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FORM 10-K
United States Securities and Exchange Commission
Washington, D.C. 20549
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15d OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the year ended December 31, 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 [ ]
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 Registrant's 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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) YES [ ] NO [ X ]
Consumers Funding LLC 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
As of June 28, 2002 and March 14, 2003, Consumers Energy Company held all voting
and non-voting equity of Consumers Funding LLC
Documents incorporated by reference: Not applicable.
FORM 10-K ANNUAL REPORT TO
THE SECURITIES AND EXCHANGE COMMISSION
FOR THE YEAR ENDED DECEMBER 31, 2002
------------------------------------------------------------
TABLE OF CONTENTS
Page
PART I:
1. Business.............................................................................................3
2. Properties...........................................................................................4
3. Legal Proceedings....................................................................................4
4. Submission of Matters to a Vote of Security Holders..................................................Omitted
PART II:
5. Market for the Registrant's Common Equity and Related Stockholder Matters............................4
6. Selected Financial Data..............................................................................Omitted
7. Management's Narrative and Analysis of Results of Operations.........................................5
7A. Quantitative and Qualitative Disclosures About Market Risk...........................................6
Report of Independent Accountants....................................................................7
8. Financial Statements and Supplementary Data
Statement of Income..............................................................................8
Balance Sheet....................................................................................9
Statement of Cash Flows..........................................................................10
Statement of Member's Equity.....................................................................11
Notes to Financial Statements....................................................................12
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure...........................................................................................15
PART III:
10. Directors and Executive Officers of the Registrant...................................................Omitted
11. Executive Compensation...............................................................................Omitted
12. Security Ownership of Certain Beneficial Owners and Management.......................................Omitted
13. Certain relationships and Related Transactions.......................................................Omitted
14. Controls and Procedures..............................................................................15
PART IV:
15. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................................15
Signatures...........................................................................................16
Exhibit Index........................................................................................18
Exhibit 99...........................................................................................19
-2-
PART I
ITEM 1. BUSINESS
GENERAL
On October 11, 2000, Consumers Funding, LLC ("Consumers Funding") whose sole
member is Consumers Energy Company ("Consumers Energy"), was formed as a
Delaware limited liability company pursuant to a limited liability company
agreement of Consumers Energy. Consumers Energy is an electric and gas utility
company and is a wholly owned subsidiary of CMS Energy Corporation.
Consumers Funding was organized for the sole purposes of:
o Purchasing and owning securitization property;
o Issuing one or more series of securitization bonds;
o Pledging its interest in securitization property and other
collateral to the trustee under the indenture in order to
secure securitization bonds; and
o Performing activities that are necessary, suitable or
convenient to accomplish these purposes, including the
execution of any interest rate swap agreement or hedging
arrangement incident to the issuance of securitization bonds.
Consumers Funding is not authorized to and will not engage in any activities in
the nature of selling electricity.
Consumers Funding's assets are limited to the securitization property that was
sold to the issuer, the trust funds held by the trustee, the rights of the
issuer under the transaction documents, any third party credit enhancement or
rights under any interest rate swap agreement and any money distributed to the
issuer from the collection account in accordance with the indenture and not
distributed to Consumers Energy.
The securitization property represents the irrevocable right to recover an
amount sufficient to recover a portion of Consumers Energy's qualified costs,
including an amount sufficient to pay the principal of and interest on the
series 2001-1 securitization bonds and the expenses associated with the
securitization bonds. This amount is to be recovered through a non-bypassable
securitization charge, approved by the Michigan Public Service Commission
("MPSC"), payable by all of Consumers Energy's electric customers taking
delivery from Consumers Energy or its successor on its MPSC approved rate
schedules and under certain special contracts with specific customers.
The securitization bonds represent obligations only of Consumers Funding, and
are backed only by the assets of Consumers Funding. The securitization bonds do
not represent obligations of Consumers Energy or of any agency or
instrumentality of the State of Michigan.
The only material business conducted by Consumers Funding has been the issuance
of the securitization bonds and holding of the securitization property.
-3-
Consumers Funding has no employees. Under the Servicing Agreement, Consumers
Energy, as agent for Consumers Funding, has the following duties:
(i) obtaining meter reads, calculating and billing the
Securitization Charges and collecting from customers all
Securitization Charge Collections;
(ii) responding to inquiries by Customers, Alternative Electric
Suppliers, if any, the MPSC, or any federal, local or other
state governmental authority with respect to the
Securitization Charges;
(iii) delivering bills or arranging for delivery of bills,
accounting for Securitization Charge Collections,
investigating and resolving delinquencies, processing and
depositing collections, making periodic remittances and
furnishing periodic reports, to the Issuer, the Trustee, the
Securitization Bondholders, the Securities and Exchange
Commission and the Rating Agencies, subject, in the case of
processing and depositing collections, making periodic
remittances and furnishing periodic reports, to the provisions
of the Intercreditor Agreement;
(iv) settling, as the agent for the Issuer, as its interest may
appear, defaulted or written off accounts in accordance with
the Servicer's usual and customary practices for accounts of
its own electric service customers; and
(v) taking action in connection with Securitization Charge
Adjustments (see MANAGEMENT'S NARRATIVE AND ANALYSIS).
ITEM 2. PROPERTIES
Consumers Funding LLC has no physical property. Its primary asset is the
securitization property described in Item 1 above.
ITEM 3. LEGAL PROCEEDINGS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
(a) Sales of Unregistered Securities. There is no established public
trading market for Consumers Funding's equity securities. Consumers
Energy owns all of the Company's equity. On January 22, 2001, Consumers
Energy made a $1,000 equity contribution to Consumers Funding. On
November 8, 2001, Consumers Energy made a $2.3 million equity
investment in Consumers Funding.
(b) Restriction on Dividend. Consumers Funding may not make any payment,
distributions or dividends to any member of Consumers Funding with
respect to its membership interest in Consumers Energy except in
accordance with the Indenture.
(c) Bondholder. As of December 31, 2002, the sole holder of the
Securitization Bonds was Cede & Company, as nominee of the Depository
Trust. The Securitization Bonds are not registered on any national
securities exchange and are not traded on any established trading
market.
-4-
ITEM 7. 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 I(1)(a) and (b) of Form 10-K. 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-K 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). In 2002 and the two
month period in 2001, the securitization property, which is classified as a
securitization receivable, along with earnings on cash deposited with the
trustee, resulted in the recording of $22.9 million and $3.4 million of interest
income, respectively. Interest expense associated with the securitization bonds
also totaled $22.9 million and $3.4 million for the same periods.
Consumers, as servicer, began billing a Securitization Charge to electric
customers beginning with its December 2001 billing cycle totaling $.001427 per
kilowatt-hour. A request for adjustment was submitted on October 15, 2002 and
approval by the MPSC was granted on November 7, 2002. The new surcharge became
effective with the December 2002 billing cycle and is $0.001328 per
kilowatt-hour. 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 December 31, 2002, Consumers had
remitted approximately $53.5 million of Securitization Charge collections to the
trustee, which was sufficient for the following scheduled payments of
securitization bond principal, interest and related expenses:
Payment Date Amount (In Millions)
July 20, 2002 $ 25.4
October 20, 2002 $ 13.4
January 20, 2003 $ 12.7
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
-5-
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 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
-6-
THIS REPORT IS A COPY OF THE PREVIOUSLY ISSUED ARTHUR ANDERSEN REPORT AND THIS
REPORT HAS NOT BEEN REISSUED
BY ARTHUR ANDERSEN LLP
The Arthur Andersen LLP report below is only included for the year ended
December 31, 2001.
Report of Independent Accountants
We have audited the accompanying balance sheet of CONSUMERS FUNDING LLC (a
Delaware limited liability corporation and wholly owned subsidiary of Consumers
Energy) as of December 31, 2001, and the related statements of income, cash
flows, and member's equity for the year ended December 31, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements based on our
audit.
We conducted our audit 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 audit provides 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 Funding as of
December 31, 2001, and the results of its operations and its cash flows for the
year ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States.
/s/ Arthur Andersen LLP
Detroit, Michigan,
March 14, 2002.
-7-
REPORT OF INDEPENDENT AUDITORS
To Consumers Funding LLC:
We have audited the balance sheet of Consumers Funding LLC as of December 31,
2002, and the related statements of income, member's equity, and cash flows for
the year then ended. 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 audit. The financial statements of Consumers
Funding LLC as of December 31, 2001, were audited by other auditors (who have
ceased operations) whose report dated March, 14 2002, expressed an unqualified
opinion on those statements.
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 audit provides a reasonable basis for our
opinion.
In our opinion, the 2002 financial statements referred to above present fairly,
in all material respects, the financial position of Consumers Funding LLC as of
December 31, 2002, and the results of its operations and its cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States.
/s/ Ernst & Young LLP
Detroit, Michigan
March 14, 2003
-8-
ITEM 8. Financial Statements and Supplementary Data
CONSUMERS FUNDING LLC
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31
2002 2001
- -------------------------------------------------------------------------------------------------------------------
In Thousands
OPERATING REVENUES
Interest Income - Consumers Energy $ 22,882 $ 3,389
Other Operating Revenue - Consumers Energy 1,358 129
Other Operating Revenue 23 -
-------------------------------
Total Operating Revenues 24,263 3,518
- -------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Interest Expense 22,882 3,389
Service Fee - Consumers Energy 1,274 117
Administration Fee - Consumers Energy 84 12
Other 23 -
-------------------------------
Total Operating Expenses 24,263 3,518
- -------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ - $ -
- -------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
-9-
CONSUMERS FUNDING LLC
BALANCE SHEETS
ASSETS
DECEMBER 31
2002 2001
- ---------------------------------------------------------------------------------------------------
In Thousands
CURRENT ASSETS
Restricted Cash $ 17,411 $ 3,604
Securitization Receivable - Consumers Energy 26,402 15,650
Interest Receivable - Consumers Energy - 2,257
--------------------------------
Total Current Assets 43,813 21,511
NON-CURRENT ASSETS
Securitization Receivable - Consumers Energy 416,245 452,942
--------------------------------
Total Non-current Assets 416,245 452,942
- ---------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 460,058 $ 474,453
===================================================================================================
LIABILITIES AND MEMBER'S EQUITY
CURRENT LIABILITIES
Securitization Bonds Payable $ 26,905 15,650
Accounts Payable - Consumers Energy 314 129
Accounts Payable - Other 2 -
Interest Payable 4,457 3,389
--------------------------------
Total Current Liabilities 31,678 19,168
- ---------------------------------------------------------------------------------------------------
NON-CURRENT LIABILITIES
Securitization Bonds Payable 426,037 452,942
--------------------------------
Total Non-current Liabilities 426,037 452,942
- ---------------------------------------------------------------------------------------------------
MEMBER'S EQUITY
Total Member's Equity 2,343 2,343
--------------------------------
TOTAL LIABILITIES AND MEMBER'S EQUITY $ 460,058 $ 474,453
===================================================================================================
The accompanying notes are an integral part of these Balance Sheets.
-10-
CONSUMERS FUNDING LLC
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
2002 2001
- -----------------------------------------------------------------------------------------------------------------
In Thousands
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ - $ -
Changes in Current Assets and Liabilities:
Interest Receivable - Consumers Energy 2,257 (2,257)
Interest Payable 1,068 3,389
Accounts Payable - Consumers Energy 185 129
Accounts Payable - Other 2 -
----------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,512 1,261
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Securitization Property - (468,592)
Reduction of Securitization Receivable 25,945 -
----------------------------
NET CASH PROVIDED BY/(USED IN) INVESTING ACTIVITIES 25,945 (468,592)
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of Bonds - 468,592
Securitization Bonds Payable (15,650) -
Member's Investment - 2,343
----------------------------
NET CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES (15,650) 470,935
- ----------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 13,807 3,604
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,604 -
----------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 17,411 $ 3,604
================================================================================================================
The accompanying notes are an integral part of these statements.
-11-
CONSUMERS FUNDING LLC
STATEMENTS OF MEMBER'S EQUITY
YEARS ENDED DECEMBER 31
2002 2001
- ---------------------------------------------------------------------------------------------------------------
In Thousands
BALANCE AT BEGINNING OF PERIOD $ 2,343 $ -
Add:
Net Income - -
Member's Investment - 2,343
----------------------------
BALANCE AT END OF PERIOD $ 2,343 $ 2,343
============================
The accompanying notes are an integral part of these statements.
-12-
CONSUMERS FUNDING LLC
NOTES TO FINANCIAL STATEMENTS
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 arrangement 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
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
-13-
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
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 December 31, 2002, and December 31,
2001, the General Subaccount totaled $13.2 million and $1.3 million
respectively. These funds are used by the trustee for the scheduled payments 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 December 31, 2002, the Reserve Subaccount totaled approximately
$1.7 million. There was no balance in the Reserve Subaccount at December 31,
2001.
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. At December 31, 2002,
the Overcollateralization Subaccount totaled approximately $168,000. There was
no balance in the Overcollateralization Subaccount at December 31, 2001.
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
-14-
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 December 31, 2002,
and December 31, 2001, the Capital Subaccount contained a balance of $2.3
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.
Scheduled maturities and interest rates for the securitization bonds at December
31, 2002 are as follows:
Expected
Principal Final Final
Bond Balance Payment Maturity
Class Rate (in thousands) Date Date
-----------------------------------------------------------------------------------------
A-1 2.59% $ 10,350 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 $452,942
Current Maturities (26,905)
--------
Long-Term Debt $426,037
========
The amortization schedule for the securitization bonds provided 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
---- ----------
2003 26,905
2004 27,786
2005 28,646
2006 29,591
2007 30,763
As scheduled, on July 20, October 20, 2002, and January 20, 2003, approximately
$8.3 million, $7.3 million, and $6.7 million of the Class A-1 securitization
bonds were retired, respectively.
4. FAIR VALUE OF FINANCIAL INSTRUMENTS
Restricted cash is on deposit with the trustee and, by definition, is carried at
its fair value. At December 31, 2002, and 2001, Consumers Funding had a
financial asset (representing its securitization receivable from Consumers) of
approximately $443 million and $469 million respectively, and financial
liabilities (representing the securitization bonds) with a cost basis of
approximately $453 million and $469 million respectively. The securitization
receivable and securitization bonds are carried at cost, which approximates
-15-
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.
5. SIGNIFICANT AGREEMENTS AND RELATED PARTY TRANSACTIONS
Consumers Funding has a securitization receivable with Consumers Energy in the
amount of approximately $443 million and $469 million, respectively, as of
December 31, 2002, and December 31, 2001. Accordingly, Consumers Funding
recognized interest income totaling $23 million and $3 million for the year
ended December 31, 2002, and two months in 2001, respectively. In addition,
Consumers Funding recognized other operating income from Consumers Energy
totaling $1.4 million and $129,000 for the periods ended December 31, 2002, and
2001, respectively.
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 years ended December 31, 2002, and 2001,
Consumers Funding has recorded total expenses associated with these fees of $1.4
million and $129,000, respectively.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
In April 2002, Consumers Energy Company's Board of Directors, upon the
recommendation of the Audit Committee of the Board, voted to discontinue using
Arthur Andersen to audit the Consumers Fundings' financial statements for the
year ending December 31, 2002. In May 2002, Consumers Energy Company's Board of
Directors engaged Ernst & Young to audit Consumers Fundings' financial
statements for the year ending December 31, 2002. For 2001, there were no
disagreements or "reportable events" as described in Items 304 (a) (1) (iv) and
(v) of Regulation S-K between Consumers Funding and Arthur Andersen.
PART III
ITEM 14. CONTROLS AND PROCEDURES
Omitted pursuant to Rule 13a-15(a) of the Securities and Exchange Act of 1934,
as amended.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements - included in response to Item
8.
2. Financial Statement Schedules.
None.
3. Exhibits.
See Exhibit Index that appears following the
Signature page to this report.
(b) Reports on Form 8-K:
During the fourth quarter of 2002, Consumers Funding
filed no Current Reports on Form 8-K
-16-
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 on the 28th day of
March 2003.
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
Annual Report has been signed below by the following persons on behalf of
Consumers Funding LLC and in the capacities and on the 28th day of March 2003.
Signature Title
- ------------------------------------------------- ------------------------------------------------
By /s/ Laura L. Mountcastle President, Chief Executive Officer,
-------------------------------------------
Laura L. Mountcastle Chief Financial Officer and Treasurer
By /s/ Glenn P. Barba Chief Accounting Officer and Controller
-------------------------------------------
Glenn P. Barba
By /s/ Michael D. VanHemert Manager
-------------------------------------------
Michael D. VanHemert
By /s/ David A. Mikelonis Manager
-------------------------------------------
David A. Mikelonis
By /s/ Thomas J. Webb Manager
-------------------------------------------
Thomas J. Webb
-17-
CERTIFICATION OF LAURA L. MOUNTCASTLE
I, Laura L. Mountcastle, certify that:
1. I have reviewed this annual report on Form 10-K of Consumers Funding
LLC;
2. To the best of my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. To the best of my knowledge, the financial statements included in this
annual report provide the financial information required to be provided
to the trustee under the governing documents of Consumers Funding LLC;
and
4. Consumers Energy, as Servicer under the Securitization bonds, has
complied with its servicing obligations and minimum servicing
standards.
Date: March 27, 2003 By /s/Laura L. Mountcastle
-------------------------------------
Laura L. Mountcastle
President, Chief Executive Officer,
Chief Financial Officer and Treasurer
-18-
INDEX TO EXHIBITS
The following Exhibits indicated by an asterisk preceding the Exhibit number are
filed herewith. The balance of the Exhibits have heretofore been filed with the
Commission and pursuant to Rule 12(b) - 32 are incorporated herein by reference.
Exhibit No. Description
- ----------- -------------------
3.1 Certificate of Formation of Consumers Funding LLC dated
November 15, 2001. (Exhibit 4.2 to Consumers Funding S-3 dated
October 13, 2000, File No. 333-47938)
3.1.1 Amended and Restated Certificate of Formation of Consumers
Funding LLC dated as of November 8, 2001, which was filed with
the Delaware Secretary of State's Office on November 6, 2001
(Exhibit 4.4 to Consumers Funding Form 8-K Report dated
November 15, 2002, File No. 333-47938).
4.1 Limited Liability Company Agreement of Consumers Funding LLC
(Exhibit 4.1 to Consumers Funding S-3 dated October 13, 2000,
File No. 333-47938).
4.1.1 Amended and Restated Limited Liability Company Agreement of
Consumers Funding LLC dated November 8, 2001. (Exhibit 4.2 to
Consumers Funding Form 8-K Report dated November 15, 2001,
File No. 333-47938)
4.2 Indenture dated as of November 8, 2001 between Consumers
Funding LLC and the Bank of New York. (Exhibit 4.3.1 to
Consumers Funding Form 8-K Report dated November 15, 2001,
File No. 333-47938)
4.3 Series Supplement dated as of November 8, 2001 between
Consumers Funding LLC and the Bank of New York. (Exhibit 4.3.2
to Consumers Funding Form 8-K Report dated November 15, 2001,
File No. 333-47938)
10.1 Sale Agreement dated as of November 8, 2001 between Consumers
Energy Company and Consumers Funding LLC (Exhibit 10.1 to
Consumers Funding Form 8-K Report dated November 15, 2001,
File No. 333-47938).
10.2 Servicing Agreement dated as of November 8, 2001 between
Consumers Funding LLC and Consumers Energy Company. (Exhibit
10.2 to Consumers Funding Form 8-K Report dated November 15,
2001, File No. 333-47938).
10.3 Intercreditor Agreement dated as of November 8, 2001 among
Canadian Imperial Bank of Commerce, Asset Securitization
Cooperative Corporation, The Bank of New York, Consumers
Funding LLC and Consumers Energy Company. (Exhibit 10.3 to
Consumers Funding Form 8-K Report dated November 15, 2001,
File No. 333-47938).
16 Letter from Arthur Andersen LLP to the Securities and Exchange
Commission dated April 29, 2002, regarding change in
certifying accountant (Exhibit 16.1 to Consumers Energy Form
8-K dated April 29, 2002, File No.1-5611)
99 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
After reasonable efforts, we have been unable to obtain Arthur Andersen LLP's
consent to the incorporation by reference of their report for our fiscal year
ended December 31, 2001 previously filed with our Form 10-K for the fiscal year
ended December 31, 2001 and we have not filed that consent with this Annual
Report on Form 10-K in reliance upon Rule 437a under the Securities Act of 1933.
Because we have not been able to obtain Arthur Andersen LLP's consent, you may
not be able to recover against Arthur Andersen LLP under Section 11 of the
Securities Act of 1933 for any untrue statements of a material fact contained in
our financial statements audited by Arthur Andersen LLOP or any omission to
state a material fact required to be stated therein.