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United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the quarter ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________ to __________
Commission File Registrant; State of Incorporation; IRS Employer
Number Address and Telephone Number Identification No.
-------------------- ---------------------------------------- ---------------------
333-47938 Consumers Funding LLC 38-3575109
(Exact name of Registrant as
specified in its charter)
(Delaware)
212 W. Michigan
Jackson, Michigan 49201
(517) 788-0250
Securities registered pursuant to Section 12 (b) of the Act: None.
Securities registered pursuant to Section 12 (g) of the Act: None.
Indicate by check mark whether the Registrant (1) has 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 Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
Consumers Funding LLC meets the conditions set forth in General
Instruction H(i)(a) of the Form 10-Q and is, therefore filing this Form
10-Q with the reduced disclosure format. In accordance with Instruction
H, Part I, Item 2 has been reduced and Parts III, Items 2, 3 and 4 have
been omitted.
The aggregate market value of the voting and non-voting common equity
held by non-affiliates of the Registrant: None.
Documents incorporated by reference:
Not applicable.
CONSUMERS FUNDING, LLC
FORM 10-Q QUARTERLY REPORT TO
THE SECURITIES AND EXCHANGE COMMISSION
FOR THE QUARTER ENDED JUNE 30, 2002
TABLE OF CONTENTS
PAGE
PART I: Financial Information 3
Management Narrative Analysis 3
Financial Statements 5
Part II: Other Information 14
Item 1: Legal Proceedings 14
Item 5: Other Information 14
Item 6: Exhibit and Report on Form 8-K 14
Signatures 15
2
CONSUMERS FUNDING LLC
MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATION
This Management's Narrative Analysis (MNA) of the results of operation of
Consumers Funding LLC (Consumers Funding) is an abbreviated format pursuant to
Instruction H of Form 10-Q. The MNA refers to Consumers Funding's Notes to
Financial Statements and should be read in conjunction with such Financial
Statements and Notes.
This Form 10-Q and other written and oral statements from Consumers Funding may
contain forward-looking statements as defined by the Private Securities
Litigation Reform Act of 1995. These forward-looking statements are subject to
various factors that could cause Consumers Funding's actual results to differ
materially from the results anticipated in such statements. Consumers Funding
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 Funding does, however,
discuss certain risk factors, uncertainties and assumptions in this MNA, and in
various public filings it periodically makes with the Securities and Exchange
Commission. Consumers Funding designed this discussion of potential risks and
uncertainties, which is by no means comprehensive, to highlight important
factors that may impact Consumers Funding's outlook.
Consumers Funding, a Delaware limited liability company, whose sole member is
Consumers Energy Company (Consumers), was formed by Consumers on October 11,
2000. Consumers is an electric and gas utility and is a wholly owned subsidiary
of CMS Energy Corporation. Consumers Funding was organized for the sole purpose
of purchasing and owning securitization property (see below), issuing
securitization bonds, pledging its interest in securitization property and other
collateral to the trustee to collateralize the securitization bonds, and
performing activities that are necessary, suitable or convenient to accomplish
these purposes.
On November 8, 2001, Consumers Funding issued $468.6 million of securitization
bonds. Consumers Funding used the proceeds from the securitization bond issuance
to purchase securitization property from Consumers. As discussed in Note 1 to
the Financial Statements, securitization property represents the irrevocable
right of Consumers to collect a nonbypassable Securitization Charge
(Securitization Charge) from customers in accordance with a financing order
issued by the Michigan Public Service Commission (MPSC). The securitization
property, which is classified as a securitization receivable, along with
earnings on cash deposited with the trustee, resulted in the recording of $5.8
million of interest income for the three months ended June 30, 2002. Interest
expense associated with the securitization bonds totaled $5.8 million for the
same three-month period. For the six months ended June 30, 2002, interest income
totaled $11.5 million and interest expense totaled $11.5 million.
Consumers, as servicer, began billing a Securitization Charge to electric
customers beginning with its December 2001 billing cycle. The surcharge
currently totals $.001427 per kilowatthour. In the servicing agreement between
Consumers Funding and Consumers, Consumers is required to remit its
Securitization Charge collections to the trustee each business day. Through June
30, 2002, Consumers had remitted approximately $25.4 million of Securitization
Charge collections to the trustee, which was sufficient for the first payment of
securitization bond principal, interest and related expenses, which was
completed July 20, 2002, in the amount of $25.4 million.
Under the servicing agreement, Consumers is required to request periodic
Securitization Charge adjustments from the MPSC. The request for an adjustment
must be submitted at least 45 days before the adjustment may take place.
Adjustments will be made annually, and then quarterly beginning
approximately one year before the expected final payment date of the last
maturing class of securitization bonds. Adjustments to the
3
Securitization Charge are based, among other things, on actual Securitization
Charge revenue collections and updated assumptions by Consumers as to projected
future deliveries of electricity to customers.
CHANGE IN AUDITORS
On April 22, 2002 the Board of Directors of Consumers, upon the recommendation
of the Audit Committee of the Board, voted to discontinue using Arthur Andersen
to audit the Consumers' financial statements, including the financial statements
for Consumers Funding, for the year ending December 31, 2002. Consumers Funding
previously retained Arthur Andersen to review its financial statements for the
quarter ended March 31, 2002. On May 23, 2002, Consumers' Board of Directors
engaged Ernst & Young to audit its financial statements, including the financial
statements of Consumers Funding, for the year ending December 31, 2002. Ernst &
Young has hired some of Arthur Andersen's Detroit office employees, including
some of the former auditors from the Consumers Funding audit engagement team.
As a result of certain financial reporting issues surrounding round trip trading
transactions at CMS MST, Arthur Andersen notified CMS Energy that Arthur
Andersen's historical opinions on CMS Energy's financial statements for the
fiscal years end December 31, 2001 and December 31, 2000 cannot be relied upon.
However, this is not the case for Consumers Funding. Arthur Andersen's reports
on Consumers Fundings' financial statements for the fiscal year ended December
31, 2001 contained no adverse or disclaimer of opinion. Nor were the reports
qualified or modified regarding uncertainty, audit scope or accounting
principles.
During the fiscal year ended December 31, 2001 and through the date of their
opinion for the quarter ended March 31, 2002, Consumers Funding and Arthur
Andersen did not disagree on any matter of accounting principle or practice,
financial statement disclosure, or auditing scope or procedure. If Arthur
Andersen and Consumers Funding had disagreed on these matters and they were not
resolved to Arthur Andersen's satisfaction, Arthur Andersen would have noted
this in its report on Consumers Fundings' financial statements.
During Consumers Fundings' most recent fiscal year ended December 31, 2001 and
the subsequent interim period through June 10, 2002, Consumers did not consult
with Ernst and Young regarding any matter or event identified by SEC laws and
regulations. However, as a result of certain financial reporting issues
surrounding "round trip" trading transactions at CMS MST, Ernst & Young is in
the process of re-auditing CMS Energy's consolidated financial statements for
each of the fiscal years ended December 31, 2001 and December 31, 2000, and
includes audit work at Consumers Funding for the year ended 2001.
In light of the foregoing circumstances, we cannot issue a certification to
accompany the Report pursuant to 18 U.S.C 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
4
CONSUMERS FUNDING LLC
STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------------------
In Thousands
OPERATING REVENUES
Interest Income -- Consumers Energy $ 5,665 $0 $ 11,395 $0
Interest Income 112 0 137 0
Other Operating Revenue -- Consumers Energy 412 0 747 0
Other Operating Revenue 5 0 5 0
-------------------------------------------------
Total Operating Revenues 6,194 0 12,284 0
-------------------------------------------------
OPERATING EXPENSES
Interest Expense 5,754 0 11,509 0
Service Fee -- Consumers Energy 388 0 703 0
Administration Fee -- Consumers Energy 24 0 44 0
Other 16 0 16 0
-------------------------------------------------
Total Operating Expenses 6,182 0 12,272 0
-------------------------------------------------
NET INCOME (LOSS) $ 12 $0 $ 12 $0
-------------------------------------------------
The accompanying notes are an integral part of these statements.
5
CONSUMERS FUNDING LLC
BALANCE SHEETS
ASSETS
JUNE 30 DEC. 31 JUNE 30
2002 2001 2001
(UNAUDITED) (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------
In Thousands
CURRENT ASSETS
Restricted Cash $ 27,859 $ 3,604 $1
Securitization Receivable -- Consumers Energy 19,290 15,650 0
Interest Receivable -- Consumers Energy 0 2,257 0
-----------------------------------------
Total Current Assets 47,149 21,511 1
NON-CURRENT ASSETS
Securitization Receivable -- Consumers Energy 439,587 452,942 0
-----------------------------------------
Total Non-current Assets 439,587 452,942 0
-----------------------------------------
TOTAL ASSETS $ 486,736 $ 474,453 $1
=========================================
LIABILITIES AND MEMBER'S EQUITY
CURRENT LIABILITIES
Securitization Bonds Payable $ 29,005 $ 15,650 0
Accounts Payable - Consumers Energy 887 129 0
Accounts Payable - Other 4 0 0
Interest Payable 14,898 3,389 0
-----------------------------------------
Total Current Liabilities 44,794 19,168 0
NON-CURRENT LIABILITIES
Securitization Bonds Payable 439,587 452,942 0
-----------------------------------------
Total Non-current Liabilities 439,587 452,942 0
MEMBER'S EQUITY
Total Member's Equity 2,355 2,343 1
-----------------------------------------
TOTAL LIABILITIES AND MEMBER'S EQUITY $ 486,736 $ 474,453 $1
=========================================
The accompanying notes are an integral part of these Balance Sheets.
6
CONSUMERS FUNDING LLC
Statements of Cash Flows
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30 2002 2001
- ----------------------------------------------------------------------------------------------------------------
In Thousands
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................ $ 12 $ 0
Changes in Current Assets and Liabilities:
Interest Receivable -- Consumers Energy 2,257 0
Interest Payable 11,509 0
Accounts Payable -- Consumers Energy 758 0
Accounts Payable - Other 4 0
-------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 14,540 0
-------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Reduction of Securitization Receivable 9,715 0
-------------------------
NET CASH USED IN INVESTING ACTIVITIES 9,715 0
-------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Member's Investment 0 1
-------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 0 1
-------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 24,255 0
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,604 0
-------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 27,859 $ 1
=========================
The accompanying notes are an integral part of these statements.
7
CONSUMERS FUNDING LLC
STATEMENTS OF MEMBER'S EQUITY
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------------------
In Thousands
BALANCE AT BEGINNING OF PERIOD $ 2,343 $ 0 $ 2,343 $ 0
Add:
Net Income 12 0 12 0
Member's Investment 0 1 0 1
-----------------------------------------------
BALANCE AT END OF PERIOD $ 2,355 $ 1 $ 2,355 $ 1
===============================================
The accompanying notes are an integral part of these statements.
8
CONSUMERS FUNDING LLC
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
These interim Financial Statements have been prepared by Consumers Funding LLC
(Consumers Funding) In management's opinion, the unaudited information contained
in this report reflects all adjustments necessary to assure the fair
presentation of financial position, results of operations and cash flows for the
periods presented. These Notes to Financial Statements and the related Financial
Statements should be read in conjunction with the Financial Statements and Notes
to Financial Statements contained in Consumers Funding's Form 10-K for the year
ended December 31, 2001, which includes the Report of Independent Public
Accountants.
1. ORGANIZATION AND NATURE OF OPERATIONS
Consumers Funding, a Delaware limited liability company, whose sole member is
Consumers Energy Company (Consumers), was formed by Consumers on October 11,
2000. On January 22, 2001, Consumers completed a $1,000 equity contribution to
Consumers Funding. Consumers is an electric and gas utility and is a wholly
owned subsidiary of CMS Energy Corporation. Consumers Funding was organized for
the sole purpose of purchasing and owning securitization property (see below),
issuing securitization bonds, pledging its interest in securitization property
and other collateral to the trustee to collateralize the securitization bonds,
and performing activities that are necessary, suitable or convenient to
accomplish these purposes.
Securitization property represents the irrevocable right of Consumers, or its
successor or assignee, to collect a nonbypassable Securitization Charge
(Securitization Charge) from customers in accordance with the October 24, 2000
MPSC Financing Order (MPSC Financing Order). As modified by rehearing on January
4, 2001, the MPSC Financing Order authorizes the Securitization Charge to be
sufficient to recover $468.6 million aggregate principal amount of
securitization bonds, plus an amount sufficient to provide for any credit
enhancement, to fund any reserves and to pay interest, redemption premiums, if
any, servicing fees and other expenses relating to the securitization bonds. For
financial reporting purposes, the purchase of the securitization property has
been accounted for as a financing activity by Consumers Funding in the amount of
$468.6 million. Accordingly, Consumers Funding has classified the purchase of
securitization property as a securitization receivable from Consumers in the
financial statements.
Consumers Funding's organizational documents require it to operate in a manner
so that it would not be consolidated into the bankruptcy estate of Consumers in
the event Consumers becomes subject to a bankruptcy proceeding. Consumers and
Consumers Funding have agreed that in the event of Consumers' bankruptcy, the
parties will treat the transfer of the securitization property to Consumers
Funding as a true sale. The securitization bonds are treated as debt obligations
of Consumers Funding. For financial reporting, Federal income tax and State of
Michigan income and franchise tax purposes, the transfer of securitization
property to Consumers Funding is treated as part of a financing arrangement and
not as a sale. Furthermore, the results of operations of Consumers Funding are
consolidated with Consumers for financial and income tax reporting purposes.
Consumers Funding is legally separate from Consumers. The assets and income of
Consumers Funding, including without limitation, the securitization property,
are not available to creditors of Consumers or CMS Energy Corporation.
On November 8, 2001, Consumers Funding issued $468.6 million of securitization
bonds, Series 2001-1, in six different classes. Consumers Funding used the
proceeds to fund the purchase of securitization property from Consumers. The
principal amount of the securitization bonds, interest, fees and required
9
overcollateralization for the securitization bonds, will be recovered through
Securitization Charges collected from electric retail customers taking delivery
of electricity from Consumers or its successor based on MPSC approved rate
schedules and as permitted by contracts between Consumers and certain specific
customers.
Consumers, as servicer, collects Securitization Charges from its customers and
deposits collections daily into the General Subaccount held by the trustee (The
Bank of New York). The trustee is required to use these funds to make principal
and interest payments on the securitization bonds and to pay certain fees and
expenses of Consumers Funding.
Consumers Funding has no employees. Under the servicing agreement with
Consumers, Consumers is required to manage and administer the securitization
property and to collect Securitization Charges on Consumers Funding's behalf.
Consumers receives a monthly servicing fee of one twelfth times 0.25 percent of
the principal amount of securitization bonds outstanding as of the payment date.
The servicing agreement also requires Consumers to file annual Securitization
Charge adjustment requests with the MPSC. These Securitization Charge adjustment
requests will be based on actual Securitization Charge revenue collections and
Consumers' updated assumptions as to projected future deliveries of electricity
to customers, expected delinquencies and write-offs, future payments and costs
and expenses relating to securitization property and the securitization bonds,
any deficiency in the Capital or Overcollateralization Subaccounts and any
amounts on deposit in the Reserve Subaccount.
2. SIGNIFICANT 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 estimates
and assumptions. These estimates and assumptions affect the reported amount of
revenues, expenses, assets, and liabilities and disclosure of contingencies.
Actual results could differ from these estimates.
INCOME TAXES
Consumers Funding has elected not to be taxed as a corporation for Federal
income tax purposes. Consumers Funding is treated as a division of Consumers,
and accordingly, will not be treated as a separate taxable entity.
RESTRICTED CASH
The trustee has established the following subaccounts for the securitization
bonds.
GENERAL SUBACCOUNT: The General Subaccount is comprised of Securitization Charge
collections and interest earned from short-term investments. These amounts
accumulate until the trustee pays principal, interest, service and
administration fees and other expenses. At June 30, 2002, the General Subaccount
totaled $25.5 million. On July 20, 2002, the trustee used these funds for the
first scheduled payment of principal and interest to bondholders and to pay
expenses of Consumers Funding.
RESERVE SUBACCOUNT: The Reserve Subaccount includes any Securitization Charge
collections in excess of the amounts required in the General,
Overcollateralization and Capital Subaccounts. The trustee will draw funds from
this subaccount if the General Subaccount is insufficient to make scheduled
payments. At June 30, 2002, there was no balance in the Reserve Subaccount.
Remittances through the June 2002
10
billing month provided for the trustee to transfer approximately $463,000 to the
Reserve Subaccount from the General Subaccount on the July 20, 2002 payment
date.
OVERCOLLATERALIZATION SUBACCOUNT: On each payment date, the trustee will deposit
in the Overcollateralization Subaccount a predetermined, specified amount so
that the account balance reaches the required amount of $2.3 million, which
represents 0.5 percent of the initial outstanding principal balance of the
securitization bonds. If amounts available in the General Subaccount and the
Reserve Subaccount are not sufficient on any payment date to make scheduled
payments to the securitization bondholders and to pay the required expenses,
fees and charges, the trustee will draw on the amounts in the
Overcollateralization Subaccount to make those payments. The first funding of
the Overcollateralization Subaccount by the trustee occurred, as scheduled, on
July 20, 2002. At that time, the trustee transferred $125,516 to the
Overcollateralization Subaccount from the General Subaccount.
CAPITAL SUBACCOUNT: The Capital Subaccount was established on November 8, 2001.
Consumers deposited $2.3 million into the Capital Subaccount, an amount equal to
0.5 percent of the initial principal balance of the securitization bonds. If
amounts available in the General Subaccount, the Reserve Subaccount and the
Overcollateralization Subaccount are not sufficient on any payment date to make
scheduled payments of principal and interest to the securitization bondholders
and to pay the expenses, fees and charges of Consumers Funding, the trustee will
draw on amounts in the Capital Subaccount to make those payments. At June 30,
2002, the Capital Subaccount contained a balance of $2.4 million.
3. LONG-TERM DEBT
On November 8, 2001, Consumers Funding issued $468.6 million of securitization
bonds, in six classes at interest rates ranging from 2.59 percent to 5.76
percent. Consumers Funding used the proceeds from the securitization bonds to
purchase securitization property from Consumers.
11
Scheduled maturities and interest rates for the securitization bonds at June 30,
2002 are as follows:
Initial Class Expected
Principal Final Final
Bond Balance Payment Maturity
Class Rate (in thousands) Date Date
------------------------------------------------------------------------------------
A-1 2.59% $ 26,000 4/20/2003 4/20/2005
A-2 3.80% 84,000 4/20/2006 4/20/2008
A-3 4.55% 31,000 4/20/2007 4/20/2009
A-4 4.98% 95,000 4/20/2010 4/20/2012
A-5 5.43% 117,000 4/20/2013 4/20/2015
A-6 5.76% 115,592 10/20/2015 10/20/2016
--------
Total $468,592
Current Maturities (29,005)
--------
Long-Term Debt $439,587
========
Current maturities are based on the expected final payment dates indicated
above.
The amortization schedule for the securitization bonds provides for an initial
payment to bondholders on July 20, 2002 and then quarterly thereafter. The
following table provides the expected principal retirement of the securitization
bonds over the next five calendar years (in thousands).
Principal
Year Retirement
---- ----------
2002 $ 15,650
2003 26,905
2004 27,786
2005 28,646
2006 29,591
As scheduled, on July 20, 2002, approximately $8.3 million of the Class A-1
securitization bonds were retired.
4. FAIR VALUE OF FINANCIAL INSTRUMENTS
Restricted cash is on deposit with the trustee and, by definition, is carried at
its fair value. At June 30, 2002, Consumers Funding had a financial asset
(representing its securitization receivable from Consumers) of approximately
$458.9 million, and financial liabilities (representing the securitization
bonds) with a cost basis of approximately $468.6 million. The securitization
receivable and securitization bonds are carried at cost, which approximates fair
value. Fair value is estimated based on quoted market prices, or, in the absence
of specific market prices, on quoted market prices of similar investments or
other valuation techniques.
12
5. SIGNIFICANT AGREEMENTS AND RELATED PARTY TRANSACTIONS
Under the servicing and administration agreements, Consumers is required to
manage and administer the securitization property of Consumers Funding, and to
collect the Securitization Charge on Consumers Funding's behalf. Consumers
Funding pays Consumers a servicing fee (see Note 1) and an annual administrative
fee. These fees are payable to Consumers on each scheduled quarterly payment
date beginning July 20, 2002. For the three-month and six month periods ending
June 30, 2002, Consumers Funding has recorded total expenses associated with
these fees of $412,000 and $747,000, respectively.
13
CONSUMERS FUNDING LLC
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NONE
ITEM 4. OTHER INFORMATION
NONE
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
See Exhibit Index that appears following the Signature page to this
report.
(b) Reports on Form 8-K:
None
14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CONSUMERS FUNDING LLC
By: /s/Laura L. Mountcastle
--------------------------
Laura L. Mountcastle
President, Chief Executive Officer,
Chief Financial Officer and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Quarterly Report has been signed below by the following persons on behalf of
Consumers Funding LLC and in the capacities and on the 14th day of August 2002.
SIGNATURE TITLE
---------------------------- ---------------------------------------
By /s/Laura L. Mountcastle President, Chief Executive Officer,
---------------------------- Chief Financial Officer and Treasurer
Laura L. Mountcastle
By /s/Glenn P. Barba Chief Accounting Officer and Controller
----------------------------
Glenn P. Barba
15
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
----------- -----------
10 (a) Monthly Servicer's Certificate dated May 15, 2002
10(b) Monthly Servicer's Certificate dated June 18, 2002
10(c) Monthly Servicer's Certificate dated July 17, 2002
99(a) Consumers Funding LLC's Letter regarding Section 906 of the
Sarbanes-Oxley Act of 2002
16