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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 March 31, 2003
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
(A Delaware Corporation)
One Energy Plaza
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 whether the registrant is an accelerated filer
(as defined in rule 12b-2 of the Exchange Act). YES [ ] NO [X]
Consumers Funding LLC meets the conditions set forth in General
Instruction H(1)(a) and (b) 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 MARCH 31, 2003
TABLE OF CONTENTS
Page
PART I: Financial Information
1. Management's Narrative and Analysis of Results of Operations.....................3
2. Financial Statements and Supplementary Data
Statements of Income.........................................................5
Balance Sheets...............................................................6
Statements of Cash Flows.....................................................7
Statements of Member's Equity................................................8
Notes to Financial Statements................................................9
PART II: Other Information
3. Item 1. Legal Proceedings
Item 5. Other Information
Item 6. Exhibit, and Report on Form 8-K..........................................13
Signatures.......................................................................14
Exhibit Index....................................................................16
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). In 2003, the securitization property,
which is classified as a securitization receivable, along with earnings on
cash deposited with the trustee, resulted in the recording of $5.6 million
and $5.7 million of interest income for the three months ended March 31,
2003 and 2002 respectively. Interest expense associated with the
securitization bonds totaled $5.6 million and $5.8 million for the same
three-month 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. 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 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.
3
For the three months ended March 31, 2003, Consumers Funding collected $5.9
million in surcharge revenues, a decrease of $0.2 million compared to 2002.
Included in the $5.9 million is $5.6 million of interest income and $0.3
million of other operating income. The decrease in surcharge revenues for
the three-month period is primarily the result of the reduced
Securitization Charge mentioned above.
For the three months ended March 31, 2003, Consumers Funding incurred $5.9
million of operating expenses, a decrease of $0.2 million compared to 2002.
Included in the $5.9 million is $5.6 million of interest expense and $0.3
of servicing, administration and other expenses. The decrease in operating
expenses for the three-month period is primarily the result of reduced debt
levels.
4
CONSUMERS FUNDING LLC
STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED MARCH 31
2003 2002
- -------------------------------------------------------------------------------------------------------------------
In Thousands
OPERATING REVENUES
Interest Income -- Consumers Energy $ 5,619 $ 5,730
Other Operating Revenue -- Consumers Energy 299 335
Other Operating Revenue 17 25
-------------------------------
Total Operating Revenues 5,935 6,090
- -------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Interest Expense 5,619 5,755
Service Fee -- Consumers Energy 279 315
Administration Fee -- Consumers Energy 20 20
Other 17 -
-------------------------------
Total Operating Expenses 5,935 6,090
- -------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ - $ -
- -------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
5
CONSUMERS FUNDING LLC
BALANCE SHEETS
(UNAUDITED)
ASSETS
MARCH 31 DECEMBER 31 MARCH 31
2003 2002 2002
(Unaudited) (Unaudited)
- ----------------------------------------------------------------------------------------------------------------
In Thousands
CURRENT ASSETS
Restricted Cash $ 17,619 $ 17,411 $ 15,172
Securitization Receivable -- Consumers Energy 26,431 26,402 19,087
--------------------------------------------
Total Current Assets 44,050 43,813 34,259
NON-CURRENT ASSETS
Securitization Receivable -- Consumers Energy 409,323 416,245 446,283
--------------------------------------------
Total Non-current Assets 409,323 416,245 446,283
- ----------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 453,373 $ 460,058 $ 480,542
================================================================================================================
LIABILITIES AND MEMBER'S EQUITY
CURRENT LIABILITIES
Securitization Bonds Payable $ 27,168 26,905 22,309
Accounts Payable - Consumers Energy 306 314 464
Accounts Payable - Other 17 2 -
Interest Payable 4,423 4,457 9,143
--------------------------------------------
Total Current Liabilities 31,914 31,678 31,916
- ----------------------------------------------------------------------------------------------------------------
NON-CURRENT LIABILITIES
Securitization Bonds Payable 419,116 426,037 446,283
--------------------------------------------
Total Non-current Liabilities 419,116 426,037 446,283
- ----------------------------------------------------------------------------------------------------------------
MEMBER'S EQUITY
Total Member's Equity 2,343 2,343 2,343
--------------------------------------------
TOTAL LIABILITIES AND MEMBER'S EQUITY $ 453,373 $ 460,058 $ 480,542
================================================================================================================
The accompanying notes are an integral part of these Balance Sheets.
6
CONSUMERS FUNDING LLC
STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31
2003 2002
- -----------------------------------------------------------------------------------------------------------------
In Thousands
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ - $ -
Changes in Current Assets and Liabilities:
Interest Receivable -- Consumers Energy - 2,257
Interest Payable (34) 5,754
Accounts Payable -- Consumers Energy (8) 335
Accounts Payable -- Other 15 -
----------------------------
NET CASH PROVIDED BY/ (USED IN) OPERATING ACTIVITIES (27) 8,346
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Reduction of Securitization Receivable 6,893 3,222
----------------------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 6,893 3,222
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of Bonds - -
Securitization Bonds Payable (6,658) -
Member's Investment - -
----------------------------
NET CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES (6,658) -
- ----------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 208 11,568
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 17,411 3,604
----------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 17,619 $ 15,172
================================================================================================================
The accompanying notes are an integral part of these statements.
7
CONSUMERS FUNDING LLC
STATEMENTS OF MEMBER'S EQUITY
(UNAUDITED)
THREE MONTHS ENDED MARCH 31
2003 2002
- --------------------------------------------------------------------------------
In Thousands
BALANCE AT BEGINNING OF PERIOD $ 2,343 $ 2,343
Add:
Net Income - -
Member's Investment - -
----------------------------
BALANCE AT END OF PERIOD $ 2,343 $ 2,343
============================
The accompanying notes are an integral part of these statements.
8
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
9
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 are 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 March 31, 2003, and March 31,
2002, the General Subaccount totaled $11.9 million and $12.8 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 March 31, 2003, the Reserve Subaccount totaled
approximately $3.1 million. There was no balance in the Reserve Subaccount
at March 31, 2002.
OVERCOLLATERALIZATION SUBACCOUNT: On each payment date, the trustee will
deposit in the Overcollateralization Subaccount a predetermined, specified
amount so that the account balance ultimately 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
March 31, 2003, the Overcollateralization Subaccount totaled approximately
$211,000. There was no balance in the Overcollateralization Subaccount at
March 31, 2002.
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
10
Funding, the trustee will draw on amounts in the Capital Subaccount to make
those payments. At March 31, 2003, and March 31, 2002, 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
March 31, 2003 are as follows:
Expected
Principal Final Final
Bond Balance Payment Maturity
Class Rate (in thousands) Date Date
------------------------------------------------------------------------------------
A-1 2.59% $ 3,692 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 $446,284
Current Maturities (27,168)
--------
Long-Term Debt $419,116
========
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, 2002, October 20, 2002, January 20, 2003, and
April 20, 2003, approximately $8.3 million, $7.3 million, $6.7 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 March 31, 2003, and 2002, Consumers Funding
had a financial asset (representing its securitization receivable from
Consumers) of approximately $436 million and $465 million respectively, and
financial liabilities (representing the securitization bonds) with a cost
basis of approximately $446 million and $469 million respectively. 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.
11
5. SIGNIFICANT AGREEMENTS AND RELATED PARTY TRANSACTIONS
Consumers Funding has a securitization receivable with Consumers Energy in
the amount of approximately $436 million and $465 million, as of March 31,
2003, and March 31, 2002, respectively. Accordingly, Consumers Funding
recognized interest income totaling $5.6 million and $5.7 million for the
three months ended March 31, 2003, and 2002, respectively. In addition,
Consumers Funding recognized other operating income from Consumers Energy
totaling approximately $300,000 for the three months ended March 31, 2003, and
2002.
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 months ended
March 31, 2003, and 2002, Consumers Funding has recorded total expenses
associated with these fees of approximately $300,000.
12
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 Certification page to
this report.
(b) Reports on Form 8-K:
None
13
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 May 2003.
SIGNATURE TITLE
By /s/Laura L. Mountcastle President, Chief Executive
-------------------------- Officer, Chief Financial
Laura L. Mountcastle Officer and Treasurer
By /s/Glenn P. Barba Chief Accounting Officer
-------------------------- and Controller
Glenn P. Barba
14
CERTIFICATION OF LAURA L. MOUNTCASTLE
I, Laura L. Mountcastle, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Consumers Funding
LLC;
2. To the best of my knowledge, this quarterly 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 quarterly
report;
3. To the best of my knowledge, the financial statements included in
this quarterly 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: May 14, 2003 By /s/ Laura L. Mountcastle
---------------------------------
Laura L. Mountcastle
President, Chief Executive Officer,
Chief Financial Officer and
Treasurer
15
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
----------- -----------------------------------------------------------
10(a) Monthly Servicer's Certificate dated February 20, 2003
10(b) Monthly Servicer's Certificate dated March 19, 2003
10(c) Monthly Servicer's Certificate dated April 17, 2003
10(d) Quarterly Servicer's Certificate dated April 18, 2003
99 Consumers Funding, LLC's certification pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
16