.
17. EQUITY METHOD INVESTMENTS
Certain of CMS Energy's investments in companies, partnerships and joint
ventures, where ownership is more than 20 percent but less than a majority, are
accounted for by the equity method in accordance with APB Opinion No. 18. In
2001, 2000 and 1999 consolidated net income included distributions in excess of
(less than) earnings of $57 million, $(171) million and $(45) million,
respectively, from these investments. The most significant of these investments
is CMS Energy's 50 percent interest in Jorf Lasfar. CMS Energy's investment in
Loy Yang met the test of a significant subsidiary in prior years but was not
reported separately in 2001 as a result of the write-off of the investment in
the fourth quarter of 2000. Summarized combined financial information of CMS
Energy's equity method investments follows with the exception of the MCV
Partnership that is disclosed separately in Note 18, Summarized Financial
Information of Significant Related Energy Supplier.
CMS-84
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Income Statement Data
YEARS ENDED DECEMBER 31
-----------------------------------------------------
2001
-----------------------------------------------------
JORF LASFAR LOY YANG ALL OTHERS TOTAL
----------- -------- ---------- -----
IN MILLIONS
Operating revenue.................................. $326 $ -- $3,911 $4,237
Operating expenses................................. 132 -- 3,364 3,496
---- ---- ------ ------
Operating income................................... 194 -- 547 741
Other expense, net................................. 49 -- 326 375
---- ---- ------ ------
Net income......................................... $145 $ -- $ 221 $ 366
==== ==== ====== ======
2000
-----------------------------------------------------
JORF LASFAR LOY YANG ALL OTHERS TOTAL
----------- -------- ---------- -----
Operating revenue.................................. $246 $268 $3,576 $4,090
Operating expenses................................. 102 123 3,043 3,268
---- ---- ------ ------
Operating income................................... 144 145 533 822
Other expense, net................................. 29 169 246 444
---- ---- ------ ------
Net income (loss).................................. $115 $(24) $ 287 $ 378
==== ==== ====== ======
1999
-----------------------------------------------------
JORF LASFAR LOY YANG ALL OTHERS TOTAL
----------- -------- ---------- -----
Operating revenue.................................. $189 $322 $2,389 $2,900
Operating expenses................................. 85 140 1,840 2,065
---- ---- ------ ------
Operating income................................... 104 182 549 835
Other expense, net................................. 27 191 321 539
---- ---- ------ ------
Net income (loss).................................. $ 77 $ (9) $ 228 $ 296
==== ==== ====== ======
CMS-85
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Balance Sheet Data
AS OF DECEMBER 31
-------------------------------------------------------
2001
-------------------------------------------------------
JORF LASFAR LOY YANG ALL OTHERS TOTAL
----------- -------- ---------- -----
IN MILLIONS
Assets
Current assets.................................. $ 164 $ -- $1,036 $ 1,200
Property, plant and equipment, net.............. 13 -- 5,175 5,188
Goodwill, net................................... -- -- -- --
Other assets.................................... 2,482 -- 2,167 4,649
------ ------ ------ -------
$2,659 $ -- $8,378 $11,037
====== ====== ====== =======
Liabilities and Equity
Current liabilities............................. $ 173 $ -- $ 795 $ 968
Long-term debt and other noncurrent
liabilities.................................. 1,949 -- 4,647 6,596
Equity.......................................... 537 -- 2,936 3,473
------ ------ ------ -------
$2,659 $ -- $8,378 $11,037
====== ====== ====== =======
2000
-------------------------------------------------------
JORF LASFAR LOY YANG ALL OTHERS TOTAL
----------- -------- ---------- -----
Assets
Current assets................................... $ 145 $ 100 $ 725 $ 970
Property, plant and equipment, net............... 834 2,601 4,836 8,271
Other assets..................................... 1,499 27 2,089 3,615
------ ------ ------ -------
$2,478 $2,728 $7,650 $12,856
====== ====== ====== =======
Liabilities and Equity
Current liabilities.............................. $ 49 $ 106 $ 952 $ 1,107
Long-term debt and other noncurrent
liabilities................................... 2,144 1,936 3,832 7,912
Equity........................................... 285 686 2,866 3,837
------ ------ ------ -------
$2,478 $2,728 $7,650 $12,856
====== ====== ====== =======
18: SUMMARIZED FINANCIAL INFORMATION OF SIGNIFICANT RELATED ENERGY SUPPLIER
Under the PPA with the MCV Partnership discussed in Note 5, Consumers' 2001
obligation to purchase electric capacity from the MCV Partnership provided 15.3
percent of Consumers' owned and contracted electric generating capacity.
Summarized financial information of the MCV Partnership follows:
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31
------------------------
2001 2000 1999
---- ---- ----
IN MILLIONS
Operating revenue(a)........................................ $611 $604 $617
Operating expenses.......................................... 453 392 401
---- ---- ----
Operating income............................................ 158 212 216
Other expense, net.......................................... 110 122 136
---- ---- ----
Net income.................................................. $ 48 $ 90 $ 80
==== ==== ====
CMS-86
CMS ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
BALANCE SHEETS
DECEMBER 31
---------------
2001 2000
---- ----
IN MILLIONS
ASSETS
Current assets(b)........ $ 341 $ 429
Plant, net............... 1,610 1,671
Other assets............. 166 175
------ ------
$2,117 $2,275
====== ======
DECEMBER 31
---------------
2001 2000
---- ----
IN MILLIONS
LIABILITIES AND EQUITY
Current liabilities.... $ 320 $ 316
Noncurrent
liabilities(c)...... 1,245 1,431
Partners' equity(d).... 552 528
------ ------
$2,117 $2,275
====== ======
- -------------------------
(a) For 2001, 2000, and 1999, revenue from Consumers totaled $550 million, $569
million and $586 million, respectively.
(b) At December 31, 2001 and 2000, receivables from Consumers totaled $49 and
$43 million, respectively.
(c) FMLP is the sole beneficiary of an owner trust that is the lessor in a
long-term direct finance lease with the lessee, MCV Partnership. CMS
Holdings holds a 46.4 percent ownership interest in FMLP. At December 31,
2001 and 2000, the MCV Partnership owed lease obligations of $1.11 billion
and $1.24 billion, respectively, to the owner trust. CMS Holdings' share of
the interest and principal portion for the 2001 lease payments was $36
million and $54 million, respectively, and for the 2000 lease payments was
$52 million and $67 million, respectively. As of December 31, 2001 and 2000
the lease payments service $597 million and $733 million in non-recourse
debt outstanding, respectively, of the owner-trust. The MCV Partnership's
lease obligations, assets, and operating revenues secures FMLP's debt. For
2001 and 2000, the owner-trust made debt payments (including interest) of
$217 million and $212 million, respectively. FMLP's earnings for 2001,
2000, and 1999 were $30 million, $30 million, and $24 million,
respectively.
(d) CMS Midland's recorded investment in the MCV Partnership includes
capitalized interest, which Consumers is amortizing to expense over the
life of its investment in the MCV Partnership. Covenants contained in
financing agreements prohibit the MCV Partnership from paying distributions
until it meets certain financial test requirements. Consumers does not
anticipate receiving a cash distribution in the near future.
CMS-87
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To CMS Energy Corporation:
We have audited the accompanying consolidated balance sheets and
consolidated statements of preferred stock of CMS ENERGY CORPORATION (a Michigan
corporation) and subsidiaries as of December 31, 2001 and 2000, and the related
consolidated statements of income, common stockholders' equity and cash flows
for each of the three years in the period ended December 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CMS Energy Corporation and
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States.
As explained in Note 2 to the financial statements, effective January 1,
2000, CMS Energy Corporation changed its method of accounting for oil and gas
exploration and production inventories and effective January 1, 2001, July 1,
2001 and December 31, 2001, CMS Energy Corporation changed its method of
accounting related to derivatives and hedging activities in accordance with the
adoption of Statement of Financial Accounting Standards No. 133, "Accounting for
Derivatives and Hedging Activities" and the related implementation guidance
issued by the Derivatives Implementation Group and approved by the Financial
Accounting Standards Board.
[ARTHUR ANDERSEN LLP SIG]
Detroit, Michigan,
March 22, 2002
CMS-88
CMS ENERGY CORPORATION
QUARTERLY FINANCIAL AND COMMON STOCK INFORMATION
2001 (UNAUDITED)
---------------------------------------------
QUARTERS ENDED MARCH 31 JUNE 30 SEPT. 30 DEC. 31
- -------------- -------- ------- -------- -------
IN MILLIONS, EXCEPT PER SHARE AMOUNTS
Operating revenue(a)(b)....... $2,859 $2,237 $2,150 $2,351
Pretax operating income
(loss)(b)................... $ 329 $ 254 $ (401) $ 119
Income (loss) from continuing
operations(b)............... $ 109 $ 53 $ (384) $ (109)
Discontinued operations(c).... $ -- $ -- $ (185) $ --
Cumulative effect of change in
accounting principles(c).... $ -- $ -- $ -- $ (11)
Extraordinary item(c)......... $ -- $ -- $ -- $ (18)
Consolidated net income
(loss)...................... $ 109 $ 53 $ (569) $ (138)
Basic earnings (loss) per
average common share(d):.... $ 0.87 $ 0.40 $(4.29) $(1.03)
Diluted earnings (loss) per
average common share(d):.... $ 0.85 $ 0.40 $(4.29) $(1.03)
Dividends declared per common
share:...................... $0.365 $0.365 $0.365 $0.365
Common stock prices(e)
High...................... $31.44 $31.75 $28.37 $24.31
Low....................... $26.75 $27.68 $19.89 $20.00
2000 (UNAUDITED)
---------------------------------------------
QUARTERS ENDED MARCH 31 JUNE 30 SEPT. 30 DEC. 31
- -------------- -------- ------- -------- -------
IN MILLIONS, EXCEPT PER SHARE AMOUNTS
Operating revenue(a)(b)....... $1,766 $1,531 $2,323 $3,119
Pretax operating income
(loss)(b)................... $ 286 $ 197 $ 237 $ (17)
Income (loss) from continuing
operations(b)............... $ 78 $ 79 $ 51 $ (170)
Discontinued operations(c).... $ 2 $ -- $ 2 $ (1)
Cumulative effect of change in
accounting principles(c).... $ (5) $ -- $ -- $ --
Extraordinary item(c)......... $ -- $ -- $ -- $ --
Consolidated net income
(loss)...................... $ 75 $ 79 $ 53 $ (171)
Basic earnings (loss) per
average common share(d):.... $ 0.66 $ 0.72 $ 0.49 $(1.44)
Diluted earnings (loss) per
average common share(d):.... $ 0.65 $ 0.71 $ 0.49 $(1.44)
Dividends declared per common
share:...................... $0.365 $0.365 $0.365 $0.365
Common stock prices(e)
High...................... $32.06 $23.69 $29.69 $32.25
Low....................... $16.06 $17.75 $22.06 $25.13
- -------------------------
(a) First, second and third quarters of 2001 have been restated to reflect
certain transactions on a net basis. See Note 2, Summary of Significant
Accounting Policies and Other Matters, "Reclassifications."
(b) Certain amounts in 2001 and 2000 were restated to reflect discontinued
operations of the International Energy Distribution segment. For further
discussion, see Note 3, Discontinued Operations.
(c) Net of tax.
(d) The sum of the quarters may not equal the annual earnings per share due to
changes in shares outstanding.
(e) Based on New York Stock Exchange -- Composite transactions.
CMS-89
[CONSUMERS ENERGY LOGO]
2001 FINANCIAL STATEMENTS
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CONSUMERS ENERGY COMPANY
SELECTED FINANCIAL INFORMATION
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Operating revenue (in millions)..................... ($) 4,014 3,935 3,874 3,709 3,769
Net income (in millions) (Note 1 and 2)............. ($) 100 304 340 349 321
Net income available to common stockholder (in
millions)......................................... ($) 57 268 313 312 284
Cash from operations (in millions).................. ($) 517 468 791 637 761
Capital expenditures, excluding capital lease
additions and DSM (in millions)................... ($) 745 498 444 369 360
Total assets (in millions).......................... ($) 8,306 7,773 7,170 7,163 6,949
Long-term debt, excluding current maturities (in
millions)......................................... ($) 2,472 2,110 2,006 2,007 1,369
Non-current portion of capital leases (in
millions)......................................... ($) 56 49 85 100 74
Total preferred stock (in millions)................. ($) 44 44 44 238 238
Total preferred securities (in millions)............ ($) 520 395 395 220 220
Number of preferred shareholders at year-end........ 2,220 2,365 2,534 5,649 6,178
Book value per common share at year-end............. ($) 21.99 24.09 23.87 21.94 20.38
Return on average common equity..................... (%) 2.9 13.3 16.2 17.5 16.8
Return on average assets............................ (%) 2.8 5.7 6.4 6.6 6.2
Number of full-time equivalent employees at year-end
Consumers......................................... 8,477 8,748 8,736 8,456 8,640
Michigan Gas Storage.............................. 62 57 63 65 66
ELECTRIC STATISTICS
Sales (billions of kWh)........................... 39.6 41.0 41.0 40.0 37.9
Customers (in thousands).......................... 1,712 1,691 1,665 1,640 1,617
Average sales rate per kWh........................ (c) 6.65 6.56 6.54 6.50 6.57
GAS STATISTICS
Sales and transportation deliveries (bcf)......... 367 410 389 360 420
Customers (in thousands)(a)....................... 1,630 1,611 1,584 1,558 1,533
Average sales rate per mcf........................ ($) 5.34 4.39 4.52 4.56 4.44
- -------------------------
(a) Excludes off-system transportation customers.
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CONSUMERS ENERGY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
Consumers, a subsidiary of CMS Energy, a holding company, is an electric
and gas utility company that provides service to customers in Michigan's Lower
Peninsula. Consumers' customer base includes a mix of residential, commercial
and diversified industrial customers, the largest segment of which is the
automotive industry.
This MD&A refers to, and in some sections specifically incorporates by
reference, Consumers' Notes to Consolidated Financial Statements and should be
read in conjunction with such Consolidated Financial Statements and Notes. This
Annual Report and other written and oral statements that Consumers may make
contain forward-looking statements as defined by the Private Securities
Litigation Reform Act of 1995. Consumers' intentions with the use of the words,
"anticipates," "believes," "estimates," "expects," "intends," and "plans," and
variations of such words and similar expressions, are solely to identify
forward-looking statements that involve risk and uncertainty. These
forward-looking statements are subject to various factors that could cause
Consumers' actual results to differ materially from the results anticipated in
such statements. Consumers has no obligation to update or revise forward-looking
statements regardless of whether new information, future events or any other
factors affect the information contained in such statements. Consumers does,
however, discuss certain risk factors, uncertainties and assumptions in this
Management's Discussion and Analysis, in Item 1 of this Form 10-K in the section
entitled, "Forward-Looking Statements Cautionary Factors" and in various public
filings it periodically makes with the SEC. Consumers designed this discussion
of potential risks and uncertainties, which is by no means comprehensive, to
highlight important factors that may impact Consumers' outlook. This Annual
Report also describes material contingencies in Consumers' Notes to Consolidated
Financial Statements, and Consumers encourages its readers to review these
Notes.
CRITICAL ACCOUNTING POLICIES
The presentation of financial statements in accordance with generally
accepted accounting principles requires the use of accounting methods that are
often subject to judgment and the use of estimates and assumptions. Presented
below, are the accounting policies and assumptions that Consumers believes are
most critical to both the presentation and understanding of its financial
statements. Application of these accounting policies can involve very complex
judgments in the preparation of its financial statements. Accordingly, a
different financial presentation could result if different judgments, estimates
or assumptions are used.
USE OF ESTIMATES IN ACCOUNTING FOR CONTINGENCIES
The recording of estimated liabilities for contingencies within the
financial statements is guided by the principles in SFAS No. 5. SFAS No. 5
requires a company to record estimated liabilities in the financial statements
when it is probable that a loss will be paid in the future as a result of a
current event and that amount can be reasonably estimated. Consumers has used
this accounting principle to record estimated liabilities for the following
significant events.
ELECTRIC ENVIRONMENTAL ESTIMATES: Consumers is subject to costly and
increasingly stringent environmental regulations. Consumers expects that the
cost of future environmental compliance, especially compliance with clean air
laws, will be significant.
The EPA has issued regulations regarding ozone and particulate-related
emissions that require some of Consumers' electric generating facilities to
achieve lower emissions rates. These regulations will require Consumers to make
capital expenditures estimated between $530 million and $570 million, calculated
in year 2001 dollars. As of December 2001, Consumers has incurred $296 million
in capital expenditures to comply with these regulations and anticipates that
the remaining capital expenditures will be incurred between 2002 and 2004.
At some point after 2004, if new environmental standards for
multi-pollutants become effective, Consumers may need additional capital
expenditures to comply with the standards. These and other required
environmental
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expenditures may have a material adverse effect upon Consumers' financial
condition and results of operations after 2004. For further information see Note
2, Uncertainties, "Electric Environmental Matters."
GAS ENVIRONMENTAL ESTIMATES: Under the Michigan Natural Resources and
Environmental Protection Act, Consumers expects that it will ultimately incur
investigation and remedial action costs at a number of sites. Consumers has
estimated its costs related to further investigation and remedial action using
the Gas Research Institute-Manufactured Gas Plant Probabilistic Cost Model. The
estimated total costs are between $82 million and $113 million. These estimates
are based on discounted 2001 costs and follow EPA recommended use of discount
rates between 3 and 7 percent for this type of activity. Consumers expects to
recover a significant portion of these costs through insurance proceeds and
through MPSC approved rates charged to its customers. 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. For further information see Note 2, Uncertainties,
"Gas Environmental Matters."
MCV UNDERRECOVERIES: The MCV Partnership, which leases and operates the MCV
Facility, contracted to sell electricity to Consumers for a 35-year period
beginning in 1990 and to supply electricity and steam to Dow. Consumers, through
two wholly owned subsidiaries, holds a partnership interest in the MCV
Partnership, and a lessor interest in the MCV Facility.
Consumers' annual obligation to purchase capacity from the MCV Partnership
is 1,240 MW through the termination of the PPA in 2025. The PPA requires
Consumers to pay, based on the MCV Facility's availability, a levelized average
capacity charge of 3.77 cents per kWh, a fixed energy charge, and a variable
energy charge based primarily on Consumers' average cost of coal consumed for
all kWh delivered. Consumers has not been allowed full recovery of the capacity
charges in rates and has recorded the estimated losses on this contract through
2007.
Consumers' availability payments to the MCV Partnership is capped at 98.5
percent. If the MCV Facility generates electricity at the maximum 98.5 percent
level during the next five years, Consumers' after-tax cash underrecoveries
associated with the PPA could be as follows:
2002 2003 2004 2005 2006
---- ---- ---- ---- ----
IN MILLIONS
Estimated cash underrecoveries at 98.5%, net of tax......... $37 $37 $36 $36 $36
For further information see Note 2, Uncertainties "The Midland Cogeneration
Venture" for additional detail.
ACCOUNTING FOR DERIVATIVE AND FINANCIAL INSTRUMENTS
DERIVATIVE INSTRUMENTS: Consumers uses the criteria in SFAS No. 133 to
determine if certain contracts must be accounted for as derivative instruments.
The rules for determining whether a contract meets the criteria for derivative
accounting are numerous and complex. As a result, significant judgment is
required to determine whether a contract requires derivative accounting, and
similar contracts can sometimes be accounted for differently.
The types of contracts Consumers currently account for as derivative
instruments are interest rate swaps and locks, certain electric call options,
and gas fuel call options and swaps. Consumers does not account for electric
capacity and energy contracts, gas supply contracts, coal supply contracts, or
purchase orders for numerous supply items as derivatives.
If a contract must be accounted for as a derivative instrument, the
contract is recorded as either an asset or a liability in the financial
statements at the fair value of the contract. Any difference between the
recorded book value and the fair value is reported either in earnings or other
comprehensive income depending on certain qualifying criteria. The recorded fair
value of the contract is then adjusted quarterly to reflect any change in the
market value of the contract.
CE-4
In order to value the contracts that are accounted for as derivative
instruments, Consumers uses a combination of market quoted prices and
mathematical models. Option models require various inputs, including forward
prices, volatilities, interest rates and exercise periods. Changes in forward
prices or volatilities could significantly change the calculated fair value of
the call option contracts. The models used by Consumers have been tested against
market quotes to ensure consistency between model outputs and market quotes. At
December 31, 2001, Consumers assumed an interest rate of 4.5 percent in
calculating the fair value of its electric call options.
In order for derivative instruments to qualify for hedge accounting under
SFAS No. 133, the hedging relationship must be formally documented at inception
and be highly effective in achieving offsetting cash flows or offsetting changes
in fair value attributable to the risk being hedged. If hedging a forecasted
transaction, the forecasted transaction must be probable. If a derivative
instrument, used as a cash flow hedge, is terminated early because it is
probable that a forecasted transaction will not occur, any gain or loss as of
such date is immediately recognized in earnings. If a derivative instrument,
used as a cash flow hedge, is terminated early for other economic reasons, any
gain or loss as of the termination date is deferred and recorded when the
forecasted transaction affects earnings. For further information see Note 1,
Corporate Structure and Summary of Significant Accounting Policies,
"Implementation of New Accounting Standards," Note 2, Uncertainties, "Other
Electric Uncertainties -- Derivative Activities," and Note 3, Short-Term
Financings and Capitalization, "Derivative Activities."
FINANCIAL INSTRUMENTS: Consumers accounts for its investments in debt and
equity securities in accordance with SFAS No. 115. As such, debt and equity
securities can be classified into one of three categories: held-to-maturity,
trading, or available-for-sale securities. Consumers' investments in equity
securities are classified as available-for-sale securities and are reported at
fair value with any unrealized gains or losses resulting from changes in fair
value excluded from earnings and reported in equity as part of other
comprehensive income. Unrealized gains or losses resulting from changes in the
fair value of Consumers' nuclear decommissioning investments are reported in
accumulated depreciation. The fair value of these instruments is determined from
quoted market prices. For further information, see Note 5, Financial
Instruments.
ACCOUNTING FOR LEASES
Consumers uses SFAS No. 13 to account for any leases to which it may be a
party. SFAS No. 13 classifies leases as either operating or capital depending
upon certain criteria. Under an operating lease, payments are expensed as
incurred, and there is no recognition of an asset or liability on the balance
sheet. Capital leases require that an asset and liability be recorded on the
balance sheet at the inception of the lease for the present value of the minimum
lease payments required during the term of the lease.
Accounting for leases using SFAS No. 13, and related statements, requires
the use of assumptions and judgment to determine lease classification. This
judgment includes evaluating a lease for the transfer of ownership at the end of
the lease, provision for bargain purchase option, the lease term relative to the
estimated economic life of the leased property, and the present value at the
beginning of the lease term of the minimum lease payments. Considerable judgment
is required for leases involving special purpose entities such as trusts, sales
and leasebacks and when the lessee is involved in the construction of the
property it will lease. Different financial presentations of leases could result
if different judgment, estimates or assumptions are made.
Consumers is party to a number of leases, the most significant are the
leases associated with its new headquarters building and its railcar lease. For
further information see Note 8, Leases.
ACCOUNTING FOR THE EFFECTS OF INDUSTRY REGULATION
Because Consumers is involved in a regulated industry, regulatory decisions
affect the timing and recognition of revenues and expenses. Consumers uses SFAS
No. 71 to account for the effects of these regulatory decisions. As a result,
Consumers may defer or recognize revenues and expenses differently than a
non-regulated entity.
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Items that may normally be expensed for a non-regulated entity may be
capitalized as regulatory assets if the actions of the regulator indicate that
such expenses will be recovered in future rates charged to customers designed to
recover such costs. Conversely, items that may normally be recognized as
revenues for a non-regulated entity may be recorded as regulatory liabilities if
the actions of the regulator indicate that such revenues will be required to be
refunded to customers at a future time. Judgment is required to discern the
recoverability of items recorded as regulatory assets and liabilities. As of
December 31, 2001, Consumers had $1.130 billion recorded as regulatory assets
and $291 million recorded as regulatory liabilities.
ACCOUNTING FOR PENSION AND OPEB
Consumers uses SFAS No. 87 to account for pension costs and uses SFAS No.
106 to account for other postretirement benefit costs. These statements require
liabilities to be recorded on the balance sheet at the present value of these
future obligations to employees net of any plan assets. The calculation of these
liabilities and associated expenses require the expertise of actuaries and are
subject to many assumptions including life expectancies, present value discount
rates, expected long-term rate of return on plan assets, rate of compensation
increase and anticipated health care costs. Any change in these assumptions can
significantly change the liability and associated expenses recognized in any
given year. For further information see Note 7, Retirement Benefits.
ACCOUNTING FOR NUCLEAR DECOMMISSIONING COSTS
Consumers' decommissioning cost estimates for the Big Rock and Palisades
plants assume that each plant site will eventually be restored to conform to the
adjacent landscape, and all contaminated equipment will be disassembled and
disposed of in a licensed burial facility. On December 31, 2000, Big Rock trusts
were fully funded per a March 1999 MPSC order. A December 1999 MPSC order set
the annual decommissioning surcharge for Palisades decommissioning at $6 million
a year. Consumers estimates that at the time Palisades is fully decommissioned
in year 2049, the trust funds will have provided $2.5 billion, including trust
earnings, to pay for the anticipated expenditures over the entire
decommissioning period. Earning assumptions are that the trust funds are
invested in equities and fixed income investments, the trust funds will be
converted to municipal bonds after decommissioning becomes fully funded, and
that municipal bonds are converted to cash one year before expenditures are
made. The Palisades and Big Rock trust funds are currently estimated to earn 7.1
percent and 5.7 percent, respectively, annually.
The funds provided by the trusts are expected to fully fund the
decommissioning costs, which have been developed, in part, by independent
contractors with expertise in decommissioning. These costs have been developed
using various inflation rates for labor, non-labor, and for contaminated
equipment burial costs. Variance from trust earnings, changes in decommissioning
technology, regulations, estimates or assumptions could affect the cost of
decommissioning these sites.
RELATED PARTY TRANSACTIONS
Consumers enters into a number of significant transactions with related
parties. These transactions include the purchase of capacity and energy from the
MCV Partnership and from affiliates of Enterprises, the purchase of electricity
from CMS MST, the purchase of gas supply from CMS MST and CMS Oil and Gas, the
purchase of gas transportation from Panhandle and its subsidiary Trunkline, the
payment of parent company overhead costs to CMS Energy, the sale, storage and
transportation of natural gas and other services to the MCV Partnership, certain
transactions involving derivative instruments with CMS MST, and an investment in
CMS Energy Common Stock.
Transactions involving CMS Energy and its affiliates and the sale, storage
and transportation of natural gas and other services to the MCV Partnership are
based on regulated prices, market prices or competitive bidding. Purchases are
based upon the lowest market price available or most competitive bid submitted.
Transactions involving the power supply purchases from the MCV Partnership are
based upon avoided costs under PURPA; and the payment of parent company overhead
costs to CMS Energy are based upon use or accepted industry allocation
methodologies.
CE-6
Consumers is also involved in a significant transaction to sell its
transmission facilities to Trans-Elect, Inc., an independent company, whose
management employs former executive employees of Consumers, and was based on
competitive bidding.
For detailed information about related party transactions see Note 1,
Corporate Structure and Summary of Significant Accounting Policies,
"Related-Party Transactions", and Note 2, Uncertainties, "Electric Rate
Matters -- Transmission Business", and "Other Electric Uncertainties -- The
Midland Cogeneration Venture".
RESULTS OF OPERATIONS
CONSUMERS CONSOLIDATED EARNINGS
YEARS ENDED DECEMBER 31
------------------------------------------------
2001 2000 CHANGE 2000 1999 CHANGE
---- ---- ------ ---- ---- ------
IN MILLIONS
Net income available to common stockholder.......... $57 $268 $(211) $268 $313 $(45)
2001 COMPARED TO 2000: For 2001, Consumers' net income available to the
common stockholder totaled $57 million, a decrease of $211 million from the
previous year. The decrease in earnings reflects an $82 million after-tax loss,
recorded in September 2001, related to Consumers' Power Purchase Agreement with
the Midland Cogeneration Venture for additional underrecoveries through
September 2007. After September 2007, the PPA terms require Consumers to pay MCV
Partnership capacity and energy charges that the MPSC has authorized for
recovery from electric customers. The earnings decrease also reflects
significantly increased operating expense in 2001, primarily $59 million of
after-tax costs for replacement power supply costs due to a six month
unscheduled outage at the Palisades Plant. Net income in 2001 was also adversely
impacted by $11 million to reflect a change in accounting for certain electric
call option contracts. In addition, 2001 earnings decreased due to the impact of
reduced gas deliveries resulting from milder temperatures during both the first
quarter and fourth quarter heating seasons. Electric and gas revenues were also
adversely impacted by a decrease in electricity and gas delivered to industrial
customers, reflecting the year-long impact of an economic slowdown throughout
Michigan.
2000 COMPARED TO 1999: Net income in 2000 decreased $45 million from the
1999 level primarily reflecting higher gas costs, which exceeded the frozen gas
commodity rate charged to customers. The impact of a five percent electric rate
reduction for residential customers due to the passing of the Customer Choice
Act that went into effect in June of 2000, and the purchase of electric call
options, which were ultimately not needed due to the milder-than-expected summer
temperatures also decreased earnings. Partially offsetting these decreases were
lower operating costs.
For further information, see the Electric and Gas Utility Results of
Operations sections and Note 2, Uncertainties.
ELECTRIC UTILITY RESULTS OF OPERATION
YEARS ENDED DECEMBER 31
------------------------------------------------
2001 2000 CHANGE 2000 1999 CHANGE
---- ---- ------ ---- ---- ------
IN MILLIONS
Pretax Operating Income............................ $212 $481 $(269) $481 $494 $(13)
==== ==== ===== ==== ==== ====
Reasons for the change:
Electric deliveries................................ $ 19 $ 12
Loss on MCV power purchases........................ (126) 0
Power supply costs and related revenue............. (109) (50)
Rate decrease...................................... (35) (22)
Other operating expenses........................... (10) 33
Non-commodity revenue.............................. (8) 14
----- ----
Total change....................................... $(269) $(13)
===== ====
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ELECTRIC DELIVERIES: For the year 2001, electric deliveries, including
transactions with other electric utilities, were 39.6 billion kWh, a decrease of
1.4 billion kWh or 3.5 percent from 2000. Although total deliveries for 2001
were below the 2000 level, increased deliveries to the higher margin residential
and commercial sectors, more than offset the impact of reduced deliveries to the
lower margin industrial sector. All deliveries in 2001 reflect the year-long
impact of an economic slowdown throughout Michigan. For the year 2000, electric
deliveries were 41 billion kWh, similar to 1999.
LOSS ON POWER PURCHASES FROM MCV: Since 1987, Consumers has had a power
purchase agreement with the MCV. The MPSC has disallowed a portion of the costs
of this contract, primarily related to the capacity payment. Consumers had
previously identified certain potential savings, which were anticipated to
significantly mitigate future capacity losses. However, management recently
evaluated these potential savings and determined that expected increases in fuel
prices and other operating expenses would significantly reduce the mitigating
impact of the savings. Therefore, Consumers revised its estimated losses under
this contract and recorded an additional pretax loss of $126 million (see Note
2, Uncertainties).
POWER SUPPLY COSTS AND RELATED REVENUE: For the year 2001, lower overall
sales produced a decrease in fuel related revenues. Nevertheless, power supply
costs increased as a result of the purchase of greater quantities of
higher-priced electricity to offset the loss of generation resulting from the
six month unscheduled Palisades outage that ended in January 2002. For the year
2000, the increase in power supply costs was also due to unscheduled plant
outages at other generating facilities.
For the years 2001 and 2000 respectively, Consumers purchased $66 million
and $51 million of electric call options to purchase electricity to ensure a
reliable source of power supply during the summer months. As a result of
periodic excess daily capacity, certain call options were sold for $2 million
and $1 million in the years 2001 and 2000, respectively. The remaining call
options were either exercised or expired. Consumers accounted for the costs
relating to the expired call options and the income received from the sale of
call options, as purchased power supply costs.
RATE DECREASE AND OTHER OPERATING EXPENSES: In June 2000, Consumers' retail
rates were frozen and a five percent residential rate decrease was implemented
to comply with the Customer Choice Act. As a result, 2001 reflects a full year
impact of this rate decrease. Other operating expenses increased in 2001 due to
higher operating and maintenance costs. This increase in expense was
significantly offset by reduced amortization expense, as permitted by MPSC
orders resulting from the Customer Choice Act. Consumers temporarily suspended
amortization of the securitized assets pending the issuance of securitization
bonds in November 2001. The year 2000 reflects a half-year impact of the rate
decrease along with a decrease in other operating expenses due to lower
operating and maintenance costs.
GAS UTILITY RESULTS OF OPERATION
YEARS ENDED DECEMBER 31
-------------------------------------------
2001 2000 CHANGE 2000 1999 CHANGE
---- ---- ------ ---- ---- ------
IN MILLIONS
Pretax Operating Income.............................. $98 $98 $ 0 $98 $132 $(34)
=== === ==== === ==== ====
Reasons for the change:
Gas commodity and related revenue.................... 44 (64)
Gas wholesale and retail services.................... 8 4
Operation and maintenance............................ (31) 11
Gas deliveries....................................... (21) 17
General taxes and depreciation....................... 0 (2)
---- ----
Total change......................................... $ 0 $(34)
==== ====
For the year 2001 as compared to 2000, the gas commodity cost and related
revenues increased primarily as a result of the absence of a $45 million
regulatory liability recorded in 2000 that did not exist in 2001. This liability
was due to the increased cost of gas, which was significantly above the
commodity rate being collected
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from Consumers' gas customers. The recording of this $45 million liability
reduced revenue for the year 2000. Since April 2001, Consumers is back on a
fully recoverable GCR factor, which results in no gain or loss on the commodity
portion of the tariff rate. Wholesale and retail services increased, principally
due to growth in the appliance service plan program. Operation and maintenance
cost increases reflect additional focus on customer reliability and service. Gas
delivery revenues reflect a significant decrease due to warmer temperatures
compared to the 2000 heating season and a reduction due to the economic slowdown
in 2001. Gas system deliveries, including miscellaneous transportation, totaled
367 bcf, a decrease of 43 bcf or 10 percent compared with 2000.
For the year 2000 as compared to 1999, the gas commodity cost and related
revenue decreased primarily as a result of recording the regulatory liability
related to increased gas costs in 2000. The increase in gas costs were
significantly above the gas commodity rate being collected from Consumers' gas
customers. Operation and maintenance cost decreased due to control of employee
benefit costs. System deliveries, including miscellaneous transportation,
totaled 410 bcf, an increase of 21 bcf or five percent compared with 1999. The
increased deliveries reflect colder temperatures during the fourth quarter of
2000.
CAPITAL RESOURCES AND LIQUIDITY
CASH POSITION, INVESTING AND FINANCING
OPERATING ACTIVITIES: Consumers' principal source of liquidity is from cash
derived from operating activities involving the sale and transportation of
natural gas and the generation, delivery and sale of electricity. For 2001 and
2000, cash from operations totaled $517 million and $515 million, respectively.
The $2 million increase resulted primarily from a $315 million increase in cash
collected from customers and related parties, offset by a $248 million use of
cash to increase natural gas inventories and $65 million of other temporary
changes in working capital items due to timing of cash receipts and payments.
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. A decrease in cash from operations could reduce the availability
of funds and result in additional short-term financings, see Note 3, Short-Term
Financing and Capitalization for additional details about this source of funds.
INVESTING ACTIVITIES: For 2001 and 2000, cash used for investing activities
totaled $803 million and $604 million, respectively. The change of $199 million
is primarily for capital expenditures to comply with the Clean Air Act and to
purchase nuclear fuel.
FINANCING ACTIVITIES: For 2001 and 2000, cash provided by financing
activities totaled $281 million and $92 million, respectively. The change of
$189 million is primarily the result of $55 million decrease in the payment of
common stock dividend, $121 million net proceeds from the sale of Trust
Preferred Securities, $130 million increase in net proceeds from Senior notes
issued and $459 million net proceeds from the issuance of Securitization Bonds,
offset by a $176 million net decrease in notes payable and $392 million increase
in retirement of bonds and other long-term debt.
OFF-BALANCE SHEET ARRANGEMENTS: Consumers' use of long-term contracts for
the purchase of commodities and services, the sale of its accounts receivables,
and operating leases are considered to be off-balance sheet arrangements.
Consumers has responsibility for the collectability of the accounts receivables
sold, and the full obligation of its leases become due in case of lease payment
default. Consumers uses these off-balance sheet arrangements in its normal
business operations.
DISCLOSURES ABOUT CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS: The
following schedule of material contractual obligations and commercial
commitments is provided to aggregate information in a single location so that a
picture of liquidity and capital resources is readily available. For further
information about these obligations, see Note 2, Uncertainties, Note 3,
Short-Term Financing and Capitalization, the Consolidated Statements of
Long-Term Debt, and Note 8, Leases.
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PAYMENTS DUE
---------------------------------------------
YEARS ENDED DECEMBER 31
---------------------------------------------
CONTRACTUAL OBLIGATIONS TOTAL 2002 2003 2004 2005 2006 AND BEYOND
- ----------------------- ----- ---- ---- ---- ---- ---------------
IN MILLIONS
On-balance sheet:
Long-term debt.......................... $ 2,735 $ 263 $634 $ 28 $170 $ 1,640
Notes payable........................... 416 416 -- -- -- --
Capital lease obligations............... 81 19 16 13 12 21
Off-balance sheet:
Operating leases........................ 160 12 15 13 11 109
Sale of accounts receivable............. 334 334 -- -- -- --
Unconditional purchase obligations...... 17,704 1,115 945 787 781 14,076
Unconditional purchase obligations are for natural gas and electricity and
represent normal business operating contracts used to assure adequate supply and
minimize exposure to market price fluctuations.
Consumers has long-term power purchase agreements with various generating
plants including the MCV Facility. These contracts require monthly capacity
payments based on the plants' availability or deliverability. These payments are
approximately $48 million per month for year 2002, which includes $33 million
related to the MCV Facility. If a plant is not available to deliver electricity
to Consumers, then Consumers would not be obligated to make the capacity payment
until the plant could deliver. See Electric Utility Results of Operations above,
Note 2, Uncertainties, "Power Supply Costs" and "The Midland Cogeneration
Venture", and Note 11, Summarized Financial Information of Significant Related
Energy Supplier, for further information concerning power supply costs. See Note
1, Corporate Structure and Summary of Significant Accounting Policies, "Related-
Party Transactions" for additional details concerning related party
transactions.
COMMITMENT EXPIRATION
-------------------------------------------
YEARS ENDED DECEMBER 31
-------------------------------------------
COMMERCIAL COMMITMENTS TOTAL 2002 2003 2004 2005 2006 AND BEYOND
- ---------------------- ----- ---- ---- ---- ---- ---------------
IN MILLIONS
Off-balance sheet:
Guarantees..................................... $16 $16 -- -- -- --
Indemnities.................................... 14 -- -- -- -- 14
Letters of Credit.............................. 6 6 -- -- -- --
Consumers has $300 million credit facilities, $215 million aggregate lines
of credit and a $450 million trade receivable sale program in place as
anticipated sources of funds to fulfill its currently expected capital
expenditures. For further information about this source of funds see Note 3,
Short-Term Financing and Capitalization.
OUTLOOK
CAPITAL EXPENDITURES OUTLOOK
Over the next three years, Consumers estimates the following capital
expenditures, including new lease commitments, by expenditure type and by
business segments. Consumers prepares these estimates for planning purposes and
may revise them.
YEARS ENDED DECEMBER 31
------------------------
2002 2003 2004
---- ---- ----
IN MILLIONS
Construction................................................ $588 $548 $540
Nuclear fuel lease.......................................... 9 0 28
Capital leases other than nuclear fuel...................... 25 22 22
---- ---- ----
$622 $570 $590
==== ==== ====
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YEARS ENDED DECEMBER 31
------------------------
2002 2003 2004
---- ---- ----
IN MILLIONS
Electric utility operations(a)(b)........................... $448 $405 $440
Gas utility operations(a)................................... 174 165 150
---- ---- ----
$622 $570 $590
==== ==== ====
- -------------------------
(a) These amounts include an attributed portion of Consumers' anticipated
capital expenditures for plant and equipment common to both the electric
and gas utility businesses.
(b) These amounts include estimates for capital expenditures that may be
required by recent revisions to the Clean Air Act's national air quality
standards. For further information see Note 2, Uncertainties.
ELECTRIC BUSINESS OUTLOOK
GROWTH: Over the next five years, Consumers expects electric deliveries
(including both full service sales and delivery service to customers who choose
to buy generation service from an alternative electric supplier) to grow at an
average rate of approximately two percent per year based primarily on a steadily
growing customer base. This growth rate reflects a long-range expected trend of
growth. Growth from year to year may vary from this trend due to customer
response to abnormal weather conditions and changes in economic conditions
including, utilization and expansion of manufacturing facilities.
COMPETITION AND REGULATORY RESTRUCTURING: Regulatory changes and other
developments have resulted and will continue to result in increased competition
in the electric business. Generally, increased competition threatens Consumers'
share of the market for generation services and can reduce profitability.
Competition is increasing as a result of the introduction of retail open access
in the state of Michigan pursuant to the enactment of Michigan's Customer Choice
Act, and therefore, alternative electric suppliers for generation services have
entered Consumers' market. The Customer Choice Act allows all electric customers
to have the choice of buying electric generation service from an alternative
electric supplier as of January 1, 2002. To the extent Consumers experiences
"net" Stranded Costs as a result of customers switching to an alternative
electric supplier, the Customer Choice Act provides for the recovery of such
related "net" Stranded Costs through a surcharge that would be paid by those
customers that choose to switch to an alternative electric supplier.
Stranded and Implementation Costs: The Customer Choice Act allows for the
recovery by an electric utility of the cost of implementing the act's
requirements and "net" Stranded Costs, without defining the term. The act
directs the MPSC to establish a method of calculating "net" Stranded Costs and
of conducting related true-up adjustments. In December 2001, the MPSC adopted a
methodology for calculating "net" Stranded Costs as the shortfall between (a)
the revenue needed to cover the costs associated with fixed generation assets,
generation-related regulatory assets, and capacity payments associated with
purchase power agreements and (b) the revenues received from retail and
wholesale customers under existing rates available to cover those revenue needs.
According to the MPSC, "net" Stranded Costs are to be recovered from retail open
access customers through a Stranded Cost surcharge. Even though the MPSC ruled
that the Stranded Cost surcharge to be in effect on January 1, 2002 for the
recovery of "net" Stranded Costs for calendar year 2000 for Consumers is zero,
the MPSC also indicated that the "net" Stranded Costs for 2000 would be subject
to further review in the context of its subsequent determinations of "net"
Stranded Costs for 2001 and later years. The MPSC authorized Consumers to use
deferred accounting to recognize the future recovery of assets determined to be
stranded by application of the MPSC's methodology. Consumers is seeking a
rehearing and clarification of the methodology adopted, and will be making
future "net" Stranded Cost filings with the MPSC in March or April of 2002. The
outcome of these proceedings before the MPSC is uncertain at this time.
Between 1999 and 2001, Consumers filed applications with the MPSC for the
recovery of electric utility restructuring implementation costs of $75 million,
incurred between 1997 and 2000. Consumers received final orders that granted
recovery of $41 million of restructuring implementation costs for the years 1997
through 1999, and disallowed recovery of $10 million, based upon a conclusion
that this amount did not represent costs incremental to costs already reflected
in rates. Consumers expects to receive a final order for the 2000
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restructuring implementation costs in 2002. In the orders received for the years
1997 through 1999, the MPSC also ruled that it reserved the right to undertake
another review of the total restructuring implementation costs depending upon
the progress and success of the retail open access program, and ruled that due
to the rate freeze imposed by the Customer Choice Act, it was premature to
establish a cost recovery method for the allowable costs. For the year 2001,
Consumers incurred, and deferred as a regulatory asset, an additional $8 million
in implementation costs for which an application for recovery will be filed with
the MPSC in 2002. In addition, Consumers has recorded as a regulatory asset $9
million for the cost of money associated with restructuring implementation
costs. Consumers believes the restructuring implementation costs and the
associated cost of money are fully recoverable in accordance with the Customer
Choice Act; however, Consumers cannot predict the amounts the MPSC will approve
as recoverable costs.
Rate Caps: The Customer Choice Act imposes certain limitations on rates
that could result in Consumers being unable to collect customer rates sufficient
to fully recover its cost of conducting business. Some of these costs may be
beyond Consumers' ability to control. In particular, if Consumers needs to
purchase power supply from wholesale suppliers during the period when retail
rates are frozen or capped, the rate restrictions imposed by the Customer Choice
Act may make it impossible for Consumers to fully recover the cost of purchased
power through the rates it charges its customers. As a result, it is not certain
that Consumers can maintain its profit margins in its electric utility business
during the period of the rate freeze or rate caps.
Industrial Contracts: In response to industry restructuring efforts,
Consumers entered into multi-year electric supply contracts with certain of its
largest industrial customers to provide electricity to certain of their
facilities at specially negotiated prices. The MPSC approved these special
contracts as part of its phased introduction to competition. During the period
from 2001 through 2005, either Consumers or these industrial customers can
terminate or restructure some of these contracts. As of December 2001, neither
Consumers nor any of its industrial customers have terminated or restructured
any of these contracts, but some contracts have expired by their terms.
Outstanding contracts involve approximately 510 MW of customer power supply
requirements. Consumers cannot predict the ultimate financial impact of changes
related to these power supply contracts, or whether additional contracts will be
necessary or advisable.
Code of Conduct: In December 2000, as a result of the passage of the
Customer Choice Act, the MPSC issued a new code of conduct that applies to
electric utilities and alternative electric suppliers. The code of conduct seeks
to prevent cross-subsidization, information sharing and preferential treatment
between a utility's regulated and unregulated services. The new code of conduct
is broadly written, and as a result could affect Consumers' retail gas business,
the marketing of unregulated services and equipment to customers in Michigan,
and internal transfer pricing between Consumers' departments and affiliates. The
new code of conduct was recently reaffirmed without substantial modification,
and will become operationally effective after the MPSC reviews and approves a
utility's compliance plans and requests for waivers. Consumers appealed the MPSC
orders related to the code of conduct and sought a stay of the orders until the
appeal was complete; however, the request for a stay was denied. Consumers has
filed a compliance plan in accordance with the code of conduct, and has sought
waivers to the code of conduct with respect to utility activities that provide
approximately $50 million in annual revenues that may be restricted. The full
impact of the new code of conduct on Consumers' business will remain uncertain
until the appellate courts issue definitive rulings or the MPSC rules on the
waivers.
Energy Policy: Uncertainty exists with respect to the enactment of a
national comprehensive energy policy, specifically federal electric industry
restructuring legislation. A variety of bills introduced in Congress in recent
years have sought to change existing federal regulation of the industry. If the
federal government enacts a comprehensive energy policy or legislation
restructuring the electric industry, then that legislation could potentially
affect or even supercede state regulation.
Transmission: In 1999, in part because of the provisions of certain policy
pronouncements by the FERC designed to encourage utilities to either transfer
operating control of their transmission facilities to an RTO or sell their
transmission facilities to an independent company, Consumers joined a coalition
of companies known as the Alliance companies for the purpose of creating a
FERC-approved RTO. In December 2001, the FERC denied the RTO plan submitted by
the Alliance companies and ordered the Alliance companies to explore membership
in the Midwest ISO, whose RTO plan was approved by the FERC. Membership in the
Midwest ISO could potentially
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increase Consumers' costs during the period of the rate freeze or rate caps
where Consumers could not raise retail electric rates in Michigan. Consumers and
METC are evaluating their options regarding RTO membership as a result of the
December 2001 FERC order.
In January 2001, the FERC granted Consumers' application to transfer
ownership and control of its electric transmission facilities to METC, and in
April 2001 the transfer took place. In October 2001, Consumers executed an
agreement to sell METC for approximately $290 million, depending on the final
date of the sale, to MTH, a non-affiliated limited partnership whose general
partner is a subsidiary of Trans-Elect, Inc. Certain of Trans-Elect's officers
and directors are former officers and directors of CMS Energy, Consumers and
certain of their subsidiaries, but all had left the employment of such
affiliates prior to the period when the transaction was discussed internally and
negotiated with purchasers. Trans-Elect, Inc. submitted the winning bid to
purchase METC through a competitive bidding process, and the transaction is
subject to approval by various federal agencies. Consumers is not providing any
financial or credit support to Trans-Elect, Inc. in connection with the purchase
of METC. Proceeds from the sale of METC will be used to improve Consumers'
balance sheet. Consumers chose to sell its transmission facilities as a form of
compliance with Michigan's Customer Choice Act and FERC Order No. 2000 rather
than own and invest in an asset that it cannot control. After selling its
transmission facilities, Consumers anticipates a reduction in after-tax earnings
of approximately $6 million and $14 million in 2002 and 2003, respectively, as a
result of the loss in revenue associated with wholesale and retail open access
customers that would buy services directly from MTH and the loss of a return on
the transmission assets upon the sale of METC to MTH. Under the agreement with
MTH, and subject to certain additional RTO surcharges, transmission rates
charged to Consumers will be fixed at current levels until December 2005, and
will be subject to FERC ratemaking thereafter. Consumers, through METC, will
continue to own and operate the transmission system until the companies meet all
conditions of closing, including approval of the transaction by the FERC. In
February 2002, MTH and Consumers received conditional approval of the
transaction from the FERC. Consumers and Trans-Elect, Inc. have petitioned for
rehearing to resolve certain remaining issues. Trans-Elect, Inc. has also
submitted filings to the FERC designed to bring it into the Midwest ISO and to
establish rates to be charged over the Trans-Elect, Inc. owned system. Final
regulatory approvals and operational transfer are expected to take place in the
first or second quarter of 2002; however, Consumers can make no assurances as to
when or whether the transaction will be completed. For further information, see
Note 2, Uncertainties, "Electric Rate Matters -- Transmission Business."
Consumers cannot predict the outcome of these electric
industry-restructuring issues on its financial position, liquidity, or results
of operations.
PERFORMANCE STANDARDS: In July 2001, the MPSC proposed electric
distribution performance standards applicable to Consumers and other Michigan
distribution utilities. The proposal would establish standards related to
restoration after an outage, safety, and customer relations. Failure to meet the
proposed performance standards would result in customer bill credits. Consumers
submitted comments to the MPSC. In December 2001, the MPSC issued an order
stating its intent to initiate a formal rulemaking proceeding to develop and
adopt performance standards. Consumers will continue to participate in this
process. Consumers cannot predict the outcome of the proposed performance
standards or the likely effect, if any, on Consumers.
For further information and material changes relating to the rate matters
and restructuring of the electric utility industry, see Note 1, Corporate
Structure and Summary of Significant Accounting Policies, and Note 2,
Uncertainties, "Electric Rate Matters -- Electric Restructuring" and "Electric
Rate Matters -- Electric Proceedings."
NUCLEAR MATTERS: In June 2001, an unplanned outage began at Palisades that
negatively affected power supply costs in the third and fourth quarter of 2001.
On June 20, 2001, the Palisades reactor was shut down so technicians could
inspect a small steam leak on a control rod drive assembly. In August 2001,
Consumers completed an expanded inspection that included all similar control rod
drive assemblies and elected to completely replace the defective components. In
December 2001, installation of the new components was completed and the plant
returned to service on January 21, 2002. For further information and material
changes relating to nuclear matters, see Note 2, Uncertainties, "Other Electric
Uncertainties -- Nuclear Matters."
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UNCERTAINTIES: Several electric business trends or uncertainties may affect
Consumers' financial results and condition. These trends or uncertainties have,
or Consumers reasonably expects could have, a material impact on net sales,
revenues, or income from continuing electric operations. Such trends and
uncertainties include: 1) the need to make additional capital expenditures and
increase operating expenses for compliance with the Clean Air Act; 2)
environmental liabilities arising from various federal, state and local
environmental laws and regulations, including potential liability or expenses
relating to the Michigan Natural Resources and Environmental Protection Acts and
Superfund; 3) uncertainties relating to the storage and ultimate disposal of
spent nuclear fuel and the successful operation of the Palisades plant by NMC;
4) electric industry restructuring issues, including those described above; 5)
Consumers' ability to meet peak electric demand requirements at a reasonable
cost, without market disruption, and initiatives undertaken to reduce exposure
to electric price increases for purchased power; 6) the restructuring of the
MEPCC and the termination of joint merchant operations with Detroit Edison; 7)
Consumers' ability to sell wholesale power at market-based rates; 8) the
recovery of electric restructuring implementation costs; 9) sufficient reserves
for OATT rate refunds; and 10) the effects of derivative accounting and
potential earnings volatility. For further information about these trends or
uncertainties, see Note 2, Uncertainties.
GAS BUSINESS OUTLOOK
GROWTH: Over the next five years, Consumers anticipates gas deliveries,
including gas customer choice deliveries (excluding transportation to the MCV
Facility and off-system deliveries), to grow at an average of about one percent
per year based primarily on a steadily growing customer base. Actual gas
deliveries in future periods may be affected by abnormal weather, alternative
electric costs, changes in competitive and economic conditions, and the level of
natural gas consumption per customer.
GAS RATE CASE: In June 2001, Consumers filed an application with the MPSC
seeking a distribution service rate increase. Contemporaneously with this
filing, Consumers requested partial and immediate relief in the annual amount of
$33 million. In October 2001, Consumers revised its filing to reflect lower
operating costs and is now requesting a $133 million annual distribution service
rate increase. In December 2001, the MPSC authorized a $15 million annual
interim increase in distribution service revenues. In February 2002, Consumers
revised its filing to reflect lower estimated gas inventory prices and revised
depreciation expense and is now requesting a $105 million distribution service
rate increase. See Note 2, Uncertainties "Gas Rate Case" for further
information.
UNBUNDLING STUDY: In July 2001, the MPSC directed gas utilities under its
jurisdiction to prepare and file an unbundled cost of service study. The purpose
of the study is to allow parties to advocate or oppose the unbundling of the
following services: metering, billing information, transmission, balancing,
storage, backup and peaking, and customer turn-on and turn-off services.
Unbundled services could be separately priced in the future and made subject to
competition by other providers. The subject is likely to remain the topic of
further study by the utilities in 2002 and under further consideration by the
MPSC. Consumers cannot predict the outcome of unbundling costs on its financial
results and conditions.
UNCERTAINTIES: Several gas business trends or uncertainties may affect
Consumers' financial results and conditions. These trends or uncertainties have,
or Consumers reasonably expects could have, a material impact on net sales,
revenues, or income from continuing gas operations. Such trends and
uncertainties include: 1) potential environmental costs at a number of sites,
including sites formerly housing manufactured gas plant facilities; 2) future
gas industry restructuring initiatives; 3) any initiatives undertaken to protect
customers against gas price increases; and 4) market and regulatory responses to
increases in gas costs. For further information about these uncertainties, see
Note 2, Uncertainties.
OTHER OUTLOOK
TERRORIST ATTACKS: Since the September 11, 2001 terrorists attack in the
United States, Consumers has increased security at all facilities and over its
infrastructure, and will continue to evaluate security on an ongoing basis.
Consumers may be required to comply with federal and state regulatory security
measures promulgated in
CE-14
the future. As a result, Consumers anticipates increased operating costs related
to security after September 11, 2001 that could be significant. Consumers would
attempt to seek recovery of these costs from its customers.
ENERGY-RELATED SERVICES: Consumers offers a variety of energy-related
services to retail customers that focus on appliance maintenance, home safety,
commodity choice and assistance to customers purchasing heating, ventilation and
air conditioning equipment. Consumers continues to look for additional growth
opportunities in providing energy-related services to its customers. The ability
to offer all or some of these services and other utility related revenue
generating services, which provide approximately $50 million in annual revenues,
may be restricted by the new code of conduct issued by the MPSC as discussed
above in Electric Business Outlook, "Competition and Regulatory
Restructuring -- Code of Conduct."
PENSION AND OPEB COSTS: Consumers provides post retirement benefits under
its Pension Plan, and post retirement health and life benefits under its OPEB
plan to substantially all its employees. Pension and OPEB plan assets, net of
contributions, have reduced in value from the previous year due to a downturn in
the equities market. As a result, Consumers expects to see an increase in
pension and OPEB expense levels over the next few years unless market
performance improves. Consumers anticipates pension expense and OPEB expense to
rise in 2002 by approximately $10 million and $20 million, respectively, over
2001 expenses. For pension expense, this increase is due to underperformance of
pension assets during the past two years, forecasted increases in pay and added
service, decline in the interest rate used to value the liability of the plan,
and expiration of the transition gain amortization. For OPEB expense, the
increase is due to the trend of rising health care costs, the market return on
plan assets being below expected levels and a lower discount rate, based on
recent economic conditions, used to compute the benefit obligation. Health care
cost decreases gradually under the assumptions used in the OPEB plan from
current levels through 2009; however, Consumers cannot predict the impact that
interest rates or market returns will have on pension and OPEB expense in the
future. For further information, see Note 7, Retirement Benefits.
OTHER MATTERS
NEW ACCOUNTING STANDARDS
In addition to the identified critical accounting policies discussed above,
future results may be affected by a number of new accounting standards that have
recently been issued which are discussed below.
SFAS NO. 141, BUSINESS COMBINATIONS: SFAS No. 141, issued in July 2001,
requires that all business combinations initiated after June 30, 2001, be
accounted for under the purchase method; use of the pooling-of-interests method
is no longer permitted. The adoption of SFAS No. 141, effective July 1, 2001,
will result in Consumers accounting for any future business combinations under
the purchase method of accounting.
SFAS NO. 142, GOODWILL AND OTHER INTANGIBLE ASSETS: SFAS No. 142, also
issued in July 2001, requires that goodwill no longer be amortized to earnings,
but instead be reviewed for impairment. When effective, January 1, 2002, the
provisions of SFAS No. 142 will have no impact on Consumers' consolidated
results of operations or financial position.
SFAS NO. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS: Issued by the
FASB in August 2001, the provisions of SFAS No. 143 require adoption as of
January 1, 2003. The standard requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity would capitalize
an offsetting amount by increasing the carrying amount of the related long-lived
asset. Over time, the liability is accreted to its present value while the
capitalized cost is depreciated over the useful life of the related asset.
Consumers is currently studying the new standard but has yet to quantify the
effects of adoption on its financial statements.
SFAS NO. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED
ASSETS: This new standard was issued by the FASB in October 2001, and supersedes
SFAS No. 121, and APB Opinion No. 30. SFAS No. 144 requires long-lived assets to
be measured at the lower of either the carrying amount or of the fair value less
the cost to sell, whether reported in continuing operations or in discontinued
operations. Therefore, discontinued operations will no longer be measured at net
realizable value or include amounts for operating losses that have not yet
occurred. SFAS No. 144 also broadens the reporting of discontinued operations to
include all components
CE-15
of an entity with operations that can be distinguished from the rest of the
entity and that will be eliminated from the ongoing operations of the entity in
a disposal transaction. The adoption of SFAS No. 144, effective January 1, 2002,
will result in Consumers accounting for any future impairment or disposal of
long-lived assets under the provisions of SFAS No. 144, but will not change the
accounting used for previous asset impairments or disposals.
DERIVATIVE IMPLEMENTATION GROUP ISSUES: In December 2001, the FASB issued
revised guidance for DIG Statement No. C15 and in October 2001, issued final
guidance for DIG Statement No. C16. These issues are effective April 1, 2002,
however, early application is permitted for DIG Statement No. C15, and Consumers
chose to implement the effects of this issue as of December 31, 2001. Upon
initial adoption of the revised guidance in DIG Statement No. C15, Consumers
recorded an $11 million, net of tax, cumulative effect adjustment as a decrease
to earnings. Consumers has completed its study of DIG Statement No. C16, and has
determined that this issue will not affect the accounting for its fuel supply
contracts. For further information, see Note 1, Corporate Structure and Summary
of Significant Accounting Policies, "Implementation of New Accounting Standards"
and Note 2, Uncertainties, "Other Electric Uncertainties -- Derivative
Activities."
DERIVATIVES AND HEDGES
MARKET RISK INFORMATION: Consumers is exposed to market risks including,
but not limited to, changes in interest rates, commodity prices, and equity
security prices. Consumers' market risk, and activities designed to minimize
this risk, are subject to the direction of an executive oversight committee
consisting of designated members of senior management and a risk committee,
consisting of business unit managers. The role of the risk committee is to
review the corporate commodity position and ensure that net corporate exposures
are within the economic risk tolerance levels established by Consumers' Board of
Directors. Established policies and procedures are used to manage the risks
associated with market fluctuations.
Consumers uses various derivative instruments, including swaps, options,
and forward contracts to manage its risks associated with the variability in
expected future cash flows attributable to fluctuations in interest rates and
commodity prices. When management uses these instruments, it intends that any
losses incurred on derivative instruments used to hedge risk would be offset by
an opposite movement in the value of the hedged risk. Consumers enters into all
derivative instruments for purposes other than trading.
Derivative instruments may be subject to derivative and hedge accounting in
accordance with SFAS No. 133. In order for derivative instruments to qualify for
hedge accounting under SFAS No. 133, the hedging relationship must be formally
documented at inception and be highly effective in achieving offsetting cash
flows or offsetting changes in fair value attributable to the risk being hedged.
If hedging a forecasted transaction, the forecasted transaction must be
probable. If a derivative instrument, used as a cash flow hedge, is terminated
early because it is probable that a forecasted transaction will not occur, any
gain or loss as of such date is immediately recognized in earnings. If a
derivative instrument, used as a cash flow hedge, is terminated early for other
economic reasons, any gain or loss as of the termination date is deferred and
recorded when the forecasted transaction affects earnings.
Derivative instruments contain credit risk if the counterparties, including
financial institutions and energy marketers, fail to perform under the
agreements. Consumers minimizes such risk by performing financial credit reviews
using, among other things, publicly available credit ratings of such
counterparties.
In accordance with SEC disclosure requirements, Consumers performs
sensitivity analyses to assess the potential loss in fair value, cash flows and
earnings based upon a hypothetical 10 percent adverse change in market rates or
prices. Consumers determines fair value based upon mathematical models using
current and historical pricing data. Management does not believe that
sensitivity analyses alone provide an accurate or reliable method for monitoring
and controlling risks; therefore, Consumers relies on the experience and
judgment of its senior management to revise strategies and adjust positions, as
it deems necessary. Losses in excess of the amounts determined in sensitivity
analyses could occur if market rates or prices exceed the ten percent shift used
for the analyses.
INTEREST RATE RISK: Consumers is exposed to interest rate risk resulting
from the issuance of fixed-rate debt and variable-rate debt, and from interest
rate swap and rate lock agreements. Consumers uses a combination of
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these instruments to manage and mitigate interest rate risk exposure when it
deems it appropriate, based upon market conditions. These strategies attempt to
provide and maintain the lowest cost of capital. As of December 31, 2001 and
2000, Consumers had entered into floating-to-fixed interest rate swap agreements
for a notional amount of $75 million and $300 million, respectively. As of
December 31, 2001 and 2000, Consumers had outstanding $1.189 billion and $843
million of variable-rate debt, respectively. At December 31, 2001 and 2000,
assuming a hypothetical 10 percent adverse change in market interest rates,
Consumers' exposure to earnings, before tax on its variable rate debt, would be
$2 million and $5 million, respectively. As of December 31, 2001 and 2000,
Consumers had outstanding long-term fixed-rate debt including fixed-rate swaps
of $2.682 billion and $2.583 billion, respectively, with a fair value of $2.676
billion and $2.515 billion, respectively. As of December 31, 2001 and 2000,
assuming a hypothetical 10 percent adverse change in market rates, Consumers
would have an exposure of $144 million and $133 million to the fair value of
these instruments, respectively, if it had to refinance all of its long-term
fixed-rate debt. Consumers does not intend to refinance its fixed-rate debt in
the near term and believes that any adverse change in debt price and interest
rates would not have a material effect on either its consolidated financial
position, results of operation or cash flows.
COMMODITY MARKET RISK: Consumers enters into, for purposes other than
trading, electricity and gas fuel for generation call options and swap
contracts. The electric call options are used to protect against risk due to
fluctuations in the market price of electricity and to ensure a reliable source
of capacity to meet its customers' electric needs. The gas fuel for generation
call options and swap contracts are used to protect generation activities
against risk due to fluctuations in the market price of natural gas.
As of December 31, 2001 and 2000, the fair value based on quoted future
market prices of electricity-related call option and swap contracts was $15
million and $126 million, respectively. At December 31, 2001 and 2000, assuming
a hypothetical 10 percent adverse change in market prices, the potential
reduction in fair value associated with these contracts would be $3 million and
$16 million, respectively. As of December 31, 2001 and 2000, Consumers had an
asset of $48 million and $86 million, respectively, related to premiums incurred
for electric call option contracts. Consumers' maximum exposure associated with
the call option contracts is limited to the premiums incurred.
EQUITY SECURITY PRICE RISK: Consumers has a less than 20 percent equity
investment in CMS Energy. At December 31, 2001 and 2000, a hypothetical 10
percent adverse change in market price would have resulted in an $8 million and
$11 million change in its equity investment, respectively. This 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.
For further information on market risk and derivative activities, see Note
1, Corporate Structure and Summary of Significant Accounting Policies, "Risk
Management Activities and Derivative Transactions" and "Implementation of New
Accounting Standards", Note 2, Uncertainties, "Other Electric Uncertainties --
Derivative Activities", and Note 3, Short-Term Financings and Capitalization,
"Derivative Activities."
OTHER
CHANGE IN PAID PERSONAL ABSENCES PLAN: During the first and third quarters
of 2000, Consumers implemented the results of a change in its paid personal
absences plan, in part due to provisions of a new union labor contract. The
change resulted in employees receiving the benefit of paid personal absence
immediately at the beginning of each fiscal year, rather than earning it in the
previous year. The change for non-union employees affected the first quarter of
2000. The change for union employees affected the third quarter of 2000. The
total effect of these one-time changes decreased operating expenses by $16
million collectively, and increased earnings, net of tax, by $6 million in the
first quarter and $4 million in the third quarter.
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CONSUMERS ENERGY COMPANY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31
--------------------------
2001 2000 1999
---- ---- ----
IN MILLIONS
OPERATING REVENUE
Electric.................................................. $2,633 $2,676 $2,667
Gas....................................................... 1,338 1,196 1,156
Other..................................................... 43 63 51
------ ------ ------
4,014 3,935 3,874
------ ------ ------
OPERATING EXPENSES
Operation
Fuel for electric generation............................ 330 324 336
Purchased power -- related parties...................... 543 534 560
Purchased and interchange power......................... 476 402 297
Cost of gas sold........................................ 707 616 519
Cost of gas sold -- related parties..................... 123 103 118
Loss on power purchase agreement -- MCV Partnership..... 126 -- --
Other................................................... 635 526 570
------ ------ ------
2,940 2,505 2,400
Maintenance............................................... 203 172 174
Depreciation, depletion and amortization.................. 339 426 424
General taxes............................................. 187 197 201
------ ------ ------
3,669 3,300 3,199
------ ------ ------
PRETAX OPERATING INCOME
Electric.................................................. 212 481 494
Gas....................................................... 98 98 132
Other..................................................... 35 56 49
------ ------ ------
345 635 675
------ ------ ------
OTHER INCOME (DEDUCTIONS)
Dividends and interest from affiliates.................... 6 10 11
Accretion income (Note 1)................................. -- 2 4
Accretion expense (Note 1)................................ (10) (7) (14)
Other, net................................................ 5 (5) 17
------ ------ ------
1 -- 18
------ ------ ------
INTEREST CHARGES
Interest on long-term debt................................ 151 141 140
Other interest............................................ 41 44 41
Capitalized interest...................................... (6) (2) --
------ ------ ------
186 183 181
------ ------ ------
NET INCOME BEFORE INCOME TAXES.............................. 160 452 512
INCOME TAXES................................................ 49 148 172
------ ------ ------
NET INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE................................................. 111 304 340
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR DERIVATIVE
INSTRUMENTS, NET OF $6 TAX BENEFIT (NOTE 1)............... (11) -- --
------ ------ ------
NET INCOME.................................................. 100 304 340
PREFERRED STOCK DIVIDENDS................................... 2 2 6
PREFERRED SECURITIES DISTRIBUTIONS.......................... 41 34 21
------ ------ ------
NET INCOME AVAILABLE TO COMMON STOCKHOLDER.................. $ 57 $ 268 $ 313
====== ====== ======
The accompanying notes are an integral part of these statements.
CE-18
CONSUMERS ENERGY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
------------------------
2001 2000 1999
---- ---- ----
IN MILLIONS
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $100 $304 $340
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization (includes
nuclear decommissioning of $6, $39 and $50,
respectively)....................................... 339 426 424
Loss on power purchase agreement -- MCV
Partnership......................................... 126 -- --
Deferred income taxes and investment tax credit...... 80 (9) 2
Capital lease and other amortization................. 20 32 35
Cumulative effect of accounting change............... 11 -- --
Undistributed earnings of related parties (net of
dividends, $8, $8 and $10, respectively)............ (30) (49) (40)
Changes in assets and liabilities
Decrease (increase) in accounts receivable and
accrued revenue................................. 144 (171) 12
Increase (decrease) in accounts payable........... 50 15 36
Decrease (increase) in inventories................ (307) (59) 5
Regulatory liability -- gas customer choice....... (24) 33 --
Changes in other assets and liabilities........... 8 (7) (23)
---- ---- ----
Net cash provided by operating activities....... 517 515 791
---- ---- ----
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under capital
lease)................................................. (745) (498) (444)
Cost to retire property, net.............................. (118) (125) (93)
Investment in Electric Restructuring Implementation
Plan................................................... (13) (29) (32)
Investments in nuclear decommissioning trust funds........ (6) (39) (50)
Proceeds from nuclear decommissioning trust funds......... 29 37 43
Associated company preferred stock redemption............. 50 50 50
Other..................................................... -- -- 7
---- ---- ----
Net cash used in investing activities.................. (803) (604) (519)
---- ---- ----
CASH FLOWS FROM FINANCING ACTIVITIES
Retirement of bonds and other long-term debt.............. (401) (9) (87)
Payment of common stock dividends......................... (190) (245) (262)
Preferred securities distributions........................ (41) (34) (21)
Payment of capital lease obligations...................... (20) (32) (33)
Contribution from (return of equity to) stockholder,
net.................................................... (14) -- 150
Payment of preferred stock dividends...................... (1) (2) (10)
Retirement of preferred stock............................. -- -- (200)
Increase (decrease) in notes payable, net................. 13 189 --
Proceeds from preferred securities, net................... 121 -- 169
Proceeds from senior notes and bank loans................. 355 225 15
Proceeds from securitization bonds, net................... 459 -- --
---- ---- ----
Net cash provided from (used in) financing
activities............................................ 281 92 (279)
---- ---- ----
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH
INVESTMENT................................................ (5) 3 (7)
Cash and temporary cash investments -- Beginning of
year................................................... 21 18 25
---- ---- ----
End of year............................................ $ 16 $ 21 $ 18
==== ==== ====
CE-19
YEARS ENDED DECEMBER 31
------------------------
2001 2000 1999
---- ---- ----
IN MILLIONS
OTHER CASH FLOW ACTIVITIES AND NON-CASH INVESTING AND
FINANCING ACTIVITIES WERE:
CASH TRANSACTIONS
Interest paid (net of amounts capitalized)................ $169 $183 $168
Income taxes paid (net of refunds)........................ 56 149 187
NON-CASH TRANSACTIONS
Nuclear fuel placed under capital lease................... $ 13 $ 4 $ 6
Other assets placed under capital lease................... 21 15 14
All highly liquid investments with an original maturity of three months or less
are considered cash equivalents.
The accompanying notes are an integral part of these statements.
CE-20
CONSUMERS ENERGY COMPANY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
----------------
2001 2000
---- ----
IN MILLIONS
ASSETS
PLANT (AT ORIGINAL COST)
Electric.................................................. $7,661 $7,241
Gas....................................................... 2,593 2,503
Other..................................................... 23 23
------ ------
10,277 9,767
Less accumulated depreciation, depletion and
amortization........................................... 5,934 5,768
------ ------
4,343 3,999
Construction work-in-progress............................. 464 279
------ ------
4,807 4,278
------ ------
INVESTMENTS
Stock of affiliates....................................... 59 86
First Midland Limited Partnership......................... 253 245
Midland Cogeneration Venture Limited Partnership.......... 300 290
------ ------
612 621
------ ------
CURRENT ASSETS
Cash and temporary cash investments at cost, which
approximates market.................................... 16 21
Accounts receivable and accrued revenue, less allowances
of $4 in 2001 and $3 in 2000........................... 125 225
Accounts receivable -- related parties.................... 17 111
Inventories at average cost
Gas in underground storage............................. 569 271
Materials and supplies................................. 69 66
Generating plant fuel stock............................ 52 46
Prepaid property taxes.................................... 144 136
Regulatory assets......................................... 19 19
Deferred income taxes..................................... -- 2
Other..................................................... 14 13
------ ------
1,025 910
------ ------
NON-CURRENT ASSETS
Regulatory Assets
Securitization costs................................... 717 709
Postretirement benefits................................ 209 232
Abandoned Midland project.............................. 12 22
Other.................................................. 167 168
Nuclear decommissioning trust funds....................... 581 611
Other..................................................... 176 222
------ ------
1,862 1,964
------ ------
TOTAL ASSETS................................................ $8,306 $7,773
====== ======
CE-21
DECEMBER 31
----------------
2001 2000
---- ----
IN MILLIONS
STOCKHOLDERS' INVESTMENT AND LIABILITIES
CAPITALIZATION (NOTE 3)
Common stockholder's equity
Common stock........................................... $ 841 $ 841
Paid-in capital........................................ 632 646
Revaluation capital.................................... 4 33
Retained earnings since December 31, 1992.............. 373 506
------ ------
1,850 2,026
Preferred stock........................................... 44 44
Company-obligated mandatorily redeemable preferred
securities of subsidiaries (a)......................... 520 395
Long-term debt............................................ 2,472 2,110
Non-current portion of capital leases..................... 56 49
------ ------
4,942 4,624
------ ------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases...... 257 231
Notes payable............................................. 416 403
Accounts payable.......................................... 291 254
Accrued taxes............................................. 219 247
Accounts payable -- related parties....................... 80 67
Deferred income taxes..................................... 12 --
Other..................................................... 260 253
------ ------
1,535 1,455
------ ------
NON-CURRENT LIABILITIES
Deferred income taxes..................................... 747 716
Postretirement benefits................................... 279 366
Regulatory liabilities for income taxes, net.............. 276 246
Power purchase agreement -- MCV Partnership............... 169 54
Deferred investment tax credit............................ 102 109
Other..................................................... 256 203
------ ------
1,829 1,694
------ ------
Commitments and Contingencies (Notes 1, 2, 8 and 11)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES.............. $8,306 $7,773
====== ======
- -------------------------
(a) See Note 3, Short-Term Financings and Capitalization
The accompanying notes are an integral part of these Balance Sheets.
CE-22
CONSUMERS ENERGY COMPANY
CONSOLIDATED STATEMENTS OF LONG-TERM DEBT
DECEMBER 31
----------------
SERIES(%) DUE 2001 2000
--------- --- ---- ----
IN MILLIONS
FIRST MORTGAGE BONDS........................................ 6 3/8 2003 $ 300 $ 300
7 3/8 2023 208 263
------ ------
508 563
SENIOR NOTES................................................ Floating 2001 -- 125
Floating 2002 100 100
6 3/8 2008 159 250
6 7/8 2018 180 225
6 1/5 2008(a) 250 250
6 1/2 2018(b) 141 200
6 1/2 2028 143 145
6 1/4 2006 332 --
------ ------
1,813 1,858
LONG-TERM BANK DEBT......................................... 184 190
POLLUTION CONTROL REVENUE BONDS............................. 126 126
SECURITIZATION BONDS........................................ 469 --
OTHER....................................................... 8 --
NUCLEAR FUEL DISPOSAL(c).................................... 135 130
------ ------
PRINCIPAL AMOUNT OUTSTANDING................................ 2,735 2,304
CURRENT AMOUNTS............................................. (244) (175)
NET UNAMORTIZED DISCOUNT.................................... (19) (19)
------ ------
TOTAL LONG-TERM DEBT........................................ $2,472 $2,110
====== ======
LONG-TERM DEBT MATURITIES
SECURITIZATION FIRST MORTGAGE SENIOR LONG-TERM
BONDS BONDS NOTES BANK DEBT OTHER TOTAL
-------------- -------------- ------ --------- ----- -----
IN MILLIONS
2002................................. $ 16 $ -- $100 $127 $1 $244
2003................................. 27 300 250(a) 57 -- 634
2004................................. 28 -- -- -- -- 28
2005................................. 29 -- 141(b) -- -- 170
2006................................. 30 -- 332 -- -- 362
- -------------------------
(a) These Notes are subject to a Call Option by the Callholder or a Mandatory
Put on May 1, 2003
(b) Senior Remarketed Notes subject to optional redemption by Consumers after
June 15, 2005
(c) Due date uncertain (see Note 1)
The accompanying notes are an integral part of these statements.
CE-23
CONSUMERS ENERGY COMPANY
CONSOLIDATED STATEMENTS OF PREFERRED STOCK
OPTIONAL DECEMBER 31
REDEMPTION ----------------------------------
SERIES PRICE 2001 2000 2001 2000
------ ---------- ---- ---- ---- ----
NUMBER OF SHARES IN MILLIONS
PREFERRED STOCK
Cumulative, $100 par value, authorized
7,500,000 shares, with no mandatory
redemption.............................. $4.16 $103.25 68,451 68,451 $ 7 $ 7
4.50 110.00 373,148 373,148 37 37
--- ---
TOTAL PREFERRED STOCK........................ $44 $44
=== ===
The accompanying notes are an integral part of these statements.
CE-24
CONSUMERS ENERGY COMPANY
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31
--------------------------
2001 2000 1999
---- ---- ----
IN MILLIONS
COMMON STOCK
At beginning and end of period(a)......................... $ 841 $ 841 $ 841
------ ------ ------
OTHER PAID-IN CAPITAL
At beginning of period.................................... 646 645 502
Capital stock expense..................................... -- (7)
Stockholder's contribution................................ 150 -- 150
Return of stockholder's contribution...................... (164) -- --
Miscellaneous............................................. -- 1 --
------ ------ ------
At end of period....................................... 632 646 645
------ ------ ------
REVALUATION CAPITAL
Investments
At beginning of period................................. 33 37 68
Unrealized gain (loss) on investments(b)............... (16) (4) (31)
Reclassification adjustments included in net
income(b)............................................. (1) -- --
------ ------ ------
At end of period.................................. 16 33 37
Derivative Instruments
At beginning of period(c).............................. 18 -- --
Unrealized gain (loss) on derivative instruments(b).... (30) -- --
------ ------ ------
At end of period.................................. (12) -- --
------ ------ ------
RETAINED EARNINGS
At beginning of period.................................... 506 485 434
Net income(b)............................................. 100 304 340
Cash dividends declared -- Common Stock................... (190) (247) (262)
Cash dividends declared -- Preferred Stock................ (2) (2) (6)
Preferred securities distributions........................ (41) (34) (21)
------ ------ ------
At end of period....................................... 373 506 485
------ ------ ------
TOTAL COMMON STOCKHOLDER'S EQUITY........................... $1,850 $2,026 $2,008
====== ====== ======
- -------------------------
(a) Number of shares of common stock outstanding was 84,108,789 for all periods
presented.
(b) Disclosure of Comprehensive Income:
Revaluation capital
Investments
Unrealized gain (loss) on investments, net of tax of
$9, $2 and $17, respectively......................... $ (16) $ (4) $ (31)
Reclassification adjustments included in net income,
net of tax of $1, $-- and $--, respectively.......... (1) -- --
Derivative Instruments
Unrealized gain (loss) on derivative instruments, net
of tax of $15, $-- and $--, respectively............. (30) -- --
Net income.................................................. 100 304 340
------ ------ ------
Total Comprehensive Income.................................. $ 53 $ 300 $ 309
====== ====== ======
(c) Cumulative effect of change in accounting principle, as of 1/1/01 and
7/1/01, net of $(9) tax (Note 1).
The accompanying notes are an integral part of these statements.
CE-25
CONSUMERS ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1: CORPORATE STRUCTURE AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CORPORATE STRUCTURE: Consumers, a subsidiary of CMS Energy, a holding
company, is an electric and gas utility company that provides service to
customers in Michigan's Lower Peninsula. Consumers' customer base includes a mix
of residential, commercial and diversified industrial customers, the largest
segment of which is the automotive industry.
BASIS OF PRESENTATION: The consolidated financial statements include
Consumers and its wholly owned subsidiaries. Consumers prepared the financial
statements in conformity with generally accepted accounting principles that
include the use of management's estimates. Consumers uses the equity method of
accounting for investments in its companies and partnerships where it has more
than a twenty percent but less than a majority ownership interest and includes
these results in operating income.
USE OF ESTIMATES: The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements. Estimates and
assumptions are also used in the disclosure of contingent assets and liabilities
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The recording of estimated liabilities for contingent losses within the
financial statements is guided by the principles in SFAS No. 5. SFAS No. 5
requires a company to record estimated liabilities in the financial statements
when it is probable that a loss will be paid in the future as a result of a
current event, and that amount can be reasonably estimated. Consumers has used
this accounting principle to record estimated liabilities discussed in Note 2,
Uncertainties.
REVENUE RECOGNITION POLICY: Revenues from deliveries of electricity and
natural gas, and the storage of natural gas, are recognized as services are
provided. Therefore, revenues include the accrual of electricity or gas consumed
and/or delivered, but not billed at month-end.
ACCRETION INCOME AND EXPENSE: In 1991, the MPSC allowed Consumers to
recover a portion of its abandoned Midland investment over a 10-year period, but
did not allow Consumers to earn a return on that amount. Consumers reduced the
recoverable investment to the present value of the future recoveries. During the
recovery period, Consumers adjusts the unrecovered asset to its present value.
It reflects this adjustment as accretion income. Conversely, in 1992 and 2001,
Consumers recorded a loss for the present value of its estimated future
underrecoveries of power supply costs resulting from purchases from the MCV
Partnership (see Note 2). It now recognizes accretion expense annually to
reflect the time value of money on the recorded loss.
GAS INVENTORY: Consumers uses the weighted average cost method for valuing
working gas inventory. Beginning October 2000, gas inventory also includes
recoverable cushion gas. Consumers records non-recoverable cushion gas in the
appropriate gas utility plant account. Consumers stores gas inventory in its
underground storage facilities.
MAINTENANCE, DEPRECIATION AND DEPLETION: Consumers charges property repairs
and minor property replacements to maintenance expense. Depreciable property
retired or sold, plus cost of removal (net of salvage credits), is charged to
accumulated depreciation. Consumers bases depreciation provisions for utility
property on straight-line and units-of-production rates approved by the MPSC.
For 2001, 2000 and 1999, the composite depreciation rate for electric utility
property was 3.1 percent, 3.1 percent and 3.0 percent, respectively. For 2001,
2000 and 1999, the composite rate for gas utility property was 4.4 percent
annually. For 2001, 2000 and 1999, the composite rate for other property was
11.2 percent, 10.7 percent, and 8.6 percent, respectively.
NUCLEAR FUEL COST: Consumers amortizes nuclear fuel cost to fuel expense
based on the quantity of heat produced for electric generation. Through November
2001, Consumers expensed the interest on leased nuclear fuel as it was incurred.
Effective December 2001, Consumers no longer leases its nuclear fuel.
CE-26
CONSUMERS ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For nuclear fuel used after April 6, 1983, Consumers charges disposal costs
to nuclear fuel expense, recovers these costs through electric rates, and then
remits them to the DOE quarterly. Consumers elected to defer payment for
disposal of spent nuclear fuel burned before April 7, 1983. As of December 31,
2001, Consumers has a recorded liability to the DOE of $135 million, including
interest, which is payable upon the first delivery of spent nuclear fuel to the
DOE. Consumers recovered through electric rates the amount of this liability,
excluding a portion of interest. In 1997, a federal court decision has confirmed
that the DOE was to begin accepting deliveries of spent nuclear fuel for
disposal by January 31, 1998. Subsequent litigation in which Consumers and
certain other utilities participated has not been successful in producing more
specific relief for the DOE's failure to comply.
In July 2000, the DOE reached a settlement agreement with one utility to
address the DOE's delay in accepting spent fuel. The DOE may use that settlement
agreement as a framework that it could apply to other nuclear power plants;
however, certain other utilities are challenging the validity of the settlement.
Additionally, there are two court decisions that support the right of utilities
to pursue damage claims in the United States Court of Claims against the DOE for
failure to take delivery of spent fuel. A number of utilities have commenced
litigation in the Court of Claims. Consumers is evaluating its options with
respect to its contract with the DOE.
NUCLEAR PLANT DECOMMISSIONING: In 2001, Consumers collected $6 million from
its electric customers for the decommissioning of its Palisades nuclear plant.
Amounts collected from electric retail customers and deposited in trusts
(including trust earnings) are credited to accumulated depreciation. In March
2001, Consumers filed updated decommissioning cost estimates for Big Rock and
Palisades that were $340 million and $739 million in 2000 dollars, respectively.
Using the inflation factors presented in the filing to the MPSC to escalate the
estimated decommissioning costs to 2001 dollars, the Big Rock and Palisades
estimated decommissioning costs are $346 million and $752 million, 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. On December 31, 2000, Big Rock trusts
were fully funded per the March 22, 1999 MPSC order and Consumers discontinued
depositing funds in the trust. The December 16, 1999 MPSC order set the annual
decommissioning surcharge for Palisades at $6 million a year. In December 2000,
the NRC extended the Palisades' operating license to March 2011 and the impact
of this extension was included as part of Consumers' March filing with the MPSC.
Consumers is required to file the next "Report on the Adequacy of the Existing
Annual Provision for Nuclear Plant Decommissioning" (Report) with the MPSC by
March 31, 2004.
In 1997, Big Rock closed permanently and plant decommissioning began.
Consumers estimates that the Big Rock site will be returned to a natural state
by the end of 2012 if the DOE begins removing the spent nuclear fuel by 2010.
For 2001, Consumers incurred costs of $28 million that were charged to the
accumulated depreciation reserve for decommissioning and withdrew $29 million
from the Big Rock nuclear decommissioning trust fund. In total, Consumers has
incurred costs of $190 million that have been charged to the accumulated
depreciation reserve for decommissioning and withdrew $179 million from the Big
Rock nuclear decommissioning trust fund. These activities had no material impact
on net income. At December 31, 2001, Consumers is the beneficiary of the
investment in nuclear decommissioning trust funds of $149 million for Big Rock.
In 1996, Consumers and several wholesale electric customers entered into
five-year contracts that fixed their contribution to nuclear decommissioning
costs for the term. Since that time, the total estimated decommissioning costs
for Big Rock increased substantially over the estimates used to calculate the
decommissioning costs in the wholesale contracts. As a result of a reduction in
decommissioning trust earnings in August 2001, along with the higher estimated
costs of decommissioning, Consumers, in September 2001, expensed approximately
$5 million related to this issue to recognize the unrecoverable portion of Big
Rock decommissioning costs associated with these customers.
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
CE-27
CONSUMERS ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
after the plant's NRC operating license expires. Palisades' current NRC license
will expire in 2011 and the trust funds were estimated to have accumulated $921
million, at that time, assuming currently approved MPSC surcharge levels.
Consumers estimates that at the time Palisades is fully decommissioned in the
year 2049, the trust funds will have provided $2.5 billion, including trust
earnings, to pay for the anticipated expenditures over the entire
decommissioning period. At December 31, 2001, Consumers is the beneficiary of
the investment in the MPSC nuclear decommissioning trust funds of $423 million
for Palisades. In addition, at December 31, 2001, Consumers has a FERC
decommissioning trust fund with a balance of approximately $8 million.
UNAMORTIZED DEBT PREMIUM, DISCOUNT AND EXPENSE: Consumers amortizes
premiums, discounts and expenses incurred in connection with the issuance of
presently outstanding long-term debt over the terms of the respective issues.
For the regulated portions of our businesses, if debt is refinanced, Consumers
amortizes any unamortized premiums, discounts and expenses over the term of the
new debt, as allowed under regulated utility accounting.
RECLASSIFICATIONS: Consumers reclassified certain prior year amounts for
comparative purposes. These reclassifications did not affect consolidated net
income for the years presented.
RELATED-PARTY TRANSACTIONS: Consumers completed its five-year redemption
program of its investment of $250 million in ten shares of Enterprises'
preferred stock. The balances as of December 31, 2001 and 2000 were $0 and $50
million, respectively. In addition, Consumers has an investment in 2.4 million
shares of CMS Energy Common Stock with a fair value totaling $57 million at
December 31, 2001 (see Note 5). In 2001, 2000 and 1999, Consumers received
dividends from these two investments totaling $6 million, $10 million, and $11
million, respectively. In 2001, 2000, and 1999, Consumers paid parent company
overhead costs to CMS Energy of $11 million, $1 million and $8 million,
respectively.
In 2001, 2000 and 1999, Consumers paid $55 million, $51 million and $52
million, respectively, for electric generating capacity and energy from
affiliates of Enterprises. From time to time, Consumers purchases a portion of
its gas from CMS Oil and Gas and CMS Marketing Services and Trading. In 2001,
Consumers did not make a purchase from CMS Oil and Gas. In 2000 and 1999,
Consumers purchased $3 million and $19 million, respectively. In 2001, 2000 and
1999, Consumers gas purchases from CMS Marketing Services and Trading were
$120 -- million, $95 million and $70 million, respectively. Consumers pays a
portion of its gas transportation costs to Panhandle and its subsidiary
Trunkline. In 2001, 2000 and 1999 transportation fees paid were $21 million, $38
million and $33 million, respectively. In 2001, 2000 and 1999, Consumers and its
subsidiaries sold, stored and transported natural gas and provided other
services to the MCV Partnership totaling $27 million, $26 million and $23
million, respectively. For additional discussion of related-party transactions
with the MCV Partnership and the FMLP, see Notes 2 and 11. Other related-party
transactions are immaterial.
UTILITY REGULATION: Consumers accounts for the effects of regulation based
on the regulated utility accounting standard SFAS No. 71. As a result, the
actions of regulators affect when Consumers recognizes revenues, expenses,
assets and liabilities.
In March 1999, Consumers received MPSC electric restructuring orders and as
a result discontinued application of SFAS No. 71 for the electric supply portion
of its business. Discontinuation of SFAS No. 71 for the generation portion of
Consumers' business resulted in Consumers reducing the carrying value of its
Palisades plant-related assets by approximately $535 million and establishing a
regulatory asset for a corresponding amount. According to current accounting
standards, Consumers can continue to carry its electric supply-related
regulatory assets if legislation or an MPSC rate order allows the collection of
cash flows to recover these regulatory assets from its regulated transmission
and distribution customers. As of December 31, 2001, Consumers had a net
investment in electric supply facilities of $1.319 billion included in electric
plant and property. See Note 2, Uncertainties, "Electric Rate
Matters -- Electric Restructuring."
CE-28
CONSUMERS ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SFAS No. 121 imposes strict criteria for retention of regulatory-created
assets by requiring that such assets be probable of future recovery at each
balance sheet date. Management believes these assets are probable of future
recovery.
The following regulatory assets (liabilities), which include both current
and non-current amounts, are reflected in the Consolidated Balance Sheets. These
costs are expected to be recovered through rates over periods of up to 14 years.
DECEMBER 31
----------------
2001 2000
---- ----
IN MILLIONS
Securitization costs (Note 2)............................... $ 717 $ 709
Postretirement benefits (Note 7)............................ 228 251
Electric Restructuring Implementation Plan.................. 82 75
Manufactured gas plant sites (Note 2)....................... 70 63
Abandoned Midland project................................... 12 22
Income taxes (Note 4)....................................... 6 24
Unamortized nuclear costs................................... -- 6
DSM -- deferred costs....................................... -- 6
Other....................................................... 15 18
------ ------
Total regulatory assets..................................... $1,130 $1,174
====== ======
Income taxes (Note 4)....................................... $ (282) $ (270)
Gas customer choice......................................... (9) (33)
Other....................................................... -- (6)
------ ------
Total regulatory liabilities................................ $ (291) $ (309)
====== ======
In October 2000, Consumers received an MPSC order authorizing Consumers to
securitize certain regulatory assets up to $469 million, net of tax, see Note 2,
Uncertainties, "Electric Rate Matters -- Electric Restructuring". Accordingly,
in December 2000, Consumers established a regulatory asset for Securitization
costs of $709 million, before tax, that had previously been recorded in other
regulatory asset accounts. As a result, regulatory assets totaling $709 million
were transferred to the regulatory asset Securitization costs accounts. In order
to prepare the Securitization assets for sale in November 2001, issuance fees of
$10 million and $1 million were incurred in 2001 and 2000, respectively, and
capitalized as a part of Securitization costs. These costs represent the
increase in Securitization costs between periods. These issuance costs will be
amortized each month for up to fourteen years, which approximated $2 million in
2001. The components of the Securitization costs are illustrated below.
DECEMBER 31
------------
2001 2000
---- ----
IN MILLIONS
Unamortized nuclear costs................................... $405 $405
Postretirement benefits..................................... 84 84
Income taxes................................................ 203 203
Uranium enrichment facility................................. 16 16
Other....................................................... 9 1
---- ----
Total securitized regulatory assets......................... $717 $709
==== ====
RISK MANAGEMENT ACTIVITIES AND DERIVATIVE TRANSACTIONS: Consumers is
exposed to market risks including, but not limited to, changes in interest
rates, commodity prices, and equity security prices. Consumers'
CE-29
CONSUMERS ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
market risk, and activities designed to minimize this risk, are subject to the
direction of an executive oversight committee consisting of designated members
of senior management and a risk committee, consisting of business unit managers.
The role of the risk committee is to review the corporate commodity position and
ensure that net corporate exposures are within the economic risk tolerance
levels established by Consumers' Board of Directors. Established policies and
procedures are used to manage the risks associated with market fluctuations.
Consumers uses various derivative instruments, including swaps, options,
and forward contracts to manage its risks associated with the variability in
expected future cash flows attributable to fluctuations in interest rates and
commodity prices. When management uses these instruments, it intends that an
opposite movement in the value of the hedged item would offset any losses
incurred on the derivative instruments. Consumers enters into all derivative
instruments for purposes other than trading.
Derivative instruments may be subject to derivative and hedge accounting in
accordance with SFAS No. 133. In order for derivative instruments to qualify for
hedge accounting under SFAS No. 133, the hedging relationship must be formally
documented at inception and be highly effective in achieving offsetting cash
flows or offsetting changes in fair value attributable to the risk being hedged.
If hedging a forecasted transaction, the forecasted transaction must be
probable. If a derivative instrument, used as a cash flow hedge, is terminated
early because it is probable that a forecasted transaction will not occur, any
gain or loss as of such date is immediately recognized in earnings. If a
derivative instrument, used as a cash flow hedge, is terminated early for other
economic reasons, any gain or loss as of the termination date is deferred and
recorded when the forecasted transaction affects earnings.
For further discussion see "Implementation of New Accounting Standards"
below, Note 2, Uncertainties, "Other Electric Uncertainties -- Derivative
Activities" and Note 3, Short-Term Financing and Capitalization, "Derivative
Activities."
IMPLEMENTATION OF NEW ACCOUNTING STANDARDS: Effective January 1, 2001,
Consumers adopted SFAS No. 133. The new standard requires Consumers to recognize
at fair value, all contracts that meet the definition of a derivative instrument
on the balance sheet as either assets or liabilities. The standard also requires
Consumers to record all changes in fair value directly in earnings, or other
comprehensive income if the derivative meets certain qualifying hedge criteria.
Consumers determines fair value based upon quoted market prices and mathematical
models using current and historical pricing data. The ineffective portion, if
any, of all hedges are recognized in earnings.
Consumers believes that the majority of its contracts qualify for the
normal purchases and sales exception of SFAS No. 133 and, therefore, are not
subject to derivative accounting. There are, however, certain contracts used to
limit Consumers' exposure to electricity and gas commodity price risk and
interest rate risk that require derivative accounting.
On January 1, 2001, upon initial adoption of the standard, Consumers
recorded a $21 million, net of tax, cumulative effect adjustment as an
unrealized gain increasing accumulated other comprehensive income. This
adjustment relates to the difference between the fair value and recorded book
value of contracts related to gas call options, gas fuel for generation swap
contracts, and interest rate swap contracts that qualified for cash flow hedge
accounting prior to the initial adoption of SFAS No. 133 and Consumers'
proportionate share of the effects of adopting SFAS No. 133 related to its
equity investment in the MCV Partnership. Based on the pretax initial transition
adjustment of $32 million recorded in accumulated other comprehensive income on
the January 1, 2001 transition date, Consumers reclassified to earnings $12
million as a reduction to the cost of gas, $1 million as a reduction to the cost
of power supply, $2 million as an increase in interest expense, and $8 million
as an increase in other revenue for the twelve months ended December 31, 2001.
The difference between the initial transition adjustment and the amounts
reclassified to earnings represents an unrealized loss in the fair value of the
derivative instruments since January 1, 2001, decreasing other comprehensive
income. As of December 31, 2001, there are
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CONSUMERS ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
no remaining amounts included in accumulated other comprehensive income related
to the initial transition adjustment.
As of December 31, 2001, Consumers had a total of $8 million, net of tax,
recorded as an unrealized loss in other comprehensive income related to its
proportionate share of the effects of derivative accounting related to its
equity investment in the MCV Partnership. Consumers expects to reclassify this
loss as a decrease to other operating revenue during the next 12 months, if this
value remains.
On January 1, 2001, upon initial adoption of SFAS No. 133, derivative and
hedge accounting for certain utility industry contracts, particularly electric
call option contracts and option-like contracts, and contracts subject to
Bookouts was uncertain. Consumers accounted for these types of contracts as
derivatives that qualified for the normal purchase exception of SFAS No. 133
and, therefore, did not record these contracts on the balance sheet at fair
value. In June and December 2001, the FASB issued guidance that resolved the
accounting for these contracts. As a result, on July 1, 2001, Consumers recorded
a $3 million, net of tax, cumulative effect adjustment as an unrealized loss
decreasing accumulated other comprehensive income, and on December 31, 2001,
recorded an $11 million, net of tax, cumulative effect adjustment as a decrease
to earnings. These adjustments relate to the difference between the fair value
and the recorded book value of electric call option contracts.
For further discussion of derivative activities, see Note 2, Uncertainties,
"Other Electric Uncertainties -- Derivative Activities" and Note 3, Short-Term
Financings and Capitalization, "Derivative Activities."
OTHER: For significant accounting policies regarding income taxes, see Note
4; for executive incentive compensation, see Note 6; for pensions and other
postretirement benefits, see Note 7; and for leases, see Note 8.
2: UNCERTAINTIES
ELECTRIC CONTINGENCIES
ELECTRIC ENVIRONMENTAL MATTERS: Consumers is subject to costly and
increasingly stringent environmental regulations. Consumers expects that the
cost of future environmental compliance, especially compliance with clean air
laws, will be significant.
Clean Air -- In 1997, the EPA introduced new regulations regarding the
standard for ozone and particulate-related emissions that were the subject of
litigation. The United States Supreme Court determined that the EPA has the
power to revise the standards but that the EPA implementation plan was not
lawful. In 1998, the EPA Administrator issued final regulations requiring the
state of Michigan to further limit nitrogen oxide emissions. The EPA has also
issued additional final regulations regarding nitrogen oxide emissions that
require certain generators, including some of Consumers' electric generating
facilities, to achieve the same emissions rate as that required by the 1998
plan. These regulations will require Consumers to make significant capital
expenditures estimated between $530 million and $570 million, calculated in year
2001 dollars. Much of the future expenditures are for retrofit post-combustion
technology. Cost estimates have been developed, in part, by independent
contractors with expertise in this field. The estimates are dependent on
regulatory outcome, market forces associated with emission reduction, and with
regional and national economic conditions. As of December 2001, Consumers has
incurred $296 million in capital expenditures to comply with these regulations
and anticipates that the remaining capital expenditures will be incurred between
2002 and 2004. At some point after 2004, if new environmental standards for
multi-pollutants become effective, Consumers may need additional capital
expenditures to comply with the standards. Consumers is unable to estimate the
additional capital expenditures required until the proposed standards are
further defined. Beginning January 2004, an annual return of and on these types
of capital expenditures, to the extent they are above depreciation levels, are
expected to be recoverable, subject to an MPSC prudency hearing, in future
rates.
These and other required environmental expenditures, if not recovered in
Consumers rates, may have a material adverse effect upon Consumers' financial
condition and results of operations.
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CONSUMERS ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Cleanup and Solid Waste -- Under the Michigan Natural Resources and
Environmental Protection Act, Consumers expects that it will ultimately incur
investigation and remedial action costs at a number of sites. Consumers believes
that these costs will be recoverable in rates under current ratemaking policies.
Consumers is a potentially responsible party at several contaminated sites
administered under Superfund. Superfund liability is joint and several. Along
with Consumers, many other creditworthy, potentially responsible parties with
substantial assets cooperate with respect to the individual sites. Based upon
past negotiations, Consumers estimates that its share of the total liability for
the known Superfund sites will be between $2 million and $9 million. As of
December 31, 2001, Consumers had accrued the minimum amount of the range for its
estimated Superfund liability.
In October 1998, during routine maintenance activities, Consumers
identified PCB as a component in certain paint, grout and sealant materials at
the Ludington Pumped Storage facility. Consumers removed and replaced part of
the PCB material. In April 2000, Consumers proposed a plan to deal with the
remaining materials and is awaiting a response from the EPA.
ELECTRIC RATE MATTERS
ELECTRIC RESTRUCTURING: In June 2000, the Michigan Legislature passed
electric utility restructuring legislation known as the Customer Choice Act.
This act: 1) permits all customers to exercise choice of electric generation
suppliers by January 1, 2002; 2) cuts residential electric rates by five
percent; 3) freezes all electric rates through December 31, 2003, and
establishes a rate cap for residential customers through at least December 31,
2005, and a rate cap for small commercial and industrial customers through at
least December 31, 2004; 4) allows for the use of low-cost Securitization bonds
to refinance Stranded Costs as a means of offsetting the earnings impact of the
five percent residential rate reduction; 5) establishes a market power supply
test that may require the transfer of control of a portion of generation
resources in excess of that required to serve firm retail sales requirements (a
requirement with which Consumers believes itself to be in compliance with at
this time); 6) requires Michigan utilities to join a FERC-approved RTO or divest
their interest in transmission facilities to an independent transmission owner;
7) requires the joint expansion of available transmission capability by
Consumers, Detroit Edison and American Electric Power by at least 2,000 MW by
June 5, 2002; 8) allows for the deferred recovery of an annual return of and on
capital expenditures in excess of depreciation levels incurred during and before
the rate cap period; and 9) allows for the recovery of "net" Stranded Costs and
implementation costs incurred as a result of the passage of the act. Consumers
is highly confident that it will meet the conditions of items 5 and 7 above,
prior to the earliest rate cap termination dates specified in the act. Failure
to do so could result in an extension of the rate caps to as late as December
31, 2013. As of December 31, 2001, Consumers spent $26 million on the required
expansion of transmission capabilities. Consumers anticipates it could spend up
to an additional $9 million in 2002, until Consumers sells METC to MTH, as
discussed below under "Transmission."
In October 2000 and January 2001, the MPSC issued orders that authorized
Consumers to issue Securitization bonds. Securitization typically involves the
issuance of asset backed bonds with a higher credit rating than conventional
utility corporate financing. The orders authorized Consumers to securitize
approximately $469 million in qualified costs, which were primarily regulatory
assets plus recovery of the Securitization expenses. Securitization is expected
to result in lower interest costs and a longer amortization period for the
securitized assets, that would offset the majority of the revenue impact of the
five percent residential rate reduction of approximately $22 million in 2000 and
$49 million on an annual basis thereafter that Consumers was required to
implement by the Customer Choice Act. The orders direct Consumers to apply any
cost savings in excess of the five percent residential rate reduction to rate
reductions for non-residential customers and reductions in Stranded Costs for
retail open access customers after the bonds are sold. Excess savings are
currently estimated to be approximately $13 million annually.
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CONSUMERS ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In November 2001, Consumers Funding LLC, a special purpose consolidated
subsidiary of Consumers formed to issue the bonds, issued $469 million of
Securitization bonds, Series 2001-1. The Securitization bonds mature at
different times over a period of up to 14 years and have an average interest
rate of 5.3 percent. The last expected maturity date is October 20, 2015. Net
proceeds from the sale of the Securitization bonds after issuance expenses were
approximately $460 million. The net proceeds were used by Consumers to buy back
$164 million of its common stock from its parent, CMS Energy. Beginning in
December 2001, and completed in March 2002, the remainder of these proceeds were
used to pay down long-term debt. CMS Energy used the $164 million received from
Consumers to pay down its own short-term debt.
Consumers and Consumers Funding LLC will recover the repayment of
principal, interest and other expenses relating to the issuance of the bonds
through a securitization charge and a tax charge that began in December 2001.
These charges are subject to an annual true-up until one year prior to the last
expected bond maturity date, and no more than quarterly thereafter. Current
electric rate design covers these charges, and there will be no impact on rates
for most of Consumers' electric customers until the rate freeze imposed under
the Customer Choice Act expires. Securitization charges collected will be
remitted to a trustee for the Securitization bonds and are not available to
Consumers' creditors.
Regulatory assets are normally amortized over their period of regulated
recovery. Beginning January 1, 2001, the amortization of the approved regulatory
assets being securitized as qualified costs was deferred, which effectively
offset the loss in revenue in 2001 resulting from the five percent residential
rate reduction. In December 2001, after the Securitization bonds were sold, the
amortization was re-established based on a schedule that is the same as the
recovery of the principal amounts of the securitized qualified costs. In 2002,
the amortization amount is expected to be approximately $31 million and the
securitized assets will be fully amortized by the end of 2015.
In 1998, Consumers submitted a plan for electric retail open access to the
MPSC and in March 1999 the MPSC issued orders that generally supported the plan.
Implementation began in September 1999. The Customer Choice Act states that
orders issued by the MPSC before the date of this act that; 1) allow electric
customers to choose their supplier; 2) authorize recovery of "net" Stranded
Costs and implementation costs; and 3) confirm any voluntary commitments of
electric utilities, are in compliance with this act and enforceable by the MPSC.
In September 2000, as required by the MPSC, Consumers once again filed tariffs
governing its retail open access program and addressed revisions appropriate to
comply with the Customer Choice Act. In December 2001, the MPSC approved revised
retail open access service tariffs. The revised tariffs establish the rates,
terms, and conditions under which retail customers will be permitted to choose
an alternative electric supplier for generation services. The tariffs are
effective January 1, 2002, and in general do not require any significant
modifications in the existing retail open access program. The terms of the
tariff allow retail open access customers, upon thirty days notice to Consumers,
to return to Consumers' generation service at current tariff rates. Consumers
may not have sufficient, reasonably priced, capacity to meet the additional
demand needs of returning retail open access customers, and may be forced to
purchase electricity on the spot market at prices higher than it could recover
from its customers.
POWER SUPPLY COSTS: During periods when electric demand is high, the cost
of purchasing electricity on the spot market can be substantial. To reduce
Consumers' exposure to the fluctuating cost of electricity, and to ensure
adequate supply to meet demand, Consumers intends to maintain sufficient
generation and to purchase electricity from others to create a power supply
reserve, also called a reserve margin, of approximately 15 percent. The reserve
margin provides Consumers with additional power supply above its anticipated
peak power supply demands. It also allows Consumers to provide reliable service
to its electric service customers and to protect itself against unscheduled
plant outages and unanticipated demand. For the summers 2002 and 2003, as it has
in previous summers, Consumers is planning for a reserve margin of 15 percent.
The actual reserve margin needed will depend primarily on summer weather
conditions, the level of retail open access requirements being served by
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CONSUMERS ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
others during the summer, and any unscheduled plant outages. As of February
2002, alternative electric suppliers are providing generation services to
customers with 309 MW of demand.
To reduce the risk of high electric prices during peak demand periods and
to achieve its reserve margin target, Consumers employs a strategy of purchasing
electric call option contracts for the physical delivery of electricity during
the months of June through September. The cost of these electric call option
contracts for 2001 was approximately $66 million. Consumers expects to use a
similar strategy in the future, but cannot predict the cost of this strategy at
this time. As of December 31, 2001, Consumers had purchased or had commitments
to purchase electric call option contracts covering the estimated reserve margin
requirement for the summer 2002 and partially covering the estimated reserve
margin requirements for summers 2003 through 2008, and has recorded an asset of
$48 million for these call options, of which $10 million pertains to 2002.
In 1996, as a result of the FERC's efforts to move the electric industry in
Michigan to competition, Detroit Edison gave Consumers the required four-year
contractual notice of its intent to terminate the agreements under which the
companies had jointly operated the MEPCC. Detroit Edison and Consumers
restructured and continued certain parts of the MEPCC control area and joint
transmission operations, but expressly excluded any merchant operations
(electricity purchasing, sales, and dispatch operations). The former joint
merchant operations began operating independently on April 1, 2001. The
termination of joint merchant operations with Detroit Edison has opened Detroit
Edison and Consumers to wholesale market competition as individual companies.
Consumers cannot predict the long-term financial impact of terminating these
joint merchant operations with Detroit Edison.
Prior to 1998, the PSCR process provided for the reconciliation of actual
power supply costs with power supply revenues. This process assured recovery of
all reasonable and prudent power supply costs actually incurred by Consumers,
including the actual cost of fuel for electric generation, and purchased and
interchange power. In 1998, as part of the electric restructuring efforts, the
MPSC suspended the PSCR process through December 31, 2001. Under the suspension,
the MPSC would not grant adjustment of customer rates through 2001. As a result
of the rate freeze imposed by the Customer Choice Act, the current rates will
remain in effect for all customers until at least December 31, 2003 and
therefore the PSCR process remains suspended. Therefore, changes in power supply
costs as a result of fluctuating electric prices will not be reflected in rates
charged to Consumers' customers during the rate freeze period.
Consumers is authorized by the FERC to sell electricity at wholesale market
prices. In authorizing sales at market prices, the FERC considers several
factors, including the extent to which the seller possesses "market power" as a
result of the seller's dominance of generation resources and surplus generation
resources in adjacent wholesale markets. In order to continue to be authorized
to sell at market prices, Consumers filed a traditional market dominance
analysis in October 2001. In November 2001, the FERC issued an order modifying
the method to be used to determine an entity's degree of market power. Due,
however, to several reliability issues brought before the FERC regarding this
order, the FERC has issued a stay of the order. If the modified market power
test in the order is not amended, Consumers cannot be certain at this time if it
will be granted authorization to continue to sell wholesale electricity at
market-based prices and may be limited to charging prices no greater than its
cost-based rates. A final decision about the proposed assessment method is not
expected for several months.
TRANSMISSION: In 1999, the FERC issued Order No. 2000, that strongly
encouraged utilities like Consumers to either transfer operating control of
their transmission facilities to an RTO, or sell their transmission facilities
to an independent company. In addition, in June 2000, the Michigan legislature
passed Michigan's Customer Choice Act, which contains a requirement that
utilities transfer the operating authority of transmission facilities to an
independent company or divest the facilities.
In 1999, Consumers and four other electric utility companies joined
together to form a coalition known as the Alliance companies for the purpose of
creating a FERC-approved RTO. In December 2001, the FERC denied the RTO plan
submitted by the Alliance companies and ordered the Alliance companies to
explore membership in the Midwest ISO, whose RTO plan was approved by the FERC.
Membership in the Midwest ISO could
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CONSUMERS ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
potentially increase Consumers' costs during the period of the rate freeze or
rate caps where Consumers could not raise retail electric rates in Michigan.
Consumers and METC are evaluating their options regarding RTO membership as a
result of the December 2001 FERC order.
In October 2000, Consumers filed a request with the FERC to transfer
ownership and control of its electric transmission facilities to METC. This
request was granted in January 2001. In December 2000, the MPSC issued an order
authorizing an anticipated sale or ownership transfer of Consumers' electric
transmission facilities. In April 2001, the transfer of the electric
transmission facilities to METC took place.
In October 2001, in compliance with Michigan's Customer Choice Act, and in
conformance with FERC Order No. 2000, Consumers executed an agreement to sell
METC for approximately $290 million, depending upon the final date of the sale,
to MTH, a non-affiliated limited partnership whose general partner is a
subsidiary of Trans-Elect, Inc. Certain of Trans-Elect's officers and directors
are former officers and directors of CMS Energy, Consumers and certain of their
subsidiaries, but all had left the employment of such affiliates prior to the
period when the transaction was discussed internally and negotiated with
purchasers. Trans-Elect, Inc. submitted the winning bid to purchase METC through
a competitive bidding process, and the transaction is subject to approval by
various federal agencies. Consumers is not providing any financial or credit
support to Trans-Elect, Inc. in connection with the purchase of METC. Proceeds
from the sale of METC will be used to improve Consumers' balance sheet.
Consumers, through, METC will continue to own and operate the system until the
companies meet all conditions of closing, including approval of the transaction
by the FERC. In February 2002, MTH and Consumers received conditional approval
of the transaction from the FERC. Consumers and Trans-Elect, Inc. have
petitioned for rehearing to resolve certain remaining issues. Trans-Elect, Inc.
has also submitted filings to the FERC designed to bring it into the Midwest ISO
and to establish rates to be charged over the Trans-Elect, Inc. owned system.
Final regulatory approvals and operational transfer are expected to take place
in the first or second quarter of 2002; however, Consumers can make no
assurances as to when or whether the transaction will be completed. After the
sale, Consumers will continue to maintain the system under a long-term contract
with MTH.
Consumers chose to sell its transmission facilities as a form of compliance
with Michigan's Customer Choice Act and FERC Order No. 2000 rather than own and
invest in an asset that it cannot control. After selling its transmission
facilities, Consumers anticipates a reduction in after-tax earnings of
approximately $6 million and $14 million in 2002 and 2003, respectively, as a
result of the loss in revenue associated with wholesale and retail open access
customers that would buy services directly from MTH and the loss of a return on
the transmission assets upon the sale of METC to MTH.
Under the agreement with MTH, and subject to additional RTO surcharges,
transmission rates charged to Consumers will be fixed at current levels until
December 31, 2005, and will be subject to FERC ratemaking thereafter. MTH will
complete the capital program to expand the transmission system's capability to
import electricity into Michigan, as required by the Customer Choice Act.
In the past, when IPPs connected to transmission systems they paid a fee
that was used by transmission companies to offset capital costs incurred to
connect the IPP to the transmission system and provide the system upgrades
needed as a result of the interconnection. In order to promote competition in
the electric generation market, the FERC recently issued an order that requires
the system upgrade portion of the fee to be refunded to IPPs over time as
transmission service is taken. As a result, transmission companies no longer
have the benefit of lowering their capital costs for transmission system
upgrades. This has resulted in METC recording a $30 million liability for a
refund to IPPs.
In June 2001, the Michigan South Central Power Agency and the Michigan
Public Power Agency filed suit against Consumers and METC in a Michigan circuit
court. The suit sought to prevent the sale or transfer of transmission
facilities without first binding a successor to honor the municipal agencies'
ownership interests, contractual agreements and rights that preceded the
transfer of the transmission facilities to METC. In
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CONSUMERS ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
August 2001, the parties reached two settlements. The settlements were approved
by the Michigan circuit court and were amended in February 2002 to assure that
closing could occur if all conditions to closing are satisfied. The circuit
court has retained jurisdiction over the matter and should dismiss the lawsuit
after closing.
ELECTRIC PROCEEDINGS: In 1997, ABATE filed a complaint with the MPSC. The
complaint alleged that Consumers' electric earnings are more than its authorized
rate of return and sought an immediate reduction in Consumers' electric rates
that approximated $189 million annually. As a result of the rate freeze imposed
by the Customer Choice Act, the MPSC issued an order in June 2000 dismissing the
ABATE complaint. In July 2000, ABATE filed a rehearing petition with the MPSC,
which was denied in October 2001. This proceeding is now final.
The Customer Choice Act allows for the recovery by an electric utility of
the cost of implementing the act's requirements and "net" Stranded Costs,
without defining the term. The act directs the MPSC to establish a method of
calculating "net" Stranded Costs and of conducting related true-up adjustments.
In December 2001, the MPSC adopted a methodology for calculating "net" Stranded
Costs as the shortfall between (a) the revenue needed to cover the costs
associated with fixed generation assets, generation-related regulatory assets,
and capacity payments associated with purchase power agreements and (b) the
revenues received from retail and wholesale customers under existing rates
available to cover those revenue needs. According to the MPSC, "net" Stranded
Costs are to be recovered from retail open access customers through a Stranded
Cost surcharge. Even though the MPSC ruled that the Stranded Cost surcharge to
be in effect on January 1, 2002 for the recovery of "net" Stranded Costs for
calendar year 2000 for Consumers is zero, the MPSC also indicated that the "net"
Stranded Costs for 2000 would be subject to further review in the context of its
subsequent determinations of "net" Stranded Costs for 2001 and later years. The
MPSC authorized Consumers to use deferred accounting to recognize the future
recovery of assets determined to be stranded by application of the MPSC's
methodology. Consumers is seeking a rehearing and clarification of the
methodology adopted, and will be making future "net" Stranded Cost filings with
the MPSC in March or April of 2002. The outcome of these proceedings before the
MPSC is uncertain at this time.
Between 1999 and 2001, Consumers filed applications with the MPSC for the
recovery of electric utility restructuring implementation costs of $75 million,
incurred between 1997 and 2000. Consumers received final orders that granted
recovery of $41 million of restructuring implementation costs for the years 1997
through 1999, and disallowed recovery of $10 million, based upon a conclusion
that this amount did not represent costs incremental to costs already reflected
in rates. Consumers expects to receive a final order for the 2000 restructuring
implementation costs in 2002. In the orders received for the years 1997 through
1999, the MPSC also ruled that it reserved the right to undertake another review
of the total restructuring implementation costs depending upon the progress and
success of the retail open access program, and ruled that due to the rate freeze
imposed by the Customer Choice Act, it was premature to establish a cost
recovery method for the allowable costs. For the year 2001, Consumers incurred,
and deferred as a regulatory asset, an additional $8 million in implementation
costs for which an application for recovery will be filed with the MPSC in 2002.
In addition, Consumers has recorded a regulatory asset of $9 million for the
cost of money associated with restructuring implementation costs. Consumers
believes the restructuring implementation costs and the associated cost of money
are fully recoverable in accordance with the Customer Choice Act; however,
Consumers cannot predict the amounts the MPSC will approve as recoverable costs.
In 1996, Consumers filed new OATT transmission rates with the FERC for
approval. Certain interveners contested these rates, and hearings were held
before an ALJ in 1998. During 1999, the ALJ rendered an initial decision, which
if upheld by the FERC, would ultimately reduce Consumers' OATT rates and require
Consumers to refund, with interest, any over-collections for past services.
Consumers, since that time has been reserving a portion of revenues billed to
customers under these OATT rates. At the time of the initial decision, Consumers
believed that certain issues would be decided in its favor, and that a
relatively quick order would be issued by the FERC regarding this matter.
However, due to changes in regulatory interpretations, Consumers believes that a
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CONSUMERS ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
successful resolution of certain issues is less likely. As a result, in
September 2001, Consumers reserved an additional $12 million, including
interest, to fully reflect its estimate of the financial impacts of the initial
decision. Consumers expects that its reserve levels for future transmission
service will be sufficient to satisfy its estimated refund obligation.
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
YEARS ENDED DECEMBER 31
------------------------
2001 2000 1999
---- ---- ----
IN MILLIONS
Pretax operating income..................................... $36 $56 $49
Income taxes and other...................................... 11 18 15
--- --- ---
Net income.................................................. $25 $38 $34
=== === ===
Power Supply Purchases from the MCV Partnership -- Consumers' annual
obligation to purchase capacity from the MCV Partnership is 1,240 MW through the
termination of the PPA in 2025. The PPA requires Consumers to pay, based on the
MCV Facility's availability, a levelized average capacity charge of 3.77 cents
per kWh, a fixed energy charge, and a variable energy charge based primarily on
Consumers' average cost of coal consumed for all kWh delivered. Since January 1,
1993, the MPSC has permitted Consumers to recover capacity charges averaging
3.62 cents per kWh for 915 MW, plus a substantial portion of the fixed and
variable energy charges. Since January 1, 1996, the MPSC has also permitted
Consumers to recover capacity charges for the remaining 325 MW of contract
capacity with an initial average charge of 2.86 cents per kWh increasing
periodically to an eventual 3.62 cents per kWh by 2004 and thereafter. However,
due to the current freeze of Consumers' retail rates that the Customer Choice
Act requires, the capacity charge for the 325 MW is now frozen at 3.17 cents per
kWh. After September 2007, the PPA's terms require Consumers to pay the MCV
Partnership capacity and energy charges that the MPSC has authorized for
recovery from electric customers.
In 1992, Consumers recognized a loss for the present value of the estimated
future underrecoveries of power supply costs under the PPA based on MPSC cost
recovery orders. Consumers continually evaluates the adequacy of the PPA
liability for future underrecoveries. These evaluations consider management's
assessment of operating levels at the MCV Facility through 2007 along with
certain other factors including MCV related costs that are included in
Consumers' frozen retail rates. During the third quarter of 2001, in connection
with Consumers' long-term electric supply planning, management reviewed the PPA
liability assumptions related to increased expected long-term dispatch of the
MCV Facility and increased MCV related costs. As a result, in September 2001,
Consumers increased the PPA liability by $126 million. Management believes that,
following the increase, the PPA liability adequately reflects the present value
of the PPA's future affect on Consumers. At December 31, 2001 and 2000, the
remaining after-tax present value of the estimated future PPA liability
associated with the loss totaled $119 million and $44 million, respectively. For
further discussion on the impact of the frozen PSCR, see "Electric Rate Matters"
in this Note.
In March 1999, Consumers and the MCV Partnership reached an agreement
effective January 1, 1999, that capped availability payments to the MCV
Partnership at 98.5 percent. If the MCV Facility generates electricity at
CE-37
CONSUMERS ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the maximum 98.5 percent level during the next five years, Consumers' after-tax
cash underrecoveries associated with the PPA could be as follows:
2002 2003 2004 2005 2006
---- ---- ---- ---- ----
IN MILLIONS
Estimated cash underrecoveries at 98.5%, net of tax......... $37 $37 $36 $36 $36
In February 1998, the MCV Partnership appealed the January 1998 and
February 1998 MPSC orders related to electric utility restructuring. At the same
time, MCV Partnership filed suit in the United States District Court in Grand
Rapids seeking a declaration that the MPSC's failure to provide Consumers and
MCV Partnership a certain source of recovery of capacity payments after 2007
deprived MCV Partnership of its rights under the Public Utilities Regulatory
Policies Act of 1978. In July 1999, the District Court granted MCV Partnership's
motion for summary judgment. The Court permanently prohibited enforcement of the
restructuring orders in any manner that denies any utility the ability to
recover amounts paid to qualifying facilities such as the MCV Facility or that
precludes the MCV Partnership from recovering the avoided cost rate. The MPSC
appealed the Court's order to the 6th Circuit Court of Appeals in Cincinnati. In
June 2001, the 6th Circuit overturned the lower court's order and dismissed the
case against the MPSC. The appellate court determined that the case was
premature and concluded that the qualifying facilities needed to wait until 2008
for an actual factual record to develop before bringing claims against the MPSC
in federal court. The MCV Partnership has requested rehearing of the appellate
court's order.
NUCLEAR MATTERS: In May 2001, Palisades received its annual performance
review in which the NRC stated that Palisades operated in a manner that
preserved public health and safety. The NRC classified all inspection findings
to have very low safety significance. At the time of the annual performance
review, the NRC had planned to conduct only baseline inspections at the facility
through May 31, 2002. The NRC, however, conducted an inspection to oversee the
Palisades June 2001 through January 2002 unplanned outage, which is discussed in
more detail below.
The amount of spent nuclear fuel discharged from the reactor to date
exceeds Palisades' temporary on-site storage pool capacity. Consequently,
Consumers is using NRC-approved steel and concrete vaults, commonly known as
"dry casks", for temporary on-site storage. As of December 31, 2001, Consumers
had loaded 18 dry casks with spent nuclear fuel at Palisades. Palisades will
need to load additional dry casks by 2004 in order to continue operation.
Palisades currently has three empty storage-only dry casks on-site, with storage
pad capacity for up to seven additional loaded dry casks. Consumers anticipates
that licensed transportable dry casks for additional storage, along with more
storage pad capacity, will be available prior to 2004.
In February 2000, Consumers submitted an analysis to the NRC that shows
that the NRC's current screening criteria for reactor vessel embrittlement at
Palisades will not be met until 2014. In December 2000, the NRC issued an
amendment revising the operating license for Palisades and extending the
expiration date to March 2011, with no restrictions related to reactor vessel
embrittlement.
In 2000, Consumers made an equity investment and entered into an operating
agreement with NMC. NMC was formed in 1999 by four utilities to operate and
manage the nuclear generating plants owned by these utilities. Consumers
benefits by consolidating expertise, cost control and resources among all of the
nuclear plants being operated on behalf of the NMC member companies.
In November 2000, Consumers requested approval from the NRC to transfer
operating authority for Palisades to NMC and the request was granted in April
2001. The formal transfer of authority from Consumers to NMC took place in May
2001. Consumers retains ownership of Palisades, its 789 MW output, the current
and future spent fuel on site, and ultimate responsibility for the safe
operation, maintenance and decommissioning of the plant. Under the agreement
that transferred operating authority of the plant to NMC, salaried Palisades'
employees became NMC employees on July 1, 2001. Union employees work under the
supervision of NMC
CE-38
CONSUMERS ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
pursuant to their existing labor contract as Consumers' employees. With
Consumers as a partner, NMC currently has responsibility for operating eight
units with 4,500 MW of generating capacity in Wisconsin, Minnesota, Iowa and
Michigan. As a result of the equity ownership in NMC, Consumers may be exposed
to additional financial impacts from the operation of all of those units.
On June 20, 2001, the Palisades reactor was shut down so technicians could
inspect a small steam leak on a control rod drive assembly. There was no risk to
the public or workers. In August 2001, Consumers completed an expanded
inspection that included all similar control rod drive assemblies and elected to
completely replace the defective components. Installation of the new components
was completed in December 2001 and the plant returned to service on January 21,
2002. Consumers' capital expenditures for the components and their installation
was approximately $31 million.
From the start of the June 20th outage through the end of 2001, the impact
on net income of replacement power supply costs associated with the outage was
approximately $59 million. Subsequently, in January 2002, the impact on 2002 net
income was $5 million.
Consumers maintains insurance against property damage, debris removal,
personal injury liability and other risks that are present at its nuclear
facilities. Consumers also maintains coverage for replacement power supply costs
during prolonged accidental outages at Palisades. Insurance would not cover such
costs during the first 12 weeks of any outage, but would cover most of such
costs during the next 52 weeks of the outage, followed by reduced coverage to 80
percent for 110 additional weeks. The June 2001 through January 2002 Palisades
outage, however, was not an insured event. If certain covered losses occur at
its own or other nuclear plants similarly insured, Consumers could be required
to pay maximum assessments of $26.9 million in any one year to NEIL; $88 million
per occurrence under the nuclear liability secondary financial protection
program, limited to $10 million per occurrence in any year; and $6 million if
nuclear workers claim bodily injury from radiation exposure. Consumers considers
the possibility of these assessments to be remote. NEIL limits its coverage from
multiple acts of terrorism during a twelve-month period to a maximum aggregate
of $3.24 billion, allocated among the claimants, plus recoverable reinsurance,
indemnity and other sources. The nuclear liability insurers for Palisades and
Big Rock also limit the amount of their coverage for liability from terrorist
acts to $200 million. This could affect the amount of loss coverage for
Consumers should multiple acts of terrorism occur. The Price Anderson Act
expires on August 1, 2002 and is currently in the process of reauthorization by
the U. S. Congress. It is possible that the Price Anderson Act will not be
reauthorized or changes may be made that significantly affect the insurance
provisions for nuclear plants.
CAPITAL EXPENDITURES: In 2002, 2003, and 2004, Consumers estimates electric
capital expenditures, including new lease commitments and environmental costs
under the Clean Air Act, of $448 million, $405 million, and $440 million. For
further information, see the Capital Expenditures Outlook section in the MD&A.
COMMITMENTS FOR FUTURE PURCHASES: Consumers enters into a number of
unconditional purchase obligations that represent normal business operating
contracts. These contracts are used to assure an adequate supply of goods and
services necessary for the operation of its business and to minimize exposure to
market price fluctuations. Consumers believes that these future costs are
prudent and reasonably assured of recovery in future rates.
Coal Supply: Consumers has entered into coal supply contracts with various
suppliers for its coal-fired generating stations. Under the terms of these
agreements, Consumers is obligated to take physical delivery of the coal and
make payment based upon the contract terms. Consumers' current contracts have
expiration dates that range from 2002 to 2004, and total an estimated $269
million. Long-term coal supply contracts account for approximately 60 to 85
percent of Consumers annual coal requirements. In 2001, coal purchases totaled
$255 million of which $197 million (71 percent of the tonnage requirement) was
under long-term contract. Consumers supplements its long-term contracts with
spot-market purchases.
CE-39
CONSUMERS ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Power Supply, Capacity and Transmission: As of December 31, 2001, Consumers
had future unrecognized commitments to purchase power supply and transmission
services under fixed price forward contracts for the years 2002 and 2003
totaling $26 million. Consumers also had commitments to purchase capacity and
energy under long-term power purchase agreements with various generating plants
including the MCV Facility. These contracts require monthly capacity payments
based on the plants' availability or deliverability. These payments for the
years 2002 through 2033 total an estimated $17 billion, undiscounted, which
includes $13 billion related to the MCV Facility. This amount may vary depending
upon plant availability and fuel costs. If a plant were not available to deliver
electricity to Consumers, then Consumers would not be obligated to make the
capacity payment until the plant could deliver. For further information, see
Note 2, Uncertainties, "The Midland Cogeneration Venture" for information
concerning power purchases from the MCV Facility.
DERIVATIVE ACTIVITIES: Consumers' electric business uses purchased electric
call option contracts to meet its regulatory obligation to serve, which requires
providing a physical supply of electricity to customers, and to manage electric
cost and to ensure a reliable source of capacity during periods of peak demand.
On January 1, 2001, upon initial adoption of SFAS No. 133, derivative and hedge
accounting for certain utility industry contracts, particularly electric call
option contracts and option-like contracts, and contracts subject to Bookouts
was uncertain. Consumers accounted for these types of contracts as derivatives
that qualified for the normal purchase exception of SFAS No. 133 and, therefore,
did not record these contracts on the balance sheet at fair value. In June 2001,
the FASB issued guidance that effectively resolved the accounting for these
contracts as of July 1, 2001. Consumers evaluated its option and option-like
contracts and determined that the majority of these contracts qualified for the
normal purchase exception of SFAS No. 133; however, certain electric call option
contracts were required to be accounted for as derivatives. On July 1, 2001,
upon initial adoption of the standard for these contracts, Consumers recorded a
$3 million, net of tax, cumulative effect adjustment as an unrealized loss
decreasing accumulated other comprehensive income. This adjustment relates to
the difference between the fair value and the recorded book value of these
electric call option contracts. The adjustment to accumulated other
comprehensive income relates to electric call option contracts that qualified
for cash flow hedge accounting prior to the initial adoption of SFAS No. 133.
After July 1, 2001, these contracts will not qualify for hedge accounting under
SFAS No. 133 and, therefore, Consumers will record any change in fair value
subsequent to July 1, 2001 directly in earnings, which could cause earnings
volatility. The initial amount recorded in other comprehensive income will be
reclassified to earnings as the forecasted future transactions occur or the call
options expire. The majority of these contracts expired in the third quarter
2001 and the remaining contracts will expire in 2002. As of December 31, 2001,
$2 million, net of tax, was reclassified to earnings as part of cost of power
supply. The remainder is expected to be reclassified to earnings in the third
quarter of 2002.
In December 2001, the FASB issued revised guidance regarding derivative
accounting for electric call option contracts and option-like contracts. The
revised guidance amends the criteria to be used to determine if derivative
accounting is required. Consumers re-evaluated its electric call option and
option-like contracts and determined that under the revised guidance additional
contracts require derivative accounting. Therefore, as of December 31, 2001,
upon initial adoption of the revised guidance for these contracts, Consumers
recorded an $11 million, net of tax, cumulative effect adjustment as a decrease
to earnings. This adjustment relates to the difference between the fair value
and the recorded book value of these electric call option contracts. Consumers
will record any change in fair value subsequent to December 31, 2001 directly in
earnings, which could cause earnings volatility.
Consumers' electric business also uses purchased gas call option and gas
swap contracts to hedge against price risk due to the fluctuations in the market
price of gas used as fuel for generation of electricity. These contracts are
financial contracts that will be used to offset increases in the price of
probable forecasted gas purchases. These contracts are designated as cash flow
hedges and, therefore, Consumers will record any change in the fair value of
these contracts in other comprehensive income until the forecasted transaction
occurs. Once the forecasted gas purchases occur, the net gain or loss on these
contracts will be reclassified to earnings and recorded as part of the cost of
power supply. These contracts have been highly effective in achieving offsetting
cash flows of future gas purchases, and no component of the gain or loss was
excluded from the assessment of the
CE-40
CONSUMERS ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
hedge's effectiveness. As a result, for the year ended December 31, 2001, no net
gain or loss has been recognized in earnings as a result of hedge
ineffectiveness. These contracts expired in December 2001.
GAS CONTINGENCIES
GAS ENVIRONMENTAL MATTERS: Under the Michigan Natural Resources and
Environmental Protection Act, Consumers expects that it will ultimately incur
investigation and remedial action costs at a number of sites. These include 23
former manufactured gas plant facilities, which were operated by Consumers for
some part of their operating lives, including sites in which it has a partial or
no current ownership interest. Consumers has completed initial investigations at
the 23 sites. For sites where Consumers has received site-wide study plan
approvals, it will continue to implement these plans. It will also work toward
closure of environmental issues at sites as studies are completed. Consumers has
estimated its costs related to further investigation and remedial action for all
23 sites using the Gas Research Institute-Manufactured Gas Plant Probabilistic
Cost Model. The estimated total costs are between $82 million and $113 million;
these estimates are based on discounted 2001 costs and follow EPA recommended
use of discount rates between 3 and 7 percent for this type of activity.
Consumers expects to recover a significant portion of these costs through
insurance proceeds and through MPSC approved rates charged to its customers. As
of December 31, 2001, Consumers has an accrued liability of $57 million, (net of
$25 million of expenditures incurred to date), and a regulatory asset of $70
million. Any significant change in assumptions, such as an increase in the
number of sites, different remediation techniques, nature and extent of
contamination, and legal and regulatory requirements, could affect Consumers'
estimate of remedial action costs. The MPSC currently allows Consumers to
recover $1 million of manufactured gas plant facilities environmental clean-up
costs annually. Consumers defers and amortizes, over a period of ten years,
manufactured gas plant facilities environmental clean-up costs above the amount
currently being recovered in rates. Additional rate recognition of amortization
expense cannot begin until after a prudency review in a future general gas rate
case. Consumers' position in the current general gas rate case is that all
manufactured gas plant facilities environmental clean-up expenditures for years
1998 through 2002 are prudent.
GAS RATE MATTERS
GAS RESTRUCTURING: From April 1, 1998 to March 31, 2001, Consumers
conducted an experimental gas customer choice pilot program that froze gas
distribution and GCR rates through the period. On April 1, 2001, a permanent gas
customer choice program commenced under which Consumers returned to a GCR
mechanism that allows it to recover from its bundled customers all prudently
incurred costs to purchase the natural gas commodity and transport it to
Consumers for ultimate distribution to customers.
GAS COST RECOVERY: As part of a settlement agreement approved by the MPSC
in July 2001, Consumers agreed not to bill a price in excess of $4.69 per mcf of
natural gas under the GCR factor mechanism through March 2002. This agreement is
not expected to affect Consumers' earnings outlook because Consumers recovers
from customers the amount that it actually pays for natural gas in the
reconciliation process. The settlement does not affect Consumers' June 2001
request to the MPSC for a distribution service rate increase. The MPSC also
approved a methodology to adjust bills for market price increases quarterly
without returning to the MPSC for approval. In December 2001, Consumers filed
its GCR Plan for the period April 2002 through March 2003. Consumers is
requesting authority to bill a GCR factor up to $3.50 per mcf for this period.
GAS RATE CASE: In June 2001, Consumers filed an application with the MPSC
seeking a distribution service rate increase. Consumers is seeking a 12.25%
authorized return on equity. Contemporaneously with this filing, Consumers
requested partial and immediate relief in the annual amount of $33 million. The
relief is primarily for higher carrying costs on more expensive natural gas
inventory than is currently included in rates. In October 2001, Consumers
revised its filing to reflect lower operating costs and requested a $133 million
annual distribution service rate increase. In December 2001, the MPSC authorized
a $15 million annual interim increase in distribution service rate revenues. The
order authorizes Consumers to apply the interim increase on its gas sales
CE-41
CONSUMERS ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
customers' bills for service effective December 21, 2001. The increase is under
bond and subject to refund if the final rate increase is less than the interim
rate increase. In February 2002, Consumers revised its filing to reflect lower
estimated gas inventory prices and revised depreciation expense and is now
requesting a $105 million annual distribution service rate increase. If the MPSC
approves Consumers' total request, then Consumers could bill an additional
amount of approximately $4.78 per month, representing a 7.7 percent increase in
the typical residential customer's average monthly bill.
OTHER GAS UNCERTAINTIES
CAPITAL EXPENDITURES: In 2002, 2003, and 2004, Consumers estimates gas
capital expenditures, including new lease commitments, of $174 million, $165
million, and $150 million. For further information, see the Capital Expenditures
Outlook section in the MD&A.
COMMITMENTS FOR GAS SUPPLIES: Consumers contracts to purchase gas and
transportation from various suppliers for its natural gas business. These
contracts have expiration dates that range from 2002 to 2005. Consumers' 2001
gas requirements totaled 229 bcf at a cost of $962 million. As of the end of
2001, Consumers expected gas requirements for 2002 are 205 bcf of which 54
percent is covered by existing contracts.
OTHER UNCERTAINTIES
In addition to the matters disclosed in this note, Consumers and certain of
its subsidiaries are parties to certain lawsuits and administrative proceedings
before various courts and governmental agencies arising from the ordinary course
of business. These lawsuits and proceedings may involve personal injury,
property damage, contractual matters, environmental issues, federal and state
taxes, rates, licensing and other matters.
Consumers has accrued estimated losses for certain contingencies discussed
in this note. Resolution of these contingencies is not expected to have a
material adverse impact on Consumers' financial position, liquidity, or results
of operations.
3: SHORT-TERM FINANCINGS AND CAPITALIZATION
AUTHORIZATION: At December 31, 2001, Consumers had FERC authorization to
issue or guarantee through June 2002, up to $1.4 billion of short-term
securities outstanding at any one time. Consumers also had remaining FERC
authorization to issue through June 2002 up to $250 million and $570 million of
long-term securities for refinancing or refunding purposes and for general
corporate purposes, respectively.
In October 2001, FERC granted Consumers' August 2001 request for
authorization of up to $500 million of First Mortgage Bonds to be issued as
collateral for the outstanding short-term securities. Further, in November 2001,
FERC granted Consumers' August 2001 request for authorization of an additional
$500 million of long-term securities for general corporate purposes and up to an
additional $500 million of First Mortgage Bonds to be issued solely as security
for the long-term securities.
SHORT-TERM FINANCINGS: Consumers has an unsecured $300 million credit
facility maturing in July 2002 and unsecured lines of credit aggregating $215
million. These facilities are available to finance seasonal working capital
requirements and to pay for capital expenditures between long-term financings.
At December 31, 2001, a total of $416 million was outstanding at a weighted
average interest rate of 2.7 percent, compared with $403 million outstanding at
December 31, 2000, at a weighted average interest rate of 7.4 percent.
Consumers currently has in place a $450 million trade receivables sale
program. At December 31, 2001 and 2000, receivables sold under the program
totaled $334 million and $325 million, respectively. Accounts receivable and
accrued revenue in the Consolidated Balance Sheets have been reduced to reflect
receivables sold.
LONG-TERM FINANCINGS: In September 2001, Consumers sold $350 million
aggregate principal amount of 6.25 percent senior notes, maturing in September
2006. Net proceeds from the sale were $347 million.
CE-42
CONSUMERS ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Consumers used the net proceeds to reduce borrowings on various lines of credit
and on a revolving credit facility. In March 2002, Consumers sold $300 million
principal amount of six percent senior notes, maturing in March 2005. Net
proceeds from the sale were $299 million. Consumers used the net proceeds to
replace a first mortgage bond that was to mature in 2003. For further
information about long-term financing, see the Consolidated Statements of
Long-Term Debt.
FIRST MORTGAGE BONDS: Consumers secures its First Mortgage Bonds by a
mortgage and lien on substantially all of its property. Consumers' ability to
issue and sell securities is restricted by certain provisions in its First
Mortgage Bond Indenture, its Articles of Incorporation and the need for
regulatory approvals to meet appropriate federal law.
MANDATORILY REDEEMABLE PREFERRED SECURITIES: Consumers has wholly owned
statutory business trusts that are consolidated within its financial statements.
Consumers created these trusts for the sole purpose of issuing Trust Preferred
Securities. The primary asset of the trusts is a note or debenture of Consumers.
The terms of the Trust Preferred Security parallel the terms of the related
Consumers' note or debenture. The term, rights and obligations of the Trust
Preferred Security and related note or debenture are also defined in the related
indenture through which the note or debenture was issued, Consumers' guarantee
of the related Trust Preferred Security and the declaration of trust for the
particular trust. All of these documents together with their related note or
debenture and Trust Preferred Security constitute a full and unconditional
guarantee by Consumers of the trust's obligations under the Trust Preferred
Security. In addition to the similar provisions previously discussed, specific
terms of the securities follow:
AMOUNT
OUTSTANDING EARLIEST
TRUST AND SECURITIES -------------------- REDEMPTION
YEARS ENDED DECEMBER 31 RATE 2001 2000 1999 MATURITY YEAR
- ----------------------- ---- ---- ---- ---- -------- ----------
IN MILLIONS
Consumers Power Company Financing I, Trust
Originated Preferred Securities............. 8.36% $100 $100 $100 2015 2000
Consumers Energy Company Financing II, Trust
Originated Preferred Securities............. 8.20% $120 $120 $120 2027 2002
Consumers Energy Company Financing III, Trust
Originated Preferred Securities............. 9.25% $175 $175 $175 2029 2004
Consumers Energy Company Financing IV, Trust
Preferred Securities........................ 9.00% $125 $ -- $ -- 2031 2006
---- ---- ----
Total......................................... $520 $395 $395
==== ==== ====
In March 2002, Consumers reduced its outstanding debt to Consumers Power
Company Financing I, Trust Originated Preferred Securities by $30 million.
OTHER: Consumers has a total of $126 million of long-term pollution control
revenue bonds outstanding, secured by first mortgage bonds and insurance
policies. These bonds had a weighted average interest rate of 2.8 percent at
December 31, 2001.
Under the provisions of its Articles of Incorporation, Consumers had $233
million of unrestricted retained earnings available to pay common dividends at
December 31, 2001. In January 2002, Consumers declared a $55 million common
dividend which was paid in February 2002.
DERIVATIVE ACTIVITIES: Consumers uses interest rate swaps to hedge the risk
associated with forecasted interest payments on variable rate debt. These
interest rate swaps are designated as cash flow hedges. As such, Consumers will
record any change in the fair value of these contracts in other comprehensive
income unless the swap is sold. These swaps fix the interest rate on $75 million
of variable rate debt, and expire in December 2002. As of December 31, 2001,
these interest rate swaps had a negative fair value of $3 million. This amount,
if
CE-43
CONSUMERS ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
sustained, will be reclassified to earnings increasing interest expense when the
swaps are settled on a monthly basis.
In September 2001, Consumers entered into a cash flow hedge to fix the
interest rate on $100 million of debt to be issued. In September 2001, the swap
terminated and resulted in a $2 million loss that has been recorded in other
comprehensive income and will be amortized to interest expense over the life of
the debt using the effective interest method.
Consumers also uses interest rate swaps to hedge the risk associated with
the fair value of its debt. These interest rate swaps are designated as fair
value hedges. During the third quarter 2001, Consumers entered into fair value
hedges to hedge the risk associated with the fair value of $400 million of fixed
rate debt. These swaps were terminated in the third and fourth quarter 2001 and
resulted in an $8 million gain that has been deferred and recorded as part of
the debt. It is anticipated that this gain will be recognized over the remaining
life of the debt. In March 2002, Consumers entered into a fair value hedge to
hedge the risk associated with the fair value of $300 million of fixed rate debt
issued in March 2002.
4: INCOME TAXES
Consumers and its subsidiaries file a consolidated federal income tax
return with CMS Energy. Income taxes are generally allocated based on each
company's separate taxable income. Consumers practices full deferred tax
accounting for temporary differences as authorized by the MPSC.
Consumers uses ITC to reduce current income taxes payable, and defers and
amortizes ITC over the life of the related property. Any AMT paid generally
becomes a tax credit that Consumers can carry forward indefinitely to reduce
regular tax liabilities in future periods when regular taxes paid exceed the tax
calculated for AMT. The significant components of income tax expense (benefit)
consisted of:
YEARS ENDED DECEMBER 31
--------------------------
2001 2000 1999
---- ---- ----
IN MILLIONS
Current federal income taxes................................ $(39) $149 $170
Deferred income taxes, includes $6 for 2001 change in
accounting (Note 1)....................................... 89 7 11
Deferred ITC, net........................................... (7) (8) (9)
---- ---- ----
$ 43 $148 $172
==== ==== ====
CE-44
CONSUMERS ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The principal components of Consumers' deferred tax assets (liabilities)
recognized in the balance sheet are as follows:
DECEMBER 31
---------------------
2001 2000
---- ----
IN MILLIONS
Property.................................................... $ (557) $ (522)
Unconsolidated investments.................................. (211) (226)
Securitization costs (Note 2)(a)............................ (194) (185)
Postretirement benefits (Note 7)............................ (76) (88)
Gas inventories............................................. (57) --
Employee benefit obligations, includes postretirement
benefits of $104 and $122 (Note 7)........................ 124 148
FAS 109 regulatory liability................................ 117 86
Power purchases (Note 2).................................... 64 24
AMT carryforward............................................ 30 53
Other, net.................................................. 1 (4)
------- -------
$ (759) $ (714)
======= =======
Gross deferred tax liabilities.............................. $(1,270) $(1,365)
Gross deferred tax assets................................... 511 651
------- -------
$ (759) $ (714)
======= =======
- -------------------------
(a) During 2000, Consumers Energy established a regulatory asset for
securitization costs of $709 million, before tax, which had previously been
recorded in other regulatory asset accounts. As a result, deferred taxes
totaling $185 million were transferred from the following components:
Property.................................................... $ (81)
FAS 109 regulatory liability................................ (70)
Postretirement benefits..................................... (29)
Other....................................................... (5)
-----
$(185)
=====
CE-45
CONSUMERS ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The actual income tax expense differs from the amount computed by applying
the statutory federal tax rate to income before income taxes as follows:
YEARS ENDED DECEMBER 31
--------------------------
2001 2000 1999
---- ---- ----
IN MILLIONS
Net income.................................................. $100 $304 $340
Income tax expense, includes $6 for 2001 change in
accounting (Note 1)....................................... 43 148 172
Preferred securities distributions.......................... (41) (34) (21)
---- ---- ----
Pretax income............................................... 102 418 491
Statutory federal income tax rate........................... x 35% x 35% x 35%
---- ---- ----
Expected income tax expense................................. 36 146 172
Increase (decrease) in taxes from Capitalized overheads
previously flowed through................................. 2 5 5
Differences in book and tax depreciation not previously
deferred............................................... 15 11 10
ITC amortization/adjustments.............................. (7) (9) (9)
Affiliated companies' dividends........................... (2) (3) (4)
Other, net................................................ (1) (2) (2)
---- ---- ----
Actual income tax expense................................... $ 43 $148 $172
==== ==== ====
Effective tax rate.......................................... 42.2% 35.4% 35.0%
5: FINANCIAL INSTRUMENTS
The carrying amounts of cash, short-term investments and current
liabilities approximate their fair values due to their short-term nature.
Consumers estimates the fair values of long-term investments based on quoted
market prices or, in the absence of specific market prices, on quoted market
prices of similar investments or other valuation techniques. The carrying
amounts of all long-term investments, except as shown below, approximate fair
value.
DECEMBER 31
-----------------------------------------------------
2001 2000
------------------------- -------------------------
FAIR UNREALIZED FAIR UNREALIZED
AVAILABLE-FOR-SALE SECURITIES COST VALUE GAIN COST VALUE GAIN
- ----------------------------- ---- ----- ---------- ---- ----- ----------
IN MILLIONS
Common stock of CMS Energy.................... $ 35 $ 57 $ 22 $ 40 $ 86 $ 46
SERP.......................................... 22 24 2 21 26 5
Nuclear decommissioning investments(a)........ 467 581 114 480 611 131
- -------------------------
(a) Consumers classifies its unrealized gains and losses on nuclear
decommissioning investments in accumulated depreciation.
At December 31, 2001, the carrying amount of long-term debt was $2.5
billion and at December 31, 2000, $2.1 billion, and the fair values were $2.5
billion and $2.0 billion, respectively. For held-to-maturity securities and
related-party financial instruments, see Note 1.
6: EXECUTIVE INCENTIVE COMPENSATION
Consumers participates in CMS Energy's Performance Incentive Stock Plan.
Under the plan, restricted shares of Common Stock of CMS Energy, stock options
and stock appreciation rights related to Common Stock may be granted to key
employees based on their contributions to the successful management of CMS
Energy and its subsidiaries. Certain plan awards are subject to
performance-based business criteria. The plan reserves for
CE-46
CONSUMERS ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
award not more than five percent, as amended January 1, 1999, of CMS Energy's
Common Stock outstanding on January 1 each year, less (1) the number of shares
of restricted Common Stock awarded and (2) Common Stock subject to options
granted under the plan during the immediately preceding four calendar years. The
number of shares of restricted Common Stock awarded under this plan cannot
exceed 20 percent of the aggregate number of shares reserved for award. Any
forfeiture of shares previously awarded will increase the number of shares
available to be awarded under the plan. As of December 31, 2001, under the plan,
awards of up to 2,321,094 shares of CMS Energy Common Stock may be issued.
Restricted shares of Common Stock are outstanding shares with full voting
and dividend rights. These awards vest over five years at the rate of 25 percent
per year after two years. The restricted shares are subject to achievement of
specified levels of total shareholder return and are subject to forfeiture if
employment terminates before vesting. If performance objectives are exceeded,
the plan provides for additional awards. Restricted shares vest fully if control
of CMS Energy changes, as defined by the plan. At December 31, 2001, 172,240 of
the 239,665 shares of restricted CMS Energy Common Stock outstanding are subject
to performance objectives.
The plan grants stock options and stock appreciation rights relating to
Common Stock with an exercise price equal to the closing market price on each
grant date. Some options may be exercised upon grant; others vest over five
years at the rate of 25 percent per year, beginning at the end of the first
year. All options expire up to ten years and one month from date of grant. In
1999, all outstanding Class G Common Stock and options were converted to CMS
Energy Common Stock and options at an exchange rate of .7041 per Class G Common
Stock or option held. The original vesting or exercise period was retained for
all converted shares or options. The status of the restricted stock and options
granted to Consumers' key employees under the Performance Incentive Stock Plan
follows.
RESTRICTED
STOCK OPTIONS
---------- ----------------------------
NUMBER NUMBER WEIGHTED AVERAGE
OF SHARES OF SHARES EXERCISE PRICE
--------- --------- ----------------
CMS ENERGY COMMON STOCK
Outstanding at January 1, 1999........................... 328,351 530,656 $32.21
Granted................................................ 71,025 250,020 $38.56
Exercised or Issued.................................... (80,489) (68,609) $29.76
Forfeited.............................................. (41,890) --
Expired................................................ -- (37,900) $39.21
Class G Common Stock Converted......................... 6,060 19,503 $32.64
------- --------- ------
Outstanding at December 31, 1999......................... 283,057 693,670 $34.37
Granted................................................ 81,030 221,900 $17.00
Exercised or Issued.................................... (48,979) (43,368) $17.48
Forfeited.............................................. (55,731) --
Expired................................................ -- (30,083) $31.87
------- --------- ------
Outstanding at December 31, 2000......................... 259,377 842,119 $30.75
Granted................................................ 71,930 294,150 $30.04
Exercised or Issued.................................... (34,704) (35,317) $19.34
Forfeited.............................................. (56,938) --
Expired................................................ -- -- $31.87
------- --------- ------
Outstanding at December 31, 2001......................... 239,665 1,100,952 $30.93
======= ========= ======
CE-47
CONSUMERS ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
RESTRICTED
STOCK OPTIONS
---------- ----------------------------
NUMBER NUMBER WEIGHTED AVERAGE
OF SHARES OF SHARES EXERCISE PRICE
--------- --------- ----------------
CLASS G COMMON STOCK
Outstanding at January 1, 1999............................ 30,490 73,900 $22.37
Granted................................................. 3,427 --
Exercised or Issued..................................... (7,360) (19,000) $18.45
Forfeited............................................... (17,949) --
Expired................................................. -- (27,200) $24.50
Converted to CMS Energy Common Stock.................... (8,608) (27,700) $22.98
------- -------- ------
Outstanding at December 31, 1999.......................... -- -- --
------- -------- ------
Outstanding at December 31, 2000.......................... -- -- --
------- -------- ------
Outstanding at December 31, 2001.......................... -- -- --
======= ======== ======
The following table summarizes information about CMS Energy Common Stock
options outstanding at December 31, 2001:
NUMBER WEIGHTED WEIGHTED
RANGE OF OF SHARES AVERAGE AVERAGE
EXERCISE PRICES OUTSTANDING REMAINING LIFE EXERCISE PRICE
- --------------- ----------- -------------- --------------
CMS ENERGY COMMON STOCK:
$17.00 -- $22.00....................................... 243,048 7.14 years $17.93
$24.75 -- $30.63....................................... 154,643 4.06 years $27.83
$31.04 -- $31.04....................................... 256,650 9.15 years $31.04
$33.11 -- $39.06....................................... 338,447 6.99 years $37.61
$43.38 -- $43.38....................................... 108,164 6.57 years $43.38
$17.00 -- $43.38....................................... 1,100,952 7.07 years $30.93
In 2001, 2000, and 1999, the weighted average fair value of options granted
for CMS Energy Common Stock was $6.37, $1.91, and $6.08. Fair value is estimated
using the Black-Scholes model, a mathematical formula used to value options
traded on securities exchanges, with the following assumptions:
YEARS ENDED DECEMBER 31
---------------------------
2001 2000 1999
---- ---- ----
CMS ENERGY COMMON STOCK OPTIONS
Risk-free interest rate..................................... 4.80% 6.56% 5.66%
Expected stock price volatility............................. 29.48% 26.53% 16.96%
Expected dividend rate...................................... $.365 $.365 $.365
Expected option life (years)................................ 4.6 4.4 4.7
Consumers applies APB Opinion No. 25 and related interpretations in
accounting for the Performance Incentive Stock Plan. Since stock options are
granted at market price, no compensation cost has been recognized for stock
options granted under the plan. For 2001, if compensation cost for stock options
had been determined in accordance with SFAS No. 123, Consumers' net income would
have decreased by $1 million, and less than $1 million for 2000 and 1999. In
2001, 2000, and 1999, the compensation cost charged against income for
restricted stock was $3 million, $1 million, and $3 million.
CE-48
CONSUMERS ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7: RETIREMENT BENEFITS
Consumers provides retirement benefits under a number of different plans,
including certain health care and life insurance benefits under OPEB, benefits
to certain management employees under SERP, and benefits to substantially all
its employees under a trusteed, non-contributory, defined benefit Pension Plan,
and a defined contribution 401(k) plan.
Amounts presented below for the Pension Plan include amounts for employees
of CMS Energy and non-utility affiliates, which were not distinguishable from
the plan's total assets.
WEIGHTED-AVERAGE ASSUMPTIONS
--------------------------------------------------
PENSION & SERP OPEB
----------------------- -----------------------
YEARS ENDED DECEMBER 31
--------------------------------------------------
2001 2000 1999 2001 2000 1999
---- ---- ---- ---- ---- ----
Discount rate................................. 7.25% 7.75% 7.75% 7.25% 7.75% 7.75%
Expected long-term rate of return on plan
assets...................................... 9.75% 9.75% 9.25% 8.30% 7.00% 7.00%
Rate of compensation increase:
Pension -- to age 45........................ 5.25% 5.25% 5.25%
-- age 45 to assumed retirement..... 3.75% 3.75% 3.75%
SERP........................................ 5.5% 5.50% 5.50%
Retiree health care costs at December 31, 2001 are based on the assumption
that costs would decrease gradually from the 2001 trend rate of 7.5 percent to
5.5 percent in 2009 and thereafter.
CMS Energy's Net Pension Plan, Consumers' SERP and OPEB benefit costs
consist of:
PENSION & SERP OPEB
-------------------- --------------------
YEARS ENDED DECEMBER 31
--------------------------------------------
2001 2000 1999 2001 2000 1999
---- ---- ---- ---- ---- ----
IN MILLIONS
Service cost........................................... $ 37 $ 31 $ 32 $ 13 $ 11 $ 12
Interest expense....................................... 84 79 69 57 52 44
Expected return on plan assets......................... (99) (92) (84) (40) (34) (24)
Amortization of unrecognized transition (asset)........ (5) (5) (5) -- -- --
Ad Hoc Retiree Increase................................ -- -- 3 -- -- --
Amortization of:
Net (gain) or loss................................... -- -- -- -- (1) (1)
Prior service cost................................... 8 4 4 (1) -- --
---- ---- ---- ---- ---- ----
Net periodic pension and postretirement benefit cost... $ 25 $ 17 $ 19 $ 29 $ 28 $ 31
==== ==== ==== ==== ==== ====
The health care cost trend rate assumption significantly affects the
amounts reported. A one percentage point change in the assumed health care cost
trend assumption would have the following effects:
ONE PERCENTAGE ONE PERCENTAGE
POINT INCREASE POINT DECREASE
-------------- --------------
IN MILLIONS
Effect on total service and interest cost component......... $ 11 $ (9)
Effect on postretirement benefit obligation................. $119 $(99)
CE-49
CONSUMERS ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The funded status of the CMS Energy Pension Plan, Consumers' SERP and OPEB
is reconciled with the liability recorded at December 31 as follows:
PENSION PLAN SERP OPEB
------------------ -------------- ----------------
2001 2000 2001 2000 2001 2000
---- ---- ---- ---- ---- ----
IN MILLIONS
Benefit obligation January 1............. $1,081 $ 971 $ 18 $ 19 $ 754 $ 685
Service cost............................. 36 30 1 1 13 11
Interest cost............................ 83 78 1 1 57 52
Plan amendment........................... -- 54 -- -- (16) --
Business combinations.................... -- -- -- -- -- --
Actuarial loss (gain).................... 96 25 -- 1 102 40
Benefits paid............................ (101) (77) (1) (1) (34) (34)
------ ------ ---- ---- ----- -----
Benefit obligation December 31........... 1,195 1,081 19 21 876 754
====== ====== ==== ==== ===== =====
Plan assets at fair value at January 1... 994 1,094 -- -- 450 418
Actual return on plan assets............. (113) (23) -- -- (23) (16)
Company contribution..................... 65 -- -- -- 48 48
Business combinations.................... -- -- -- -- -- --
Actual benefits paid..................... (101) (77) -- -- -- --
------ ------ ---- ---- ----- -----
Plan assets at fair value at December
31(a).................................. 845 994 -- -- 475 450
====== ====== ==== ==== ===== =====
Benefit obligation less than (in excess
of) plan assets........................ (350) (87) (21) (21) (401) (304)
Unrecognized net (gain) loss from
experience different than assumed...... 235 (71) 3 2 176 13
Unrecognized prior service cost.......... 68 76 1 1 (15) (1)
Unrecognized net transition (asset)...... -- (5) -- -- -- --
Panhandle adjustment..................... (7) (9) -- -- -- --
------ ------ ---- ---- ----- -----
Recorded liability....................... $ (54) $ (96) $(17) $(18) $(240) $(292)
====== ====== ==== ==== ===== =====
- -------------------------
(a) Primarily stocks and bonds, including CMS Energy Common Stock of $126
million and $166 million in the pension plan assets and $3 million and $4
million in the OPEB plan assets at December 31, 2001 and 2000,
respectively.
SERP benefits are paid from a trust established in 1988. SERP is not a
qualified plan under the Internal Revenue Code, and as such, earnings of the
trust are taxable and trust assets are included in consolidated assets. At
December 31, 2001 and 2000, trust assets were $24 million and $26 million,
respectively, and were classified as other non-current assets. In 2001 and 2000,
the accumulated benefit obligation for SERP was $16 million and $15 million.
Contributions to the 401(k) plan are invested in CMS Energy Common Stock.
Amounts charged to expense for this plan were $20 million in 2001, and $18
million in 2000.
Beginning January 1, 1986, the amortization period for the Pension Plan's
unrecognized net transition asset is 16 years. As of December 31, 2001, the net
transition asset has been fully amortized. Prior service costs are amortized on
a straight-line basis over the average remaining service period of active
employees.
In 1992, Consumers adopted the required accounting for postretirement
benefits and recorded a liability of $466 million for the accumulated transition
obligation and a corresponding regulatory asset for anticipated
CE-50
CONSUMERS ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
recovery in utility rates (see Note 1, Utility Regulation). The MPSC authorized
recovery of the electric utility portion of these costs in 1994 over 18 years
and the gas utility portion in 1996 over 16 years.
8: LEASES
Consumers leases various assets, including vehicles, railcars, aircraft,
construction equipment, computer equipment, and buildings. In November 2001,
Consumers' nuclear fuel capital leasing arrangement expired upon mutual
agreement by the lessor and Consumers. At termination of the lease, Consumers
paid the lessor $48 million, which was the lessor's remaining investment at that
time. Consumers has both full-service and net leases, the latter of which
requires Consumers to pay for taxes, maintenance, operating costs, and
insurance.
Minimum rental commitments under Consumers' non-cancelable leases at
December 31, 2001, were:
CAPITAL LEASES OPERATING LEASES
-------------- ----------------
IN MILLIONS
2002........................................................ $19 $ 12
2003........................................................ 16 15
2004........................................................ 13 13
2005........................................................ 12 11
2006........................................................ 11 11
2007 and thereafter......................................... 10 98
--- ----
Total minimum lease payments................................ 81 $160
====
Less imputed interest....................................... 12
---
Present value of net minimum lease payments................. 69
Less current portion........................................ 13
---
Non-current portion......................................... $56
===
Consumers recovers lease charges from customers and accordingly charges
payments for its capital and operating leases to operating expense. For the
years ended December 31, 2001, 2000 and 1999, operating lease charges, including
charges to clearing and other accounts, were $15 million, $16 million, and $14
million, respectively.
For the years ended December 31, 2001, 2000 and 1999, capital lease
expenses were $26 million, $41 million, and $41 million, respectively. Included
in these amounts, for the years ended 2001, 2000 and 1999, are nuclear fuel
lease expenses of $9 million, $22 million and $23 million, respectively.
In April 2001, Consumers Campus Holdings entered into a lease agreement for
the construction of an office building to be used as the main headquarters for
Consumers in Jackson, Michigan. Consumers' current headquarters building leases
expire in June 2003. The lessor has committed to fund up to $70 million for
construction of the building. Consumers is acting as the construction agent of
the lessor for this project. During construction, the lessor has a maximum
recourse of 89.9 percent against Consumers in the unlikely event of certain
defaults. For several other remote events of default, primarily bankruptcy or
intentional misapplication of funds, there could be full recourse for the
amounts expended by the lessor at that time. The agreement is a seven-year lease
term with payments commencing upon completion of construction, which is
projected for March of 2003. Consumers Campus Holdings has the right to acquire
the property at any time during the life of the agreement. At the end of the
lease term, Consumers Campus Holdings has the option to renew the lease,
purchase the property, or return the property and assist the lessor in the sale
of the building. The return option obligates Consumers Campus Holdings to pay
the lessor an amount equal to the outstanding debt associated with the building.
This lease is classified as an operating lease. Estimated minimum lease
commitments, assuming an investment of $70 million, based on LIBOR at inception
of the lease, under this non-cancelable operating lease
CE-51
CONSUMERS ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
would be approximately $5 million each year from 2003 through 2007 and a total
of $52 million for the remainder of the lease. Actual lease payments will depend
upon final total construction costs and LIBOR rates.
9: JOINTLY OWNED UTILITY FACILITIES
Consumers is responsible for providing its share of financing for the
jointly owned utility facilities. Consumers includes in operating expenses the
direct expenses of the joint plants. The following table indicates the extent of
Consumers' investment in jointly owned utility facilities:
ACCUMULATED
NET INVESTMENT DEPRECIATION
-------------- --------------
DECEMBER 31
----------------------------------
2001 2000 2001 2000
---- ---- ---- ----
IN MILLIONS
Campbell Unit 3 -- 93.3 percent............................. $279 $291 $312 $299
Ludington -- 51 percent..................................... 76 100 88 105
Transmission facilities -- various.......................... 37 31 40 17
Distribution lines -- various............................... 10 0 0 0
10: REPORTABLE SEGMENTS
Consumers has two reportable segments: electric and gas. The electric
segment consists of regulated activities associated with the generation,
transmission and distribution of electricity. The gas segment consists of
regulated activities associated with the transportation, storage and
distribution of natural gas. Consumers' reportable segments are domestic
strategic business units organized and managed by the nature of the product and
service each provides. The accounting policies of the segments are the same as
those Consumers describes in the summary of significant accounting policies.
Consumers' management evaluates performance based on pretax operating income.
The Consolidated Statements of Income show operating revenue and pretax
operating income by reportable segment. For 2001, 2000 and 1999, these amounts
include earnings from investments accounted for by the equity method of $38
million, $57 million and $50 million, respectively. For 2001, 2000 and 1999,
Consumers had investments accounted for by the equity method of $553 million,
$535 million and $487 million, respectively. Consumers accounts for intersegment
sales and transfers at current market prices and eliminates them in consolidated
pretax operating income by segment. Other segment information follows:
YEARS ENDED DECEMBER 31
--------------------------
2001 2000 1999
---- ---- ----
IN MILLIONS
Depreciation, depletion and amortization
Electric.................................................. $ 219 $ 311 $ 315
Gas....................................................... 118 113 107
Other..................................................... 2 2 2
------ ------ ------
Total Consolidated.......................................... $ 339 $ 426 $ 424
====== ====== ======
Interest Charges
Electric.................................................. $ 153 $ 145 $ 133
Gas....................................................... 50 48 48
Other..................................................... 21 27 19
------ ------ ------
Subtotal.................................................. 224 220 200
Eliminations.............................................. (38) (37) (19)
------ ------ ------
Total Consolidated.......................................... $ 186 $ 183 $ 181
====== ====== ======
CE-52
CONSUMERS ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31
--------------------------
2001 2000 1999
---- ---- ----
IN MILLIONS
Income Taxes
Electric(a)............................................... $ 17 $ 115 $ 126
Gas....................................................... 25 24 41
Other..................................................... 1 9 5
------ ------ ------
Total Consolidated.......................................... $ 43 $ 148 $ 172
====== ====== ======
Total assets
Electric(b)............................................... $5,454 $5,231 $4,675
Gas(b).................................................... 2,197 1,780 1,731
Other..................................................... 1,124 1,117 1,122
------ ------ ------
Subtotal.................................................. 8,775 8,128 7,528
Eliminations.............................................. (469) (355) (358)
------ ------ ------
Total Consolidated.......................................... $8,306 $7,773 $7,170
====== ====== ======
Capital expenditures(c)
Electric.................................................. $ 623 $ 430 $ 385
Gas....................................................... 145 120 120
------ ------ ------
Total....................................................... $ 768 $ 550 $ 505
====== ====== ======
- -------------------------
(a) 2001 amount includes the $6 million tax benefit due to the change in
accounting for derivative instruments.
(b) Amounts include an attributed portion of Consumers' other common assets to
both the electric and gas utility businesses.
(c) Includes electric restructuring implementation plan, capital leases for
nuclear fuel, purchase of nuclear fuel and other assets and electric DSM
costs. Amounts also include an attributed portion of Consumers' capital
expenditures for plant and equipment common to both the electric and gas
utility businesses.
11: SUMMARIZED FINANCIAL INFORMATION OF SIGNIFICANT RELATED ENERGY SUPPLIER
Under the PPA with the MCV Partnership discussed in Note 2, Consumers' 2001
obligation to purchase electric capacity from the MCV Partnership provided 15.3
percent of Consumers' owned and contracted electric generating capacity.
Summarized financial information of the MCV Partnership follows:
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31
------------------------
2001 2000 1999
---- ---- ----
IN MILLIONS
Operating revenue(a)........................................ $611 $604 $617
Operating expenses.......................................... 453 392 401
---- ---- ----
Operating income............................................ 158 212 216
Other expense, net.......................................... 110 122 136
---- ---- ----
Net income.................................................. $ 48 $ 90 $ 80
==== ==== ====
CE-53
CONSUMERS ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
BALANCE SHEETS
DECEMBER 31
---------------
2001 2000
---- ----
IN MILLIONS
ASSETS
Current assets(b)........ $ 341 $ 429
Plant, net............... 1,610 1,671
Other assets............. 166 175
------ ------
$2,117 $2,275
====== ======
DECEMBER 31
---------------
2001 2000
---- ----
IN MILLIONS
LIABILITIES AND EQUITY
Current liabilities.... $ 320 $ 316
Non-current
liabilities(c)...... 1,245 1,431
Partners' equity(d).... 552 528
------ ------
$2,117 $2,275
====== ======
- -------------------------
(a) For 2001, 2000, and 1999, revenue from Consumers totaled $550 million, $569
million and $586 million, respectively.
(b) At December 31, 2001 and 2000, receivables from Consumers totaled $49 and
$43 million, respectively.
(c) FMLP is the sole beneficiary of an owner trust that is the lessor in a
long-term direct finance lease with the lessee, MCV Partnership. CMS
Holdings holds a 46.4 percent ownership interest in FMLP. At December 31,
2001 and 2000, the MCV Partnership owed lease obligations of $1.11 billion
and $1.24 billion, respectively, to the owner trust. CMS Holdings' share of
the interest and principal portion for the 2001 lease payments was $36
million and $54 million, respectively, and for the 2000 lease payments was
$52 million and $67 million, respectively. As of December 31, 2001 and 2000
the lease payments service $597 million and $733 million in non-recourse
debt outstanding, respectively, of the owner-trust. The MCV Partnership's
lease obligations, assets, and operating revenues secures FMLP's debt. For
2001 and 2000, the owner-trust made debt payments (including interest) of
$217 million and $212 million, respectively. FMLP's earnings for 2001,
2000, and 1999 were $30 million, $30 million, and $24 million,
respectively.
(d) CMS Midland's recorded investment in the MCV Partnership includes
capitalized interest, which Consumers is amortizing to expense over the
life of its investment in the MCV Partnership. Covenants contained in
financing agreements prohibit the MCV Partnership from paying distributions
until it meets certain financial test requirements. Consumers does not
anticipate receiving a cash distribution in the near future.
CE-54
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Consumers Energy Company:
We have audited the accompanying consolidated balance sheets and
consolidated statements of long-term debt and preferred stock of CONSUMERS
ENERGY COMPANY (a Michigan corporation and wholly owned subsidiary of CMS Energy
Corporation) and subsidiaries as of December 31, 2001 and 2000, and the related
consolidated statements of income, common stockholder's equity and cash flows
for each of the three years in the period ended December 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Consumers Energy Company and
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States.
As explained in Note 1 to the financial statements, effective January 1,
2001, July 1, 2001 and December 31, 2001, Consumers Energy Company changed its
method of accounting related to derivatives and hedging activities in accordance
with the adoption of Statement of Financial Accounting Standards No. 133,
"Accounting for Derivatives and Hedging Activities" and the related
implementation guidance issued by the Derivatives Implementation Group and
approved by the Financial Accounting Standards Board.
[ARTHUR ANDERSEN LLP SIG]
Detroit, Michigan,
March 22, 2002
CE-55
CONSUMERS ENERGY COMPANY
QUARTERLY FINANCIAL INFORMATION
2001 (UNAUDITED) 2000 (UNAUDITED)
------------------------------------------ ------------------------------------------
QUARTERS ENDED MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
-------------- -------- ------- -------- ------- -------- ------- -------- -------
IN MILLIONS
Operating revenue.......... $1,219 $873 $899 $1,023 $1,126 $808 $874 $1,127
Pretax operating income
(loss)................... $ 213 $108 $(53) $ 77 $ 187 $ 92 $142 $ 214
Net income (loss) before
cumulative effect of
change in accounting
principle................ $ 107 $ 43 $(62) $ (23) $ 94 $ 33 $ 72 $ 105
Cumulative effect of change
in accounting for
derivative instruments,
net of $6 tax............ -- -- -- $ (11) -- -- -- --
Net income (loss).......... $ 107 $ 43 $(62) $ 12 $ 94 $ 33 $ 72 $ 105
Preferred stock
dividends................ -- -- -- $ 2 -- -- -- $ 2
Preferred securities
distributions............ $ 9 $ 10 $ 12 $ 10 $ 9 $ 9 $ 9 $ 7
Net income (loss) available
to common stockholder.... $ 98 $ 33 $(74) $ 0 $ 85 $ 24 $ 63 $ 96
CE-56
(This page intentionally left blank)
CE-57
[CMS ENERGY-PANHANDLE EASTERN PIPELINE LOGO]
2001 FINANCIAL STATEMENTS
PE-1
PANHANDLE EASTERN PIPE LINE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
Panhandle is primarily engaged in the interstate transportation and storage
of natural gas. Panhandle also owns an interest in an LNG regasification plant
and related facilities (See Note 1, Corporate Structure). The rates and
conditions of service of the interstate natural gas transmission and storage
operations of Panhandle, as well as the LNG operations are subject to the rules
and regulations of the FERC.
This MD&A refers to, and in some sections specifically incorporates by
reference, Panhandle's Notes to Consolidated Financial Statements and should be
read in conjunction with such Statements and Notes. This Annual Report and other
written and oral statements that Panhandle may make contain forward-looking
statements, as defined by the Private Securities Litigation Reform Act of 1995.
Panhandle's intentions with the use of the words "anticipates," "believes,"
"estimates," "expects," "intends," and "plans" and variations of such words and
similar expressions, are solely to identify forward-looking statements that
involve risk and uncertainty. These forward-looking statements are subject to
various factors that could cause Panhandle's actual results to differ materially
from those anticipated in such statements. Panhandle has no obligation to update
or revise forward-looking statements regardless of whether new information,
future events or any other factors affect the information contained in such
statements. Panhandle does, however discuss certain risk factors, uncertainties
and assumptions in this MD&A and in Item 1 of this Form 10-K in the section
entitled "Forward-Looking Statements Cautionary Factors" and in various public
filings it periodically makes with the SEC. Panhandle designed this discussion
of potential risks and uncertainties which is by no means comprehensive, to
highlight important factors that may impact Panhandle's business and financial
outlook. This Annual Report also describes material contingencies in the Notes
to Consolidated Financial Statements and the readers are encouraged to review
these Notes.
The following information is provided to facilitate increased understanding
of the Consolidated Financial Statements and accompanying Notes of Panhandle and
should be read in conjunction with these financial statements. Because all of
the outstanding common stock of Panhandle Eastern Pipe Line is owned by a
wholly-owned subsidiary of CMS Energy, the following discussion uses the reduced
disclosure format permitted by Form 10-K for issuers that are wholly-owned
direct or indirect subsidiaries of reporting companies.
RESULTS OF OPERATIONS
NET INCOME:
YEARS ENDED
DECEMBER 31
----------------------
2001 2000 CHANGE
---- ---- ------
IN MILLIONS
Net Income.................................................. $62 $64 $(2)
For the year 2001, net income was $62 million, a decrease of $2 million
from the corresponding period in 2000 due primarily to lower reservation
revenues, higher operating expenses, and an extraordinary loss on debt
extinguishment in 2001, partially offset by higher LNG terminalling revenues in
2001. Total natural gas volumes delivered for the year 2001 decreased 3 percent
from 2000 primarily due to lower transportation volumes for Panhandle Eastern
Pipe Line.
Revenues for the year 2001 increased $30 million from the corresponding
period in 2000 due primarily to increased LNG terminalling revenues resulting
from increased LNG demand due to extremely high gas prices in early 2001. This
increase was partially offset by lower reservation revenues in 2001, continuing
a trend from prior years.
Operating expenses for the year 2001 increased $34 million from the
corresponding period in 2000 due primarily to $11 million of lower of cost or
market adjustments to Panhandle's current supply of system gas, higher corporate
charges, insurance costs and expenses for twelve months in 2001 for Sea Robin
versus only ten months in 2000.
PE-2
PRETAX OPERATING INCOME:
CHANGE COMPARED
TO PRIOR YEAR
---------------
2001 VS 2000
------------
IN MILLIONS
Reservation revenue......................................... $(11)
LNG terminalling revenue.................................... 35
Commodity revenue........................................... 9
Other revenue............................................... (3)
Operations and maintenance.................................. (26)
Depreciation and amortization............................... (4)
General Taxes............................................... (4)
----
Total Change......................................... $ (4)
====
CRITICAL ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States, requires management to make
judgments, estimates and assumptions that affect the reported amounts of assets
and liabilities, disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Certain accounting principles require subjective
and complex judgments used in the preparation of financial statements.
Accordingly, a different financial presentation could result depending on the
judgment, estimates or assumptions that are used. Such estimates and
assumptions, include, but are not specifically limited to: depreciation and
amortization, interest rates, discount rates, future commodity prices,
mark-to-market valuations, investment returns, volatility in the price of CMS
Energy Common Stock, impact of new accounting standards, future costs associated
with long-term contractual obligations, future compliance costs associated with
environmental regulations and continuing creditworthiness of counterparties.
Actual results could materially differ from those estimates.
NEW ACCOUNTING STANDARDS
In addition to the identified critical accounting policy discussed above,
future results will be affected by a number of new accounting standards that
recently have been issued.
SFAS NO. 141, BUSINESS COMBINATIONS: SFAS No. 141 issued in July 2001,
requires that all business combinations initiated after June 30, 2001, be
accounted for under the purchase method; use of pooling-of-interests method is
no longer permitted. The adoption of SFAS No. 141, effective July 1, 2001 will
result in Panhandle accounting for any future business combinations under the
purchase method of accounting, but will not change the method of accounting used
in previous business combinations.
SFAS NO. 142, GOODWILL AND OTHER INTANGIBLE ASSETS: SFAS No. 142, issued in
July 2001, requires that goodwill no longer be amortized to earnings, but
instead be reviewed for impairment on an annual basis. Goodwill represents the
excess of the purchase price over the fair value of the net assets of acquired
companies and has been amortized using the straight-line method, with a
forty-year life, through December 31, 2001. The amortization of goodwill ceased
upon adoption of the standard as of January 1, 2002. Panhandle is currently
studying the effects of the new standard, but cannot predict at this time if any
amounts will be recognized as impairments of goodwill or other intangible assets
upon adoption. At December 31, 2001, the amount of unamortized goodwill was $700
million. Goodwill amortization was approximately $19 million for the twelve
months ended December 31, 2001. The provisions of SFAS No. 142 require adoption
as of January 1, 2002 for calendar year entities.
SFAS NO. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS: Issued by the
FASB in August 2001, the provisions of SFAS No. 143 require adoption as of
January 1, 2003. The standard requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred. When the liability is
PE-3
initially recorded, the entity capitalizes a cost by increasing the carrying
amount of the related long-lived asset. Over time, the liability is accreted to
its present value each period, and the capitalized cost is depreciated over the
useful life of the related asset. Upon settlement of the liability, an entity
either settles the obligation for its recorded amount or incurs a gain or loss
upon settlement. Panhandle is currently studying the effects of the new
standard.
SFAS NO. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED
ASSETS: This new standard was issued by the FASB in October 2001, and supersedes
SFAS No. 121. The accounting model for long-lived assets to be disposed of by
sale applies to all long-lived assets, including discontinued operations, and
replaces the provisions of APB Opinion No. 30. SFAS No. 144 requires that those
long-lived assets be measured at the lower of carrying amount or fair value less
cost to sell, whether reported in continuing operations or in discontinued
operations. Therefore, discontinued operations will no longer be measured at net
realizable value or include amounts for operating losses that have not yet
occurred. SFAS No. 144 also broadens the reporting of discontinued operations to
include all components of an entity with operations that can be distinguished
from the rest of the entity and that will be eliminated from the ongoing
operations of the entity in a disposal transaction. The adoption of SFAS No.
144, effective January 1, 2002, will result in Panhandle accounting for any
future impairments or disposals of long-lived assets under the foregoing
provisions, but will not change the accounting principles used in previous asset
impairments or disposals.
OFF BALANCE SHEET ARRANGEMENTS
In December 2001, Panhandle entered into a joint venture transaction that
created CMS Trunkline LNG Holdings, LLC, which now owns 100 percent of Trunkline
LNG. LNG Holdings is jointly owned by a subsidiary of Panhandle Eastern Pipe
Line and Dekatherm Investor Trust, an unaffiliated entity. Panhandle initially
contributed its interest in Trunkline LNG to the joint venture. LNG Holdings
then raised $30 million from the issuance of equity to Dekatherm Investor Trust
and $290 million from bank loans. The net proceeds were distributed to Panhandle
Eastern Pipe Line, with $75 million of the proceeds coming in the form of a
loan. While earnings are divided pursuant to a sharing formula, LNG Holdings'
owners require unanimous consent over significant governance issues, including,
among others, issuance of additional debt or equity, budgets, asset
dispositions, and appointment of officers.
The LNG Holdings transaction monetized the value of Trunkline LNG and the
value created by a 22-year contract with BG LNG Services, beginning January
2002, for all the uncommitted capacity at the facility. Due to the commitment by
Panhandle to reinvest the proceeds in the joint venture to finance the LNG
expansion project, the $183 million of proceeds received by Panhandle in excess
of Panhandle's book basis in Trunkline LNG was not recognized as a gain, but
instead has been recorded as a deferred credit on Panhandle's balance sheet.
Panhandle has also guaranteed repayment of $90 million of bridge loans included
in the initial $290 million of debt issued by the joint venture, if the joint
venture has not obtained replacement lenders by March 2002. Panhandle Eastern
Pipe Line has also provided indemnities to certain parties involved in the
transaction for pre-closing claims and liabilities, and subsidiaries of
Panhandle have provided indemnities for certain post-closing expenses and
liabilities as the manager/operator of the joint venture. For further
information, see Note 9, Investment in Affiliates and Note 10, Commitments and
Contingencies.
OUTLOOK
CMS Energy seeks to build on Panhandle's position as a leading United
States interstate natural gas pipeline system and its significant ownership
interest in and operation of the nation's largest operating LNG receiving
terminal (See Note 9, Investment in Affiliates) through expansion and better
utilization of its existing facilities and construction of new facilities. By
providing additional transportation, storage and other asset-based value-added
services to customers such as gas-fueled power plants, local distribution
companies, industrial and end-users, marketers and others, CMS Energy expects to
expand its natural gas pipeline business. Panhandle has a one-third interest in
Guardian Pipeline LLC, which is currently constructing a 141-mile, 36 inch
pipeline from Illinois to southeastern Wisconsin for the transportation of
natural gas beginning late 2002 (See Note 9, Investment in Affiliates). Upon
completion of the project, Trunkline will operate and maintain the pipeline.
Panhandle also has a one-third interest in the Centennial Pipeline Company which
is converting an existing
PE-4
720-mile, 26 inch pipeline extending from the U.S. Gulf Coast to Illinois for
the transportation of interstate refined petroleum products. The pipeline is
expected to begin full commercial service in April 2002. For further information
see Note 9, Investment in Affiliates.
In May 2001, Trunkline LNG signed an agreement with BG LNG Services that
provides for a 22-year contract, beginning January 2002, for all the uncommitted
capacity at the Lake Charles facility. The 22-year contract, in conjunction with
new rates effective January 2002 (see Note 3, Regulatory Matters), will result
in reduced revenues for Trunkline LNG from 2001 levels but less earnings
volatility going forward. In October 2001 Trunkline LNG announced the planned
expansion of the Lake Charles, Louisiana facility to approximately 1.2 bcf per
day of send out capacity, up from its current send out capacity of 630 million
cubic feet per day. The terminal's storage capacity will also be expanded to 9
bcf from its current storage capacity of 6.3 bcf. Assuming FERC approval, the
expanded facility is planned to be in operation in early 2005. The expansion
expenditures are currently expected to be funded by Panhandle loans to CMS
Trunkline LNG Holdings, which will be sourced by repayments by CMS Capital to
Panhandle on its outstanding note receivable. In late December 2001, Panhandle
completed a previously announced $320 million monetization of the Trunkline LNG
business and the value created by long-term contracts for capacity at the
facility. The joint venture transaction will result in a reduced share of
Trunkline LNG's income and distributions being received by Panhandle due to the
service of debt on the books of the joint venture as well as a reduced equity
ownership in the project, partially offset by lower consolidated interest
expense due to Panhandle debt being retired with the proceeds generated by the
transaction. For further information, see Note 2, Summary of Significant
Accounting Policies and Other Matters and Note 9, Investment in Affiliates.
In October 2001, CMS Energy and Sempra Energy announced an agreement to
jointly develop a major new LNG receiving terminal to bring much-needed natural
gas supplies into northwestern Mexico and southern California. The plant will be
located on the Pacific Coast, north of Ensenada, Baja California, Mexico. As
currently planned, it will have a send out capacity of approximately 1 bcf per
day of natural gas via a new 40-mile pipeline between the terminal and existing
pipelines in the region. The terminal will be operated and maintained by a joint
operating company with majority oversight by Panhandle upon its completion,
which is estimated to be in 2006.
In April 2001, FERC approved Trunkline's rate settlement without
modification. The settlement resulted in Trunkline reducing its maximum rates in
May 2001. The reduction is expected to reduce revenues by approximately $2
million annually. For further information, see Note 3, Regulatory Matters.
UNCERTAINTIES: Panhandle's results of operations and financial position may
be affected by a number of trends or uncertainties that have, or Panhandle
reasonably expects could have, a material impact on income from continuing
operations and cash flows. Such trends and uncertainties include: 1) the
increased competition in the market for transmission of natural gas to the
Midwest causing pressure on prices charged by Panhandle; 2) the current market
conditions causing more contracts to be of shorter duration, which may increase
revenue volatility; 3) the increased potential for declining financial condition
of certain customers within the industry due to recession and other factors; 4)
the possibility of decreased demand for natural gas resulting from a downturn in
the economy and scaling back of new power plants; 5) the impact of any future
rate cases, for any of Panhandle's regulated operations; 6) current initiatives
for additional federal rules and legislation regarding pipeline safety; 7)
capital spending requirements for safety, environmental or regulatory
requirements that could result in depreciation expense increases not covered by
additional revenues; 8) market risks associated with Panhandle's investment in
the liquids pipeline business via the Centennial Pipeline venture; and 9)
increased security costs as a result of the September 11, 2001 terrorist attack
in the United States. It is not certain to what extent these additional costs
will be recoverable through Panhandle's rates.
OTHER MATTERS
ENVIRONMENTAL MATTERS
Panhandle is subject to federal, state, and local laws and regulations
governing environmental quality and pollution control. These laws and
regulations under certain circumstances require Panhandle to remove or remedy
the effect on the environment of the disposal or release of specified substances
at its operating sites.
PE-5
PCB (POLYCHLORINATED BIPHENYL) ASSESSMENT AND CLEAN-UP PROGRAMS: Panhandle
previously identified environmental contamination at certain sites on its
systems and undertook clean-up programs at these sites. For further information,
see Note 10, Commitments and Contingencies -- Environmental Matters.
AIR QUALITY CONTROL: In 1998, the EPA issued a final rule on regional ozone
control that requires revised State Implementation Plans (SIPS) for 22 states,
including five states in which Panhandle operates. For further information, see
Note 10, Commitments and Contingencies -- Environmental Matters.
In 1997, the Illinois Environmental Protection Agency initiated an
enforcement proceeding relating to alleged air quality permit violations at
Panhandle's Glenarm Compressor Station. On November 15, 2001 the Illinois
Pollution Control Board approved an order imposing a penalty of $850 thousand,
plus fees and cost reimbursements of $116 thousand. Under terms of the sale of
Panhandle to CMS Energy, a subsidiary of Duke Energy was obligated to indemnify
Panhandle against this environmental penalty. The state issued a permit in
February of 2002 requiring the installation of certain capital improvements at
the facility at a cost of approximately $3 million. It is expected that the
capital improvements will occur in 2002 and 2003.
PE-6
PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED YEAR ENDED MARCH 29- JANUARY 1-
DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 28,
2001 2000 1999 1999
------------ ------------ ------------ ----------
(IN MILLIONS)
OPERATING REVENUE
Transportation and storage of natural gas... $423 $425 $305 $123
LNG terminalling revenue.................... 75 40 13 --
Other....................................... 15 18 25 5
---- ---- ---- ----
Total operating revenue................ 513 483 343 128
---- ---- ---- ----
OPERATING EXPENSES
Operation and maintenance................... 237 211 151 40
Depreciation and amortization............... 69 65 44 14
General taxes............................... 27 23 22 7
---- ---- ---- ----
Total operating expenses............... 333 299 217 61
---- ---- ---- ----
PRETAX OPERATING INCOME....................... 180 184 126 67
OTHER INCOME, NET............................. 10 8 2 4
INTEREST CHARGES
Interest on long-term debt.................. 84 82 59 5
Other interest.............................. (1) 3 1 13
---- ---- ---- ----
Total interest charges................. 83 85 60 18
---- ---- ---- ----
NET INCOME BEFORE INCOME TAXES................ 107 107 68 53
INCOME TAXES.................................. 43 43 27 20
---- ---- ---- ----
NET INCOME BEFORE EXTRAORDINARY ITEM.......... 64 64 41 33
EXTRAORDINARY LOSS, NET OF TAX................ (2) -- -- --
---- ---- ---- ----
CONSOLIDATED NET INCOME....................... $ 62 $ 64 $ 41 $ 33
==== ==== ==== ====
The accompanying notes are an integral part of these statements.
PE-7
PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
MARCH 29- JANUARY 1-
DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 28,
2001 2000 1999 1999
------------ ------------ ------------ ----------
(IN MILLIONS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................. $ 62 $ 64 $ 41 $ 33
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............... 69 65 44 14
Deferred income taxes....................... 59 87 34 --
Changes in current assets and liabilities... (18) (35) 51 (29)
Other, net.................................. (8) (7) 9 3
----- ----- ------- ----
Net cash provided by operating
activities............................. 164 174 179 21
----- ----- ------- ----
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of Panhandle.................... -- -- (1,900) --
Capital and investment expenditures......... (85) (129) (53) (4)
Net increase in advances
receivable -- PanEnergy.................. -- -- -- (17)
Proceeds from LNG transaction............... 235 -- -- --
Retirements and other....................... (25) (1) (1) --
----- ----- ------- ----
Net cash provided by (used in) investing
activities............................. 125 (130) (1,954) (21)
----- ----- ------- ----
CASH FLOWS FROM FINANCING ACTIVITIES
Contribution from parent.................... 150 -- 1,116 --
Long-term debt issuance..................... 75 99 785 --
Long-term debt retirements.................. (192) -- -- --
Net increase in current note
receivable -- CMS Capital................ 76 (77) (85) --
Net increase in non-current note
receivable -- CMS Capital................ (337) -- -- --
Dividends paid.............................. (61) (66) (41) --
----- ----- ------- ----
Net cash provided by/(used in) financing
activities............................. (289) (44) 1,775 --
----- ----- ------- ----
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)............................. $ 85 $ 80 $ 31 $ 12
Income taxes paid (net of refunds).......... (9) (12) 8 37
OTHER NONCASH ACTIVITIES WERE:
Property dividend........................... $ -- $ (4) $ -- $(81)
Capital contributions received.............. 9 -- 11 --
The accompanying notes are an integral part of these statements.
PE-8
PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
2001 2000
------------ ------------
(IN MILLIONS)
ASSETS
PROPERTY, PLANT AND EQUIPMENT
Cost...................................................... $1,675 $1,679
Less accumulated depreciation and amortization............ 142 99
------ ------
Sub-total.............................................. 1,533 1,580
Construction work-in-progress............................. 24 20
------ ------
Net property, plant and equipment...................... 1,557 1,600
------ ------
INVESTMENTS IN AFFILIATES................................... 66 7
------ ------
CURRENT ASSETS
Accounts receivable, less allowances of $3 and $1 as of
December 31, 2001 and 2000, respectively............... 114 140
Gas Imbalances -- Receivable.............................. 26 71
System gas and operating supplies......................... 55 21
Deferred income taxes..................................... 7 12
Note receivable -- CMS Capital............................ 86 162
Other..................................................... 24 21
------ ------
Total current assets................................... 312 427
------ ------
NON-CURRENT ASSETS
Goodwill, net............................................. 700 753
Note receivable -- CMS Capital............................ 337 --
Debt issuance cost........................................ 8 11
Other..................................................... 30 8
------ ------
Total non-current assets............................... 1,075 772
------ ------
TOTAL ASSETS................................................ $3,010 $2,806
====== ======
COMMON STOCKHOLDER'S EQUITY AND LIABILITIES
CAPITALIZATION
Common stockholder's equity
Common stock, no par, 1,000 shares authorized, issued
and outstanding....................................... $ 1 $ 1
Paid-in capital........................................ 1,286 1,127
Retained earnings...................................... (5) (6)
------ ------
Total common stockholder's equity.................... 1,282 1,122
Long-term debt............................................ 1,082 1,193
------ ------
Total capitalization................................. 2,364 2,315
------ ------
CURRENT LIABILITIES
Accounts payable.......................................... 22 32
Gas Imbalances -- Payable................................. 64 56
Accrued taxes............................................. 8 3
Accrued interest.......................................... 26 31
Accrued liabilities....................................... 35 45
Other..................................................... 40 104
------ ------
Total current liabilities............................ 195 271
------ ------
NON-CURRENT LIABILITIES
Deferred income taxes..................................... 185 134
Deferred commitments...................................... 183 --
Other..................................................... 83 86
------ ------
Total non-current liabilities........................ 451 220
------ ------
TOTAL COMMON STOCKHOLDER'S EQUITY AND LIABILITIES........... $3,010 $2,806
====== ======
The accompanying notes are an integral part of these statements.
PE-9
PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
YEAR YEAR
ENDED ENDED MARCH 29- JANUARY 1-
DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 28,
2001 2000 1999 1999
------------ ------------ ------------ ----------
(IN MILLIONS)
COMMON STOCK
At beginning and end of period.............. $ 1 $ 1 $ 1 $ 1
------ ------ ------ ------
OTHER PAID-IN CAPITAL
At beginning of period...................... 1,127 1,127 466 466
Acquisition adjustment to eliminate original
paid-in capital.......................... -- -- (466) --
Capital contribution of acquisition costs by
parent................................... -- -- 11 --
Contribution of investment by parent........ 9 -- -- --
Cash capital contribution by parent......... 150 -- 1,116 --
------ ------ ------ ------
At end of period......................... 1,286 1,127 1,127 466
------ ------ ------ ------
RETAINED EARNINGS
At beginning of period...................... (6) -- 101 92
Acquisition adjustment to eliminate original
retained earnings........................ -- -- (101) --
Net income.................................. 62 64 41 33
Assumption of net liability by PanEnergy.... -- -- -- 57
Common stock dividends...................... (61) (70) (41) (81)
------ ------ ------ ------
At end of period......................... (5) (6) -- 101
------ ------ ------ ------
TOTAL COMMON STOCKHOLDER'S EQUITY........... $1,282 $1,122 $1,128 $ 568
====== ====== ====== ======
The accompanying notes are an integral part of these statements.
PE-10
PANHANDLE EASTERN PIPE LINE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. CORPORATE STRUCTURE
Panhandle Eastern Pipe Line Company is a wholly owned subsidiary of CMS Gas
Transmission and ultimately CMS Energy. Panhandle Eastern Pipe Line was
incorporated in Delaware in 1929. Panhandle is primarily engaged in interstate
transportation and storage of natural gas, owns an interest in an LNG
regasification plant and related facilities, and is subject to the rules and
regulations of the FERC.
On March 29, 1999, Panhandle Eastern Pipe Line 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 assumption
of 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. As a result, Trunkline LNG and
Panhandle Storage became wholly owned subsidiaries of Panhandle Eastern Pipe
Line.
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; all
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 and its affiliates, were 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 September 1999, Panhandle completed an
exchange offer which replaced the $800 million of notes originally issued by CMS
Panhandle Holding with substantially identical SEC-registered notes.
The acquisition of Panhandle by CMS Panhandle Holding was accounted for
using the purchase method of accounting in accordance with generally accepted
accounting principles in the United States. Panhandle allocated the purchase
price paid by CMS Panhandle Holding to its net assets as of the acquisition date
based on an appraisal completed December 1999. Accordingly, the post-acquisition
financial statements reflect a new basis of accounting. Pre-acquisition period
and post-acquisition period financial results (separated by a heavy black line)
are presented but are not comparable.
Assets acquired and liabilities assumed are recorded at their estimated
fair values. Panhandle allocated the excess purchase price over the fair value
of net assets acquired of $788 million to goodwill and has amortized this amount
on a straight-line basis with an estimated life of forty years. The amortization
of the excess purchase price over 40 years reflects the nature of the industry
in which Panhandle competes as well as the long-lived nature of Panhandle's
assets. Panhandle ceased amortization effective January 1, 2002, upon adoption
of SFAS No. 142, (see Note 2, Summary of Significant Accounting Policies and
Other Matters). The purchase price, and resulting goodwill, reflect the
significant investment required for entry into the natural gas transmission and
storage business due to regulation, high replacement costs and competition. The
excess purchase price over the
PE-11
PANHANDLE EASTERN PIPE LINE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
prior carrying amount of Panhandle's net identifiable assets as of March 29,
1999 totaled $1.3 billion, and was allocated as follows:
IN MILLIONS
Property, plant and equipment............................. $ 633
Accounts receivable....................................... 3
Inventory................................................. (9)
Goodwill.................................................. 788
Regulatory assets, net.................................... (15)
Liabilities............................................... (72)
Long-term debt............................................ (6)
Other..................................................... (16)
------
Total..................................................... $1,306
======
Pro forma results of operations for 1999 as though Panhandle had been
acquired and purchase accounting applied at the beginning of the year are as
follows:
YEAR ENDED
DECEMBER 31, 1999
(UNAUDITED)
-----------------
IN MILLIONS
Revenues.................................................... $ 467
Net income.................................................. 67
Total assets................................................ 2,560
In March 2000, Trunkline, a subsidiary of Panhandle Eastern Pipe Line,
acquired the Sea Robin Pipeline from El Paso Energy Corporation for cash of
approximately $74 million and certain other consideration (See Note 8, Long-Term
Debt). Sea Robin is a 1 bcf per day capacity natural gas and condensate pipeline
system located in the Gulf of Mexico offshore Louisiana west of Trunkline's
existing Terrebonne system.
In December 2001, Panhandle completed a $320 million monetization
transaction of its Trunkline LNG business and the value created by long-term
contracts for capacity at the Trunkline LNG Lake Charles terminal. The joint
venture transaction included the formation of CMS Trunkline LNG Holdings LLC,
which now owns 100 percent of Trunkline LNG. LNG Holdings is jointly owned by a
subsidiary of Panhandle Eastern Pipe Line and Dekatherm Investor Trust, an
unaffiliated entity. The joint venture and its $290 million of newly issued
long-term debt is not consolidated with Panhandle, reflecting Panhandle's lack
of control of the new entity. For further information, see Note 9, Investment in
Affiliates.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
CONSOLIDATIONS: The consolidated financial statements include the accounts
of all of Panhandle's majority-owned subsidiaries after the elimination of
significant intercompany transactions and balances. Investments in other
entities that are not controlled by Panhandle, but where it has significant
influence over operations, are accounted for using the conventional equity
method where Panhandle's equity income is equal to its percentage ownership
share of the net income of the affiliate. When special conditions warrant, for
example when the affiliate is a highly leveraged entity and its capital
structure is such that Panhandle's share of net income cannot be simply stated
as a percentage of net income based on its equity ownership percentage,
accounting rules dictate that the preferred approach to equity income
measurement is determined by using the Hypothetical Liquidation at Book Value
(HLBV) method. Panhandle believes such conditions exist with its LNG Holdings
investment, therefore Panhandle will use the HLBV method to account for earnings
from this investment. Cash distributions by LNG Holdings are expected to be made
quarterly, subject to coverage tests and other requirements. For more
information, see Note 9, Investment in Affiliates.
PE-12
PANHANDLE EASTERN PIPE LINE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
USE OF ESTIMATES: The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. 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.
SYSTEM GAS AND OPERATING SUPPLIES: System gas and operating supplies
consists of gas held for current operations and materials and supplies and is
recorded at the lower of cost or market, using the weighted average cost method.
The non-current portion of gas held for operations has been reflected in Other
non-current assets and is recorded at cost. Effective January 1, 1999, Trunkline
changed to the weighted average cost method from the last-in first-out method
for its gas held for operations with no material impact on the financial
statements.
GAS IMBALANCES: Gas imbalances occur as a result of differences in volumes
of gas received and delivered. Gas imbalance inventory receivables and payables
are valued at lower of cost or market.
PROPERTY, PLANT AND EQUIPMENT: On March 29, 1999, Panhandle's assets were
acquired by CMS Panhandle Holding. The acquisition was accounted for using the
purchase method of accounting in accordance with generally accepted accounting
principles in the United States. Panhandle's property, plant and equipment
(PP&E) was adjusted to estimated fair market value on March 29, 1999 and
depreciated based on revised estimated remaining useful lives. Panhandle's
accumulated depreciation and amortization provision balance at March 29, 1999
was eliminated pursuant to the purchase method of accounting (See Note 1,
Corporate Structure).
Ongoing additions of PP&E are stated at original cost. Panhandle
capitalizes all construction-related direct labor and material costs, as well as
indirect construction costs. The cost of replacements and betterments that
extend the useful life of PP&E is also capitalized. The cost of repairs and
replacements of minor items of PP&E is charged to expense as incurred.
Depreciation is generally computed using the straight-line method. The composite
weighted-average depreciation rates were 3.0%, 2.9% and 2.6% for 2001, 2000 and
1999, respectively.
When PP&E is 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.
IMPAIRMENT OF INVESTMENTS AND LONG-LIVED ASSETS: In accordance with APB
Opinion No. 18 and SFAS No. 121, Panhandle evaluates the potential impairment of
its investments in projects and other long-lived assets, including goodwill,
based on various analyses, including the projection of undiscounted cash flows,
whenever events or changes in circumstances indicate that the carrying amount of
the assets may not be recoverable. If the carrying amount of the investment or
asset exceeds the amount of the expected future undiscounted cash flows, an
impairment loss is recognized and the investment or asset is written down to its
estimated fair value.
UNAMORTIZED DEBT PREMIUM, DISCOUNT AND EXPENSE: Panhandle amortizes
premiums, discounts and expenses incurred in connection with the issuance of
long-term debt consistent with the terms of the respective issues.
ENVIRONMENTAL EXPENDITURES: Environmental expenditures that relate to an
existing condition caused by past operations that 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. Under the terms of the sale
of Panhandle to CMS Energy (See Note 1, Corporate Structure), a subsidiary of
Duke Energy is obligated to complete the Panhandle clean-up programs at certain
agreed-upon sites
PE-13
PANHANDLE EASTERN PIPE LINE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and to defend and indemnify Panhandle against certain future environmental
litigation and claims. These clean-up programs are expected to continue for
several years.
REVENUES: Revenues on transportation and storage of natural gas are
recognized as service is provided. Prior to final FERC approval of filed rates,
Panhandle is exposed to risk that the FERC will ultimately approve the rates at
a level lower than those requested. The difference is subject to refund and
reserves are established, where required, for that purpose. (See Note 3,
Regulatory Matters).
During 2001, sales to Proliance Corporation, a nonaffiliated gas marketer,
accounted for 15% of Panhandle's consolidated revenues. Sales to subsidiaries of
CMS Energy, primarily Consumers, accounted for 15% of Panhandle's consolidated
revenues during 2001 and 12% during 2000 and 1999. No other customer accounted
for 10% or more of consolidated revenues during 2001, 2000, or 1999. Aggregate
sales to Panhandle's top ten customers accounted for 60%, 53% and 54% of
revenues during 2001, 2000 and 1999, respectively.
CHANGE IN ACCOUNTING POLICY: As a result of Panhandle's new cost basis
resulting from the merger with CMS Panhandle Holding in 1999, which included
costs not likely to be considered for regulatory recovery, in addition to the
level of discounting being experienced, Panhandle no longer met the criteria of
SFAS No. 71 and therefore discontinued application of SFAS No. 71, effective
March 1999. Accordingly, upon acquisition by CMS Panhandle Holding, the
remaining net regulatory assets of approximately $15 million were eliminated in
purchase accounting (See Note 1, Corporate Structure).
INTEREST COST CAPITALIZED: SFAS No. 34 requires capitalization of interest
on certain qualifying assets that are undergoing activities to prepare them for
their intended use. SFAS No. 34 limits the capitalization of interest for the
period to the actual interest cost that is incurred and prohibits imputing
interest costs on any equity funds. As a result of the discontinuance of SFAS
No. 71, Panhandle is now subject to the provisions of SFAS No. 34.
INCOME TAXES: CMS Energy and its subsidiaries file a consolidated federal
income tax return. Federal income taxes have been provided by Panhandle on the
basis of its separate company income and deductions in accordance with the
established practices of the tax sharing agreement of the consolidated group
which provides for, among others, the allocation of tax attributes among its
participating members. 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.
GOODWILL AMORTIZATION: Goodwill represents the excess of the purchase
price over the fair value of the net assets of acquired companies and has been
amortized using the straight-line method, with a forty-year life, through
December 31, 2001. Beginning January 1, 2002 and thereafter, goodwill will no
longer be amortized to earnings, but will instead be reviewed for impairment on
an annual basis as required by SFAS No. 142. Accumulated amortization of
goodwill was $53 million and $35 million, at December 31, 2001 and December 31,
2000, respectively.
RECLASSIFICATIONS: Certain prior year amounts have been reclassified in
the Consolidated Financial Statements to conform to the current presentation.
IMPLEMENTATION OF SFAS NO. 133:
SFAS NO. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES:
SFAS No. 133 effective January 1, 2001, requires companies to recognize all
derivative instruments as assets or liabilities in the balance sheet and to
measure those instruments at fair value. SFAS No. 133 requires that as of the
date of the initial adoption the difference between the fair market value of
derivative instruments recorded on the Company's balance sheet and the
previously recorded book value of the derivative instruments should be reflected
as the cumulative effect of a change in accounting principle in either net
income or other comprehensive income as appropriate. The gain and losses on
derivative instruments that are reported in other comprehensive income will be
reclassified as earnings in the periods in which earnings are impacted by the
variability of the cash flows of the
PE-14
PANHANDLE EASTERN PIPE LINE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
hedged item. The ineffective portion, if any, of all hedges is recognized in
current period earnings. Fair market value is determined based upon mathematical
models using current and historical data. The adoption of SFAS No. 133 has had
no material effect on Panhandle's financial statements.
3. REGULATORY MATTERS
Effective August 1996, Trunkline placed into effect a general rate
increase, subject to refund. In September 1999, Trunkline filed a FERC
settlement agreement to resolve certain issues in this proceeding. FERC approved
this settlement in February 2000 and required refunds of approximately $2
million that were made in April 2000, with supplemental refunds of $1.3 million
in June 2000. In January 2001, Trunkline filed a settlement that included the
remaining issues in this proceeding. In April 2001, the FERC approved
Trunkline's uncontested settlement, without modification. As part of the
settlement, Trunkline reduced its maximum rates in May 2001 and made the
remaining refunds totaling approximately $8 million in June 2001.
In conjunction with a FERC order issued in September 1997, FERC required
certain natural gas producers to refund previously collected Kansas ad-valorem
taxes to interstate natural gas pipelines, including Panhandle Eastern Pipe
Line. FERC ordered these pipelines to refund these amounts to their customers.
In June 2001, Panhandle Eastern Pipe Line filed a proposed settlement with the
FERC which was supported by most of the customers and affected producers. In
October 2001, the FERC approved that settlement. The settlement provided for a
resolution of the Kansas ad-valorem tax matter on the Panhandle Eastern Pipe
Line system for a majority of refund amounts. Certain producers and the state of
Missouri elected to not participate in the settlement. At December 31, 2001 and
December 31, 2000, accounts receivable included $8 million and $59 million,
respectively, due from natural gas producers, and other current liabilities
included $11 million and $59 million, respectively, for related obligations.
Amounts collected and amounts refunded in the fourth quarter 2001 were $31
million and $27 million, respectively; including $3 million refunded to Michigan
Gas Storage. Remaining amounts collected but not refunded are subject to refund
pending resolution of issues remaining in the FERC docket and Kansas intrastate
proceeding.
In March 2001, Trunkline received FERC approval to abandon 720 miles of its
26-inch diameter pipeline that extends from Longville, Louisiana to Bourbon,
Illinois. This filing was in conjunction with a plan for Centennial Pipeline to
convert the line from natural gas transmission service to a refined products
pipeline, expected to begin full commercial service in April 2002. Panhandle
owns a one-third interest in a newly formed joint venture, along with TEPPCO
Partners LP and Marathon Ashland Petroleum LLC. Effective April 2001, the
26-inch pipeline was conveyed to Centennial and the book value of the asset,
including related goodwill, is now reflected in Investments on the Consolidated
Balance Sheet.
In July 2001, Panhandle Eastern Pipe Line filed a settlement with customers
on Order 637 matters to resolve issues including capacity release and imbalance
penalties, among others. On October 12, 2001 and December 19, 2001 FERC issued
orders approving the settlement, with modifications. The settlement changes
became final effective February 1, 2002. Management believes that this matter
will not have a material adverse effect on consolidated results of operations or
financial position.
In August 2001, an offer of settlement of Trunkline LNG rates sponsored
jointly by Trunkline LNG, BG LNG Services and Duke LNG Sales was filed with the
FERC and was approved on October 11, 2001. The settlement was placed into effect
on January 1, 2002. This will result in reduced revenues for Trunkline LNG from
2001 levels but less volatility going forward due to a 22-year contract with BG
LNG Services. For further information regarding the BG contract and the
Trunkline LNG monetization transaction, see Note 9, Investment in Affiliates.
For a number of years, Panhandle has sought refunds from the State of
Kansas concerning certain corporate income tax issues for the years 1981 through
1984. On January 25, 2002, the Kansas Supreme Court entered an order affirming a
previous Board of Tax Court finding that Panhandle was entitled to refunds which
with interest
PE-15
PANHANDLE EASTERN PIPE LINE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
total approximately $26 million. Pursuant to the provisions of the purchase
agreement between CMS Energy and a subsidiary of Duke Energy, Duke retains the
benefits of any tax refunds or liabilities for periods prior to the date of the
sale of Panhandle to CMS Energy.
4. RELATED PARTY TRANSACTIONS
YEAR ENDED YEAR ENDED MARCH 29- JANUARY 1-
DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 28,
2001 2000 1999 1999
------------ ------------ ------------ ----------
IN MILLIONS
Transportation of natural gas................. $54 $54 $45 $ 6
LNG terminalling.............................. 26 24 4 --
Other operating revenues...................... 4 4 15 2
Operation and maintenance(a).................. 47 39 25 8
Interest income............................... 9 8 2 --
Interest expense.............................. -- -- -- 13
- -------------------------
(a) Includes allocated benefit plan costs
Amounts for 1999 reflect only related party transactions with CMS Energy
and its subsidiaries for the period after the sale of Panhandle to CMS Energy.
In June 2001, Panhandle received a $150 million capital contribution from CMS
Gas Transmission. In June 2001, Panhandle also loaned CMS Capital $150 million.
At December 31, 2001, Note Receivable -- CMS Capital represented a $423 million
note ($86 million of which is shown as current, based on estimated draws during
the next twelve months) that bore interest at the 30-day commercial paper
interest rate. Net cash generated by Panhandle, including funds from the
Trunkline LNG monetization transaction, in excess of operating or investing
needs, has been loaned to CMS Capital. For further information regarding the
Trunkline LNG monetization transaction, see Note 9, Investment in Affiliates.
Other income includes $9 million for the period ended December 31, 2001 for
interest on note receivable from CMS Capital.
A summary of certain balances due to or due from related parties included
in the Consolidated Balance Sheets is as follows:
DECEMBER 31,
--------------
2001 2000
---- ----
IN MILLIONS
Notes Receivable -- CMS Capital............................. $423 $162
Accounts Receivable......................................... 61 48
Accounts Payable............................................ 7 27
Accrued Liabilities......................................... 2 --
Notes Payable............................................... 75 --
Deferred Commitments........................................ 183 --
PE-16
PANHANDLE EASTERN PIPE LINE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES
The separate components of income tax expense consist of:
YEAR ENDED YEAR ENDED MARCH 29- JANUARY 1-
DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 28,
INCOME TAX EXPENSE 2001 2000 1999 1999
- ------------------ ------------ ------------ ------------ ----------
IN MILLIONS
Current income taxes
Federal...................................... $(22) $(42) $(7) $18
State........................................ 6 (2) -- 2
---- ---- --- ---
Total current income taxes.............. (16) (44) (7) 20
---- ---- --- ---
Deferred income taxes
Federal...................................... 57 76 29 --
State........................................ 2 11 5 --
---- ---- --- ---
Total deferred income taxes............. 59 87 34 --
---- ---- --- ---
Total income tax expense....................... $ 43 $ 43 $27 $20
==== ==== === ===
The actual income tax expense differs from the amount computed by applying
the statutory federal tax rate to income before income taxes as follows:
YEAR ENDED YEAR ENDED MARCH 29- JANUARY 1-
DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 28,
INCOME TAX EXPENSE RECONCILIATION TO STATUTORY RATE 2001 2000 1999 1999
- --------------------------------------------------- ------------ ------------ ------------ ----------
IN MILLIONS
Income tax, computed at the statutory rate....... $ 38 $ 38 $ 24 $ 18
Adjustments resulting from state income tax, net of
federal income tax effect...................... 5 5 3 2
---- ---- ---- ----
Total income tax expense......................... $ 43 $ 43 $ 27 $ 20
==== ==== ==== ====
Effective tax rate............................... 40.2% 40.2% 39.6% 38.2%
---- ---- ---- ----
The principal components of Panhandle's deferred tax assets (liabilities)
recognized in the balance sheet are as follows:
DECEMBER 31,
--------------
NET DEFERRED INCOME TAX LIABILITY COMPONENTS 2001 2000
- -------------------------------------------- ---- ----
IN MILLIONS
Deferred credits and other liabilities...................... $ 25 $ 18
Allocated Alternative Minimum Tax Credit.................... 10 1
Other....................................................... 14 37
----- -----
Total deferred income tax assets....................... 49 56
Investments and other assets................................ (21) (24)
Property, plant and equipment............................... (121) (71)
Goodwill.................................................... (74) (73)
----- -----
Total deferred income tax liabilities.................. (216) (168)
State deferred income taxes, net of federal tax effect...... (11) (10)
----- -----
Net deferred income tax liability........................... (178) (122)
Portion classified as current asset......................... (7) (12)
----- -----
Non-current liability....................................... $(185) $(134)
===== =====
PE-17
PANHANDLE EASTERN PIPE LINE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As described in Note 1, Corporate Structure, 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.
6. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31,
----------------
2001 2000
---- ----
IN MILLIONS
Transmission................................................ $1,383 $1,365
Gathering................................................... 21 18
Underground storage......................................... 230 226
General plant............................................... 41 70
Construction work-in-progress............................... 24 20
------ ------
Total property, plant and equipment.................... 1,699 1,699
Less accumulated depreciation and amortization.............. 142 99
------ ------
Net property, plant and equipment...................... $1,557 $1,600
====== ======
7. FINANCIAL INSTRUMENTS
Panhandle's financial instruments include approximately $1.1 billion and
$1.2 billion of long-term debt at December 31, 2001 and 2000, respectively, with
an approximate fair value of $1.0 billion and $1.1 billion as of December 31,
2001 and 2000, 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, 2001 and 2000 are not necessarily indicative of
the amounts Panhandle could have realized in current market exchanges.
The $423 million Note Receivable from CMS Capital ($86 million of which is
shown as current) is at fair value since the interest portion is calculated
using a floating rate which is updated monthly (See Note 4, Related Party
Transactions).
SFAS No. 133 requires companies to recognize all derivative instruments as
assets or liabilities on the Balance Sheet and to measure those instruments at
fair value. As of December 31, 2001, Panhandle believes its derivative contracts
qualify for the normal purchase and sales exception of SFAS No. 133, and
therefore no impact related to these contracts has been reflected in the
financial statements.
8. LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31,
----------------
INTEREST RATES YEAR DUE 2001 2000
- -------------- -------- ---- ----
IN MILLIONS
6.125% -- 8.25% Notes....................................... 2004 - 2029 $ 924 $1,000
7.2% -- 7.95% Debentures.................................... 2023 - 2024 162 200
Unamortized debt (discount) and premium, net................ (4) (7)
------ ------
Total long-term debt................................... $1,082 $1,193
====== ======
PE-18
PANHANDLE EASTERN PIPE LINE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In December 2001, Panhandle issued $75 million of 7.25 percent senior notes
due in 2006 to CMS Trunkline LNG Holdings, LLC, as part of the Trunkline LNG
monetization transaction. For further information, see Note 9, Investment in
Affiliates.
The total amount of debt principal retired in December 2001 with funds from
the Trunkline LNG monetization was $189 million, and remaining funds were loaned
to CMS Capital. Panhandle incurred $3 million of related early retirement of
debt costs which are reflected as a $2 million, net of tax, extraordinary loss
on Panhandle's Consolidated Statements of Income.
On March 27, 2000, Panhandle issued $100 million of 8.25 percent senior
notes due 2010. Panhandle used the funds primarily to finance the purchase of
Sea Robin (See Note 1, Corporate Structure); the remaining funds were loaned to
CMS Capital. In July 2000, these notes were exchanged for substantially
identical SEC-registered notes. In December 2001, $40 million of these notes
were retired with funds received from the Trunkline LNG monetization
transaction. At December 31, 2001, $60 million of these notes remained
outstanding.
On March 29, 1999, CMS Panhandle Holding privately placed $800 million of
senior notes (See Note 1, Corporate Structure) 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 September 1999, Panhandle completed an exchange offer which replaced the $800
million of notes originally issued by CMS Panhandle Holding with substantially
identical SEC-registered notes. In December 2001, $111 million of these notes
were retired with funds received from the Trunkline LNG monetization
transaction. At December 31, 2001, $689 million of these notes remained
outstanding.
In conjunction with the application of purchase accounting, Panhandle's
existing notes totaling $300 million were revalued resulting in a net premium
recorded of approximately $5 million. The 7.2% -- 7.95% Debentures have call
options whereby Panhandle has the option to repay the debt early. In December
2001, $39 million of the debentures were retired with funds received from the
Trunkline LNG monetization transaction. At December 31, 2001, $162 million of
the debentures remained outstanding, along with $100 million of notes. Based on
when Panhandle can exercise the redemption options, all $162 million of the
remaining debentures could potentially be repaid in 2003.
OTHER: Under its most restrictive borrowing arrangement at December 31,
2001 and December 31, 2000, none of Panhandle's consolidated net income was
restricted for payment of common dividends.
9. INVESTMENT IN AFFILIATES
Panhandle's proportionate share of net income for the years ended December
31, 2000 and 1999 was $.3 million and $.2 million, respectively. These amounts
are reflected in the Consolidated Statements of Income as Other Operating
Revenues. Investment in affiliates includes the following:
LNG HOLDINGS. In December 2001, Panhandle entered into a joint venture
transaction that created LNG Holdings, which owns 100 percent of Trunkline LNG.
LNG Holdings is jointly owned by a subsidiary of Panhandle Eastern Pipe Line and
Dekatherm Investor Trust. Panhandle initially contributed its interest in
Trunkline LNG to the joint venture. LNG Holdings then raised $30 million from
the issuance of equity to Dekatherm Investor Trust and $290 million from bank
loans. The net proceeds were distributed to Panhandle, with $75 million of the
proceeds coming in the form of a loan. While earnings are divided pursuant to a
sharing formula, LNG Holdings' owners require unanimous consent over significant
governance issues, including, among others, issuance of additional debt or
equity, budgets, asset dispositions, and appointment of officers. Due to the
lack of control of the joint venture, LNG Holdings is not consolidated in the
financial statements of Panhandle and thus the debt of LNG Holdings is not
reflected on Panhandle's balance sheet at December 31, 2001.
PE-19
PANHANDLE EASTERN PIPE LINE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The LNG Holdings transaction monetized the value of Trunkline LNG and the
value created by a 22-year BG contract. Due to the commitment by Panhandle to
reinvest the proceeds in the joint venture to finance the LNG expansion project,
the $183 million of proceeds received by Panhandle in excess of Panhandle's book
basis in Trunkline LNG was not recognized as a gain, but instead has been
recorded as a deferred credit on Panhandle's balance sheet. Panhandle has also
guaranteed repayment of $90 million of bridge loans included in the initial $290
million of debt issued by the joint venture, if the joint venture has not
obtained replacement lenders by March 2002. Panhandle Eastern Pipe Line has also
provided indemnities to certain parties involved in the transaction for
pre-closing claims and liabilities, and subsidiaries of Panhandle have provided
indemnities for certain post-closing expenses and liabilities as the
manager/operator of the joint venture.
Trunkline Gas, a wholly owned indirect subsidiary of Panhandle is the
manager and operator of the joint venture pursuant to a management agreement
with the joint venture and is reimbursed its costs and is paid an incentive fee
if certain targets are achieved.
GUARDIAN. In November 2001, CMS Gas Transmission conveyed its interest in
Guardian Pipeline LLC to Panhandle. Panhandle now owns a one-third interest in
Guardian Pipeline LLC along with Viking Gas Transmission, a subsidiary of Xcel
Corporation and WICOR, a subsidiary of Wisconsin Energy Corporation. Guardian is
currently constructing a 141-mile, 36-inch pipeline from Illinois to Wisconsin
for the transportation of natural gas. Trunkline Gas will operate and maintain
the pipeline upon its completion, which is expected in November 2002.
CENTENNIAL. Panhandle owns a one-third interest in the Centennial Pipeline
LLC along with TEPPCO Partners L.P. and Marathon Ashland Petroleum LLC. The
joint venture will operate an interstate refined petroleum products pipeline
extending from the U.S. Gulf Coast to Illinois. Effective April 2001, Trunkline
conveyed an existing 26 inch, 720-mile pipeline to Centennial and the book value
of the asset, including related goodwill, is now reflected in Investments on the
Consolidated Balance Sheet. The pipeline is expected to begin full commercial
service in April 2002.
LEE 8 STORAGE. Panhandle Eastern Pipe Line, 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 by CMS Panhandle Holding on March 29, 1999. The remaining
interest in the Lee 8 partnership is owned by MG Ventures Storage Corporation, a
subsidiary of Utilicorp United Corporation (40 percent) and Howard Energy
Company (20 percent).
10. COMMITMENTS AND CONTINGENCIES
CAPITAL EXPENDITURES: Panhandle estimates capital expenditures and
investments, including interest costs capitalized, to be $114 million in 2002,
$153 million in 2003 and $149 million in 2004. These amounts include
expenditures associated with the LNG terminal expansion which was filed with
FERC on December 26, 2001. The expansion expenditures (excluding capitalized
interest), estimated at $21 million in 2002, $81 million in 2003 and $49 million
in 2004, are currently expected to be funded by Panhandle loans to CMS Trunkline
LNG Holdings, sourced by repayments by CMS Capital on the outstanding note
receivable (see Note 9, Investment in Affiliates). Panhandle prepared these
estimates for planning purposes and they are therefore subject to revision.
Panhandle satisfies capital expenditures using cash from operations and
contributions from the parent.
LITIGATION: Panhandle is involved in 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 No. 5 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, liquidity, or financial
position.
PE-20
PANHANDLE EASTERN PIPE LINE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. Panhandle
communicated with the EPA and appropriate state regulatory agencies on these
matters. Under the terms of the sale of Panhandle to CMS Energy, a subsidiary of
Duke Energy is obligated to complete the Panhandle clean-up programs at certain
agreed-upon sites and to indemnify against certain future environmental
litigation and claims. Panhandle expects these clean-up programs to continue for
several years. The Illinois EPA included Panhandle Eastern Pipe Line and
Trunkline, together with other non-affiliated parties, in a cleanup of former
waste oil disposal sites in Illinois. Prior to a partial cleanup by the EPA, a
preliminary study estimated the cleanup costs at one of the sites to be between
$5 million and $15 million. The State of Illinois contends that Panhandle
Eastern Pipe Line's and Trunkline's share for the costs of assessment and
remediation of the sites, based on the volume of waste sent to the facilities,
is 17.32 percent. Management believes that the costs of cleanup, if any, will
not have a material adverse impact on Panhandle's financial position, liquidity,
or results of operations.
AIR QUALITY CONTROL: In 1998, the EPA issued a final rule on regional ozone
control that requires revised SIPS for 22 states, including five states in which
Panhandle operates. This EPA ruling was challenged in court by various states,
industry and other interests, including the INGAA, an industry group to which
Panhandle belongs. In March 2000, the court upheld most aspects of the EPA's
rule, but agreed with INGAA's position and remanded to the EPA the sections of
the rule that affected Panhandle. Based on the court's decision, most of the
states subject to the rule submitted their SIP revisions in October 2000.
However, the EPA must revise the section of the rule that affected Panhandle's
facilities. Panhandle expects the EPA to make this section of the rule effective
in 2002 and expects the future costs to range from $13 million to $29 million
for capital improvements to comply.
In 1997, the Illinois Environmental Protection Agency initiated an
enforcement proceeding relating to alleged air quality permit violations at
Panhandle's Glenarm Compressor Station. On November 15, 2001 the Illinois
Pollution Control Board approved an order imposing a penalty of $850 thousand,
plus fees and cost reimbursements of $116 thousand. Under terms of the sale of
Panhandle to CMS Energy, a subsidiary of Duke Energy was obligated to indemnify
Panhandle against this environmental penalty. The state issued a permit in
February of 2002 requiring the installation of certain capital improvements at
the facility at a cost of approximately $3 million. It is expected that the
capital improvements will occur in 2002 and 2003.
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, liquidity or financial position.
In December 2001, Panhandle contributed its interest in Trunkline LNG to
LNG Holdings which then raised $30 million from the issuance of equity to
Dekatherm Investor Trust and $290 million from non-recourse bank loans.
Panhandle has guaranteed repayment of $90 million of bridge loans included in
the initial $290 million of debt issued by LNG Holdings if replacement lenders
have not been found by March 2002. Panhandle Eastern Pipe Line has also provided
indemnities to certain parties involved in the transaction for pre-closing
claims and liabilities, and subsidiaries of Panhandle have provided indemnities
for certain post-closing expenses and
PE-21
PANHANDLE EASTERN PIPE LINE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
liabilities as the manager/operator of the joint venture. For further
information, see Note 9, Investment in Affiliates.
In conjunction with the Centennial Pipeline project, Panhandle has provided
a guaranty related to project financing in an amount up to $50 million during
the construction and initial operating period of the project. The guaranty will
be released when Centennial reaches certain operational and financial targets.
For further information, see Note 9, Investment in Affiliates.
In March 1999, CMS Gas Transmission, Panhandle's parent company, became a
partner with a one-third interest in Guardian Pipeline LLC along with Viking Gas
Transmission and WICOR. In November 2001 CMS Gas Transmission conveyed its
interest in Guardian to Panhandle. Guardian is currently constructing a
141-mile, 36-inch pipeline from Illinois to Wisconsin for the transportation of
natural gas. In November 2001, in conjunction with the Guardian Pipeline
project, Panhandle provided a guaranty related to project financing for a
maximum of $60 million during the construction and initial operating period of
the project, which is expected to be completed in November 2002. The guaranty
will be released when Guardian reaches certain operational and financial
targets.
Under the terms of a settlement related to a transportation agreement
between Panhandle and Northern Border Pipeline Company, Panhandle guaranteed
payment to Northern Border Pipeline Company under a transportation agreement
held by a third party. The Panhandle guarantee expired on October 31, 2001, and
Panhandle has no remaining obligations.
LEASES: Panhandle utilizes assets under operating leases in several areas
of operation. Consolidated rental expense amounted to $11 million in 2001, $13
million in 2000 and $14 million ($11 million related to the CMS Energy ownership
period and $3 million during the Duke Energy ownership period) in 1999. Future
minimum rental payments under Panhandle's various operating leases for the years
2002 through 2006 are $12 million, $7 million, $6 million, $6 million and $3
million, respectively, and $5 million thereafter.
11. EXECUTIVE INCENTIVE COMPENSATION
Panhandle participates in CMS Energy's Performance Incentive Stock Plan.
Under the plan, restricted shares of Common Stock of CMS Energy, as well as
stock options and stock appreciation rights related to Common Stock may be
granted to key employees based on their contributions to the successful
management of CMS Energy and its subsidiaries. Awards under the plan may consist
of any class of Common Stock. Certain plan awards are subject to
performance-based business criteria. The plan reserves for awards not more than
five percent, as amended January 1, 1999, of Common Stock outstanding on January
1 each year, less (i) the number of shares of restricted Common Stock awarded
and (ii) Common Stock subject to options granted under the plan during the
immediately preceding four calendar years. The number of shares of restricted
Common Stock awarded under this plan cannot exceed 20% of the aggregate number
of shares reserved for award. Any forfeiture of shares previously awarded will
increase the number of shares available to be awarded under the plan. At
December 31, 2001, awards of up to 2,321,094 shares of CMS Energy Common Stock
may be issued.
Restricted shares of Common Stock are outstanding shares with full voting
and dividend rights. These awards vest over five years at the rate of 25 percent
per year after two years. The restricted shares are subject to achievement of
specified levels of total shareholder return and are subject to forfeiture if
employment terminates before vesting. If performance objectives are exceeded,
the plan provides additional awards. Restricted shares vest fully if control of
CMS Energy changes, as defined by the plan. At December 31, 2001, 37,000 of the
49,000 shares of restricted CMS Energy Common Stock outstanding are subject to
performance objectives.
Under the plan, stock options and stock appreciation rights relating to
Common Stock are granted with an exercise price equal to the closing market
price on each grant date. Some options may be exercised upon grant; others vest
over five years at the rate of 25 percent per year beginning at the end of the
first year and others vest over three years at a rate of 33 1/3 percent per year
after one year. All options expire up to ten years and one month
PE-22
PANHANDLE EASTERN PIPE LINE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
from date of grant. The status of the restricted stock and options granted to
Panhandle's key employees under the Performance Incentive Stock Plan follows:
RESTRICTED
STOCK OPTIONS
---------- -----------------------------
NUMBER NUMBER WEIGHTED AVERAGE
OF SHARES OF SHARES EXERCISE PRICE
--------- --------- ----------------
CMS ENERGY COMMON STOCK
Outstanding at March 29, 1999.............................. -- -- --
Granted.................................................. -- -- --
Exercised or Issued...................................... 12,000 299,912 41.07
Forfeited................................................ -- -- --
------ ------- ------
Outstanding at December 31, 1999........................... 12,000 299,912 41.07
Granted.................................................. 15,000 48,000 17.00
Exercised or Issued...................................... -- (24,000) 17.00
Forfeited................................................ (4,000) (33,964) 40.88
------ ------- ------
Outstanding at December 31, 2000........................... 23,000 289,948 39.10
Granted.................................................. 26,000 66,000 31.04
Exercised or Issued...................................... -- -- --
Forfeited................................................ -- (4,332) 41.44
------ ------- ------
Outstanding at December 31, 2001........................... 49,000 351,616 37.56
====== ======= ======
The following table summarizes information about CMS Energy Common Stock
options outstanding at December 31, 2001:
NUMBER WEIGHTED WEIGHTED
RANGE OF OF SHARES AVERAGE AVERAGE
EXERCISE PRICES OUTSTANDING REMAINING LIFE EXERCISE PRICE
--------------- ----------- -------------- --------------
CMS ENERGY COMMON STOCK:
$17.00 -- $17.00....................................... 24,000 8.15 years $17.00
$31.04 -- $31.04....................................... 66,000 9.22 years $31.04
$39.06 -- $39.06....................................... 40,000 7.56 years $39.06
$41.44 -- $41.44....................................... 211,616 7.24 years $41.44
$41.75 -- $41.75....................................... 10,000 7.18 years $41.75
$17.00 -- $41.75....................................... 351,616 7.71 years $37.56
The weighted average fair value of options granted to Panhandle employees
for CMS Energy Common Stock was $6.43, $2.04 and $5.93 in 2001, 2000 and 1999,
respectively. Fair value is estimated using the Black-Scholes model, a
mathematical formula used to value options traded on securities exchanges, with
the following assumptions:
YEAR ENDED DECEMBER 31
-------------------------------
2001 2000 1999
---- ---- ----
Risk-free interest rate..................................... 4.77% 6.56% 5.65%
Expected stock-price volatility............................. 30.59% 27.25% 16.81%
Expected dividend rate...................................... $ .365 $.365 $ .365
Expected option life (years)................................ 4.2 4.1 4.5
Panhandle applies APB Opinion No. 25 and related interpretations in
accounting for the Performance Incentive Stock Plan. Since stock options are
granted at market price, no compensation cost has been recognized
PE-23
PANHANDLE EASTERN PIPE LINE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
for stock options granted under the plan. The compensation cost charged against
income for restricted stock was $.1 million, $.2 million and $.1 million in
2001, 2000 and 1999, respectively. If compensation cost for stock options had
been determined in accordance with SFAS No. 123, Panhandle's net income would
have decreased by approximately $.3 million, $.1 million and $1.2 million in
2001, 2000 and 1999, respectively.
12. RETIREMENT BENEFITS
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.
Following the acquisition of Panhandle by CMS Energy described in Note 1,
Corporate Structure, Panhandle now participates in CMS Energy's non-contributory
defined benefit retirement plan covering most employees with a minimum of one
year vesting service. Panhandle, through CMS Energy, provides retirement
benefits under a number of different plans, including certain health care and
life insurance benefits under OPEB (Other Post Employment Benefits), benefits to
certain management employees under SERP (Supplemental Executive Retirement
Plan), and benefits to substantially all its employees under a trusteed,
non-contributory, defined benefit pension plan of CMS Energy (Pension Plan) and
a defined contribution 401 (k) plan.
CMS Energy'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 CMS Pension Plan, the fair value of the plan assets was
$1,082 million at December 31, 2001 as compared to the benefit obligation of
$1,152 million. The fair value of the plan assets was $994 million, as compared
to the benefit obligation of $1,081 million at December 31, 2000.
Panhandle's net periodic pension cost, as allocated by CMS Energy, was $2
million in 2001, 2000 and 1999.
Amounts presented below for the Pension Plan include amounts for employees
of CMS Energy and nonutility affiliates which were not distinguishable from the
plan's total assets.
WEIGHTED-AVERAGE ASSUMPTIONS:
PENSIONS & SERP OPEB
--------------------------- ---------------------------
YEARS ENDED DECEMBER 31
----------------------------------------------------------
2001 2000 1999 2001 2000 1999
---- ---- ---- ---- ---- ----
Discount rate................................. 7.25% 7.75% 7.75% 7.25% 7.75% 7.75%
Expected long-term rate of return on plan
assets...................................... 9.75% 9.25% 9.25% 7.00% 7.00% 7.00%
Rate of compensation increase
pension -- to age 45........................ 5.25% 5.25% 5.25%
-- age 45 to assumed retirement..... 3.75% 3.75% 3.75%
SERP.......................................... 5.50% 5.50% 5.50%
The Pension Plan's net unrecognized transition obligation, resulting from
the implementation of accrual accounting, is amortized over 16 years and 11
years for the SERP on a straight-line basis over the average remaining service
period of active employees. Panhandle accrues health care and life insurance
benefit costs over the active service period of employees to the date of full
eligibility for the benefits.
With respect to the CMS OPEB Plan, the fair value of the plan assets was
$473 million at December 31, 2001 as compared to the benefit obligation of $815
million. At December 31, 2000, the fair value of the plan assets was $431
million versus projected benefit obligations of $725 million.
It is Panhandle's and CMS Energy's general policy to fund accrued
postretirement health care costs. CMS Energy's retiree life insurance plan is
fully funded based on actuarially determined requirements.
PE-24
PANHANDLE EASTERN PIPE LINE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Panhandle's net periodic postretirement benefit cost, as allocated by CMS
Energy, was $5 million in 2001. In 2000 and 1999, Panhandle's net periodic
postretirement benefit cost was $3 million and $4 million respectively.
For measurement purposes, a 6.5 percent weighted average rate of increase
in the per capita cost of covered health care benefits was assumed for 2001. The
rate is based on assumptions that it will decrease gradually to 5.5 percent in
2007 and thereafter. Assumed health care cost trend rates have a significant
effect on the amounts reported for Panhandle's health care plans.
SENSITIVITY TO CHANGES IN ASSUMED HEALTH CARE COST TREND RATES
ONE PERCENTAGE ONE PERCENTAGE
POINT INCREASE POINT DECREASE
-------------- --------------
IN MILLIONS
Effect on total service and interest cost components........ $ 1 $(1)
Effect on accumulated postretirement benefit obligation..... $10 $(8)
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -----
IN MILLIONS
2001
Operating Revenue.................................... $155 $115 $120 $123 $513
Pretax Operating Income.............................. 80 38 30 32 180
Net Income........................................... 37 11 8 6 62
2000
Operating Revenue.................................... $136 $105 $114 $128 $483
Pretax Operating Income.............................. 70 34 42 38 184
Net Income........................................... 32 9 14 9 64
PE-25
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Panhandle Eastern Pipe Line Company:
We have audited the accompanying consolidated balance sheets of Panhandle
Eastern Pipe Line Company (a Delaware corporation) and subsidiaries as of
December 31, 2001 and 2000, and the related consolidated statements of income,
cash flows and common stockholder's equity for the years then ended, and for the
periods from January 1, 1999 through March 28, 1999 and from March 29, 1999
through December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Panhandle Eastern Pipe Line
Company and subsidiaries as of December 31, 2001, and 2000, and the results of
their operations and their cash flows for the years then ended, and for the
periods from January 1, 1999 through March 28, 1999 and from March 29, 1999
through December 31, 1999 in conformity with accounting principles generally
accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
Houston, Texas
February 15, 2002
PE-26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
CMS ENERGY
None for CMS Energy.
CONSUMERS
None for Consumers.
PANHANDLE
None for Panhandle.
CO-1
PART III
ITEMS 10., 11., 12. and 13.
CMS ENERGY
CMS Energy's definitive proxy statement, except for the Organization and
Compensation Committee Report, the comparison of five-year cumulative total
return performance graph contained therein and the Audit Committee Report, is
incorporated by reference herein. See also ITEM 1. BUSINESS for information
pursuant to ITEM 10.
CONSUMERS
Consumers' definitive information statement, except for the Organization
and Compensation Committee Report and the Audit Committee Report contained
therein, is incorporated by reference herein. See also ITEM 1. BUSINESS for
information pursuant to ITEM 10.
CO-2
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements and Reports of Independent Public Accountants
for CMS Energy, Consumers, and Panhandle are listed in ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA and are incorporated by
reference herein.
(a)(2) Financial Statement Schedules and Reports of Independent Public
Accountants for CMS Energy, Consumers and Panhandle are listed after
the Exhibits in the Index to Financial Statement Schedules, and are
incorporated by reference herein.
(a)(3) Exhibits for CMS Energy, Consumers, and Panhandle are listed after
Item (c) below and are incorporated by reference herein.
(b) Reports on Form 8-K for CMS Energy, Consumers and Panhandle
CMS ENERGY
During the fourth quarter of 2001, CMS Energy filed Current Reports on
October 26, 2001 and November 2, 2001, covering matters reported pursuant to
ITEM 5. OTHER EVENTS.
CONSUMERS
During the fourth quarter of 2001, Consumers filed Current Reports on
October 26, 2001, covering matters reported pursuant to ITEM 5. OTHER EVENTS.
PANHANDLE
During the fourth quarter of 2001, Panhandle filed Current Reports on
October 26, 2001, covering matters reported pursuant to ITEM 5. OTHER EVENTS.
(c) Exhibits, including those incorporated by reference (see also
Exhibit volume).
CO-3
CMS ENERGY, CONSUMERS AND PANHANDLE EXHIBITS
PREVIOUSLY FILED
-----------------------
WITH FILE AS EXHIBIT
EXHIBITS NUMBER NUMBER DESCRIPTION
- -------- --------- ---------- -----------
(3)(a) 333-51932 (3)(a) -- Restated Articles of Incorporation of CMS Energy. (Form
S-3 filed December 15, 2000)
(3)(b) 333-45556 (3)(b) -- By-Laws of CMS Energy. (Form S-3 filed September 11, 2000)
(3)(c) -- Restated Articles of Incorporation dated May 26, 2000, of
Consumers
(3)(d) 1-5611 (3)(d) -- By-Laws of Consumers. (1999 Form 10-K)
(3)(e) 1-2921 3.01 -- Restated Certificate of Incorporation of Panhandle. (1993
Form 10-K)
(3)(f) 1-2921 (3)(f) -- By-Laws of Panhandle. (1999 Form 10-K)
(4)(a) 2-65973 (b)(1)-4 -- Indenture dated as of September 1, 1945, between Consumers
and Chemical Bank (successor to Manufacturers Hanover
Trust Company), as Trustee, including therein indentures
supplemental thereto through the Forty-third Supplemental
Indenture dated as of May 1, 1979.
-- Indentures Supplemental thereto:
33-41126 (4)(c) -- 68th dated as of 06/15/93
1-5611 (4) -- 69th dated as of 09/15/93 (Form 8-K dated Sep. 21, 1993)
1-5611 (4)(a) -- 70th dated as of 02/01/98 (1997 Form 10-K)
1-5611 (4)(a) -- 71st dated as of 03/06/98 (1997 Form 10-K)
1-5611 (4)(b) -- 72nd dated as of 05/01/98 (1st Qtr. 1998 Form 10-Q)
333-58943 (4)(d) -- 73rd dated as of 06/15/98 (Form S-4 dated July 13, 1998)
1-5611 (4)(b) -- 74th dated as of 10/29/98 (3rd Qtr. 1998 Form 10-Q)
1-5611 (4)(b) -- 75th dated as of 10/1/99 (1999 Form 10-K)
1-5611 (4)(d) -- 77th dated as of 10/1/99 (1999 Form 10-K)
1-5611 (4)(b) -- 78th dated as of 11/15/00 2000 Form 10-K)
1-5611 (4)(b) -- 79th dated as of 9/26/01 (3rd qtr 2001 10-Q)
4(a)(i) -- 80th dated as of 3/22/02
(4)(c) 1-5611 (4)(b) -- Indenture dated as of January 1, 1996 between Consumers
and The Bank of New York, as Trustee. (1995 Form 10-K)
-- Indentures Supplemental thereto:
1-5611 (4)(b) -- 1st dated as of 01/18/96 (1995 Form 10-K)
1-5611 (4)(a) -- 2nd dated as of 09/04/97 (3rd qtr 1997 Form 10-Q)
1-5611 (4)(a) -- 3rd dated as of 11/04/99 (3rd qtr 1999 Form 10-Q)
1-5611 (4)(a) -- 4th dated as of 05/31/01 (3rd qtr 2001 Form 10-Q)
(4)(d) 1-5611 (4)(c) -- Indenture dated as of February 1, 1998 between Consumers
and JPMorgan Chase (formerly "The Chase Manhattan Bank")
as Trustee. (1997 Form 10-K)
1-5611 (4)(a) -- 1st dated as of 05/01/98 (1st Qtr. 1998 Form 10-Q)
333-58943 (4)(b) -- 2nd dated as of 06/15/98
1-5611 (4)(a) -- 3rd 10/29/98 (3rd Qtr. 1998 Form 10-Q)
(4)(e) 33-47629 (4)(a) -- Indenture dated as of September 15, 1992 between CMS
Energy and NBD Bank, as Trustee. (Form S-3 filed May 1,
1992)
-- Indentures Supplemental thereto:
1-9513 (4) -- 1st dated as of 10/01/92 (Form 8-K dated October 1, 1992)
1-9513 (4)(a) -- 2nd dated as of 10/01/92 (Form 8-K dated October 1, 1992)
1-9513 (4) -- 3rd dated as of 05/06/97 (1st qtr 1997 Form 10-Q)
333-37241 (4)(a) -- 4th dated as of 09/26/97 (Form S-3 filed October 6, 1997)
1-9513 (4)(b) -- 5th dated as of 11/04/97 (3rd qtr 1997 Form 10-Q)
1-9513 (4)(d) -- 6th dated as of 01/13/98 (1997 Form 10-K)
1-9513 (4)(d)(i) -- 7th dated as of 01/25/99 (1998 Form 10-K)
CO-4
PREVIOUSLY FILED
-----------------------
WITH FILE AS EXHIBIT
EXHIBITS NUMBER NUMBER DESCRIPTION
- -------- --------- ---------- -----------
1-9513 (4)(d)(ii) -- 8th dated as of 02/03/99 (1998 Form 10-K)
1-9513 (4)(a) -- 9th dated as of 06/22/99 (2nd qtr 1999 Form 10-Q)
333-48276 (4) -- 10th dated as of 10/12/00 (Form S-3MEF filed October 19,
2000)
333-58686 (4) -- 11th dated as of 03/29/2/01 (Form S-8 filed April 11,
2001) 12th dated as of 07/02/01 (Form S-3MEF filed August
, 2001)
333-51932 (4)(a) -- 12th dated as of 07/02/01 (Form POS AM filed August 8,
2001)
(4)(f) 1-9513 (4)(b) -- Indenture between CMS Energy and JP Morgan Chase Bank
(formerly "The Chase Manhattan Bank") as Trustee, dated as
of January 15, 1994. (Form 8-K dated March 29, 1994)
-- Indentures Supplemental thereto:
1-9513 (4b) -- 1st dated as of 01/20/94 (Form 8-K dated March 29, 1994)
1-9513 (4) -- 2nd dated as of 03/19/96 (1st qtr 1996 Form 10-Q)
1-9513 (4)(a)(iv) -- 3rd dated as of 03/17/97 (Form 8-K dated May 1, 1997)
333-36115 (4)(d) -- 4th dated as of 09/17/97 (Form S-3 filed September 22,
1997)
333-63229 (4)(c) -- 5th dated as of 08/26/98 (Form S-4 filed September 10,
1998)
1-9513 (4) -- 6th dated as of 11/9/00 (3rd qtr 2000 Form 10-Q)
333-74958 (4)(a)(viii) -- Form of Seventh Indenture (Form S-3 filed December 12,
2001)
(4)(g) 1-9513 (4a) -- Indenture dated as of June 1, 1997, between CMS Energy and
The Bank of New York, as trustee. (Form 8-K filed July 1,
1997)
-- Indentures Supplemental thereto:
1-9513 (4)(b) -- 1st dated as of 06/20/97 (Form 8-K filed July 1, 1997)
333-45556 (4)(e) -- 4th dated as of 08/22/00 (Form S-3 filed September 11,
2000)
(4)(h) 1-2921 (4)(a) -- Indenture dated as of March 29, 1999, among CMS Panhandle
Holding Company, Panhandle Eastern Pipe Line Company and
NBD Bank, as Trustee. (1st Qtr. 1999 10-Q)
1-2921 (4)(b) -- 1st Supplemental Indenture dated as of March 29, 1999,
among CMS Panhandle Holding Company, Panhandle Eastern
Pipe Line Company and NBD Bank, as Trustee, including a
form of Guarantee by Panhandle Eastern Pipe Line Company
of the obligations of CMS Panhandle Holding Company. (1st
qtr 1999 Form 10-Q)
1-2921 (4)(a) -- 2nd Supplemental Indenture dated as of March 27, 2000,
among Panhandle, as Issuer and Bank One Trust Company,
National Association, as Trustee, Pursuant to Item
6.01(b)(4)(iii) of Regulation S-K, in lieu of filing a
copy of such agreement, Panhandle agrees to furnish a copy
of such agreement to the Commission upon request.
(4)(i) 33-58552 (4) -- Indenture, dated as of February 1, 1993, between Panhandle
and Morgan Guaranty Trust Company of New York. (Form S-3
filed February 19, 1993)
(4)(j) 333-51932 4(r) -- $430,000,000 Credit Agreement dated June 18, 2001 among
CMS Energy, the Banks, the Administrative Agent and
Collateral Agent, the Co-Syndication Agents, the
Documentation Agents and the Advisor, Arranger and Book
Manager, all as defined thereto.
1-9313 4(c) -- Amendment 1 dated November 13, 2001.
(4)(j)(i) -- Amendment 2 dated November 26, 2001.
(4)(j)(ii) -- Amendment 3 dated February 28, 2002.
(4)(k) 333-51932 4(s) -- $300,000,000 Credit Agreement dated June 18, 2001 among
CMS Energy, the Banks, the Administrative Agent, the
Co-Syndication Agents, the Documentation Agents, the
Advisor, Arranger and Book Manager, all as defined
thereto.
1-9513 4(d) -- Amendment 1 dated November 13, 2001.
(4)(k)(i) -- Amendment 2 dated November 26, 2001.
CO-5
PREVIOUSLY FILED
-----------------------
WITH FILE AS EXHIBIT
EXHIBITS NUMBER NUMBER DESCRIPTION
- -------- --------- ---------- -----------
(4)(k)(ii) -- Amendment 3 dated February 28, 2002.
(10)(a) 1-9513 (10)(b) -- Form of Employment Agreement entered into by CMS Energy's
and Consumers' executive officers. (1999 Form 10-K)
(10)(b) 1-5611 (10)(g) -- Consumers' Executive Stock Option and Stock Appreciation
Rights Plan effective December 1, 1989. (1990 Form 10-K)
(10)(c) 1-9513 (10)(d) -- CMS Energy's Performance Incentive Stock Plan effective
February 3, 1988, as amended December 3, 1999. (1999 Form
10-K)
(10)(d) 1-9513 (10)(m) -- CMS Deferred Salary Savings Plan effective January 1,
1994. (1993 Form 10-K)
(10)(e) 1-9513 (10)(n) -- CMS Energy and Consumers Annual Executive Incentive
Compensation Plan effective January 1, 1986, as amended
January 1995. (1995 Form 10-K)
(10)(f) 1-9513 (10)(h) -- Supplemental Executive Retirement Plan for Employees of
CMS Energy/Consumers Energy Company effective January 1,
1982, as amended December 3, 1999. (1999 Form 10-K)
(10)(g) 33-37977 4.1 -- Senior Trust Indenture, Leasehold Mortgage and Security
Agreement dated as of June 1, 1990 between The Connecticut
National Bank and United States Trust Company of New York.
(MCV Partnership) Indenture Supplemental thereto:
(10)(h) 33-37977 4.2 -- Supplement No. 1 dated as of June 1, 1990. (MCV
1-9513 (28)(b) -- Partnership) Collateral Trust Indenture dated as of June
1, 1990 among
Midland Funding Corporation I, MCV Partnership and United
States Trust Company of New York, Trustee. (3rd qtr 1990
Form 10-Q) Indenture Supplemental thereto:
33-37977 4.4 -- Supplement No. 1 dated as of June 1, 1990. (MCV
Partnership)
(10)(i) 1-9513 (10)(v) -- Amended and Restated Investor Partner Tax Indemnification
Agreement dated as of June 1, 1990 among Investor
Partners, CMS Midland as Indemnitor and CMS Energy as
Guarantor. (1990 Form 10-K)
(10)(j) 1-9513 (19)(d)** -- Environmental Agreement dated as of June 1, 1990 made by
CMS Energy to The Connecticut National Bank and Others.
(1990 Form 10-K)
(10)(k) 1-9513 (10)(z)** -- Indemnity Agreement dated as of June 1, 1990 made by CMS
Energy to Midland Cogeneration Venture Limited
Partnership. (1990 Form 10-K)
(10)(l) 1-9513 (10)(aa)** -- Environmental Agreement dated as of June 1, 1990 made by
CMS Energy to United States Trust Company of New York,
Meridian Trust Company, each Subordinated Collateral Trust
Trustee and Holders from time to time of Senior Bonds and
Subordinated Bonds and Participants from time to time in
Senior Bonds and Subordinated Bonds. (1990 Form 10-K)
(10)(m) 33-37977 10.4 -- Amended and Restated Participation Agreement dated as of
June 1, 1990 among MCV Partnership, Owner Participant, The
Connecticut National Bank, United States Trust Company,
Meridian Trust Company, Midland Funding Corporation I,
Midland Funding Corporation II, MEC Development
Corporation and Institutional Senior Bond Purchasers. (MCV
Partnership)
CO-6
PREVIOUSLY FILED
-----------------------
WITH FILE AS EXHIBIT
EXHIBITS NUMBER NUMBER DESCRIPTION
- -------- --------- ---------- -----------
(10)(n) 33-3797 10.4 -- Power Purchase Agreement dated as of July 17, 1986 between
MCV Partnership and Consumers. (MCV Partnership)
Amendments thereto:
33-37977 10.5 -- Amendment No. 1 dated September 10, 1987. (MCV
Partnership)
33-37977 10.6 -- Amendment No. 2 dated March 18, 1988. (MCV Partnership)
33-37977 10.7 -- Amendment No. 3 dated August 28, 1989. (MCV Partnership)
33-37977 10.8 -- Amendment No. 4A dated May 25, 1989. (MCV Partnership)
(10)(o) 1-5611 (10)(y) -- Unwind Agreement dated as of December 10, 1991 by and
among CMS Energy, Midland Group, Ltd., Consumers, CMS
Midland, Inc., MEC Development Corp. and CMS Midland
Holdings Company. (1991 Form 10-K)
(10)(p) 1-5611 (10)(z) -- Stipulated AGE Release Amount Payment Agreement dated as
of June 1, 1990, among CMS Energy, Consumers and The Dow
Chemical Company. (1991 Form 10-K)
(10)(q) 1-5611 (10)(aa)** -- Parent Guaranty dated as of June 14, 1990 from CMS Energy
to MCV, each of the Owner Trustees, the Indenture
Trustees, the Owner Participants and the Initial
Purchasers of Senior Bonds in the MCV Sale Leaseback
transaction, and MEC Development. (1991 Form 10-K)
(10)(r) 1-8157 10.41 -- Contract for Firm Transportation of Natural Gas between
Consumers Power Company and Trunkline Gas Company, dated
November 1, 1989, and Amendment, dated November 1, 1989.
(1989 Form 10-K of PanEnergy Corp.)
(10)(s) 1-8157 10.41 -- Contract for Firm Transportation of Natural Gas between
Consumers Power Company and Trunkline Gas Company, dated
November 1, 1989. (1991 Form 10-K of PanEnergy Corp.)
(10)(t) 1-2921 10.03 -- Contract for Firm Transportation of Natural Gas between
Consumers Power Company and Trunkline Gas Company, dated
September 1, 1993. (1993 Form 10-K)
(12) -- Statements regarding computation of CMS Energy's Ratio of
Earnings to Fixed Charges.
(16)(b) 1-02921 16(B) -- Letter of Deloitte & Touche LLP (Form 8-K/A dated July 19,
1999).
(21)(a) 69-333 -- Subsidiaries of CMS Energy. (Form U-3A-2 filed February
28, 2002).
(21)(b) 69-33 -- Subsidiaries of Consumers. (Form U-3A-2 filed March 1,
2002).
(23)(a) -- Consent of Arthur Andersen LLP for CMS Energy.
(23)(b) -- Consent of Arthur Andersen LLP for Consumers.
(24)(a) -- Power of Attorney for CMS Energy.
(24)(b) -- Power of Attorney for Consumers.
(24)(c) -- Power of Attorney for Panhandle.
(99)(a) -- CMS Energy's Letter Confirming Receipt of Certain
Representations from Arthur Andersen LLP.
(99)(b) -- Consumers' Letter Confirming Receipt of Certain
Representations from Arthur Andersen LLP.
- -------------------------
** Obligations of only CMS Holdings and CMS Midland, second tier subsidiaries of
Consumers, and of CMS Energy but not of Consumers.
Exhibits listed above which have heretofore been filed with the Securities
and Exchange Commission pursuant to various acts administered by the Commission,
and which were designated as noted above, are hereby incorporated herein by
reference and made a part hereof with the same effect as if filed herewith.
CO-7
INDEX TO FINANCIAL STATEMENT SCHEDULES
PAGE
----
Schedule II
Valuation and Qualifying Accounts and Reserves 2001, 2000
and 1999:
CMS Energy Corporation................................. CO-9
Consumers Energy Company............................... CO-10
Report of Independent Public Accountants
CMS Energy Corporation................................. CO-11
Consumers Energy Company............................... CO-12
Schedules other than those listed above are omitted because they are either
not required, not applicable or the required information is shown in the
financial statements or notes thereto.
Columns omitted from schedules filed have been omitted because the
information is not applicable.
CO-8
CMS ENERGY CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
BALANCE AT CHARGED CHARGED TO BALANCE
BEGINNING TO OTHER AT END
DESCRIPTION OF PERIOD EXPENSE ACCOUNTS DEDUCTIONS OF PERIOD
----------- ---------- ------- ---------- ---------- ---------
(IN MILLIONS)
Accumulated provision for uncollectible
accounts:
2001....................................... $18 $27 $-- $14(a) $31
2000....................................... $12 $14 $ 6 $14(a) $18
1999....................................... $13 $15 $(3) $13(a) $12
- -------------------------
(a) Accounts receivable written off including net uncollectible amounts of $24
in 2001, $12 in 2000 and $12 in 1999 charged directly to operating expense
and credited to accounts receivable.
CO-9
CONSUMERS ENERGY COMPANY
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
BALANCE AT CHARGED CHARGED TO BALANCE
BEGINNING TO OTHER AT END
DESCRIPTION OF PERIOD EXPENSE ACCOUNTS DEDUCTIONS OF PERIOD
----------- ---------- ------- ---------- ---------- ---------
(IN MILLIONS)
Accumulated provision for uncollectible
accounts:
2001....................................... $3 $13 -- $12(a) $4
2000....................................... $4 $10 -- $11(a) $3
1999....................................... $5 $70 -- $ 8(a) $4
- -------------------------
(a) Accounts receivable written off including net uncollectible amounts of $10
in 2001, $9 in 2000 and $7 in 1999 charged directly to operating expense
and credited to accounts receivable.
CO-10
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To CMS Energy Corporation:
We have audited in accordance with auditing standards generally accepted in
the United States, CMS Energy Corporation's consolidated financial statements
included in this Form 10-K, and have issued our report thereon dated March 22,
2002. Our audit was made for the purpose of forming an opinion on those basic
consolidated financial statements taken as a whole. The schedule listed in Item
14(a) is the responsibility of the Company's management and is presented for the
purpose of complying with the Securities and Exchange Commission's rules and is
not part of the basic consolidated financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic
consolidated financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Detroit, Michigan,
March 22, 2002
CO-11
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Consumers Energy Company:
We have audited in accordance with auditing standards generally accepted in
the United States, Consumers Energy Company's consolidated financial statements
included in this Form 10-K, and have issued our report thereon dated March 22,
2002. Our audit was made for the purpose of forming an opinion on those basic
consolidated financial statements taken as a whole. The schedule listed in Item
14(a) is the responsibility of the Company's management and is presented for the
purpose of complying with the Securities and Exchange Commission's rules and is
not part of the basic consolidated financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic
consolidated financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Detroit, Michigan,
March 22, 2002
CO-12
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, CMS Energy Corporation has duly caused this Annual Report
to be signed on its behalf by the undersigned, thereunto duly authorized, on the
29th day of March 2002.
CMS ENERGY CORPORATION
By /s/ WILLIAM T. MCCORMICK, JR.
------------------------------------
William T. McCormick, Jr.
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report has been signed below by the following persons on behalf of CMS
Energy Corporation and in the capacities and on the 29th day of March 2002.
SIGNATURE TITLE
--------- -----
(i) Principal executive officer:
/s/ WILLIAM T. MCCORMICK, JR. Chairman of the Board and
------------------------------------------ Chief Executive Officer
William T. McCormick, Jr.
(ii) Principal financial officer:
/s/ ALAN M. WRIGHT Executive Vice President, Chief Financial
------------------------------------------ Officer and Chief Administrative Officer
Alan M. Wright
(iii) Controller or principal accounting
officer:
/s/ PRESTON D. HOPPER Senior Vice President, Controller and
------------------------------------------ Chief Accounting Officer
Preston D. Hopper
(iv) A majority of the Directors including
those named above:
JOHN M DEUTCH* Director
------------------------------------------
John M. Deutch
JAMES J. DUDERSTADT* Director
------------------------------------------
James J. Duderstadt
K R FLAHERTY* Director
------------------------------------------
Kathleen R. Flaherty
EARL D. HOLTON* Director
------------------------------------------
Earl D. Holton
DAVID W. JOOS* Director
------------------------------------------
David W. Joos
W. U. PARFET* Director
------------------------------------------
William U. Parfet
PERCY A. PIERRE* Director
------------------------------------------
Percy A. Pierre
KENNETH L. WAY* Director
------------------------------------------
Kenneth L. Way
Director
------------------------------------------
Kenneth Whipple
JOHN B. YASINSKY* Director
------------------------------------------
John B. Yasinsky
*By /s/ RODGER A. KERSHNER
------------------------------------------
Rodger A. Kershner, Attorney-in-Fact
CO-13
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Consumers Energy Company has duly caused this Annual
Report to be signed on its behalf by the undersigned, thereunto duly authorized,
on the 29th day of March 2002.
CONSUMERS ENERGY COMPANY
By /s/ WILLIAM T. MCCORMICK, JR.
------------------------------------
William T. McCormick, Jr.
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report has been signed below by the following persons on behalf of
Consumers Energy Company and in the capacities and on the 29th day of March
2002.
SIGNATURE TITLE
--------- -----
(i) Principal executive officer:
/s/ WILLIAM T. MCCORMICK, JR. Chairman of the Board
------------------------------------------
William T. McCormick, Jr.
(ii) Principal financial officer:
/s/ ALAN M. WRIGHT Executive Vice President, Chief Financial
------------------------------------------ Officer and Chief Administrative Officer
Alan M. Wright
(iii) Controller or principal accounting
officer:
/s/ DENNIS DAPRA Senior Vice President
------------------------------------------
Dennis DaPra
(iv) A majority of the Directors including
those named above:
JOHN M DEUTCH* Director
------------------------------------------
John M. Deutch
JAMES J. DUDERSTADT* Director
------------------------------------------
James J. Duderstadt
K R FLAHERTY* Director
------------------------------------------
Kathleen R. Flaherty
EARL D. HOLTON* Director
------------------------------------------
Earl D. Holton
WILLIAM T. MCCORMICK, JR.* Director
------------------------------------------
William T. McCormick, Jr.
W. U. PARFET* Director
------------------------------------------
William U. Parfet
PERCY A. PIERRE* Director
------------------------------------------
Percy A. Pierre
KENNETH L. WAY* Director
------------------------------------------
Kenneth L. Way
Director
------------------------------------------
Kenneth Whipple
JOHN B. YASINSKY* Director
------------------------------------------
John B. Yasinsky
*By /s/ RODGER A. KERSHNER
------------------------------------------
Rodger A. Kershner, Attorney-in-Fact
CO-14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Panhandle Eastern Pipe Line Company has duly caused this
Annual Report to be signed on its behalf by the undersigned, thereunto duly
authorized, on the 29th day of March 2002.
PANHANDLE EASTERN PIPE LINE COMPANY
By /s/ WILLIAM J. HAENER
------------------------------------
William J. Haener
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report has been signed below by the following persons on behalf of
Panhandle Eastern Pipe Line Company and in the capacities and on the 29th day of
March 2002.
SIGNATURE TITLE
--------- -----
(i) Principal executive officer:
/s/ CHRISTOPHER A. HELMS President and Chief Executive Officer
-----------------------------------------
Christopher A. Helms
(ii) Principal financial officer and principal
accounting officer:
/s/ GARY W. LEFELAR Vice President and Controller
-----------------------------------------
Gary W. Lefelar
(iii) A majority of the Directors including
those named above:
/s/ PRESTON D. HOPPER Director
-----------------------------------------
Preston D. Hopper
/s/ WILLIAM T. MCCORMICK, JR. Director
-----------------------------------------
William T. McCormick, Jr.
CO-15
CMS ENERGY, CONSUMERS AND PANHANDLE EXHIBITS
PREVIOUSLY FILED
-----------------------
WITH FILE AS EXHIBIT
EXHIBITS NUMBER NUMBER DESCRIPTION
- -------- --------- ---------- -----------
(3)(a) 333-51932 (3)(a) -- Restated Articles of Incorporation of CMS Energy. (Form
S-3 filed December 15, 2000)
(3)(b) 333-45556 (3)(b) -- By-Laws of CMS Energy. (Form S-3 filed September 11, 2000)
(3)(c) -- Restated Articles of Incorporation dated May 26, 2000, of
Consumers
(3)(d) 1-5611 (3)(d) -- By-Laws of Consumers. (1999 Form 10-K)
(3)(e) 1-2921 3.01 -- Restated Certificate of Incorporation of Panhandle. (1993
Form 10-K)
(3)(f) 1-2921 (3)(f) -- By-Laws of Panhandle. (1999 Form 10-K)
(4)(a) 2-65973 (b)(1)-4 -- Indenture dated as of September 1, 1945, between Consumers
and Chemical Bank (successor to Manufacturers Hanover
Trust Company), as Trustee, including therein indentures
supplemental thereto through the Forty-third Supplemental
Indenture dated as of May 1, 1979.
-- Indentures Supplemental thereto:
33-41126 (4)(c) -- 68th dated as of 06/15/93
1-5611 (4) -- 69th dated as of 09/15/93 (Form 8-K dated Sep. 21, 1993)
1-5611 (4)(a) -- 70th dated as of 02/01/98 (1997 Form 10-K)
1-5611 (4)(a) -- 71st dated as of 03/06/98 (1997 Form 10-K)
1-5611 (4)(b) -- 72nd dated as of 05/01/98 (1st Qtr. 1998 Form 10-Q)
333-58943 (4)(d) -- 73rd dated as of 06/15/98 (Form S-4 dated July 13, 1998)
1-5611 (4)(b) -- 74th dated as of 10/29/98 (3rd Qtr. 1998 Form 10-Q)
1-5611 (4)(b) -- 75th dated as of 10/1/99 (1999 Form 10-K)
1-5611 (4)(d) -- 77th dated as of 10/1/99 (1999 Form 10-K)
1-5611 (4)(b) -- 78th dated as of 11/15/00 2000 Form 10-K)
1-5611 (4)(b) -- 79th dated as of 9/26/01 (3rd qtr 2001 10-Q)
4(a)(i) -- 80th dated as of 3/22/02
(4)(c) 1-5611 (4)(b) -- Indenture dated as of January 1, 1996 between Consumers
and The Bank of New York, as Trustee. (1995 Form 10-K)
-- Indentures Supplemental thereto:
1-5611 (4)(b) -- 1st dated as of 01/18/96 (1995 Form 10-K)
1-5611 (4)(a) -- 2nd dated as of 09/04/97 (3rd qtr 1997 Form 10-Q)
1-5611 (4)(a) -- 3rd dated as of 11/04/99 (3rd qtr 1999 Form 10-Q)
1-5611 (4)(a) -- 4th dated as of 05/31/01 (3rd qtr 2001 Form 10-Q)
(4)(d) 1-5611 (4)(c) -- Indenture dated as of February 1, 1998 between Consumers
and JPMorgan Chase (formerly "The Chase Manhattan Bank")
as Trustee. (1997 Form 10-K)
1-5611 (4)(a) -- 1st dated as of 05/01/98 (1st Qtr. 1998 Form 10-Q)
333-58943 (4)(b) -- 2nd dated as of 06/15/98
1-5611 (4)(a) -- 3rd 10/29/98 (3rd Qtr. 1998 Form 10-Q)
(4)(e) 33-47629 (4)(a) -- Indenture dated as of September 15, 1992 between CMS
Energy and NBD Bank, as Trustee. (Form S-3 filed May 1,
1992)
-- Indentures Supplemental thereto:
1-9513 (4) -- 1st dated as of 10/01/92 (Form 8-K dated October 1, 1992)
1-9513 (4)(a) -- 2nd dated as of 10/01/92 (Form 8-K dated October 1, 1992)
1-9513 (4) -- 3rd dated as of 05/06/97 (1st qtr 1997 Form 10-Q)
333-37241 (4)(a) -- 4th dated as of 09/26/97 (Form S-3 filed October 6, 1997)
1-9513 (4)(b) -- 5th dated as of 11/04/97 (3rd qtr 1997 Form 10-Q)
1-9513 (4)(d) -- 6th dated as of 01/13/98 (1997 Form 10-K)
1-9513 (4)(d)(i) -- 7th dated as of 01/25/99 (1998 Form 10-K)
CO-16
PREVIOUSLY FILED
-----------------------
WITH FILE AS EXHIBIT
EXHIBITS NUMBER NUMBER DESCRIPTION
- -------- --------- ---------- -----------
1-9513 (4)(d)(ii) -- 8th dated as of 02/03/99 (1998 Form 10-K)
1-9513 (4)(a) -- 9th dated as of 06/22/99 (2nd qtr 1999 Form 10-Q)
333-48276 (4) -- 10th dated as of 10/12/00 (Form S-3MEF filed October 19,
2000)
333-58686 (4) -- 11th dated as of 03/29/2/01 (Form S-8 filed April 11,
2001) 12th dated as of 07/02/01 (Form S-3MEF filed August
, 2001)
333-51932 (4)(a) -- 12th dated as of 07/02/01 (Form POS AM filed August 8,
2001)
(4)(f) 1-9513 (4)(b) -- Indenture between CMS Energy and JP Morgan Chase Bank
(formerly "The Chase Manhattan Bank") as Trustee, dated as
of January 15, 1994. (Form 8-K dated March 29, 1994)
-- Indentures Supplemental thereto:
1-9513 (4b) -- 1st dated as of 01/20/94 (Form 8-K dated March 29, 1994)
1-9513 (4) -- 2nd dated as of 03/19/96 (1st qtr 1996 Form 10-Q)
1-9513 (4)(a)(iv) -- 3rd dated as of 03/17/97 (Form 8-K dated May 1, 1997)
333-36115 (4)(d) -- 4th dated as of 09/17/97 (Form S-3 filed September 22,
1997)
333-63229 (4)(c) -- 5th dated as of 08/26/98 (Form S-4 filed September 10,
1998)
1-9513 (4) -- 6th dated as of 11/9/00 (3rd qtr 2000 Form 10-Q)
333-74958 (4)(a)(viii) -- Form of Seventh Indenture (Form S-3 filed December 12,
2001)
(4)(g) 1-9513 (4a) -- Indenture dated as of June 1, 1997, between CMS Energy and
The Bank of New York, as trustee. (Form 8-K filed July 1,
1997)
-- Indentures Supplemental thereto:
1-9513 (4)(b) -- 1st dated as of 06/20/97 (Form 8-K filed July 1, 1997)
333-45556 (4)(e) -- 4th dated as of 08/22/00 (Form S-3 filed September 11,
2000)
(4)(h) 1-2921 (4)(a) -- Indenture dated as of March 29, 1999, among CMS Panhandle
Holding Company, Panhandle Eastern Pipe Line Company and
NBD Bank, as Trustee. (1st Qtr. 1999 10-Q)
1-2921 (4)(b) -- 1st Supplemental Indenture dated as of March 29, 1999,
among CMS Panhandle Holding Company, Panhandle Eastern
Pipe Line Company and NBD Bank, as Trustee, including a
form of Guarantee by Panhandle Eastern Pipe Line Company
of the obligations of CMS Panhandle Holding Company. (1st
qtr 1999 Form 10-Q)
1-2921 (4)(a) -- 2nd Supplemental Indenture dated as of March 27, 2000,
among Panhandle, as Issuer and Bank One Trust Company,
National Association, as Trustee, Pursuant to Item
6.01(b)(4)(iii) of Regulation S-K, in lieu of filing a
copy of such agreement, Panhandle agrees to furnish a copy
of such agreement to the Commission upon request.
(4)(i) 33-58552 (4) -- Indenture, dated as of February 1, 1993, between Panhandle
and Morgan Guaranty Trust Company of New York. (Form S-3
filed February 19, 1993)
(4)(j) 333-51932 4(r) -- $430,000,000 Credit Agreement dated June 18, 2001 among
CMS Energy, the Banks, the Administrative Agent and
Collateral Agent, the Co-Syndication Agents, the
Documentation Agents and the Advisor, Arranger and Book
Manager, all as defined thereto.
1-9313 4(c) -- Amendment 1 dated November 13, 2001.
(4)(j)(i) -- Amendment 2 dated November 26, 2001.
(4)(j)(ii) -- Amendment 3 dated February 28, 2002.
(4)(k) 333-51932 4(s) -- $300,000,000 Credit Agreement dated June 18, 2001 among
CMS Energy, the Banks, the Administrative Agent, the
Co-Syndication Agents, the Documentation Agents, the
Advisor, Arranger and Book Manager, all as defined
thereto.
1-9513 4(d) -- Amendment 1 dated November 13, 2001.
(4)(k)(i) -- Amendment 2 dated November 26, 2001.
CO-17
PREVIOUSLY FILED
-----------------------
WITH FILE AS EXHIBIT
EXHIBITS NUMBER NUMBER DESCRIPTION
- -------- --------- ---------- -----------
(4)(k)(ii) -- Amendment 3 dated February 28, 2002.
(10)(a) 1-9513 (10)(b) -- Form of Employment Agreement entered into by CMS Energy's
and Consumers' executive officers. (1999 Form 10-K)
(10)(b) 1-5611 (10)(g) -- Consumers' Executive Stock Option and Stock Appreciation
Rights Plan effective December 1, 1989. (1990 Form 10-K)
(10)(c) 1-9513 (10)(d) -- CMS Energy's Performance Incentive Stock Plan effective
February 3, 1988, as amended December 3, 1999. (1999 Form
10-K)
(10)(d) 1-9513 (10)(m) -- CMS Deferred Salary Savings Plan effective January 1,
1994. (1993 Form 10-K)
(10)(e) 1-9513 (10)(n) -- CMS Energy and Consumers Annual Executive Incentive
Compensation Plan effective January 1, 1986, as amended
January 1995. (1995 Form 10-K)
(10)(f) 1-9513 (10)(h) -- Supplemental Executive Retirement Plan for Employees of
CMS Energy/Consumers Energy Company effective January 1,
1982, as amended December 3, 1999. (1999 Form 10-K)
(10)(g) 33-37977 4.1 -- Senior Trust Indenture, Leasehold Mortgage and Security
Agreement dated as of June 1, 1990 between The Connecticut
National Bank and United States Trust Company of New York.
(MCV Partnership) Indenture Supplemental thereto:
(10)(h) 33-37977 4.2 -- Supplement No. 1 dated as of June 1, 1990. (MCV
1-9513 (28)(b) -- Partnership) Collateral Trust Indenture dated as of June
1, 1990 among
Midland Funding Corporation I, MCV Partnership and United
States Trust Company of New York, Trustee. (3rd qtr 1990
Form 10-Q) Indenture Supplemental thereto:
33-37977 4.4 -- Supplement No. 1 dated as of June 1, 1990. (MCV
Partnership)
(10)(i) 1-9513 (10)(v) -- Amended and Restated Investor Partner Tax Indemnification
Agreement dated as of June 1, 1990 among Investor
Partners, CMS Midland as Indemnitor and CMS Energy as
Guarantor. (1990 Form 10-K)
(10)(j) 1-9513 (19)(d)** -- Environmental Agreement dated as of June 1, 1990 made by
CMS Energy to The Connecticut National Bank and Others.
(1990 Form 10-K)
(10)(k) 1-9513 (10)(z)** -- Indemnity Agreement dated as of June 1, 1990 made by CMS
Energy to Midland Cogeneration Venture Limited
Partnership. (1990 Form 10-K)
(10)(l) 1-9513 (10)(aa)** -- Environmental Agreement dated as of June 1, 1990 made by
CMS Energy to United States Trust Company of New York,
Meridian Trust Company, each Subordinated Collateral Trust
Trustee and Holders from time to time of Senior Bonds and
Subordinated Bonds and Participants from time to time in
Senior Bonds and Subordinated Bonds. (1990 Form 10-K)
(10)(m) 33-37977 10.4 -- Amended and Restated Participation Agreement dated as of
June 1, 1990 among MCV Partnership, Owner Participant, The
Connecticut National Bank, United States Trust Company,
Meridian Trust Company, Midland Funding Corporation I,
Midland Funding Corporation II, MEC Development
Corporation and Institutional Senior Bond Purchasers. (MCV
Partnership)
CO-18
PREVIOUSLY FILED
-----------------------
WITH FILE AS EXHIBIT
EXHIBITS NUMBER NUMBER DESCRIPTION
- -------- --------- ---------- -----------
(10)(n) 33-3797 10.4 -- Power Purchase Agreement dated as of July 17, 1986 between
MCV Partnership and Consumers. (MCV Partnership)
Amendments thereto:
33-37977 10.5 -- Amendment No. 1 dated September 10, 1987. (MCV
Partnership)
33-37977 10.6 -- Amendment No. 2 dated March 18, 1988. (MCV Partnership)
33-37977 10.7 -- Amendment No. 3 dated August 28, 1989. (MCV Partnership)
33-37977 10.8 -- Amendment No. 4A dated May 25, 1989. (MCV Partnership)
(10)(o) 1-5611 (10)(y) -- Unwind Agreement dated as of December 10, 1991 by and
among CMS Energy, Midland Group, Ltd., Consumers, CMS
Midland, Inc., MEC Development Corp. and CMS Midland
Holdings Company. (1991 Form 10-K)
(10)(p) 1-5611 (10)(z) -- Stipulated AGE Release Amount Payment Agreement dated as
of June 1, 1990, among CMS Energy, Consumers and The Dow
Chemical Company. (1991 Form 10-K)
(10)(q) 1-5611 (10)(aa)** -- Parent Guaranty dated as of June 14, 1990 from CMS Energy
to MCV, each of the Owner Trustees, the Indenture
Trustees, the Owner Participants and the Initial
Purchasers of Senior Bonds in the MCV Sale Leaseback
transaction, and MEC Development. (1991 Form 10-K)
(10)(r) 1-8157 10.41 -- Contract for Firm Transportation of Natural Gas between
Consumers Power Company and Trunkline Gas Company, dated
November 1, 1989, and Amendment, dated November 1, 1989.
(1989 Form 10-K of PanEnergy Corp.)
(10)(s) 1-8157 10.41 -- Contract for Firm Transportation of Natural Gas between
Consumers Power Company and Trunkline Gas Company, dated
November 1, 1989. (1991 Form 10-K of PanEnergy Corp.)
(10)(t) 1-2921 10.03 -- Contract for Firm Transportation of Natural Gas between
Consumers Power Company and Trunkline Gas Company, dated
September 1, 1993. (1993 Form 10-K)
(12) -- Statements regarding computation of CMS Energy's Ratio of
Earnings to Fixed Charges.
(16)(b) 1-02921 16(B) -- Letter of Deloitte & Touche LLP (Form 8-K/A dated July 19,
1999).
(21)(a) 69-333 -- Subsidiaries of CMS Energy. (Form U-3A-2 filed February
28, 2002).
(21)(b) 69-33 -- Subsidiaries of Consumers. (Form U-3A-2 filed March 1,
2002).
(23)(a) -- Consent of Arthur Andersen LLP for CMS Energy.
(23)(b) -- Consent of Arthur Andersen LLP for Consumers.
(24)(a) -- Power of Attorney for CMS Energy.
(24)(b) -- Power of Attorney for Consumers.
(24)(c) -- Power of Attorney for Panhandle.
(99)(a) -- CMS Energy's Letter Confirming Receipt of Certain
Representations from Arthur Andersen LLP.
(99)(b) -- Consumers' Letter Confirming Receipt of Certain
Representations from Arthur Andersen LLP.
- -------------------------
** Obligations of only CMS Holdings and CMS Midland, second tier subsidiaries of
Consumers, and of CMS Energy but not of Consumers.
Exhibits listed above which have heretofore been filed with the Securities
and Exchange Commission pursuant to various acts administered by the Commission,
and which were designated as noted above, are hereby incorporated herein by
reference and made a part hereof with the same effect as if filed herewith.
CO-19
EXHIBIT (4)(a)(i)
EIGHTIETH SUPPLEMENTAL INDENTURE
Providing among other things for
FIRST MORTGAGE BONDS,
6.00% Senior Notes due March 15, 2005
--------------
Dated as of March 22, 2002
--------------
CONSUMERS ENERGY COMPANY
TO
JPMORGAN CHASE BANK,
TRUSTEE
Counterpart 80 of 80
EXHIBIT (4)(a)(i)
EIGHTIETH SUPPLEMENTAL INDENTURE, dated as of March 22, 2002
(herein sometimes referred to as "this Supplemental Indenture"), made and
entered into by and between CONSUMERS ENERGY COMPANY, a corporation organized
and existing under the laws of the State of Michigan, with its principal
executive office and place of business at 212 West Michigan Avenue, in Jackson,
Jackson County, Michigan 49201, formerly known as Consumers Power Company,
(hereinafter sometimes referred to as the "Company"), and JPMORGAN CHASE BANK, a
corporation organized and existing under the laws of the State of New York, with
its corporate trust offices at 450 W. 33rd Street, in the Borough of Manhattan,
The City of New York, New York 10001 (hereinafter sometimes referred to as the
"Trustee"), as Trustee under the Indenture dated as of September 1, 1945 between
Consumers Power Company, a Maine corporation (hereinafter sometimes referred to
as the "Maine corporation"), and City Bank Farmers Trust Company (Citibank,
N.A., successor, hereinafter sometimes referred to as the "Predecessor
Trustee"), securing bonds issued and to be issued as provided therein
(hereinafter sometimes referred to as the "Indenture"),
WHEREAS at the close of business on January 30, 1959, City
Bank Farmers Trust Company was converted into a national banking association
under the title "First National City Trust Company"; and
WHEREAS at the close of business on January 15, 1963, First
National City Trust Company was merged into First National City Bank; and
WHEREAS at the close of business on October 31, 1968, First
National City Bank was merged into The City Bank of New York, National
Association, the name of which was thereupon changed to First National City
Bank; and
WHEREAS effective March 1, 1976, the name of First National
City Bank was changed to Citibank, N.A.; and
WHEREAS effective July 16, 1984, Manufacturers Hanover Trust
Company succeeded Citibank, N.A. as Trustee under the Indenture; and
WHEREAS effective June 19, 1992, Chemical Bank succeeded by
merger to Manufacturers Hanover Trust Company as Trustee under the Indenture;
and
WHEREAS effective July 15, 1996, The Chase Manhattan Bank
(National Association), merged with and into Chemical Bank which thereafter was
renamed The Chase Manhattan Bank; and
WHEREAS effective November 11, 2001, The Chase Manhattan Bank
merged with Morgan Guaranty Trust Company of New York and the surviving
corporation was renamed JPMorgan Chase Bank; and
1
WHEREAS the Indenture was executed and delivered for the
purpose of securing such bonds as may from time to time be issued under and in
accordance with the terms of the Indenture, the aggregate principal amount of
bonds to be secured thereby being limited to $5,000,000,000 at any one time
outstanding (except as provided in Section 2.01 of the Indenture), and the
Indenture describes and sets forth the property conveyed thereby and is filed in
the Office of the Secretary of State of the State of Michigan and is of record
in the Office of the Register of Deeds of each county in the State of Michigan
in which this Supplemental Indenture is to be recorded; and
WHEREAS the Indenture has been supplemented and amended by
various indentures supplemental thereto, each of which is filed in the Office of
the Secretary of State of the State of Michigan and is of record in the Office
of the Register of Deeds of each county in the State of Michigan in which this
Supplemental Indenture is to be recorded; and
WHEREAS the Company and the Maine corporation entered into an
Agreement of Merger and Consolidation, dated as of February 14, 1968, which
provided for the Maine corporation to merge into the Company; and
WHEREAS the effective date of such Agreement of Merger and
Consolidation was June 6, 1968, upon which date the Maine corporation was merged
into the Company and the name of the Company was changed from "Consumers Power
Company of Michigan" to "Consumers Power Company"; and
WHEREAS the Company and the Predecessor Trustee entered into a
Sixteenth Supplemental Indenture, dated as of June 4, 1968, which provided,
among other things, for the assumption of the Indenture by the Company; and
WHEREAS said Sixteenth Supplemental Indenture became effective
on the effective date of such Agreement of Merger and Consolidation; and
WHEREAS the Company has succeeded to and has been substituted
for the Maine corporation under the Indenture with the same effect as if it had
been named therein as the mortgagor corporation; and
WHEREAS effective March 11, 1997, the name of Consumers Power
Company was changed to Consumers Energy Company; and
WHEREAS, the Company has entered into an Indenture dated as of
February 1, 1998 ("Senior Note Indenture") with JPMorgan Chase Bank, formerly
known as The Chase Manhattan Bank, as trustee ("Senior Note Trustee") providing
for the issuance of notes thereunder, and pursuant to such Senior Note Indenture
the Company has agreed to issue to the Senior Note Trustee, as security for the
notes ("Senior Notes") to be issued thereunder, a new series of bonds under the
Indenture at the time of authentication of each series of Senior Notes issued
under such Senior Note Indenture; and
WHEREAS, for such purposes the Company desires to issue a new
series of bonds, to be designated First Mortgage Bonds, 6.00% Senior Notes due
March 15, 2005, each of which bonds shall also bear the descriptive title "First
Mortgage Bond" (hereinafter provided for and hereinafter sometimes referred to
as the "2005 Note Bonds"), the bonds of which series are to be issued as
registered bonds without coupons and are to bear interest at the rate per annum
specified herein and are to mature March 15, 2005; and
WHEREAS, the 2005 Note Bonds shall be issued to the Senior
Note Trustee in connection with the issuance by the Company of its 6.00% Senior
Notes due March 15, 2005 (the "2005 Notes"); and
WHEREAS, each of the registered bonds without coupons of the
2005 Note Bonds and the Trustee's Authentication Certificate thereon are to be
substantially in the following form, to wit:
2
[FORM OF REGISTERED BOND OF THE 2005 NOTE BONDS]
[FACE]
NOTWITHSTANDING ANY PROVISIONS HEREOF OR IN THE INDENTURE,
THIS BOND IS NOT ASSIGNABLE OR TRANSFERABLE EXCEPT AS PERMITTED OR REQUIRED BY
SECTION 4.04 OF THE INDENTURE, DATED AS OF FEBRUARY 1, 1998 BETWEEN CONSUMERS
ENERGY COMPANY AND JPMORGAN CHASE BANK, AS TRUSTEE.
CONSUMERS ENERGY COMPANY
FIRST MORTGAGE BOND
6.00% SENIOR NOTES
DUE MARCH 15, 2005
No. 1 $300,000,000
CONSUMERS ENERGY COMPANY, a Michigan corporation (hereinafter
called the "Company"), for value received, hereby promises to pay to JPMorgan
Chase Bank, as trustee under the Senior Note Indenture hereinafter referred to,
or registered assigns, the principal sum of Three Hundred Million Dollars on
March 15, 2005, and to pay to the registered holder hereof interest on said sum
from the latest semi-annual interest payment date to which interest has been
paid on the bonds of this series preceding the date hereof, unless the date
hereof be an interest payment date to which interest is being paid, in which
case from the date hereof, or unless the date hereof is prior to September 15,
2002, in which case from March 22, 2002, (or if this bond is dated between the
record date for any interest payment date and such interest payment date, then
from such interest payment date, provided, however, that if the Company shall
default in payment of the interest due on such interest payment date, then from
the next preceding semi-annual interest payment date to which interest has been
paid on the bonds of this series, or if such interest payment date is September
15, 2002, from March 22, 2001), at 6.00% per annum through March 15, 2005;
provided however, the interest rate is subject to adjustment as provided in the
2005 Notes defined below.
Under an Indenture dated as of February 1, 1998 (hereinafter
sometimes referred to as the "Senior Note Indenture"), between Consumers Energy
Company and JPMorgan Chase Bank, as trustee (hereinafter sometimes called the
"Senior Note Trustee"), the Company will issue, concurrently with the issuance
of this bond, an issue of notes under the Senior Note Indenture entitled 6.00%
Senior Notes, due March 15, 2005 (the "2005 Notes"). Pursuant to Article IV of
the Senior Note Indenture, this bond is issued to the Senior Note Trustee to
secure any and all obligations of the Company under the 2005 Notes and any other
series of senior notes from time to time outstanding under the Senior Note
Indenture. Payment of principal of, or premium, if any, or interest on, the 2005
Notes shall constitute payments on this bond as further provided herein and in
the Supplemental Indenture.
The provisions of this bond are continued on the reverse
hereof and such continued provisions shall for all purposes have the same effect
as though fully set forth at this place.
This bond shall not be valid or become obligatory for any
purpose unless and until it shall have been authenticated by the execution by
the Trustee or its successor in trust under the Indenture of the certificate
hereon.
3
IN WITNESS WHEREOF, Consumers Energy Company has caused this
bond to be executed in its name by its Chairman of the Board, its President or
one of its Vice Presidents by his or her signature or a facsimile thereof, and
its corporate seal or a facsimile thereof to be affixed hereto or imprinted
hereon and attested by its Secretary or one of its Assistant Secretaries by his
or her signature or a facsimile thereof.
CONSUMERS ENERGY COMPANY,
Dated: By ________________________________
Attest: _________________________
TRUSTEE'S AUTHENTICATION CERTIFICATE
This is one of the bonds, of the series designated therein,
described in the within-mentioned Indenture.
JPMORGAN CHASE BANK, Trustee
By ____________________________________
Authorized Officer
4
[REVERSE]
CONSUMERS ENERGY COMPANY
FIRST MORTGAGE BOND
6.00% SENIOR NOTES
DUE MARCH 15, 2005
The interest payable on any March 15 and September 15 will,
subject to certain exceptions provided in the Indenture hereinafter mentioned,
be paid to the person in whose name this bond is registered at the close of
business on the record date, which shall be March 1 or September 1, as the case
may be, next preceding such interest payment date, or, if such March 1 or
September 1 shall be a legal holiday or a day on which banking institutions in
the City of New York, New York or the City of Detroit, Michigan are authorized
by law to close, the next succeeding day which shall not be a legal holiday or a
day on which such institutions are so authorized to close. The principal of and
the premium, if any, and the interest on this bond shall be payable at the
office or agency of the Company in the City of Jackson, Michigan designated for
that purpose, in any coin or currency of the United States of America which at
the time of payment is legal tender for public and private debts.
The 2005 Notes are subject to redemption described therein. In
the event the redemption is exercised as set forth in the 2005 Notes, interest
on this bond shall cease to accrue on the redemption date in accordance with
2005 Notes. The Senior Note Trustee shall give written notice to the Trustee
that the redemption has been exercised. In the event the 2005 Notes are redeemed
as provided therein, upon redemption thereof, this bond shall be deemed to be
redeemed on the respective dates for, in the principal amounts to be redeemed
of, and for the redemption prices for the 2005 Notes.
Upon payment of the principal of and interest by the Company
on the 2005 Notes, whether at maturity or prior to maturity by redemption or
otherwise or upon provision for the payment thereof having been made in
accordance with Section 5.01(a) of the Senior Note Indenture, the 2005 Note
Bonds in a principal amount equal to the principal amount of such 2005 Notes and
having both a corresponding maturity date and interest rate shall, to the extent
of such payment of principal and interest, be deemed paid and the obligation of
the Company thereunder to make such payment shall be discharged to such extent
and, in the case of the payment of principal (and premium, if any) this bond
shall be surrendered to the Company for cancellation as provided in Section 4.08
of the Senior Note Indenture. The Trustee may at anytime and all times
conclusively assume that the obligation of the Company to make payments with
respect to the principal of and interest on this bond, so far as such payments
at the time have become due, has been fully satisfied and discharged pursuant to
the foregoing sentence unless and until the Trustee shall have received a
written notice from the Senior Note Trustee signed by one of its officers
stating (i) that timely payment of, or premium or interest on, the 2005 Notes
has not been made, (ii) that the Company is in arrears as to the payments
required to be made by it to the Senior Note Trustee pursuant to the Senior Note
Indenture, and (iii) the amount of the arrearage.
For purposes of Section 4.09 of the Senior Note Indenture,
this bond shall be deemed to be the "related series of Senior Note First
Mortgage Bonds" in respect of the 2005 Notes.
This bond is one of the bonds issued and to be issued from
time to time under and in accordance with and all secured by an Indenture dated
as of September 1, 1945, given by the Company (or its predecessor, Consumers
Power Company, a Maine corporation) to City Bank Farmers Trust Company (JPMorgan
Chase Bank, successor) (hereinafter sometimes referred to as the "Trustee"), and
indentures supplemental thereto, heretofore or hereafter executed, to which
indenture and indentures supplemental thereto (hereinafter referred to
collectively as the "Indenture") reference is hereby made for a description of
the property mortgaged and pledged, the nature and extent of the security and
the rights, duties and immunities thereunder of the Trustee and the rights of
the holders of said bonds and of the Trustee and of the Company in
5
respect of such security, and the limitations on such rights. By the terms of
the Indenture, the bonds to be secured thereby are issuable in series which may
vary as to date, amount, date of maturity, rate of interest and in other
respects as provided in the Indenture.
The Indenture contains provisions permitting the Company and
the Trustee, with the consent of the holders of not less than seventy-five per
centum in principal amount of the bonds (exclusive of bonds disqualified by
reason of the Company's interest therein) at the time outstanding, including, if
more than one series of bonds shall be at the time outstanding, not less than
sixty per centum in principal amount of each series affected, to effect, by an
indenture supplemental to the Indenture, modifications or alterations of the
Indenture and of the rights and obligations of the Company and the rights of the
holders of the bonds and coupons; provided, however, that no such modification
or alteration shall be made without the written approval or consent of the
holder hereof which will (a) extend the maturity of this bond or reduce the rate
or extend the time of payment of interest hereon or reduce the amount of the
principal hereof, or (b) permit the creation of any lien, not otherwise
permitted, prior to or on a parity with the lien of the Indenture, or (c) reduce
the percentage of the principal amount of the bonds the holders of which are
required to approve any such supplemental indenture.
The Company reserves the right, without any consent, vote or
other action by holders of bonds of this series or any other series created
after the Sixty-eighth Supplemental Indenture to amend the Indenture to reduce
the percentage of the principal amount of bonds the holders of which are
required to approve any supplemental indenture (other than any supplemental
indenture which is subject to the proviso contained in the immediately preceding
sentence) (a) from not less than seventy-five per centum (including sixty per
centum of each series affected) to not less than a majority in principal amount
of the bonds at the time outstanding or (b) in case fewer than all series are
affected, not less than a majority in principal amount of the bonds of all
affected series, voting together.
This bond is not redeemable except upon written demand of the
Senior Note Trustee following the occurrence of an Event of Default under the
Senior Note Indenture and the acceleration of the senior notes, as provided in
Section 8.01 of the Senior Note Indenture. This bond is not redeemable by the
operation of the improvement fund or the maintenance and replacement provisions
of the Indenture or with the proceeds of released property.
This bond shall not be assignable or transferable except as
permitted or required by Section 4.04 of the Senior Note Indenture. Any such
transfer shall be effected at the Investor Services Department of the Company,
as transfer agent (hereinafter referred to as "corporate trust office"). This
bond shall be exchangeable for other registered bonds of the same series, in the
manner and upon the conditions prescribed in the Indenture, upon the surrender
of such bonds at said corporate trust office of the transfer agent. However,
notwithstanding the provisions of Section 2.05 of the Indenture, no charge shall
be made upon any registration of transfer or exchange of bonds of said series
other than for any tax or taxes or other governmental charge required to be paid
by the Company.
As provided in Section 4.11 of the Senior Note Indenture, from
and after the Release Date (as defined in the Senior Note Indenture), the
obligations of the Company with respect to this bond shall be deemed to be
satisfied and discharged, this bond shall cease to secure in any manner any
senior notes outstanding under the Senior Note Indenture, and, pursuant to
Section 4.08 of the Senior Note Indenture, the Senior Note Trustee shall
forthwith deliver this bond to the Company for cancellation.
In case of certain defaults as specified in the Indenture, the
principal of this bond may be declared or may become due and payable on the
conditions, at the time, in the manner and with the effect provided in the
Indenture.
No recourse shall be had for the payment of the principal of
or premium, if any, or interest on this bond, or for any claim based hereon, or
otherwise in respect hereof or of the Indenture, to or against any
6
incorporator, stockholder, director or officer, past, present or future, as
such, of the Company, or of any predecessor or successor company, either
directly or through the Company, or such predecessor or successor company, or
otherwise, under any constitution or statute or rule of law, or by the
enforcement of any assessment or penalty, or otherwise, all such liability of
incorporators, stockholders, directors and officers, as such, being waived and
released by the holder and owner hereof by the acceptance of this bond and being
likewise waived and released by the terms of the Indenture.
--------------------
AND WHEREAS all acts and things necessary to make the 2005
Note Bonds, when duly executed by the Company and authenticated by the Trustee
or its agent and issued as prescribed in the Indenture, as heretofore
supplemented and amended, and this Supplemental Indenture provided, the valid,
binding and legal obligations of the Company, and to constitute the Indenture,
as supplemented and amended as aforesaid, as well as by this Supplemental
Indenture, a valid, binding and legal instrument for the security thereof, have
been done and performed, and the creation, execution and delivery of this
Supplemental Indenture and the creation, execution and issuance of bonds subject
to the terms hereof and of the Indenture, as so supplemented and amended, have
in all respects been duly authorized;
NOW, THEREFORE, in consideration of the premises, of the
acceptance and purchase by the holders thereof of the bonds issued and to be
issued under the Indenture, as supplemented and amended as above set forth, and
of the sum of One Dollar duly paid by the Trustee to the Company, and of other
good and valuable considerations, the receipt whereof is hereby acknowledged,
and for the purpose of securing the due and punctual payment of the principal of
and premium, if any, and interest on all bonds now outstanding under the
Indenture and the $300,000,000 principal amount of the 2005 Note Bonds proposed
to be issued initially and all other bonds which shall be issued under the
Indenture, as supplemented and amended from time to time, and for the purpose of
securing the faithful performance and observance of all covenants and conditions
therein, and in any indenture supplemental thereto, set forth, the Company has
given, granted, bargained, sold, released, transferred, assigned, hypothecated,
pledged, mortgaged, confirmed, set over, warranted, alienated and conveyed and
by these presents does give, grant, bargain, sell, release, transfer, assign,
hypothecate, pledge, mortgage, confirm, set over, warrant, alien and convey unto
JPMorgan Chase Bank, as Trustee, as provided in the Indenture, and its successor
or successors in the trust thereby and hereby created and to its or their
assigns forever, all the right, title and interest of the Company in and to all
the property, described in Section 13 hereof, together (subject to the
provisions of Article X of the Indenture) with the tolls, rents, revenues,
issues, earnings, income, products and profits thereof, excepting, however, the
property, interests and rights specifically excepted from the lien of the
Indenture as set forth in the Indenture.
TOGETHER WITH all and singular the tenements, hereditaments
and appurtenances belonging or in any wise appertaining to the premises,
property, franchises and rights, or any thereof, referred to in the foregoing
granting clause, with the reversion and reversions, remainder and remainders and
(subject to the provisions of Article X of the Indenture) the tolls, rents,
revenues, issues, earnings, income, products and profits thereof, and all the
estate, right, title and interest and claim whatsoever, at law as well as in
equity, which the Company now has or may hereafter acquire in and to the
aforesaid premises, property, franchises and rights and every part and parcel
thereof.
SUBJECT, HOWEVER, with respect to such premises, property,
franchises and rights, to excepted encumbrances as said term is defined in
Section 1.02 of the Indenture, and subject also to all defects and limitations
of title and to all encumbrances existing at the time of acquisition.
TO HAVE AND TO HOLD all said premises, property, franchises
and rights hereby conveyed, assigned, pledged or mortgaged, or intended so to
be, unto the Trustee, its successor or successors in trust and their assigns
forever;
7
BUT IN TRUST, NEVERTHELESS, with power of sale for the equal
and proportionate benefit and security of the holders of all bonds now or
hereafter authenticated and delivered under and secured by the Indenture and
interest coupons appurtenant thereto, pursuant to the provisions of the
Indenture and of any supplemental indenture, and for the enforcement of the
payment of said bonds and coupons when payable and the performance of and
compliance with the covenants and conditions of the Indenture and of any
supplemental indenture, without any preference, distinction or priority as to
lien or otherwise of any bond or bonds over others by reason of the difference
in time of the actual authentication, delivery, issue, sale or negotiation
thereof or for any other reason whatsoever, except as otherwise expressly
provided in the Indenture; and so that each and every bond now or hereafter
authenticated and delivered thereunder shall have the same lien, and so that the
principal of and premium, if any, and interest on every such bond shall, subject
to the terms thereof, be equally and proportionately secured, as if it had been
made, executed, authenticated, delivered, sold and negotiated simultaneously
with the execution and delivery thereof.
AND IT IS EXPRESSLY DECLARED by the Company that all bonds
authenticated and delivered under and secured by the Indenture, as supplemented
and amended as above set forth, are to be issued, authenticated and delivered,
and all said premises, property, franchises and rights hereby and by the
Indenture and indentures supplemental thereto conveyed, assigned, pledged or
mortgaged, or intended so to be, are to be dealt with and disposed of under,
upon and subject to the terms, conditions, stipulations, covenants, agreements,
trusts, uses and purposes expressed in the Indenture, as supplemented and
amended as above set forth, and the parties hereto mutually agree as follows:
SECTION 1. There is hereby created one series of bonds (the
"2005 Note Bonds") designated as hereinabove provided, which shall also bear the
descriptive title "First Mortgage Bond", and the form thereof shall be
substantially as hereinbefore set forth. The 2005 Note Bonds shall be issued in
the aggregate principal amount of $300,000,000, shall mature on March 15, 2005
and shall be issued only as registered bonds without coupons in denominations of
$1,000 and any multiple thereof. The serial numbers of bonds of the 2005 Note
Bonds shall be such as may be approved by any officer of the Company, the
execution thereof by any such officer either manually or by facsimile signature
to be conclusive evidence of such approval. The 2005 Note Bonds shall bear
interest at a rate of 6.00% per annum until the principal thereof shall have
become due and payable, subject to adjustment in accordance with the 2005 Notes.
The principal of and the premium, if any, and the interest on said bonds shall
be payable in any coin or currency of the United States of America which at the
time of payment is legal tender for public and private debts, at the office or
agency of the Company in the City of Jackson, Michigan designated for that
purpose.
Upon any payment by the Company of the principal of and
interest on, all or any portion of the 2005 Notes whether at maturity or prior
to maturity by redemption or otherwise or upon provision for the payment thereof
having been made in accordance with Section 5.01(a) of the Senior Note
Indenture, the 2005 Note Bonds in a principal amount equal to the principal
amount of such 2005 Notes and having both a corresponding maturity date and
interest rate shall, to the extent of such payment of principal and interest, be
deemed paid and the obligation of the Company thereunder to make such payment
shall be discharged to such extent and, in the case of the payment of principal
(and premium, if any) such bonds of said series shall be surrendered to the
Company for cancellation as provided in Section 4.08 of the Senior Note
Indenture. The Trustee may at anytime and all times conclusively assume that the
obligation of the Company to make payments with respect to the principal of and
premium, if any, and interest on the 2005 Note Bonds so far as such payments at
the time have become due, has been fully satisfied and discharged pursuant to
the foregoing sentence unless and until the Trustee shall have received a
written notice from the Senior Note Trustee signed by one of its officers
stating (i) that timely payment of or premium or interest on, the 2005 Notes has
not been so made, (ii) that the Company is in arrears as to the payments
required to be made by it to the Senior Note Trustee pursuant to the Senior Note
Indenture, and (iii) the amount of the arrearage.
The 2005 Note Bonds are to be issued to and registered in the
name of JPMorgan Chase Bank, as trustee, or a successor trustee (said trustee or
any successor trustee being hereinafter referred to as the
8
"Senior Note Trustee") under the Indenture, dated as of February 1, 1998
(hereinafter sometimes referred to as the "Senior Note Indenture") between
Consumers Energy Company and the Senior Note Trustee, to secure any and all
obligations of the Company under the 2005 Notes and any other series of senior
notes from time to time outstanding under the Senior Note Indenture.
The 2005 Note Bonds shall not be assignable or transferable
except as permitted or required by Section 4.04 of the Senior Note Indenture.
Any such transfer shall be effected at the Investor Services Department of the
Company, as transfer agent (hereinafter referred to as "corporate trust
office"). The 2005 Note Bonds shall be exchangeable for other registered bonds
of the same series, in the manner and upon the conditions prescribed in the
Indenture, upon the surrender of such bonds at said corporate trust office of
the transfer agent. However, notwithstanding the provisions of Section 2.05 of
the Indenture, no charge shall be made upon any registration of transfer or
exchange of bonds of said series other than for any tax or taxes or other
governmental charge required to be paid by the Company.
SECTION 2. The 2005 Notes are subject to redemption described
therein. In the event the 2005 Notes are redeemed as provided therein, upon
redemption thereof, the 2005 Note Bonds shall be deemed to be redeemed on the
respective dates for, in the principal amounts to be redeemed of, and for the
redemption prices for the 2005 Notes.
The 2005 Note Bonds are also redeemable as set forth in
Section 3 hereof.
The 2005 Note Bonds are not redeemable by the operation of the
maintenance and replacement provisions of this Indenture or with the proceeds of
released property.
SECTION 3. Upon the occurrence of an Event of Default under
the Senior Note Indenture and the acceleration of the 2005 Notes, the 2005 Note
Bonds shall be redeemable in whole upon receipt by the Trustee of a written
demand (hereinafter called a "Redemption Demand") from the Senior Note Trustee
stating that there has occurred under the Senior Note Indenture both an Event of
Default and a declaration of acceleration of payment of principal, accrued
interest and premium, if any, on the 2005 Notes, specifying the last date to
which interest on such notes has been paid (such date being hereinafter referred
to as the "Initial Interest Accrual Date") and demanding redemption of the 2005
Note Bonds. The Company waives any right it may have to prior notice of such
redemption under the Indenture. Upon surrender of the 2005 Note Bonds by the
Senior Note Trustee to the Trustee, the 2005 Note Bonds shall be redeemed at a
redemption price equal to the principal amount thereof plus accrued interest
thereon from the Initial Interest Accrual Date to the date of the Redemption
Demand; provided, however, that in the event of a recision of acceleration of
senior notes pursuant to the last paragraph of Section 8.01(a) of the Senior
Note Indenture, then any Redemption Demand shall thereby be deemed to be
rescinded by the Senior Note Trustee; but no such recision or annulment shall
extend to or affect any subsequent default or impair any right consequent
thereon.
SECTION 4. For purposes of Section 4.09 of the Senior Note
Indenture, the 2005 Note Bonds shall be deemed to be the "related series of
Senior Note First Mortgage Bonds" in respect of the 2005 Notes.
SECTION 5. As provided in Section 4.11 of the Senior Note
Indenture, from and after the Release Date (as defined in the Senior Note
Indenture), the obligations of the Company with respect to the 2005 Note Bonds
shall be deemed to be satisfied and discharged, the 2005 Note Bonds shall cease
to secure in any manner any senior notes outstanding under the Senior Note
Indenture, and, pursuant to Section 4.08 of the Senior Note Indenture, the
Senior Note Trustee shall forthwith deliver the 2005 Note Bonds to the Company
for cancellation.
SECTION 6. The Company reserves the right, without any
consent, vote or other action by the holder of the 2005 Note Bonds or the
holders of any Notes, or of any subsequent series of bonds issued
9
under the Indenture, to make such amendments to the Indenture, as supplemented,
as shall be necessary in order to amend Section 17.02 to read as follows:
SECTION 17.02. With the consent of the holders of not
less than a majority in principal amount of the bonds at the
time outstanding or their attorneys-in-fact duly authorized,
or, if fewer than all series are affected, not less than a
majority in principal amount of the bonds at the time
outstanding of each series the rights of the holders of which
are affected, voting together, the Company, when authorized by
a resolution, and the Trustee may from time to time and at any
time enter into an indenture or indentures supplemental hereto
for the purpose of adding any provisions to or changing in any
manner or eliminating any of the provisions of this Indenture
or of any supplemental indenture or modifying the rights and
obligations of the Company and the rights of the holders of
any of the bonds and coupons; provided, however, that no such
supplemental indenture shall (1) extend the maturity of any of
the bonds or reduce the rate or extend the time of payment of
interest thereon, or reduce the amount of the principal
thereof, or reduce any premium payable on the redemption
thereof, without the consent of the holder of each bond so
affected, or (2) permit the creation of any lien, not
otherwise permitted, prior to or on a parity with the lien of
this Indenture, without the consent of the holders of all the
bonds then outstanding, or (3) reduce the aforesaid percentage
of the principal amount of bonds the holders of which are
required to approve any such supplemental indenture, without
the consent of the holders of all the bonds then outstanding.
For the purposes of this Section, bonds shall be deemed to be
affected by a supplemental indenture if such supplemental
indenture adversely affects or diminishes the rights of
holders thereof against the Company or against its property.
The Trustee may in its discretion determine whether or not, in
accordance with the foregoing, bonds of any particular series
would be affected by any supplemental indenture and any such
determination shall be conclusive upon the holders of bonds of
such series and all other series. Subject to the provisions of
Sections 16.02 and 16.03 hereof, the Trustee shall not be
liable for any determination made in good faith in connection
herewith.
Upon the written request of the Company, accompanied
by a resolution authorizing the execution of any such
supplemental indenture, and upon the filing with the Trustee
of evidence of the consent of bondholders as aforesaid (the
instrument or instruments evidencing such consent to be dated
within one year of such request), the Trustee shall join with
the Company in the execution of such supplemental indenture
unless such supplemental indenture affects the Trustee's own
rights, duties or immunities under this Indenture or
otherwise, in which case the Trustee may in its discretion but
shall not be obligated to enter into such supplemental
indenture.
It shall not be necessary for the consent of the
bondholders under this Section to approve the particular form
of any proposed supplemental indenture, but it shall be
sufficient if such consent shall approve the substance
thereof.
The Company and the Trustee, if they so elect, and
either before or after such consent has been obtained, may
require the holder of any bond consenting to the execution of
any such supplemental indenture to submit his
10
bond to the Trustee or to ask such bank, banker or trust
company as may be designated by the Trustee for the purpose,
for the notation thereon of the fact that the holder of such
bond has consented to the execution of such supplemental
indenture, and in such case such notation, in form
satisfactory to the Trustee, shall be made upon all bonds so
submitted, and such bonds bearing such notation shall
forthwith be returned to the persons entitled thereto.
Prior to the execution by the Company and the Trustee
of any supplemental indenture pursuant to the provisions of
this Section, the Company shall publish a notice, setting
forth in general terms the substance of such supplemental
indenture, at least once in one daily newspaper of general
circulation in each city in which the principal of any of the
bonds shall be payable, or, if all bonds outstanding shall be
registered bonds without coupons or coupon bonds registered as
to principal, such notice shall be sufficiently given if
mailed, first class, postage prepaid, and registered if the
Company so elects, to each registered holder of bonds at the
last address of such holder appearing on the registry books,
such publication or mailing, as the case may be, to be made
not less than thirty days prior to such execution. Any failure
of the Company to give such notice, or any defect therein,
shall not, however, in any way impair or affect the validity
of any such supplemental indenture.
SECTION 7. As supplemented and amended as above set forth, the
Indenture is in all respects ratified and confirmed, and the Indenture and all
indentures supplemental thereto shall be read, taken and construed as one and
the same instrument.
SECTION 8. Nothing contained in this Supplemental Indenture
shall, or shall be construed to, confer upon any person other than a holder of
bonds issued under the Indenture, as supplemented and amended as above set
forth, the Company, the Trustee and the Senior Note Trustee, for the benefit of
the holder or holders of the Notes, any right or interest to avail himself of
any benefit under any provision of the Indenture, as so supplemented and
amended.
SECTION 9. The Trustee assumes no responsibility for or in
respect of the validity or sufficiency of this Supplemental Indenture or of the
Indenture as hereby supplemented or the due execution hereof by the Company or
for or in respect of the recitals and statements contained herein (other than
those contained in the sixth, seventh and eighth recitals hereof), all of which
recitals and statements are made solely by the Company.
SECTION 10. This Supplemental Indenture may be simultaneously
executed in several counterparts and all such counterparts executed and
delivered, each as an original, shall constitute but one and the same
instrument.
SECTION 11. In the event the date of any notice required or
permitted hereunder or the date of maturity of interest on or principal of the
2005 Note Bonds or the date fixed for redemption or repayment of the 2005 Note
Bonds shall not be a Business Day, then (notwithstanding any other provision of
the Indenture or of any supplemental indenture thereto) such notice or such
payment of such interest or principal need not be made on such date, but may be
made on the next succeeding Business Day with the same force and effect as if
made on the date fixed for such notice or as if made on the date of maturity or
the date fixed for redemption or repayment, and no interest shall accrue for the
period from and after such date. "Business Day" means, with respect to this
Section 11, a day of the year on which banks are not required or authorized to
close in New York City or Detroit, Michigan.
11
SECTION 12. This Supplemental Indenture and the 2005 Note
Bonds shall be governed by and deemed to be a contract under, and construed in
accordance with, the laws of the State of Michigan, and for all purposes shall
be construed in accordance with the laws of such state, except as may otherwise
be required by mandatory provisions of law.
SECTION 13. Detailed Description of Property Mortgaged:
I.
ELECTRIC GENERATING PLANTS AND DAMS
All the electric generating plants and stations of the
Company, constructed or otherwise acquired by it and not heretofore described in
the Indenture or any supplement thereto and not heretofore released from the
lien of the Indenture, including all powerhouses, buildings, reservoirs, dams,
pipelines, flumes, structures and works and the land on which the same are
situated and all water rights and all other lands and easements, rights of way,
permits, privileges, towers, poles, wires, machinery, equipment, appliances,
appurtenances and supplies and all other property, real or personal, forming a
part of or appertaining to or used, occupied or enjoyed in connection with such
plants and stations or any of them, or adjacent thereto.
II.
ELECTRIC TRANSMISSION LINES
All the electric transmission lines of the Company,
constructed or otherwise acquired by it and not heretofore described in the
Indenture or any supplement thereto and not heretofore released from the lien of
the Indenture, including towers, poles, pole lines, wires, switches, switch
racks, switchboards, insulators and other appliances and equipment, and all
other property, real or personal, forming a part of or appertaining to or used,
occupied or enjoyed in connection with such transmission lines or any of them or
adjacent thereto; together with all real property, rights of way, easements,
permits, privileges, franchises and rights for or relating to the construction,
maintenance or operation thereof, through, over, under or upon any private
property or any public streets or highways, within as well as without the
corporate limits of any municipal corporation. Also all the real property,
rights of way, easements, permits, privileges and rights for or relating to the
construction, maintenance or operation of certain transmission lines, the land
and rights for which are owned by the Company, which are either not built or now
being constructed.
III.
ELECTRIC DISTRIBUTION SYSTEMS
All the electric distribution systems of the Company,
constructed or otherwise acquired by it and not heretofore described in the
Indenture or any supplement thereto and not heretofore released from the lien of
the Indenture, including substations, transformers, switchboards, towers, poles,
wires, insulators, subways, trenches, conduits, manholes, cables, meters and
other appliances and equipment, and all other property, real or personal,
forming a part of or appertaining to or used, occupied or enjoyed in connection
with such distribution systems or any of them or adjacent thereto; together with
all real property, rights of way, easements, permits, privileges, franchises,
grants and rights, for or relating to the construction, maintenance or operation
thereof, through, over, under or upon any private property or any public streets
or highways within as well as without the corporate limits of any municipal
corporation.
12
IV.
ELECTRIC SUBSTATIONS,
SWITCHING STATIONS AND SITES
All the substations, switching stations and sites of the
Company, constructed or otherwise acquired by it and not heretofore described in
the Indenture or any supplement thereto and not heretofore released from the
lien of the Indenture, for transforming, regulating, converting or distributing
or otherwise controlling electric current at any of its plants and elsewhere,
together with all buildings, transformers, wires, insulators and other
appliances and equipment, and all other property, real or personal, forming a
part of or appertaining to or used, occupied or enjoyed in connection with any
of such substations and switching stations, or adjacent thereto, with sites to
be used for such purposes.
V.
GAS COMPRESSOR STATIONS, GAS PROCESSING PLANTS,
DESULPHURIZATION STATIONS, METERING STATIONS,
ODORIZING STATIONS, REGULATORS AND SITES
All the compressor stations, processing plants,
desulphurization stations, metering stations, odorizing stations, regulators and
sites of the Company, constructed or otherwise acquired by it and not heretofore
described in the Indenture or any supplement thereto and not heretofore released
from the lien of the Indenture, for compressing, processing, desulphurizing,
metering, odorizing and regulating manufactured or natural gas at any of its
plants and elsewhere, together with all buildings, meters and other appliances
and equipment, and all other property, real or personal, forming a part of or
appertaining to or used, occupied or enjoyed in connection with any of such
purposes, with sites to be used for such purposes.
VI.
GAS STORAGE FIELDS
The natural gas rights and interests of the Company, including
wells and well lines (but not including natural gas, oil and minerals), the gas
gathering system, the underground gas storage rights, the underground gas
storage wells and injection and withdrawal system used in connection therewith,
constructed or otherwise acquired by it and not heretofore described in the
Indenture or any supplement thereto and not heretofore released from the lien of
the Indenture: In the Overisel Gas Storage Field, located in the Township of
Overisel, Allegan County, and in the Township of Zeeland, Ottawa County,
Michigan; in the Northville Gas Storage Field located in the Township of Salem,
Washtenaw County, Township of Lyon, Oakland County, and the Townships of
Northville and Plymouth and City of Plymouth, Wayne County, Michigan; in the
Salem Gas Storage Field, located in the Township of Salem, Allegan County, and
in the Township of Jamestown, Ottawa County, Michigan; in the Ray Gas Storage
Field, located in the Townships of Ray and Armada, Macomb County, Michigan; in
the Lenox Gas Storage Field, located in the Townships of Lenox and Chesterfield,
Macomb County, Michigan; in the Ira Gas Storage Field, located in the Township
of Ira, St. Clair County, Michigan; in the Puttygut Gas Storage Field, located
in the Township of Casco, St. Clair County, Michigan; in the Four Corners Gas
Storage Field, located in the Townships of Casco, China, Cottrellville and Ira,
St. Clair County, Michigan; in the Swan Creek Gas Storage Field, located in the
Township of Casco and Ira, St. Clair County, Michigan; and in the Hessen Gas
Storage Field, located in the Townships of Casco and Columbus, St. Clair,
Michigan.
13
VII.
GAS TRANSMISSION LINES
All the gas transmission lines of the Company, constructed or
otherwise acquired by it and not heretofore described in the Indenture or any
supplement thereto and not heretofore released from the lien of the Indenture,
including gas mains, pipes, pipelines, gates, valves, meters and other
appliances and equipment, and all other property, real or personal, forming a
part of or appertaining to or used, occupied or enjoyed in connection with such
transmission lines or any of them or adjacent thereto; together with all real
property, right of way, easements, permits, privileges, franchises and rights
for or relating to the construction, maintenance or operation thereof, through,
over, under or upon any private property or any public streets or highways,
within as well as without the corporate limits of any municipal corporation.
VIII.
GAS DISTRIBUTION SYSTEMS
All the gas distribution systems of the Company, constructed
or otherwise acquired by it and not heretofore described in the Indenture or any
supplement thereto and not heretofore released from the lien of the Indenture,
including tunnels, conduits, gas mains and pipes, service pipes, fittings,
gates, valves, connections, meters and other appliances and equipment, and all
other property, real or personal, forming a part of or appertaining to or used,
occupied or enjoyed in connection with such distribution systems or any of them
or adjacent thereto; together with all real property, rights of way, easements,
permits, privileges, franchises, grants and rights, for or relating to the
construction, maintenance or operation thereof, through, over, under or upon any
private property or any public streets or highways within as well as without the
corporate limits of any municipal corporation.
IX.
OFFICE BUILDINGS,
SERVICE BUILDINGS, GARAGES, ETC.
All office, garage, service and other buildings of the
Company, wherever located, in the State of Michigan, constructed or otherwise
acquired by it and not heretofore described in the Indenture or any supplement
thereto and not heretofore released from the lien of the Indenture, together
with the land on which the same are situated and all easements, rights of way
and appurtenances to said lands, together with all furniture and fixtures
located in said buildings.
X.
TELEPHONE PROPERTIES AND
RADIO COMMUNICATION EQUIPMENT
All telephone lines, switchboards, systems and equipment of
the Company, constructed or otherwise acquired by it and not heretofore
described in the Indenture or any supplement thereto and not heretofore released
from the line of the Indenture, used or available for use in the operation of
its properties, and all other property, real or personal, forming a part of or
appertaining to or used, occupied or enjoyed in connection with such telephone
properties or any of them or adjacent thereto; together with all real estate,
rights of way, easements, permits, privileges, franchises, property, devices or
rights related to the dispatch, transmission, reception or reproduction of
messages, communications, intelligence, signals, light, vision or
14
sound by electricity, wire or otherwise, including all telephone equipment
installed in buildings used as general and regional offices, substations and
generating stations and all telephone lines erected on towers and poles; and all
radio communication equipment of the Company, together with all property, real
or personal (except any in the Indenture expressly excepted), fixed stations,
towers, auxiliary radio buildings and equipment, and all appurtenances used in
connection therewith, wherever located, in the State of Michigan.
XI.
OTHER REAL PROPERTY
All other real property of the Company and all interests
therein, of every nature and description (except any in the Indenture expressly
excepted) wherever located, in the State of Michigan, acquired by it and not
heretofore described in the Indenture or any supplement thereto and not
heretofore released from the line of the Indenture. Such real property includes
but is not limited to the following described property, such property is subject
to any interests that were excepted or reserved in the conveyance to the
Company:
ALCONA COUNTY
Certain land in Caledonia Township, Alcona County, Michigan
described as:
The East 330 feet of the South 660 feet of the SW 1/4 of the
SW 1/4 of Section 8, T28N, R8E, except the West 264 feet of
the South 330 feet thereof; said land being more particularly
described as follows: To find the place of beginning of this
description, commence at the Southwest corner of said section,
run thence East along the South line of said section 1243 feet
to the place of beginning of this description, thence
continuing East along said South line of said section 66 feet
to the West 1/8 line of said section, thence N 02 degrees 09'
30" E along the said West 1/8 line of said section 660 feet,
thence West 330 feet, thence S 02 degrees 09' 30" W, 330 feet,
thence East 264 feet, thence S 02 degrees 09' 30" W, 330 feet
to the place of beginning.
ALLEGAN COUNTY
Certain land in Lee Township, Allegan County, Michigan
described as:
The NE 1/4 of the NW 1/4 of Section 16, T1N, R15W.
ALPENA COUNTY
Certain land in Wilson and Green Townships, Alpena County,
Michigan described as:
All that part of the S'ly 1/2 of the former Boyne City-Gaylord
and Alpena Railroad right of way, being the Southerly 50 feet
of a 100 foot strip of land formerly occupied by said
Railroad, running from the East line of Section 31, T31N, R7E,
Southwesterly across said Section 31 and Sections 5 and 6 of
T30N, R7E and Sections 10, 11 and the E 1/2 of Section 9,
except the West 1646 feet thereof, all in T30N, R6E.
15
ANTRIM COUNTY
Certain land in Mancelona Township, Antrim County, Michigan
described as:
The S 1/2 of the NE 1/4 of Section 33, T29N, R6W, excepting
therefrom all mineral, coal, oil and gas and such other rights
as were reserved unto the State of Michigan in that certain
deed running from the State of Michigan to August W. Schack
and Emma H. Schack, his wife, dated April 15, 1946 and
recorded May 20, 1946 in Liber 97 of Deeds on page 682 of
Antrim County Records.
ARENAC COUNTY
Certain land in Standish Township, Arenac County, Michigan
described as:
A parcel of land in the SW 1/4 of the NW 1/4 of Section 12,
T18N, R4E, described as follows: To find the place of
beginning of said parcel of land, commence at the Northwest
corner of Section 12, T18N, R4E; run thence South along the
West line of said section, said West line of said section
being also the center line of East City Limits Road 2642.15
feet to the W 1/4 post of said section and the place of
beginning of said parcel of land; running thence N 88 degrees
26' 00" E along the East and West 1/4 line of said section,
660.0 feet; thence North parallel with the West line of said
section, 310.0 feet; thence S 88 degrees 26' 00" W, 330.0
feet; thence South parallel with the West line of said
section, 260.0 feet; thence S 88 degrees 26' 00" W, 330.0 feet
to the West line of said section and the center line of East
City Limits Road; thence South along the said West line of
said section, 50.0 feet to the place of beginning.
BARRY COUNTY
Certain land in Johnstown Township, Barry County, Michigan
described as:
A strip of land 311 feet in width across the SW 1/4 of the NE
1/4 of Section 31, T1N, R8W, described as follows: To find the
place of beginning of this description, commence at the E 1/4
post of said section; run thence N 00 degrees 55' 00" E along
the East line of said section, 555.84 feet; thence N 59
degrees 36' 20" W, 1375.64 feet; thence N 88 degrees 30' 00"
W, 130 feet to a point on the East 1/8 line of said section
and the place of beginning of this description; thence
continuing N 88 degrees 30' 00" W, 1327.46 feet to the North
and South 1/4 line of said section; thence S 00 degrees 39'
35" W along said North and South 1/4 line of said section,
311.03 feet to a point, which said point is 952.72 feet
distant N'ly from the East and West 1/4 line of said section
as measured along said North and South 1/4 line of said
section; thence S 88 degrees 30' 00" E, 1326.76 feet to the
East 1/8 line of said section; thence N 00 degrees 47' 20" E
along said East 1/8 line of said section, 311.02 feet to the
place of beginning.
BAY COUNTY
Certain land in Frankenlust Township, Bay County, Michigan
described as:
The South 250 feet of the N 1/2 of the W 1/2 of the W 1/2 of
the SE 1/4 of Section 9, T13N, R4E.
16
BENZIE COUNTY
Certain land in Benzonia Township, Benzie County, Michigan
described as:
A parcel of land in the Northeast 1/4 of Section 7, Township
26 North, Range 14 West, described as beginning at a point on
the East line of said Section 7, said point being 320 feet
North measured along the East line of said section from the
East 1/4 post; running thence West 165 feet; thence North
parallel with the East line of said section 165 feet; thence
East 165 feet to the East line of said section; thence South
165 feet to the place of beginning.
BRANCH COUNTY
Certain land in Girard Township, Branch County, Michigan
described as:
A parcel of land in the NE 1/4 of Section 23 T5S, R6W,
described as beginning at a point on the North and South
quarter line of said section at a point 1278.27 feet distant
South of the North quarter post of said section, said distance
being measured along the North and South quarter line of said
section, running thence S89 degrees21'E 250 feet, thence North
along a line parallel with the said North and South quarter
line of said section 200 feet, thence N89 degrees21'W 250 feet
to the North and South quarter line of said section, thence
South along said North and South quarter line of said section
200 feet to the place of beginning.
CALHOUN COUNTY
Certain land in Convis Township, Calhoun County, Michigan
described as:
A parcel of land in the SE 1/4 of the SE 1/4 of Section 32,
T1S, R6W, described as follows: To find the place of beginning
of this description, commence at the Southeast corner of said
section; run thence North along the East line of said section
1034.32 feet to the place of beginning of this description;
running thence N 89 degrees 39' 52" W, 333.0 feet; thence
North 290.0 feet to the South 1/8 line of said section; thence
S 89 degrees 39' 52" E along said South 1/8 line of said
section 333.0 feet to the East line of said section; thence
South along said East line of said section 290.0 feet to the
place of beginning. (Bearings are based on the East line of
Section 32, T1S, R6W, from the Southeast corner of said
section to the Northeast corner of said section assumed as
North.)
CASS COUNTY
Certain easement rights located across land in Marcellus
Township, Cass County, Michigan described as:
The East 6 rods of the SW 1/4 of the SE 1/4 of Section 4, T5S,
R13W.
17
CHARLEVOIX COUNTY
Certain land in South Arm Township, Charlevoix County,
Michigan described as:
A parcel of land in the SW 1/4 of Section 29, T32N, R7W,
described as follows: Beginning at the Southwest corner of
said section and running thence North along the West line of
said section 788.25 feet to a point which is 528 feet distant
South of the South 1/8 line of said section as measured along
the said West line of said section; thence N 89 degrees 30'
19" E, parallel with said South 1/8 line of said section 442.1
feet; thence South 788.15 feet to the South line of said
section; thence S 89 degrees 29' 30" W, along said South line
of said section 442.1 feet to the place of beginning.
CHEBOYGAN COUNTY
Certain land in Inverness Township, Cheboygan County, Michigan
described as:
A parcel of land in the SW frl 1/4 of Section 31, T37N, R2W,
described as beginning at the Northwest corner of the SW frl
1/4, running thence East on the East and West quarter line of
said Section, 40 rods, thence South parallel to the West line
of said Section 40 rods, thence West 40 rods to the West line
of said Section, thence North 40 rods to the place of
beginning.
CLARE COUNTY
Certain land in Frost Township, Clare County, Michigan
described as:
The East 150 feet of the North 225 feet of the NW 1/4 of the
NW 1/4 of Section 15, T20N, R4W.
CLINTON COUNTY
Certain land in Watertown Township, Clinton County, Michigan
described as:
The NE 1/4 of the NE 1/4 of the SE 1/4 of Section 22, and the
North 165 feet of the NW 1/4 of the NE 1/4 of the SE 1/4 of
Section 22, T5N, R3W.
CRAWFORD COUNTY
Certain land in Lovells Township, Crawford County, Michigan
described as:
A parcel of land in Section 1, T28N, R1W, described as:
Commencing at NW corner said section; thence South 89
degrees53'30" East along North section line 105.78 feet to
point of beginning; thence South 89 degrees53'30" East along
North section line 649.64 feet; thence South 55 degrees 42'30"
East 340.24 feet; thence South 55 degrees 44' 37"" East
5,061.81 feet to the East section line; thence South 00
degrees 00' 08"" West along East section line 441.59 feet;
thence North 55 degrees 44' 37" West 5,310.48 feet; thence
North 55 degrees 42'30" West 877.76 feet to point of
beginning.
18
EATON COUNTY
Certain land in Eaton Township, Eaton County, Michigan
described as:
A parcel of land in the SW 1/4 of Section 6, T2N, R4W,
described as follows: To find the place of beginning of this
description commence at the Southwest corner of said section;
run thence N 89 degrees 51' 30" E along the South line of said
section 400 feet to the place of beginning of this
description; thence continuing N 89 degrees 51' 30" E, 500
feet; thence N 00 degrees 50' 00" W, 600 feet; thence S 89
degrees 51' 30" W parallel with the South line of said section
500 feet; thence S 00 degrees 50' 00" E, 600 feet to the place
of beginning.
EMMET COUNTY
Certain land in Wawatam Township, Emmet County, Michigan
described as:
The West 1/2 of the Northeast 1/4 of the Northeast 1/4 of
Section 23, T39N, R4W.
GENESEE COUNTY
Certain land in Argentine Township, Genesee County, Michigan
described as:
A parcel of land of part of the SW 1/4 of Section 8, T5N, R5E,
being more particularly described as follows:
Beginning at a point of the West line of Duffield Road, 100
feet wide, (as now established) distant 829.46 feet measured
N01 degrees42'56"W and 50 feet measured S88 degrees14'04"W
from the South quarter corner, Section 8, T5N, R5E; thence S88
degrees14'04"W a distance of 550 feet; thence N01
degrees42'56"W a distance of 500 feet to a point on the North
line of the South half of the Southwest quarter of said
Section 8; thence N88 degrees14'04"E along the North line of
South half of the Southwest quarter of said Section 8 a
distance 550 feet to a point on the West line of Duffield
Road, 100 feet wide (as now established); thence S01
degrees42'56"E along the West line of said Duffield Road a
distance of 500 feet to the point of beginning.
GLADWIN COUNTY
Certain land in Secord Township, Gladwin County, Michigan
described as:
The East 400 feet of the South 450 feet of Section 2, T19N,
R1E.
GRAND TRAVERSE COUNTY
Certain land in Mayfield Township, Grand Traverse County,
Michigan described as:
A parcel of land in the Northwest 1/4 of Section 3, T25N,
R11W, described as follows: Commencing at the Northwest corner
of said section, running thence S 89 degrees19'15" E along the
North line of said section and the center line of Clouss Road
225 feet, thence South 400 feet, thence N 89 degrees19'15" W
225 feet to the West line of said section and the center line
of Hannah Road,
19
thence North along the West line of said section and the
center line of Hannah Road 400 feet to the place of beginning
for this description.
GRATIOT COUNTY
Certain land in Fulton Township, Gratiot County, Michigan
described as:
A parcel of land in the NE 1/4 of Section 7, Township 9 North,
Range 3 West, described as beginning at a point on the North
line of George Street in the Village of Middleton, which is
542 feet East of the North and South one-quarter (1/4) line of
said Section 7; thence North 100 feet; thence East 100 feet;
thence South 100 feet to the North line of George Street;
thence West along the North line of George Street 100 feet to
place of beginning.
HILLSDALE COUNTY
Certain land in Litchfield Village, Hillsdale County, Michigan
described as:
Lots numbered three (3) and four (4) of Block three (3) of
Harvey Smiths Southern Addition to the Village of Litchfield
according to the recorded plat thereof as recorded in Liber AK
of deeds, page 490.
HURON COUNTY
Certain easement rights located across land in Sebewaing
Township, Huron County, Michigan described as:
The North 1/2 of the Northwest 1/4 of Section 15, T15N, R9E.
INGHAM COUNTY
Certain land in Vevay Township, Ingham County, Michigan
described as:
A parcel of land 660 feet wide in the Southwest 1/4 of Section
7 lying South of the centerline of Sitts Road as extended to
the North-South 1/4 line of said Section 7, T2N, R1W, more
particularly described as follows: Commence at the Southwest
corner of said Section 7, thence North along the West line of
said Section 2502.71 feet to the centerline of Sitts Road;
thence South 89 degrees54'45" East along said centerline
2282.38 feet to the place of beginning of this description;
thence continuing South 89 degrees54'45" East along said
centerline and said centerline extended 660.00 feet to the
North-South 1/4 line of said section; thence South 00
degrees07'20" West 1461.71 feet; thence North 89 degrees34'58"
West 660.00 feet; thence North 00 degrees07'20" East 1457.91
feet to the centerline of Sitts Road and the place of
beginning.
IONIA COUNTY
Certain land in Sebewa Township, Ionia County, Michigan
described as:
A strip of land 280 feet wide across that part of the SW 1/4
of the NE 1/4 of Section 15, T5N, R6W, described as follows:
To find the place of beginning of this description commence at
the E 1/4 corner of said section; run thence
20
N 00 degrees 05' 38" W along the East line of said section,
1218.43 feet; thence S 67 degrees 18' 24" W, 1424.45 feet to
the East 1/8 line of said section and the place of beginning
of this description; thence continuing S 67 degrees 18' 24" W,
1426.28 feet to the North and South 1/4 line of said section
at a point which said point is 105.82 feet distant N'ly of the
center of said section as measured along said North and South
1/4 line of said section; thence N 00 degrees 04' 47" E along
said North and South 1/4 line of said section, 303.67 feet;
thence N 67 degrees 18' 24" E, 1425.78 feet to the East 1/8
line of said section; thence S 00 degrees 00' 26" E along said
East 1/8 line of said section, 303.48 feet to the place of
beginning. (Bearings are based on the East line of Section 15,
T5N, R6W, from the E 1/4 corner of said section to the
Northeast corner of said section assumed as N 00 degrees 05'
38" W.)
IOSCO COUNTY
Certain land in Alabaster Township, Iosco County, Michigan
described as:
A parcel of land in the NW 1/4 of Section 34, T21N, R7E,
described as follows: To find the place of beginning of this
description commence at the N 1/4 post of said section; run
thence South along the North and South 1/4 line of said
section, 1354.40 feet to the place of beginning of this
description; thence continuing South along the said North and
South 1/4 line of said section, 165.00 feet to a point on the
said North and South 1/4 line of said section which said point
is 1089.00 feet distant North of the center of said section;
thence West 440.00 feet; thence North 165.00 feet; thence East
440.00 feet to the said North and South 1/4 line of said
section and the place of beginning.
ISABELLA COUNTY
Certain land in Chippewa Township, Isabella County, Michigan
described as:
The North 8 rods of the NE 1/4 of the SE 1/4 of Section 29,
T14N, R3W.
JACKSON COUNTY
Certain land in Waterloo Township, Jackson County, Michigan
described as:
A parcel of land in the North fractional part of the N
fractional 1/2 of Section 2, T1S, R2E, described as follows:
To find the place of beginning of this description commence at
the E 1/4 post of said section; run thence N 01 degrees 03'
40" E along the East line of said section 13335.45 feet to the
North 1/8 line of said section and the place of beginning of
this description; thence N 89 degrees 32' 00" W, 2677.7 feet
to the North and South 1/4 line of said section; thence S 00
degrees 59' 25" W along the North and South 1/4 line of said
section 22.38 feet to the North 1/8 line of said section;
thence S 89 degrees 59' 10" W along the North 1/8 line of said
section 2339.4 feet to the center line of State Trunkline
Highway M-52; thence N 53 degrees 46' 00" W along the center
line of said State Trunkline Highway 414.22 feet to the West
line of said section; thence N 00 degrees 55' 10" E along the
West line of said section 74.35 feet; thence S 89 degrees 32'
00" E, 5356.02 feet to the East line of said section; thence S
01 degrees 03' 40" W along the East line of said section 250
feet to the place of beginning.
21
KALAMAZOO COUNTY
Certain land in Alamo Township, Kalamazoo County, Michigan
described as:
The South 350 feet of the NW 1/4 of the NW 1/4 of Section 16,
T1S, R12W, being more particularly described as follows: To
find the place of beginning of this description, commence at
the Northwest corner of said section; run thence S 00 degrees
36' 55" W along the West line of said section 971.02 feet to
the place of beginning of this description; thence continuing
S 00 degrees 36' 55" W along said West line of said section
350.18 feet to the North 1/8 line of said section; thence S 87
degrees 33' 40" E along the said North 1/8 line of said
section 1325.1 feet to the West 1/8 line of said section;
thence N 00 degrees 38' 25" E along the said West 1/8 line of
said section 350.17 feet; thence N 87 degrees 33' 40" W,
1325.25 feet to the place of beginning.
KALKASKA COUNTY
Certain land in Kalkaska Township, Kalkaska County, Michigan
described as:
The NW 1/4 of the SW 1/4 of Section 4, T27N, R7W, excepting
therefrom all mineral, coal, oil and gas and such other rights
as were reserved unto the State of Michigan in that certain
deed running from the Department of Conservation for the State
of Michigan to George Welker and Mary Welker, his wife, dated
October 9, 1934 and recorded December 28, 1934 in Liber 39 on
page 291 of Kalkaska County Records, and subject to easement
for pipeline purposes as granted to Michigan Consolidated Gas
Company by first party herein on April 4, 1963 and recorded
June 21, 1963 in Liber 91 on page 631 of Kalkaska County
Records.
KENT COUNTY
Certain land in Caledonia Township, Kent County, Michigan
described as:
A parcel of land in the Northwest fractional 1/4 of Section
15, T5N, R10W, described as follows: To find the place of
beginning of this description commence at the North 1/4 corner
of said section, run thence S 0 degrees 59' 26" E along the
North and South 1/4 line of said section 2046.25 feet to the
place of beginning of this description, thence continuing S 0
degrees 59' 26" E along said North and South 1/4 line of said
section 332.88 feet, thence S 88 degrees 58' 30" W 2510.90
feet to a point herein designated "Point A" on the East bank
of the Thornapple River, thence continuing S 88 degrees 53'
30" W to the center thread of the Thornapple River, thence
NW'ly along the center thread of said Thornapple River to a
point which said point is S 88 degrees 58' 30" W of a point on
the East bank of the Thornapple River herein designated "Point
B", said "Point B" being N 23 degrees 41' 35" W 360.75 feet
from said above-described "Point A", thence N 88 degrees 58'
30" E to said "Point B", thence continuing N 88 degrees 58'
30" E 2650.13 feet to the place of beginning. (Bearings are
based on the East line of Section 15, T5N, R10W between the
East 1/4 corner of said section and the Northeast corner of
said section assumed as N 0 degrees 59' 55" W.)
22
LAKE COUNTY
Certain land in Pinora and Cherry Valley Townships, Lake
County, Michigan described as:
A strip of land 50 feet wide East and West along and adjoining
the West line of highway on the East side of the North 1/2 of
Section 13 T18N, R12W. Also a strip of land 100 feet wide East
and West along and adjoining the East line of the highway on
the West side of following described land: The South 1/2 of NW
1/4, and the South 1/2 of the NW 1/4 of the SW 1/4, all in
Section 6, T18N, R11W.
LAPEER COUNTY
Certain land in Hadley Township, Lapeer County, Michigan
described as:
The South 825 feet of the W 1/2 of the SW 1/4 of Section 24,
T6N, R9E, except the West 1064 feet thereof.
LEELANAU COUNTY
Certain land in Cleveland Township, Leelanau County, Michigan
described as:
The North 200 feet of the West 180 feet of the SW 1/4 of the
SE 1/4 of Section 35, T29N, R13W.
LENAWEE COUNTY
Certain land in Madison Township, Lenawee County, Michigan
described as:
A strip of land 165 feet wide off the West side of the
following described premises: The E 1/2 of the SE 1/4 of
Section 12. The E 1/2 of the NE 1/4 and the NE 1/4 of the SE
1/4 of Section 13, being all in T7S, R3E, excepting therefrom
a parcel of land in the E 1/2 of the SE 1/4 of Section 12,
T7S, R3E, beginning at the Northwest corner of said E 1/2 of
the SE 1/4 of Section 12, running thence East 4 rods, thence
South 6 rods, thence West 4 rods, thence North 6 rods to the
place of beginning.
LIVINGSTON COUNTY
Certain land in Cohoctah Township, Livingston County, Michigan
described as:
Parcel 1
The East 390 feet of the East 50 rods of the SW 1/4 of Section
30, T4N, R4E.
Parcel 2
A parcel of land in the NW 1/4 of Section 31, T4N, R4E,
described as follows: To find the place of beginning of this
description commence at the N 1/4 post of said section; run
thence N 89 degrees 13' 06" W along the North line of said
section, 330 feet to the place of beginning of this
description; running thence S 00 degrees 52' 49" W, 2167.87
feet; thence N 88 degrees 59' 49" W, 60 feet;
23
thence N 00 degrees 52' 49" E, 2167.66 feet to the North line
of said section; thence S 89 degrees 13' 06" E along said
North line of said section, 60 feet to the place of beginning.
MACOMB COUNTY
Certain land in Macomb Township, Macomb County, Michigan
described as:
A parcel of land commencing on the West line of the E 1/2 of
the NW 1/4 of fractional Section 6, 20 chains South of the NW
corner of said E 1/2 of the NW 1/4 of Section 6; thence South
on said West line and the East line of A. Henry Kotner's Hayes
Road Subdivision #15, according to the recorded plat thereof,
as recorded in Liber 24 of Plats, on page 7, 24.36 chains to
the East and West 1/4 line of said Section 6; thence East on
said East and West 1/4 line 8.93 chains; thence North parallel
with the said West line of the E 1/2 of the NW 1/4 of Section
6, 24.36 chains; thence West 8.93 chains to the place of
beginning, all in T3N, R13E.
MANISTEE COUNTY
Certain land in Manistee Township, Manistee County, Michigan
described as:
A parcel of land in the SW 1/4 of Section 20, T22N, R16W,
described as follows: To find the place of beginning of this
description, commence at the Southwest corner of said section;
run thence East along the South line of said section 832.2
feet to the place of beginning of this description; thence
continuing East along said South line of said section 132
feet; thence North 198 feet; thence West 132 feet; thence
South 198 feet to the place of beginning, excepting therefrom
the South 2 rods thereof which was conveyed to Manistee
Township for highway purposes by a Quitclaim Deed dated June
13, 1919 and recorded July 11, 1919 in Liber 88 of Deeds on
page 638 of Manistee County Records.
MASON COUNTY
Certain land in Riverton Township, Mason County, Michigan
described as:
Parcel 1
The South 10 acres of the West 20 acres of the S 1/2 of the NE
1/4 of Section 22, T17N, R17W.
Parcel 2
A parcel of land containing 4 acres of the West side of
highway, said parcel of land being described as commencing 16
rods South of the Northwest corner of the NW 1/4 of the SW 1/4
of Section 22, T17N, R17W, running thence South 64 rods,
thence NE'ly and N'ly and NW'ly along the W'ly line of said
highway to the place of beginning, together with any and all
right, title, and interest of Howard C. Wicklund and Katherine
E. Wicklund in and to that portion of the hereinbefore
mentioned highway lying adjacent to the E'ly line of said
above described land.
24
MECOSTA COUNTY
Certain land in Wheatland Township, Mecosta County, Michigan
described as:
A parcel of land in the SW 1/4 of the SW 1/4 of Section 16,
T14N, R7W, described as beginning at the Southwest corner of
said section; thence East along the South line of Section 133
feet; thence North parallel to the West section line 133 feet;
thence West 133 feet to the West line of said Section; thence
South 133 feet to the place of beginning.
MIDLAND COUNTY
Certain land in Ingersoll Township, Midland County, Michigan
described as:
The West 200 feet of the W 1/2 of the NE 1/4 of Section 4,
T13N, R2E.
MISSAUKEE COUNTY
Certain land in Norwich Township, Missaukee County, Michigan
described as:
A parcel of land in the NW 1/4 of the NW 1/4 of Section 16,
T24N, R6W, described as follows: Commencing at the Northwest
corner of said section, running thence N 89 degrees 01' 45" E
along the North line of said section 233.00 feet; thence South
233.00 feet; thence S 89 degrees 01' 45" W, 233.00 feet to the
West line of said section; thence North along said West line
of said section 233.00 feet to the place of beginning.
(Bearings are based on the West line of Section 16, T24N, R6W,
between the Southwest and Northwest corners of said section
assumed as North.)
MONROE COUNTY
Certain land in Whiteford Township, Monroe County, Michigan
described as:
A parcel of land in the SW1/4 of Section 20, T8S, R6E,
described as follows: To find the place of beginning of this
description commence at the S 1/4 post of said section; run
thence West along the South line of said section 1269.89 feet
to the place of beginning of this description; thence
continuing West along said South line of said section 100
feet; thence N 00 degrees 50' 35" E, 250 feet; thence East 100
feet; thence S 00 degrees 50' 35" W parallel with and 16.5
feet distant W'ly of as measured perpendicular to the West 1/8
line of said section, as occupied, a distance of 250 feet to
the place of beginning.
MONTCALM COUNTY
Certain land in Crystal Township, Montcalm County, Michigan
described as:
The N 1/2 of the S 1/2 of the SE 1/4 of Section 35, T10N, R5W.
25
MONTMORENCY COUNTY
Certain land in the Village of Hillman, Montmorency County,
Michigan described as:
Lot 14 of Hillman Industrial Park, being a subdivision in the
South 1/2 of the Northwest 1/4 of Section 24, T31N, R4E,
according to the plat thereof recorded in Liber 4 of Plats on
Pages 32-34, Montmorency County Records.
MUSKEGON COUNTY
Certain land in Casnovia Township, Muskegon County, Michigan
described as:
The West 433 feet of the North 180 feet of the South 425 feet
of the SW 1/4 of Section 3, T10N, R13W.
NEWAYGO COUNTY
Certain land in Ashland Township, Newaygo County, Michigan
described as:
The West 250 feet of the NE 1/4 of Section 23, T11N, R13W.
OAKLAND COUNTY
Certain land in Wixcom City, Oakland County, Michigan
described as:
The E 75 feet of the N 160 feet of the N 330 feet of the W
526.84 feet of the NW 1/4 of the NW 1/4 of Section 8, T1N,
R8E, more particularly described as follows: Commence at the
NW corner of said Section 8, thence N 87 degrees 14' 29" E
along the North line of said Section 8 a distance of 451.84
feet to the place of beginning for this description; thence
continuing N 87 degrees 14' 29" E along said North section
line a distance of 75.0 feet to the East line of the West
526.84 feet of the NW 1/4 of the NW 1/4 of said Section 8;
thence S 02 degrees 37' 09" E along said East line a distance
of 160.0 feet; thence S 87 degrees 14' 29" W a distance of
75.0 feet; thence N 02 degrees 37' 09" W a distance of 160.0
feet to the place of beginning.
OCEANA COUNTY
Certain land in Crystal Township, Oceana County, Michigan
described as:
The East 290 feet of the SE 1/4 of the NW 1/4 and the East 290
feet of the NE 1/4 of the SW 1/4, all in Section 20, T16N,
R16W.
OGEMAW COUNTY
Certain land in West Branch Township, Ogemaw County, Michigan
described as:
The South 660 feet of the East 660 feet of the NE 1/4 of the
NE 1/4 of Section 33, T22N, R2E.
26
OSCEOLA COUNTY
Certain land in Hersey Township, Osceola County, Michigan
described as:
A parcel of land in the North 1/2 of the Northeast 1/4 of
Section 13, T17N, R9W, described as commencing at the
Northeast corner of said Section; thence West along the North
Section line 999 feet to the point of beginning of this
description; thence S 01 degrees 54' 20" E 1327.12 feet to the
North 1/8 line; thence S 89 degrees 17' 05" W along the North
1/8 line 330.89 feet; thence N 01 degrees 54' 20" W 1331.26
feet to the North Section line; thence East along the North
Section line 331 feet to the point of beginning.
OSCODA COUNTY
Certain land in Comins Township, Oscoda County, Michigan
described as:
The East 400 feet of the South 580 feet of the W 1/2 of the SW
1/4 of Section 15, T27N, R3E.
OTSEGO COUNTY
Certain land in Corwith Township, Otsego County, Michigan
described as:
Part of the NW 1/4 of the NE 1/4 of Section 28, T32N, R3W,
described as: Beginning at the N 1/4 corner of said section;
running thence S 89 degrees 04' 06" E along the North line of
said section, 330.00 feet; thence S 00 degrees 28' 43" E,
400.00 feet; thence N 89 degrees 04' 06" W, 330.00 feet to the
North and South 1/4 line of said section; thence N 00 degrees
28' 43" W along the said North and South 1/4 line of said
section, 400.00 feet to the point of beginning; subject to the
use of the N'ly 33.00 feet thereof for highway purposes.
OTTAWA COUNTY
Certain land in Robinson Township, Ottawa County, Michigan
described as:
The North 660 feet of the West 660 feet of the NE 1/4 of the
NW 1/4 of Section 26, T7N, R15W.
PRESQUE ISLE COUNTY
Certain land in Belknap and Pulawski Townships, Presque Isle
County, Michigan described as:
Part of the South half of the Northeast quarter, Section 24,
T34N, R5E, and part of the Northwest quarter, Section 19,
T34N, R6E, more fully described as: Commencing at the East 1/4
corner of said Section 24; thence N 00 degrees15'47" E, 507.42
feet, along the East line of said Section 24 to the point of
beginning; thence S 88 degrees15'36" W, 400.00 feet, parallel
with the North 1/8 line of said Section 24; thence N 00
degrees15'47" E, 800.00 feet, parallel with said East line of
Section 24; thence N 88 degrees15'36"E, 800.00 feet, along
said North 1/8 line of Section 24 and said line extended;
thence S 00 degrees15'47" W, 800.00 feet, parallel with said
East line of Section 24; thence
27
S 88 degrees15'36" W, 400.00 feet, parallel with said North
1/8 line of Section 24 to the point of beginning.
Together with a 33 foot easement along the West 33 feet of the
Northwest quarter lying North of the North 1/8 line of Section
24, Belknap Township, extended, in Section 19, T34N, R6E.
ROSCOMMON COUNTY
Certain land in Gerrish Township, Roscommon County, Michigan
described as:
A parcel of land in the NW 1/4 of Section 19, T24N, R3W,
described as follows: To find the place of beginning of this
description commence at the Northwest corner of said section,
run thence East along the North line of said section 1,163.2
feet to the place of beginning of this description (said point
also being the place of intersection of the West 1/8 line of
said section with the North line of said section), thence S 01
degrees 01' E along said West 1/8 line 132 feet, thence West
parallel with the North line of said section 132 feet, thence
N 01 degrees 01' W parallel with said West 1/8 line of said
section 132 feet to the North line of said section, thence
East along the North line of said section 132 feet to the
place of beginning.
SAGINAW COUNTY
Certain land in Chapin Township, Saginaw County, Michigan
described as:
A parcel of land in the SW 1/4 of Section 13, T9N, R1E,
described as follows: To find the place of beginning of this
description commence at the Southwest corner of said section;
run thence North along the West line of said section 1581.4
feet to the place of beginning of this description; thence
continuing North along said West line of said section 230 feet
to the center line of a creek; thence S 70 degrees 07' 00" E
along said center line of said creek 196.78 feet; thence South
163.13 feet; thence West 185 feet to the West line of said
section and the place of beginning.
SANILAC COUNTY
Certain easement rights located across land in Minden
Township, Sanilac County, Michigan described as:
The Southeast 1/4 of the Southeast 1/4 of Section 1, T14N,
R14E, excepting therefrom the South 83 feet of the East 83
feet thereof.
SHIAWASSEE COUNTY
Certain land in Burns Township, Shiawassee County, Michigan
described as:
The South 330 feet of the E 1/2 of the NE 1/4 of Section 36,
T5N, R4E.
28
ST. CLAIR COUNTY
Certain land in Ira Township, St. Clair County, Michigan
described as:
The N 1/2 of the NW 1/4 of the NE 1/4 of Section 6, T3N, R15E.
ST. JOSEPH COUNTY
Certain land in Mendon Township, St. Joseph County, Michigan
described as:
The North 660 feet of the West 660 feet of the NW 1/4 of SW
1/4, Section 35, T5S, R10W.
TUSCOLA COUNTY
Certain land in Millington Township, Tuscola County, Michigan
described as:
A strip of land 280 feet wide across the East 96 rods of the
South 20 rods of the N 1/2 of the SE 1/4 of Section 34, T10N,
R8E, more particularly described as commencing at the
Northeast corner of Section 3, T9N, R8E, thence S 89 degrees
55' 35" W along the South line of said Section 34 a distance
of 329.65 feet, thence N 18 degrees 11' 50" W a distance of
1398.67 feet to the South 1/8 line of said Section 34 and the
place of beginning for this description; thence continuing N
18 degrees 11' 50" W a distance of 349.91 feet; thence N 89
degrees 57' 01" W a distance of 294.80 feet; thence S 18
degrees 11' 50" E a distance of 350.04 feet to the South 1/8
line of said Section 34; thence S 89 degrees 58' 29" E along
the South 1/8 line of said section a distance of 294.76 feet
to the place of beginning.
VAN BUREN COUNTY
Certain land in Covert Township, Van Buren County, Michigan
described as:
All that part of the West 20 acres of the N 1/2 of the NE
fractional 1/4 of Section 1, T2S, R17W, except the West 17
rods of the North 80 rods, being more particularly described
as follows: To find the place of beginning of this description
commence at the N 1/4 post of said section; run thence N 89
degrees 29' 20" E along the North line of said section 280.5
feet to the place of beginning of this description; thence
continuing N 89 degrees 29' 20" E along said North line of
said section 288.29 feet; thence S 00 degrees 44' 00" E,
1531.92 feet; thence S 89 degrees 33' 30" W, 568.79 feet to
the North and South 1/4 line of said section; thence N 00
degrees 44' 00" W along said North and South 1/4 line of said
section 211.4 feet; thence N 89 degrees 29' 20" E, 280.5 feet;
thence N 00 degrees 44' 00" W, 1320 feet to the North line of
said section and the place of beginning.
WASHTENAW COUNTY
Certain land in Manchester Township, Washtenaw County,
Michigan described as:
A parcel of land in the NE 1/4 of the NW 1/4 of Section 1,
T4S, R3E, described as follows: To find the place of beginning
of this description commence at the Northwest corner of said
section; run thence East along the North line of said section
1355.07 feet to the West 1/8 line of said section;
29
thence S 00 degrees 22' 20" E along said West 1/8 line of said
section 927.66 feet to the place of beginning of this
description; thence continuing S 00 degrees 22' 20" E along
said West 1/8 line of said section 660 feet to the North 1/8
line of said section; thence N 86 degrees 36' 57" E along said
North 1/8 line of said section 660.91 feet; thence N 00
degrees22' 20" W, 660 feet; thence S 86 degrees 36' 57" W,
660.91 feet to the place of beginning.
WAYNE COUNTY
Certain land in Livonia City, Wayne County, Michigan described
as:
Commencing at the Southeast corner of Section 6, T1S, R9E;
thence North along the East line of Section 6 a distance of
253 feet to the point of beginning; thence continuing North
along the East line of Section 6 a distance of 50 feet; thence
Westerly parallel to the South line of Section 6, a distance
of 215 feet; thence Southerly parallel to the East line of
Section 6 a distance of 50 feet; thence easterly parallel with
the South line of Section 6 a distance of 215 feet to the
point of beginning.
WEXFORD COUNTY
Certain land in Selma Township, Wexford County, Michigan
described as:
A parcel of land in the NW 1/4 of Section 7, T22N, R10W,
described as beginning on the North line of said section at a
point 200 feet East of the West line of said section, running
thence East along said North section line 450 feet, thence
South parallel with said West section line 350 feet, thence
West parallel with said North section line 450 feet, thence
North parallel with said West section line 350 feet to the
place of beginning.
SECTION 14. The Company is a transmitting utility under
Section 9401(5) of the Michigan Uniform Commercial Code (M.C.L. 440.9401(5)) as
defined in M.C.L. 440.9105(n).
IN WITNESS WHEREOF, said Consumers Energy Company has caused
this Supplemental Indenture to be executed in its corporate name by its Chairman
of the Board, President, a Vice President or its Treasurer and its corporate
seal to be hereunto affixed and to be attested by its Secretary or an Assistant
Secretary, and said JPMorgan Chase Bank, as Trustee as aforesaid, to evidence
its acceptance hereof, has caused this Supplemental Indenture to be executed in
its corporate name by a Vice President and its corporate seal to be hereunto
affixed and to be attested by a Trust Officer, in several counterparts, all as
of the day and year first above written.
30
CONSUMERS ENERGY COMPANY
(SEAL) By /s/ Laura L. Mountcastle
-------------------------------------
Laura L. Mountcastle
Attest: Vice President and Treasurer
/s/ Jennifer Evans
- ---------------------
Assistant Secretary
Signed, sealed and delivered
by CONSUMERS ENERGY COMPANY
in the presence of
/s/ Kimberly C. Wilson
- ----------------------------
Kimberly C. Wilson
/s/ Sammie Dalton
- ----------------------------
Sammie B. Dalton
STATE OF MICHIGAN )
ss.
COUNTY OF JACKSON )
The foregoing instrument was acknowledged before me this 22nd
day of March, 2002, by Laura L. Mountcastle, Vice President and Treasurer of
CONSUMERS ENERGY COMPANY, a Michigan corporation, on behalf of the corporation.
/s/ Margaret Hillman
----------------------------------------
Margaret Hillman, Notary Public
[Seal] Jackson County, Michigan
My Commission Expires: June 14, 2004
S-1
JPMORGAN CHASE BANK, AS TRUSTEE
(SEAL) By /s/ L. O' Brien
-----------------------------------
L.O'Brien
Attest: Vice President
/s/ James D. Heaney
- ----------------------------
James D. Heaney
Trust Officer
/s/ William G. Keenan
- ----------------------------
Willam G. Keenan
Assistant Vice President
STATE OF NEW YORK )
ss.
COUNTY OF NEW YORK )
The foregoing instrument was acknowledged before me this 22nd
day of March, 2002, by , a Vice President
of JPMORGAN CHASE BANK, a New York corporation, on behalf of the corporation.
/s/ Emily Fayan
---------------------------------------
Emily Fayan Notary Public
[Seal] New York County, New York
My Commission Expires:
Prepared by: When recorded, return to:
Kimberly C. Wilson Consumers Energy Company
212 West Michigan Avenue General Services Real Estate Department
Jackson, MI 49201 Attn: Nancy P. Fisher, P-21-410B
1945 W. Parnall Road
Jackson, MI 49201
S-2
4(j)(i)
AMENDMENT NO. 2 TO $450,000,000 CREDIT AGREEMENT
This AMENDMENT NO. 2, dated as of November 26, 2001, among CMS Energy
Corporation (the "BORROWER"), the lenders parties thereto as "lenders" (the
"LENDERS"), Barclays Bank PLC, as administrative gent (the "ADMINISTRATIVE
AGENT"), collateral agent (the "COLLATERAL AGENT") and issuing bank (the
"ISSUING BANK"), Bank of America, N.A., and The Chase Manhattan Bank, as
co-syndication agents (the "CO-SYNDICATION AGENTS"), and Citibank, N.A., and
Union Bank of California, as documentation agents (the "DOCUMENTATION AGENTS").
PRELIMINARY STATEMENTS:
(1) The Borrower, the Lenders, the Administrative Agent, the Collateral
Agent, the Co-Syndication Agents and the Documentation Agents have entered into
a $450,000,000 Credit Agreement, dated as of June 18, 2001 (as amended, the
"CREDIT AGREEMENT"; the terms defined therein being used herein as therein
defined unless otherwise defined herein).
(2) The parties to the Credit Agreement have agreed to terminate the
Letter of Credit facility and, consequently, to amend the Credit Agreement as
hereinafter set forth.
1. AMENDMENTS TO THE CREDIT AGREEMENT. Subject to the conditions set
forth in paragraph 2 hereof, clause (c) of Section 4.02 of the Credit Agreement
is, effective as of the date hereof, hereby amended by deleting the reference to
"$100,000,000" therein and substituting "0" therefor.
2. CONDITIONS TO EFFECTIVENESS. The amendments contemplated by this
Agreement shall become effective upon the execution and delivery of counterparts
hereof by the Required Lenders, the Administrative Agent, the Collateral Agent,
the Issuing Bank and the Borrower and the fulfillment of the following
conditions:
(a) All representations and warranties contained in this
Agreement and in the Credit Agreement and the other Loan Documents, in
each case as amended hereby, shall be true and correct in all material
respects.
(b) No event shall have occurred and be continuing which
constitutes a Default or an Event of Default.
3. REFERENCE TO AND EFFECT ON THE LOAN DOCUMENTS. On and after the
effective date of this Agreement, each reference in the Credit Agreement to
"this Agreement", "hereunder", "hereof" or words of like import referring to the
Credit Agreement shall mean and be a reference to the Credit Agreement, as
amended by this Agreement, and each reference in the other Loan Documents to
"the Credit Agreement", "thereunder", "thereof" or words of like import
referring to the Credit Agreement shall mean and be a reference to the Credit
Agreement, as amended by this Agreement. Except as specifically amended above,
the Credit Agreement and all other Loan Documents are and shall continue to be
in full force and effect and are hereby in all respects ratified and confirmed.
Without limiting the generality of the foregoing, the Cash Collateral Agreement
and all of the Collateral described therein do and shall continue to secure the
payment of all obligations of Borrower described therein after giving effect to
this Agreement.
4. MISCELLANEOUS.
(a) The Borrower reaffirms and restates the representations
and warranties set forth in the Credit Agreement and the other Loan
Documents, and all such representations and
warranties shall be true and correct on the date hereof with the same
force and effect as if made on such date. The Borrower represents and
warrants (which representations and warranties shall survive the
execution and delivery hereof) that:
(i) It is a duly organized, validly existing
corporation in good standing under the laws of its
organization and has the corporate power and authority to
execute, deliver and carry out the terms and provisions of
this Agreement and has taken or caused to be taken all
necessary corporate action to authorize the execution,
delivery and performance of this Agreement;
(ii) No consent of any other person, including,
without limitation, shareholders or creditors of the Borrower,
and no action of, or filing with any governmental or public
body or authority, is required to authorize, or is otherwise
required in connection with the execution, delivery and
performance of this Agreement;
(iii) This Agreement has been duly executed and
delivered by a duly authorized officer on behalf of the
Borrower, and constitutes its legal, valid and binding
obligations, enforceable in accordance with its terms, except
as enforcement thereof may be subject to the effect of any
applicable (i) bankruptcy, insolvency, reorganization,
moratorium or similar law affecting creditors' rights
generally and (ii) general principles of equity (regardless of
whether enforcement is sought in a proceeding in equity or at
law); and
(iv) The execution, delivery and performance of this
Agreement will not violate any law, statue or regulation
applicable to the Borrower or any order or decree of any court
or governmental instrumentality applicable to it, or conflict
with, or result in the breach of, or constitute a default
under, any of its contractual obligations.
(b) Nothing herein contained shall constitute a waiver or be
deemed to be a waiver, of any existing Defaults or Events of Default,
and the Lenders and the Agent reserve all rights and remedies granted
to them by the Credit Agreement, the other Loan Documents, by law and
otherwise.
(c) This Agreement may be executed in any number of separate
counterparts, each of which shall collectively and separately
constitute one agreement.
(d) This Agreement shall be governed by, and construed in
accordance with, the laws of the State of New York.
[signature pages follow]
2
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
CMS ENERGY CORPORATION
By: /s/ Alan M. Wright
----------------------------------------
Name: Alan M Wright
Title: Executive Vice President, Chief Financial
Officer and Chief Administrative Officer
BARCLAYS BANK PLC, individually as a Lender and as
Administrative Agent, Collateral Agent and Issuing Bank
By: /s/ Sydney G. Dennis
------------------------
Name: Sydney G. Dennis
Title: Director
5
EXHIBIT 4(j)(ii)
AMENDMENT NO. 3
TO
$450,000,000 CREDIT AGREEMENT
This AMENDMENT NO. 3, dated as of February 28, 2002 (this "AMENDMENT"),
is by and among CMS Energy Corporation (the "BORROWER"), the financial
institutions parties thereto as "lenders" (the "LENDERS"), Barclays Bank PLC, as
administrative agent (in such capacity, the "ADMINISTRATIVE AGENT"), and as
collateral agent (in such capacity, the "COLLATERAL AGENT"), Bank of America,
N.A. and The Chase Manhattan Bank, as co-syndication agents (the "CO-SYNDICATION
AGENTS"), and Citibank, N.A. and Union Bank of California, as documentation
agents (the "DOCUMENTATION AGENTS").
WHEREAS, the Borrower, the Lenders, the Administrative Agent, the
Collateral Agent, the Co-Syndication Agents and the Documentation Agents have
entered into a $450,000,000 Credit Agreement, dated as of June 18, 2001 (as
amended, restated, supplemented or otherwise modified from time to time, the
"CREDIT AGREEMENT"; capitalized terms not defined herein are used as defined in
the Credit Agreement);
WHEREAS, the Borrower acknowledges that (a) the ratio of Consolidated
Debt to Consolidated EBITDA for the four-fiscal-quarter period ending on
December 31, 2001 is currently estimated to have been approximately 5.42 to 1,
in breach of the covenant set forth in Section 8.01(i) of the Credit Agreement,
and (b) pursuant to Section 9.01(c) of the Credit Agreement, the breach of this
covenant constitutes an Event of Default (the "Identified Event of Default")
under the Credit Agreement;
WHEREAS, the Borrower acknowledges that (a) with respect to the
reporting period of March 31, 2002, the ratio of (i) the sum of (A) Cash
Dividend Income for the four-fiscal-quarter period ending on December 31, 2001,
plus (B) 25% of the amount of Equity Distributions received by the Borrower
during such period, plus (C) all amounts received by the Borrower from its
Subsidiaries and Affiliates during such period constituting reimbursement of
interest expense paid by the Borrower to (ii) interest expense accrued by the
Borrower during such period, is currently estimated to have been approximately
1.18 to 1, (b) such ratio would, with the lapse of time, constitute a breach of
the covenant set forth in Section 8.01(j) of the Credit Agreement, and (c)
pursuant to Section 9.01(c) of the Credit Agreement, the breach of this covenant
would constitute an Event of Default (the "Identified Default") under the Credit
Agreement; and
WHEREAS, the Borrower, the Lenders, the Administrative Agent, the
Collateral Agent, the Co-Syndication Agents and the Documentation Agents have
agreed to amend the Credit Agreement as hereinafter set forth.
NOW, THEREFORE, in consideration of the premises set forth above, and
for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the Borrower, the Lenders, the Administrative Agent,
the Collateral Agent, the Co-Syndication Agents and the Documentation Agents
agree as follows:
1. AMENDMENTS TO THE CREDIT AGREEMENT. Subject to the conditions set
forth in paragraph 2 hereof, the Credit Agreement is, effective as of the date
hereof, hereby amended as follows: (a) Section 8.01(i) of the Credit Agreement
is amended by deleting the table appearing at the end thereof and substituting
therefor:
PERIOD RATIO
----------------- -----------
Closing Date through September 30, 2001 5.25 to 1
October 1, 2001 through September 30, 2002 5.50 to 1
October 1, 2002 through March 31, 2003 4.75 to 1
April 1, 2003 and thereafter 4.50 to 1
(b) Section 8.01(j) of the Credit Agreement is amended by deleting such
Section in its entirety and substituting therefor:
"(j) Cash Dividend Coverage Ratio. The Borrower shall
maintain, as of the last day of each Measurement Quarter, a
minimum ratio of (i) the sum of (A) Cash Dividend Income for
the four-fiscal-quarter period ending on such day (or, with
respect to each Measurement Quarter ending in 2002, for the
period from January 1, 2002 through and including the last day
of such Measurement Quarter), plus (B) 25% of the amount of
Equity Distributions received by the Borrower during such
period but in no event in excess of $10,000,000, plus (C) all
amounts received by the Borrower from its Subsidiaries and
Affiliates during such period constituting reimbursement of
interest expense (including commitment, guaranty and letter of
credit fees) paid by the Borrower on behalf of any such
Subsidiary or Affiliate to (ii) interest expense (including
commitment, guaranty and letter of credit fees) accrued by the
Borrower in respect of all Debt during such period of not less
than : (a) for each such period ending on March 31, 2002, June
30, 2002 and September 30, 2002, 1.40 to 1, (b) for the period
ending on December 31, 2002, 1.50 to 1, (c) for the period
ending on March 31, 2003, 1.75 to 1, and (d) for each such
period ending on June 30, 2003 and thereafter, 1.90 to 1;
provided, that the Borrower shall be deemed not to be in
breach of the foregoing covenant if, during the Measurement
Quarter, it has permanently reduced the Commitments and the
principal amount outstanding under this Agreement and the
Promissory Notes such that the amount determined pursuant to
clause (ii) above, when recalculated on a pro forma basis
assuming that the amount of such reduced Commitments and
principal amount outstanding under this Agreement and the
Promissory Notes were in effect at all times during such
four-fiscal-quarter period, would result in the Borrower being
in compliance with such ratio; and provided further, that
until the Borrower so reduces such Commitments and principal
amount outstanding under this Agreement and the
2
Promissory Notes and/or increases Cash Dividend Income during
such Measurement Quarter, the Borrower may not request any
additional Extensions of Credit (other than Conversions)."
2. CONDITIONS TO EFFECTIVENESS. The amendments contemplated by this
Amendment shall become effective upon the execution and delivery to the
Administrative Agent of counterparts hereof by the Required Lenders, the
Administrative Agent and the Borrower and the fulfillment of the following
conditions:
(a) All representations and warranties contained in this Amendment
and in the Credit Agreement and the other Loan Documents, in each case
as amended hereby, shall be true and correct in all material respects.
(b) With the exception of the Identified Event of Default and the
Identified Default, no event shall have occurred and be continuing
which constitutes an Event of Default or a Default.
3. REFERENCE TO AND EFFECT ON THE LOAN DOCUMENTS. On and after the
effective date of this Amendment, each reference in the Credit Agreement to
"this Agreement", "hereunder", "hereof" or words of like import referring to the
Credit Agreement shall mean and be a reference to the Credit Agreement, as
amended by this Amendment, and each reference in the other Loan Documents to
"the Credit Agreement", "thereunder", "thereof" or words of like import
referring to the Credit Agreement shall mean and be a reference to the Credit
Agreement, as amended by this Amendment. Except as specifically amended above,
the Credit Agreement and all other Loan Documents are and shall continue to be
in full force and effect and are hereby in all respects ratified and confirmed.
Without limiting the generality of the foregoing, the Cash Collateral Agreement
and all of the Collateral described therein do and shall continue to secure the
payment of all obligations of Borrower described therein after giving effect to
this Amendment.
4. MISCELLANEOUS.
(a) Reference to and Effect on the Credit Agreement. The Borrower
reaffirms and restates the representations and warranties set forth in
the Credit Agreement and the other Loan Documents, and all such
representations and warranties shall be true and correct on the date
hereof with the same force and effect as if made on such date. The
Borrower represents and warrants (which representations and warranties
shall survive the execution and delivery hereof) that:
(i) It is a duly organized, validly existing corporation in good
standing under the laws of its organization and has the corporate
power and authority to execute, deliver and carry out the terms and
provisions of this Amendment and has taken or caused to be taken all
necessary corporate action to authorize the execution, delivery and
performance of this Amendment;
(ii) No consent of any other person, including, without
limitation, shareholders or creditors of the Borrower, and no action
of, or filing with any governmental or public body or authority, is
required to authorize, or is otherwise
3
required in connection with the execution, delivery and performance
of this Amendment;
(iii) This Amendment has been duly executed and delivered by a
duly authorized officer on behalf of the Borrower, and constitutes
its legal, valid and binding obligations, enforceable in accordance
with its terms, except as enforcement thereof may be subject to the
effect of any applicable (i) bankruptcy, insolvency, reorganization,
moratorium or similar law affecting creditors' rights generally and
(ii) general principles of equity (regardless of whether enforcement
is sought in a proceeding in equity or at law); and
(iv) The execution, delivery and performance of this Amendment
will not violate any law, statue or regulation applicable to the
Borrower or any order or decree of any court or governmental
instrumentality applicable to it, or conflict with, or result in the
breach of, or constitute a default under, any of its contractual
obligations.
(b) No Waiver. Nothing herein contained shall constitute a waiver or
be deemed to be a waiver, of any existing Defaults or Events of
Default, and the Lenders and the Agent reserve all rights and remedies
granted to them by the Credit Agreement, by the other Loan Documents,
by law and otherwise.
(c) Costs and Expenses. The Borrower agrees to pay all costs, fees,
and out-of-pocket expenses (including attorneys' fees) incurred by the
Administrative Agent in connection with the preparation, execution and
enforcement of this Amendment.
(d) Headings. Section headings in this Amendment are included herein
for convenience of reference only and shall not constitute a part of
this Amendment for any other purpose.
(e) Counterparts. This Amendment may be executed in any number of
separate counterparts, each of which shall collectively and separately
constitute one agreement. Delivery of an executed counterpart of a
signature page to this Amendment by facsimile shall be effective as
delivery of a manually executed counterpart of this Amendment.
(f) GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK
(INCLUDING SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAWS OF THE STATE
OF NEW YORK, BUT OTHERWISE WITHOUT REGARD TO CONFLICTS OF LAW
PRINCIPLES).
[signature pages follow]
4
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
CMS ENERGY CORPORATION
By: /s/ Alan M. Wright
----------------------------------------
Name: Alan M Wright
Title: Executive Vice President, Chief Financial
Officer and Chief Administrative Officer
BARCLAYS BANK PLC, individually as a Lender and as
Administrative Agent, Collateral Agent and Issuing Bank
By: /s/ Sydney G. Dennis
------------------------
Name: Sydney G. Dennis
Title: Director
5
EXHIBIT 4(k)(i)
AMENDMENT NO. 2 TO $300,000,000 CREDIT AGREEMENT
This AMENDMENT NO. 2, dated as of November 26, 2001, among CMS Energy
Corporation (the "BORROWER"), the lenders parties thereto as "lenders" (the
"LENDERS"), Barclays Bank PLC, as administrative agent (the "ADMINISTRATIVE
AGENT"), collateral agent (the "COLLATERAL AGENT") and issuing bank (the
"ISSUING BANK"), Bank of America, N.A., and The Chase Manhattan Bank, as
co-syndication agents (the "CO-SYNDICATION AGENTS"), and Citibank, N.A., and
Union Bank of California, as documentation agents (the "DOCUMENTATION AGENTS").
PRELIMINARY STATEMENTS:
(1) The Borrower, the Lenders, the Administrative Agent, the Collateral
Agent, the Co-Syndication Agents and the Documentation Agents have entered into
a Credit Agreement, dated as of June 18, 2001 (as amended, the "CREDIT
AGREEMENT"; the terms defined therein being used herein as therein defined
unless otherwise defined herein).
(2) The parties to the Credit Agreement have agreed to amend the Credit
Agreement as hereinafter set forth.
1. AMENDMENTS TO THE CREDIT AGREEMENT. Subject to the conditions set
forth in paragraph 2 hereof, the Credit Agreement is, effective as of the date
hereof, hereby amended as follows:
(a) The following new terms are added to Section 1.01 in the
appropriate alphabetical positions:
"ALTERNATIVE CURRENCY" means Canadian Dollars, Euros, Sterling
or Yen.
"CANADIAN DOLLARS" means lawful money of Canada.
"EURO" means the currency adopted as legal tender by the
European Community, the European Coal and Steel Community, the European
Atomic Energy Community and the European Monetary Union.
"DOLLAR EQUIVALENT" means, as to Dollars, the amount thereof,
and as to any Alternative Currency, the Dollar equivalent of such
Alternative Currency as determined by the Administrative Agent in
accordance with the provisions of Section 4.07 of this Agreement.
"STERLING" means lawful money of the United Kingdom.
"YEN" means lawful money of Japan.
(b) Section 2.04 is hereby amended by adding the phrase "Dollar
Equivalent of" before the phrase "the aggregate LC Outstandings" in the fourth
line thereof.
(c) Section 4.02 is hereby amended in full to read as follows:
"(a) Each Letter of Credit shall be issued (or stated
maturity thereof extended or terms thereof modified or
amended) on not less than three (3) Business Days' prior
written notice thereof to the Administrative Agent (which
shall promptly distribute copies thereof to the Lenders) and
the relevant Issuing Bank and shall be denominated in Dollars
or in an Alternative Currency. Each such notice (a "Request
for Issuance") shall specify (i) the date (which shall be a
Business Day) of issuance of such Letter of Credit (or the
date of effectiveness of such extension, modification or
amendment) and the stated expiry date thereof (which shall be
no later than the date that is five (5) Business Days prior to
the Termination Date), subject to the other terms and
conditions contained herein (including the satisfaction of the
conditions precedent set forth in Section 6.02), (ii) the
proposed stated amount of such Letter of Credit (which stated
amount shall not be less than $250,000 or the Dollar
Equivalent thereof in an Alternative Currency, as the case may
be) and whether such Letter of Credit is denominated in
Dollars, Canadian Dollars, Euros, Sterling or Yen and (iii)
such other information as shall demonstrate compliance of such
Letter of Credit with the requirements specified therefor in
this Agreement and the relevant Issuing Bank Agreement. Each
Request for Issuance shall be irrevocable unless modified or
rescinded by the Borrower not less than two (2) days prior to
the proposed date of issuance (or effectiveness) specified
therein. Not later than 12:00 noon on the proposed date of
issuance (or effectiveness) specified in such Request for
Issuance, and upon fulfillment of the applicable conditions
precedent and the other requirements set forth herein in the
relevant Issuing Bank Agreement, such Issuing Bank shall issue
(or extend, amend or modify) such Letter of Credit and provide
notice and a copy thereof to the Administrative Agent, which
shall promptly furnish copies thereof to the Lenders.
(b) Each Lender severally agrees with such Issuing
Bank to participate in the Extension of Credit resulting from
the issuance (or extension modification or amendment) of such
Letter of Credit, in the manner and the amount provided in
Section 4.04(b), and the issuance of such Letter of Credit
shall be deemed to be a confirmation by such Issuing Bank and
each Lender of such participation in such amount.
(c) Each Issuing Bank agrees on the terms and
conditions herein set forth, to issue Letters of Credit for
the account of the Borrower from time to time in accordance
with Section 4.02(a); provided, however, that at the time of
such issuance of any Letter of Credit, after giving effect to
such issuance, (i) the aggregate Dollar Equivalent of the
stated amount of all Letters of Credit outstanding shall not
exceed $250,000,000; (ii) the aggregate Dollar Equivalent of
the stated amount of all Letters of Credit outstanding (A) in
Canadian Dollars shall not exceed $35,000,000, (B) in Euros
shall not exceed $35,000,000, (C) in Sterling shall not exceed
$15,000,000 and (D) in Yen shall not exceed $15,000,000; and
(iii) the sum of the aggregate principal amount of the Loans
and the aggregate Dollar Equivalent of the LC Outstandings
shall not exceed the Commitments."
(d) Clause (a) of Section 4.04 is hereby amended by deleting the phrase
"a sum equal to the amount so paid plus interest on such amount" and
substituting therefor the following: "a sum in Dollars equal to the Dollar
Equivalent of the amount so paid plus interest on such amount."
(e) The first clause in the first sentence of clause (b) of Section
4.04 is amended to read as follows: "If any Issuing Bank shall not have been
reimbursed in full on the date of payment of a Letter of Credit for any payment
made by such Issuing Bank under the Letter of Credit issued by such Issuing Bank
on such date," and the second clause in the second sentence of clause (b) of
Section 4.04 beginning with "by paying to the Administrative Agent" is hereby
amended to read as follows: "by paying to the Administrative Agent for the
account of such Issuing Bank an amount in Dollars equal to such Lender's
Percentage of the Dollar Equivalent of such unreimbursed amount paid by such
Issuing Bank, plus interest on the Dollar Equivalent of such amount at a rate
per annum equal to the Federal Funds Effective Rate from the date of such
payment by such Issuing Bank to the date of payment to such Issuing Bank by such
Lender."
2
(f) The second sentence of clause (c) of Section 4.04 is hereby amended
by adding the phrase "the Dollar Equivalent of" before the phrase "the
outstanding principal amount due and payable" in the last phrase thereof.
(g) Clause (d) of Section 4.04 is hereby amended by deleting "Each
participation" in the first line thereof and by substituting therefor the phrase
"The Dollar Equivalent of the amount of each participation" and by adding after
"ABR Loan" the phrase "in the amount of such Dollar Equivalent".
(h) A new Section 4.07 is hereby added after Section 4.06 to read in
full as follows:
"SECTION 4.07. CURRENCY EQUIVALENTS.
For purposes of Articles IV and V of this Agreement, the
Dollar Equivalent of any Alternative Currency shall be determined by
the Agent by using the quoted closing spot rate at which Barclays'
principal office in London offers to exchange Dollars for such
Alternative Currency in London on the day such equivalent is to be
determined; provided, however, that if at any time of such
determination, for any reason, no spot rate is being quoted, the
Administrative Agent, after consultation with the Borrower, may use any
reasonable method it deems appropriate to determine such rate, and such
determination shall be conclusive absent manifest error. The Dollar
Equivalent of the stated amount of each Letter of Credit outstanding
made in an Alternative Currency and of the amount of each participation
purchased by a Lender under Section 4.04(b) shall be recalculated
hereunder on (i) each date that it shall be necessary to determine the
unused portion of each Lender's Commitment, or any or all Loans,
Letters of Credit outstanding, LC Outstandings or any Extension of
Credit, or (ii) on any such other date on which the Agent deems such
recalculation necessary or advisable, but in any event at least
monthly. The Agent agrees to provide notice to the Lenders of the
relevant Dollar Equivalent determined pursuant to each such
determination and each such recalculation as soon as practicable
following such determination or recalculation, as the case may be."
(i) The third sentence of clause (a) of Section 5.01 is hereby amended
by adding before the phrase "the unpaid amount of such distribution" the
following: "the Dollar Equivalent of".
(j) Clause (b) of Section 5.03 is hereby amended in full to read as
follows:
"(b) On the date of any termination or optional or mandatory
reduction of the Commitments pursuant to Section 2.03, and on any date
on which the sum of the aggregate principal amount of the Loans and the
aggregate Dollar Equivalent of all LC Outstandings shall exceed the
aggregate amount of the Commitments, the Borrower shall first, pay or
prepay so much of the principal outstanding on the Loans or so much of
the LC Outstandings that represent amounts that have been drawn under
Letters of Credit but have neither been reimbursed by the Borrower nor
converted into ABR Loans, second, if all of the Loans and all of such
unreimbursed amounts constituting LC Outstandings shall have been paid
in full, provide cash collateral, pursuant to the Cash Collateral
Agreement, to secure so much of the remaining LC Outstandings, and
third, cause so much of Letters of Credit to be cancelled (if necessary
after taking into account the payments and provision of cash collateral
in the immediately preceding clause), in each case, as shall be
necessary in order that the sum of the aggregate principal amount of
the Loans outstanding and the aggregate Dollar Equivalent of all LC
Outstandings (in each case after giving effect to all Extensions of
Credit to be made on such date and the application of the proceeds
thereof) will not exceed the aggregate amount of the sum of the
Commitments (following such termination or reduction, if any) and such
cash collateral, together with, in the case of any such payment (x)
accrued interest to the date of such prepayment on the amount
3
repaid and (y) in the case of prepayments of Eurodollar Rate Loans and
Swingline Loans, any amount payable to the Lenders pursuant to Section
5.04(b). Any payments and prepayments required by clause "first" of
this subsection (b) shall be applied to outstanding Swingline Loans up
to the full amount thereof before they are applied, first to
outstanding ABR Loans and second, to outstanding Eurodollar Rate loans
and third, to unreimbursed amounts constituting LC Outstandings. In the
event that the Borrower requests the release of any cash collateral
pursuant to the terms of the Cash Collateral Agreement and on the date
of such request or at any time prior to the time of such release, there
has become, or there becomes, due and payable any prepayment of any
Loans under this Agreement, the Borrower hereby directs the Collateral
Agent to apply the proceeds of such release of cash collateral to such
prepayment of such Loans and agrees that any such request is a
confirmation of such direction."
(k) A new Section 11.15 is hereby added after Section 11.14 to read in
full as follows:
"SECTION 11.15. JUDGMENT CURRENCY.
(a) If for the purposes of obtaining judgment in any court it
is necessary to convert a sum due hereunder or under the Notes in any
currency (the "ORIGINAL CURRENCY") into another currency (the "OTHER
CURRENCY") the parties hereto agree, to the fullest extent that they
may effectively do so, that the rate of exchange used shall be that at
which in accordance with normal banking procedures the Administrative
Agent could purchase the Original Currency with the Other Currency at
Barclays on the Business Day immediately preceding that on which final
judgment is given.
(b) The obligation of the Borrower in respect of any sum due
in the Original Currency from it to any Lender, Swing Line Lender,
Issuing Bank, Collateral Agent or Administrative Agent hereunder or
under any other Loan Document shall, notwithstanding any judgment in
any Other Currency, be discharged only to the extent that on the
Business Day following receipt by such Lender, Issuing Lender, Swing
Line Lender, Collateral Agent or Administrative Agent (as the case may
be) of any sum adjudged to be so due in such Other Currency such
Lender, Issuing Lender, Swing Line Lender, Collateral Agent or
Administrative Agent (as the case may be) may in accordance with normal
banking procedures purchase the Original Currency with such Other
Currency; if the amount of the Original Currency so purchased is less
than the sum originally due to such Lender, Issuing Lender, Swing Line
Lender, Collateral Agent or Administrative Agent (as the case may be)
in the Original Currency, the Borrower agrees, as a separate obligation
and notwithstanding any such judgment, to indemnify such Lender,
Issuing Lender, Swing Line Lender, Collateral Agent or Administrative
Agent (as the case may be) against such loss, and if the amount of the
Original Currency so purchased exceeds the sum originally due in the
Original Currency to any Lender, Issuing Lender, Swing Line Lender,
Collateral Agent or Administrative Agent (as the case may be), such
Lender, Issuing Lender, Swing Line Lender, Collateral Agent or
Administrative Agent (as the case may be) agrees to remit to the
Borrower such excess."
2. CONDITIONS TO EFFECTIVENESS. The amendments contemplated by this
Agreement shall become effective upon the execution and delivery of counterparts
hereof by the Required Lenders, the Administrative Agent, the Collateral Agent,
the Issuing Bank and the Borrower and the fulfillment of the following
conditions:
(a) All representations and warranties contained in this
Agreement and in the Credit Agreement and the other Loan Documents, in
each case as amended hereby, shall be true and correct in all material
respects.
4
(b) No event shall have occurred and be continuing which
constitutes a Default or an Event of Default.
3. REFERENCE TO AND EFFECT ON THE LOAN DOCUMENTS. On and after the
effective date of this Amendment, each reference in the Credit Agreement to
"this Agreement", "hereunder", "hereof" or words of like import referring to the
Credit Agreement shall mean and be a reference to the Credit Agreement, as
amended by this Agreement, and each reference in the other Loan Documents to
"the Credit Agreement", "thereunder", "thereof" or words of like import
referring to the Credit Agreement shall mean and be a reference to the Credit
Agreement, as amended by this Agreement. Except as specifically amended above,
the Credit Agreement and all other Loan Documents are and shall continue to be
in full force and effect and are hereby in all respects ratified and confirmed.
Without limiting the generality of the foregoing, the Cash Collateral Agreement
and all of the Collateral described therein do and shall continue to secure the
payment of all obligations of the Borrower described therein after giving effect
to this Agreement.
4. MISCELLANEOUS.
(a) The Borrower reaffirms and restates the representations
and warranties set forth in the Credit Agreement and the other Loan
Documents, and all such representations and warranties shall be true
and correct on the date hereof with the same force and effect as if
made on such date. The Borrower represents and warrants (which
representations and warranties shall survive the execution and delivery
hereof) that:
(i) It is a duly organized, validly existing
corporation in good standing under the laws of its
organization and has the corporate power and authority to
execute, deliver and carry out the terms and provisions of
this Agreement and has taken or caused to be taken all
necessary corporate action to authorize the execution,
delivery and performance of this Agreement;
(ii) No consent of any other person, including,
without limitation, shareholders or creditors of the Borrower,
and no action of, or filing with any governmental or public
body or authority, is required to authorize, or is otherwise
required in connection with the execution, delivery and
performance of this Agreement;
(iii) This Agreement has been duly executed and
delivered by a duly authorized officer on behalf of the
Borrower, and constitutes its legal, valid and binding
obligations, enforceable in accordance with its terms, except
as enforcement thereof may be subject to the effect of any
applicable (i) bankruptcy, insolvency, reorganization,
moratorium or similar law affecting creditors' rights
generally and (ii) general principles of equity (regardless of
whether enforcement is sought in a proceeding in equity or at
law); and
(iv) The execution, delivery and performance of this
Agreement will not violate any law, statue or regulation
applicable to the Borrower or any order or decree of any court
or governmental instrumentality applicable to it, or conflict
with, or result in the breach of, or constitute a default
under, any of its contractual obligations.
(b) Nothing herein contained shall constitute a waiver or be
deemed to be a waiver, of any existing Defaults or Events of Default,
and the Lenders and the Agent reserve all rights and remedies granted
to them by the Credit Agreement, the other Loan Documents, by law and
otherwise.
5
(c) This Agreement may be executed in any number of separate
counterparts, each of which shall collectively and separately
constitute one agreement.
(d) This Agreement shall be governed by, and construed in
accordance with, the laws of the State of New York.
[signature pages follow]
6
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
CMS ENERGY CORPORATION
By: /s/ Alan M. Wright
----------------------------------------
Name: Alan M Wright
Title: Executive Vice President, Chief Financial
Officer and Chief Administrative Officer
BARCLAYS BANK PLC, individually as a Lender and as
Administrative Agent, Collateral Agent and Issuing Bank
By: /s/ Sydney G. Dennis
------------------------
Name: Sydney G. Dennis
Title: Director
5
EXHIBIT (4)(K)(ii)
EXECUTION COPY
AMENDMENT NO. 3
TO
$300,000,000 CREDIT AGREEMENT
This AMENDMENT NO. 3, dated as of February 28, 2002 (this "AMENDMENT"),
is by and among CMS Energy Corporation (the "BORROWER"), the financial
institutions parties thereto as "lenders" (the "LENDERS"), Barclays Bank PLC, as
administrative agent (in such capacity, the "ADMINISTRATIVE AGENT"), and as
collateral agent (in such capacity, the "COLLATERAL AGENT"), Bank of America,
N.A. and The Chase Manhattan Bank, as co-syndication agents (the "CO-SYNDICATION
AGENTS"), and Citibank, N.A. and Union Bank of California, as documentation
agents (the "DOCUMENTATION AGENTS").
WHEREAS, the Borrower, the Lenders, the Administrative Agent, the
Collateral Agent, the Co-Syndication Agents and the Documentation Agents have
entered into a $300,000,000 Credit Agreement, dated as of June 18, 2001 (as
amended, restated, supplemented or otherwise modified from time to time, the
"CREDIT AGREEMENT"; capitalized terms not defined herein are used as defined in
the Credit Agreement);
WHEREAS, the Borrower acknowledges that (a) the ratio of Consolidated
Debt to Consolidated EBITDA for the four-fiscal-quarter period ending on
December 31, 2001 is currently estimated to have been approximately 5.42 to 1,
in breach of the covenant set forth in Section 8.01(i) of the Credit Agreement,
and (b) pursuant to Section 9.01(c) of the Credit Agreement, the breach of this
covenant constitutes an Event of Default (the "Identified Event of Default")
under the Credit Agreement;
WHEREAS, the Borrower acknowledges that (a) with respect to the
reporting period of March 31, 2002, the ratio of (i) the sum of (A) Cash
Dividend Income for the four-fiscal-quarter period ending on December 31, 2001,
plus (B) 25% of the amount of Equity Distributions received by the Borrower
during such period, plus (C) all amounts received by the Borrower from its
Subsidiaries and Affiliates during such period constituting reimbursement of
interest expense paid by the Borrower to (ii) interest expense accrued by the
Borrower during such period, is currently estimated to have been approximately
1.18 to 1, (b) such ratio would, with the lapse of time, constitute a breach of
the covenant set forth in Section 8.01(j) of the Credit Agreement, and (c)
pursuant to Section 9.01(c) of the Credit Agreement, the breach of this covenant
would constitute an Event of Default (the "Identified Default") under the Credit
Agreement; and
WHEREAS, the Borrower, the Lenders, the Administrative Agent, the
Collateral Agent, the Co-Syndication Agents and the Documentation Agents have
agreed to amend the Credit Agreement as hereinafter set forth.
NOW, THEREFORE, in consideration of the premises set forth above, and
for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged,
the Borrower, the Lenders, the Administrative Agent, the Collateral Agent, the
Co-Syndication Agents and the Documentation Agents agree as follows:
1. AMENDMENTS TO THE CREDIT AGREEMENT. Subject to the conditions set
forth in paragraph 2 hereof, the Credit Agreement is, effective as of the date
hereof, hereby amended as follows:
(a) Section 8.01(i) of the Credit Agreement is amended by
deleting the table appearing at the end thereof and substituting
therefor:
PERIOD RATIO
----------------- --------------------
Closing Date through September 30, 2001 5.25 to 1
October 1, 2001 through 5.50 to 1
September 30, 2002
October 1, 2002 through 4.75 to 1
March 31, 2003
April 1, 2003 and thereafter 4.50 to 1
(b) Section 8.01(j) of the Credit Agreement is amended by
deleting such Section in its entirety and substituting therefor:
"(j) Cash Dividend Coverage Ratio. The Borrower shall
maintain, as of the last day of each Measurement Quarter, a
minimum ratio of (i) the sum of (A) Cash Dividend Income for the
four-fiscal-quarter period ending on such day (or, with respect
to each Measurement Quarter ending in 2002, for the period from
January 1, 2002 through and including the last day of such
Measurement Quarter), plus (B) 25% of the amount of Equity
Distributions received by the Borrower during such period but in
no event in excess of $10,000,000, plus (C) all amounts received
by the Borrower from its Subsidiaries and Affiliates during such
period constituting reimbursement of interest expense (including
commitment, guaranty and letter of credit fees) paid by the
Borrower on behalf of any such Subsidiary or Affiliate to (ii)
interest expense (including commitment, guaranty and letter of
credit fees) accrued by the Borrower in respect of all Debt
during such period of not less than : (a) for each such period
ending on March 31, 2002, June 30, 2002 and September 30, 2002,
1.40 to 1, (b) for the period ending on December 31, 2002, 1.50
to 1, (c) for the period ending on March 31, 2003, 1.75 to 1,
and (d) for each such period ending on June 30, 2003 and
thereafter, 1.90 to 1; provided, that the Borrower shall be
deemed not to be in breach of the foregoing covenant if, during
the Measurement Quarter, it has permanently reduced the
Commitments and the principal amount outstanding under this
Agreement and the Promissory Notes such that the amount
determined pursuant to clause (ii) above, when recalculated on a
pro forma basis assuming that the amount of such reduced
Commitments and principal amount outstanding under this
Agreement and the Promissory Notes were in effect at all times
during such
2
four-fiscal-quarter period, would result in the Borrower being
in compliance with such ratio; and provided further, that until
the Borrower so reduces such Commitments and principal amount
outstanding under this Agreement and the Promissory Notes and/or
increases Cash Dividend Income during such Measurement Quarter,
the Borrower may not request any additional Extensions of Credit
(other than Conversions)."
2. CONDITIONS TO EFFECTIVENESS. The amendments contemplated by this
Amendment shall become effective upon the execution and delivery to the
Administrative Agent of counterparts hereof by the Required Lenders, the
Administrative Agent and the Borrower and the fulfillment of the following
conditions:
(a) All representations and warranties contained in this
Amendment and in the Credit Agreement and the other Loan Documents, in
each case as amended hereby, shall be true and correct in all material
respects.
(b) With the exception of the Identified Event of Default and
the Identified Default, no event shall have occurred and be continuing
which constitutes an Event of Default or a Default.
3. REFERENCE TO AND EFFECT ON THE LOAN DOCUMENTS. On and after the
effective date of this Amendment, each reference in the Credit Agreement to
"this Agreement", "hereunder", "hereof" or words of like import referring to the
Credit Agreement shall mean and be a reference to the Credit Agreement, as
amended by this Amendment, and each reference in the other Loan Documents to
"the Credit Agreement", "thereunder", "thereof" or words of like import
referring to the Credit Agreement shall mean and be a reference to the Credit
Agreement, as amended by this Amendment. Except as specifically amended above,
the Credit Agreement and all other Loan Documents are and shall continue to be
in full force and effect and are hereby in all respects ratified and confirmed.
Without limiting the generality of the foregoing, the Cash Collateral Agreement
and all of the Collateral described therein do and shall continue to secure the
payment of all obligations of Borrower described therein after giving effect to
this Amendment.
4. MISCELLANEOUS.
(a) Reference to and Effect on the Credit Agreement. The
Borrower reaffirms and restates the representations and warranties set
forth in the Credit Agreement and the other Loan Documents, and all
such representations and warranties shall be true and correct on the
date hereof with the same force and effect as if made on such date. The
Borrower represents and warrants (which representations and warranties
shall survive the execution and delivery hereof) that:
(i) It is a duly organized, validly existing corporation
in good standing under the laws of its organization and has the
corporate power and authority to execute, deliver and carry out
the terms and provisions of this Amendment and has taken or
caused to be taken all necessary corporate action to authorize
the execution, delivery and performance of this Amendment;
3
(ii) No consent of any other person, including, without
limitation, shareholders or creditors of the Borrower, and no
action of, or filing with any governmental or public body or
authority, is required to authorize, or is otherwise required in
connection with the execution, delivery and performance of this
Amendment;
(iii) This Amendment has been duly executed and
delivered by a duly authorized officer on behalf of the
Borrower, and constitutes its legal, valid and binding
obligations, enforceable in accordance with its terms, except as
enforcement thereof may be subject to the effect of any
applicable (i) bankruptcy, insolvency, reorganization,
moratorium or similar law affecting creditors' rights generally
and (ii) general principles of equity (regardless of whether
enforcement is sought in a proceeding in equity or at law); and
(iv) The execution, delivery and performance of this
Amendment will not violate any law, statue or regulation
applicable to the Borrower or any order or decree of any court
or governmental instrumentality applicable to it, or conflict
with, or result in the breach of, or constitute a default under,
any of its contractual obligations.
(b) No Waiver. Nothing herein contained shall constitute a
waiver or be deemed to be a waiver, of any existing Defaults or Events
of Default, and the Lenders and the Agent reserve all rights and
remedies granted to them by the Credit Agreement, by the other Loan
Documents, by law and otherwise.
(c) Costs and Expenses. The Borrower agrees to pay all costs,
fees, and out-of-pocket expenses (including attorneys' fees) incurred
by the Administrative Agent in connection with the preparation,
execution and enforcement of this Amendment.
(d) Headings. Section headings in this Amendment are included
herein for convenience of reference only and shall not constitute a
part of this Amendment for any other purpose.
(e) Counterparts. This Amendment may be executed in any number
of separate counterparts, each of which shall collectively and
separately constitute one agreement. Delivery of an executed
counterpart of a signature page to this Amendment by facsimile shall be
effective as delivery of a manually executed counterpart of this
Amendment.
(f) GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK
(INCLUDING SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAWS OF THE STATE
OF NEW YORK, BUT OTHERWISE WITHOUT REGARD TO CONFLICTS OF LAW
PRINCIPLES).
4
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
CMS ENERGY CORPORATION
By: /s/ Alan M. Wright
----------------------------------------
Name: Alan M Wright
Title: Executive Vice President, Chief Financial
Officer and Chief Administrative Officer
BARCLAYS BANK PLC, individually as a Lender and as
Administrative Agent, Collateral Agent and Issuing Bank
By: /s/ Sydney G. Dennis
------------------------
Name: Sydney G. Dennis
Title: Director
5
EXHIBIT (12)
CMS ENERGY CORPORATION
Ratio of Earnings to Fixed Charges and
Preferred Securities Dividends and Distributions
(Millions of Dollars)
Years Ended December 31 -
2001 2000 1999 1998 1997 1996
-------------------------------------------------------
(b) (c) (d)
Earnings as defined (a)
Consolidated net income $(545) $ 36 $ 277 $ 242 $ 244 $ 224
Discontinued operations 185 (3) 14 12 (1) (1)
Income taxes (73) 50 63 100 108 137
Exclude equity basis subsidiaries -- (171) (84) (92) (80) (85)
Fixed charges as defined, adjusted to
exclude capitalized interest of $38, $48,
$41, $29, $13, and $5 million for
the years ended December 31, 2001, 2000,
1999, 1998, 1997, and 1996, respectively 751 736 594 393 360 313
-------------------------------------------------------
Earnings as defined $ 318 $ 648 $ 864 $ 655 $ 631 $ 588
======================================================
Fixed charges as defined (a)
Interest on long-term debt $ 573 $ 591 $ 502 $ 318 $ 273 $ 230
Estimated interest portion of lease rental 6 7 8 8 10
Other interest charges 58 38 62 47 49 43
Preferred securities dividends and
distributions 152 147 96 77 67 54
-------------------------------------------------------
Fixed charges as defined $ 789 $ 784 $ 668 $ 450 $ 397 $ 337
======================================================
Ratio of earnings to fixed charges and
preferred securities dividends and distributions -- -- 1.29 1.46 1.59 1.74
======================================================
NOTES:
(a) Earnings and fixed charges as defined in instructions for Item 503 of
Regulation S-K.
(b) For the year ended December 31, 2001, fixed charges exceeded earnings by
$471 million. Earnings as defined include $704 million of pretax contract
losses, asset revaluations and other charges. The ratio of earnings to fixed
charges and preferred securities dividends and distributions would have been
1.30 excluding these amounts.
(c) For the year ended December 31, 2000, fixed charges exceeded earnings by
$136 million. Earnings as defined include a $329 million pretax impairment loss
on the Loy Yang investment. The ratio of earnings to fixed charges and preferred
securities dividends and distributions would have been 1.25 excluding this
amount.
(d) Excludes a cumulative effect of change in accounting after-tax gain of $43
million.
EXHIBIT (23)(A)
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation of our
reports included or incorporated by reference in this Form 10-K, into CMS Energy
Corporation's previously filed Registration Statement No. 33-55805, 33-60007,
333-27849, 333-37241, 333-27849, 333-32229, 333-45556, 333-51932, 333-52560,
333-58686, 333-73922 and 333-74958.
/s/ Arthur Andersen
Detroit, Michigan,
March 22, 2002.
EXHIBIT (23)(B)
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation of our
reports included or incorporated by reference in this Form 10-K, into Consumers
Energy Company's previously filed Registration Statement No. 333-76347.
Detroit, Michigan,
March 22, 2002.
EXHIBIT (24)(A)
February 22, 2002
Mr. Alan M. Wright and
Mr. Rodger A. Kershner
CMS Energy Corporation
Fairlane Plaza South, Suite 1100
330 Town Center Drive
Dearborn, MI 48126
CMS Energy Corporation is required to file an Annual Report on Form 10-K for the
year ended December 31, 2001 with the Securities and Exchange Commission within
90 days after the end of the year.
We hereby make, constitute and appoint each of you our true and lawful attorney
for each of us and in each of our names, places and steads to sign and cause to
be filed with the Securities and Exchange Commission said Annual Report with any
necessary exhibits, and any amendments thereto that may be required.
Very truly yours,
/s/ WILLIAM T. MCCORMICK, JR. /s/ DAVID W. JOOS
- ----------------------------------------------------- ----------------------------------------------------
William T. McCormick, Jr. David W. Joos
/s/ J. M. DEUTCH /s/ W. U. PARFET
- ----------------------------------------------------- ----------------------------------------------------
John M. Deutch William U. Parfet
/s/ JAMES J. DUDERSTADT /s/ PERCY A. PIERRE
- ----------------------------------------------------- ----------------------------------------------------
James J. Duderstadt Percy A. Pierre
/s/ KATHLEEN R. FLAHERTY /s/ K. L. WAY
- ----------------------------------------------------- ----------------------------------------------------
Kathleen R. Flaherty Kenneth L. Way
/s/ EARL D. HOLTON /s/ K. WHIPPLE
- ----------------------------------------------------- ----------------------------------------------------
Earl D. Holton Kenneth Whipple
/s/ JOHN B. YASINSKY
--------------------------------------
John B. Yasinsky
EXHIBIT (24)(B)
February 22, 2002
Mr. Alan M. Wright and
Mr. Rodger A. Kershner
Consumers Energy Company
212 West Michigan Avenue
Jackson, MI 49201
Consumers Energy Company is required to file an Annual Report on Form 10-K for
the year ended December 31, 2001 with the Securities and Exchange Commission
within 90 days after the end of the year.
We hereby make, constitute and appoint each of you our true and lawful attorney
for each of us and in each of our names, places and steads to sign and cause to
be filed with the Securities and Exchange Commission said Annual Report with any
necessary exhibits, and any amendments thereto that may be required.
Very truly yours,
/s/ WILLIAM T. MCCORMICK, JR. /s/ DAVID W. JOOS
- ----------------------------------------------------- ---------------------------------------------------
William T. McCormick, Jr. David W. Joos
/s/ J. M. DEUTCH /s/ W. U. PARFET
- ----------------------------------------------------- ---------------------------------------------------
John M. Deutch William U. Parfet
/s/ JAMES J. DUDERSTADT /s/ PERCY A. PIERRE
- ----------------------------------------------------- ---------------------------------------------------
James J. Duderstadt Percy A. Pierre
/s/ KATHLEEN R. FLAHERTY /s/ K. L. WAY
- ----------------------------------------------------- ---------------------------------------------------
Kathleen R. Flaherty Kenneth L. Way
/s/ EARL D. HOLTON /s/ K. WHIPPLE
- ----------------------------------------------------- ---------------------------------------------------
Earl D. Holton Kenneth Whipple
/s/ JOHN B. YASINSKY
--------------------------------------
John B. Yasinsky
EXHIBIT (24)(C)
February 22, 2002
Mr. Michael D. VanHemert
Panhandle Eastern Pipe Line Company
5444 Westheimer Court
Houston, Texas 77056-5310
Panhandle Eastern Pipe Line Company is required to file an Annual Report on Form
10-K for the year ended December 31, 2001 with the Securities and Exchange
Commission within 90 days after the end of the year.
We hereby make, constitute and appoint you our true and lawful attorney for each
of us and in each of our names, places and steads to sign and cause to be filed
with the Securities and Exchange Commission said Annual Report with any
necessary exhibits, and any amendments thereto that may be required.
/s/ William T. McCormick, Jr.
--------------------------------
William T. McCormick, Jr.
/s/ William J. Haener
---------------------------------
William J. Haener
/s/ Preston D. Hopper
- ----------------------------------
Preston D. Hopper
EXHIBIT 99(A)
March 29, 2002
Securities and Exchange Commission
Washington, DC 20549
Arthur Andersen LLP has represented to CMS Energy Corporation that its audit was
subject to Andersen's quality control system for the U.S. accounting and
auditing practice to provide reasonable assurance that the engagement was
conducted in compliance with professional standards and that there was
appropriate continuity of Andersen personnel working on the audit, availability
of national office consultation and availability of personnel at foreign
affiliates of Andersen to conduct the relevant portions of the audit.
Sincerely,
/s/ Preston D. Hopper
- ---------------------------------
Senior Vice President, Controller
and Chief Accounting Officer
EXHIBIT 99(B)
March 29, 2002
Securities and Exchange Commission
Washington, DC 20549
Arthur Andersen LLP has represented to Consumers Energy Company that its audit
was subject to Andersen's quality control system for the U.S. accounting and
auditing practice to provide reasonable assurance that the engagement was
conducted in compliance with professional standards and that there was
appropriate continuity of Andersen personnel working on the audit and
availability of national office consultation. Availability of personnel at
foreign affiliates of Andersen was not relevant to this audit.
Sincerely,
/s/ Dennis DaPra
- -------------------------------
Dennis DaPra
Senior Vice President
Accounting & Regulatory Affairs
