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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
For the quarterly period ended September 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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 limited liability company
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.
CONSUMERS FUNDING LLC
FORM 10-Q QUARTERLY REPORT TO
THE SECURITIES AND EXCHANGE COMMISSION
FOR THE QUARTER ENDED SEPTEMBER 30, 2004
TABLE OF CONTENTS
Page
----
PART I: Financial Information
1. Management's Narrative 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 .................................................. 13
Item 5. Other Information .................................................. 13
Item 6. Exhibits, and Reports on Form 8-K................................... 13
Item 7A. Quantitative and Qualitative Disclosures About Market Risk......... 13
Signatures.................................................................. 14
Exhibit Index............................................................... 15
2
CONSUMERS FUNDING LLC
MANAGEMENT'S NARRATIVE ANALYSIS
OF RESULTS OF OPERATIONS
This Management's Narrative Analysis (MNA) of the results of operations 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
contain forward-looking statements as defined by the Private Securities
Litigation Reform Act of 1995. Consumers Funding's intention with the use of
words such as "may," "could," "anticipates," "believes," "estimates," "expects,"
"intends," "plans," and other similar words is to identify forward-looking
statements that involve risk and uncertainty. Consumers Funding designed this
discussion of potential risks and uncertainties to highlight important factors
that may impact its business and financial outlook. 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 the statements. 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 these statements.
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 purposes 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 Consumers Funding
recording $5.3 million of interest income for the three months ended September
30,2004 and $5.4 million of interest income for the three months ended
September 30, 2003. Interest expense associated with the securitization bonds
totaled $5.3 million for the three months ended September 30, 2004 and $5.4
million for the three months ended September 30, 2003. Interest income totaled
$16.0 million for the nine months ended September 30, 2004 and $16.6 million
for the nine months ended September 30, 2003. Interest expense totaled $16.0
million for the nine months ended September 30, 2004 and $16.6 million for the
nine months ended September 30, 2003.
Consumers, as servicer, began billing a Securitization Charge to electric
customers with its December 2001 billing cycle, totaling $.001427 per
kilowatt-hour, per customer, per billing cycle. 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
On October 16, 2003, Consumers submitted a request to the MPSC for its annual
adjustment and it was approved on November 25, 2003. The approved adjustment
revised the Securitization Charge to $.001299 from $.001328 per kilowatt-hour,
per customer, per billing cycle, effective with the December 2003 billing cycle.
On October 15, 2004, Consumers submitted a request to the MPSC for its annual
adjustment. If approved, the adjustment will revise the Securitization Charge to
$.001311 per kilowatt-hour, per customer, per billing cycle, effective December
1, 2004.
For the three months ended September 30, 2004, operating revenues totaled $5.6
million, a decrease of approximately $0.1 million compared to 2003. Included in
the $5.6 million is $5.3 million of interest income and approximately $0.3
million of other operating revenue. The decrease in total operating revenues for
the three-month period primarily reflects lower interest income associated with
the reduction in the securitization receivable from Consumers.
For the three months ended September 30, 2004, Consumers Funding incurred $5.6
million of operating expenses, a decrease of approximately $0.1 million compared
to 2003. Included in the $5.6 million is $5.3 million of interest expense and
approximately $0.3 million of servicing, administration and other expenses. The
decrease in operating expenses for the three-month period is primarily the
result of reduced debt levels.
For the nine months ended September 30, 2004, operating revenues totaled $16.9
million, a decrease of approximately $0.6 million compared to 2003. Included in
the $16.9 million is $16.0 million of interest income and approximately $0.9
million of other operating revenue. The decrease in total operating revenues for
the nine-month period primarily reflects lower interest income associated with
the reduction in the securitization receivable from Consumers.
For the nine months ended September 30, 2004, Consumers Funding incurred $16.9
million of operating expenses, a decrease of approximately $0.6 million compared
to 2003. Included in the $16.9 million is $16.0 million of interest expense and
approximately $0.9 million of servicing, administration and other expenses. The
decrease in operating expenses for the nine-month period is primarily the result
of reduced debt levels.
4
CONSUMERS FUNDING LLC
STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 2004 2003 2004 2003
- ------------ ------ ------ ------- -------
In Thousands
OPERATING REVENUES
Interest Income - Consumers $5,262 $5,427 $16,045 $16,593
Other Operating Revenue - Consumers 274 291 833 885
Other Operating Revenue 19 7 22 42
------ ------ ------- -------
Total Operating Revenues 5,555 5,725 16,900 17,520
------ ------ ------- -------
OPERATING EXPENSES
Interest Expense 5,262 5,427 16,045 16,593
Service Fee - Consumers 254 271 773 825
Administration Fee - Consumers 20 20 60 60
Other 19 7 22 42
------ ------ ------- -------
Total Operating Expenses 5,555 5,725 16,900 17,520
------ ------ ------- -------
NET INCOME $ - $ - $ - $ -
====== ====== ======= =======
The accompanying notes are an integral part of these statements.
5
CONSUMERS FUNDING LLC
BALANCE SHEETS
SEPT. 30 SEPT. 30
2004 DEC. 31 2003
(UNAUDITED) 2003 (UNAUDITED)
----------- -------- -----------
In Thousands
ASSETS
CURRENT ASSETS
Restricted Cash $ 17,736 $ 17,045 $ 17,837
Securitization Receivable - Consumers 27,230 27,361 26,437
-------- -------- --------
Total Current Assets 44,966 44,406 44,274
NON-CURRENT ASSETS
Securitization Receivable - Consumers 367,758 388,459 396,170
-------- -------- --------
Total Non-current Assets 367,758 388,459 396,170
-------- -------- --------
TOTAL ASSETS $412,724 $432,865 $440,444
======== ======== ========
LIABILITIES AND MEMBER'S EQUITY
CURRENT LIABILITIES
Securitization Bonds Payable $ 28,412 $ 27,786 $ 27,590
Accounts Payable - Consumers 302 305 286
Accounts Payable - Other 13 32 33
Interest Payable 4,104 4,148 4,229
-------- -------- --------
Total Current Liabilities 32,831 32,271 32,138
NON-CURRENT LIABILITIES
Securitization Bonds Payable 377,550 398,251 405,963
-------- -------- --------
Total Non-current Liabilities 377,550 398,251 405,963
-------- -------- --------
MEMBER'S EQUITY
Total Member's Equity 2,343 2,343 2,343
-------- -------- --------
TOTAL LIABILITIES AND MEMBER'S EQUITY $412,724 $432,865 $440,444
======== ======== ========
The accompanying notes are an integral part of these statements.
6
CONSUMERS FUNDING LLC
STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30 2004 2003
- ------------ -------- --------
In Thousands
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ - $ -
Changes in Current Assets and Liabilities:
Interest Payable (44) (228)
Accounts Payable - Consumers (3) (28)
Accounts Payable - Other (19) 31
-------- --------
NET CASH (USED IN) OPERATING ACTIVITIES (66) (225)
CASH FLOWS FROM INVESTING ACTIVITIES
Restricted Cash (691) (426)
Reduction of Securitization Receivable 20,832 20,040
-------- --------
NET CASH PROVIDED BY INVESTING ACTIVITIES 20,141 19,614
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of Securitization Bonds Principal (20,075) (19,389)
-------- --------
NET CASH (USED IN) FINANCING ACTIVITIES (20,075) (19,389)
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS - -
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD - -
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ - $ -
======== ========
The accompanying notes are an integral part of these statements.
7
CONSUMERS FUNDING LLC
STATEMENTS OF MEMBER'S EQUITY
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 2004 2003 2004 2003
- ------------ ------ ------ ------ ------
In Thousands
BALANCE AT BEGINNING OF PERIOD $2,343 $2,343 $2,343 $2,343
Add:
Net Income - - - -
------ ------ ------ ------
BALANCE AT END OF PERIOD $2,343 $2,343 $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, 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 purposes 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 from
customers in accordance with an 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 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' financial statements 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 U.S. generally
accepted accounting principles 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. The General Subaccount totaled $12.8
million at September 30, 2004 and $12.6 million at September 30, 2003. 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. The Reserve Subaccount totaled approximately $2.1 million at
September 30, 2004 and $2.6 million at September 30, 2003.
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. The
Overcollateralization Subaccount totaled approximately $0.5 million at
September 30, 2004 and $0.3 million at September 30, 2003.
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 September 30, 2004 and September 30, 2003, 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. As of September 30, 2004,
Consumers Funding has retired all of the class A-1 securitization bonds and
$36.6 million of the class A-2 securitization bonds in accordance with the bond
amortization schedule.
Scheduled maturities and interest rates for the remaining securitization bonds
at September 30, 2004 are as follows:
Expected
Principal Final Final
Bond Balance Payment Maturity
Class Rate (in thousands) Date Date
----- ---- -------------- ---- ----
A-2 3.80% $ 47,370 April 20, 2006 April 20, 2008
A-3 4.55% 31,000 April 20, 2007 April 20, 2009
A-4 4.98% 95,000 April 20, 2010 April 20, 2012
A-5 5.43% 117,000 April 20, 2013 April 20, 2015
A-6 5.76% 115,592 October 20, 2015 October 20, 2016
--------
Total $405,962
Current Maturities (28,412)
--------
Long-Term Debt $377,550
========
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 during the remainder of 2004, the next five calendar years, and thereafter
(in thousands).
Principal
Retirement
Year (in thousands)
- ---- --------------
2004 $ 7,711
2005 28,646
2006 29,591
2007 30,763
2008 32,130
2009 33,589
Thereafter 243,532
--------
Total Debt $405,962
========
As scheduled, on October 20, 2004, $7.7 million of securitization bonds were
retired.
11
4. FAIR VALUE OF FINANCIAL INSTRUMENTS
Restricted cash is on deposit with the trustee and, by definition, is carried at
its fair value. Consumers Funding had a financial asset (representing its
securitization receivable from Consumers) of approximately $395 million at
September 30, 2004 and $423 million at September 30, 2003. Consumers Funding had
a financial liability (representing the securitization bonds) with a cost basis
of approximately $406 million at September 30, 2004 and $434 million at
September 30, 2003. 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.
5. SIGNIFICANT AGREEMENTS AND RELATED PARTY TRANSACTIONS
Consumers Funding has a securitization receivable with Consumers in the amount
of approximately $395 million as of September 30, 2004 and $423 million as of
September 30, 2003. Accordingly, Consumers Funding recognized interest income
totaling $5.3 million for the three months ended September 30, 2004 and $5.4
million for the three months ended September 30, 2003. In addition, Consumers
Funding recognized other operating revenue from Consumers totaling approximately
$0.3 million for the three months ended September 30, 2004, and approximately
$0.3 million for the three months ended September 30, 2003.
Consumers Funding recognized interest income totaling $16.0 million for the
nine months ended September 30, 2004 and $16.6 million for the nine months ended
September 30, 2003. In addition, Consumers Funding recognized other operating
revenue from Consumers totaling approximately $0.8 for the nine months ended
September 30, 2004 and approximately $0.9 million for the nine months ended
September 30, 2003.
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. For the three months ended September 30, 2004 and 2003, Consumers Funding
has recorded total expenses related to these fees of approximately $0.3 million.
For the nine months ended September 30, 2004, Consumers Funding has recorded
total expenses associated with these fees of approximately $0.8 million, and
approximately $0.9 million for the nine months ended September 30, 2003.
12
CONSUMERS FUNDING LLC
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 5. 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
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CONSUMERS FUNDING LLC
By:/s/ Laura L. Mountcastle Date: November 5, 2004
------------------------
Laura L. Mountcastle
President, Chief Executive Officer,
Chief Financial Officer and Treasurer
By:/s/ Glenn P. Barba Date: November 5, 2004
------------------------
Glenn P. Barba
Vice President, Controller
and Chief Accounting Officer
14
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10(a) Monthly Servicer's Certificate dated August 10, 2004
10(b) Monthly Servicer's Certificate dated September 17, 2004
10(c) Monthly Servicer's Certificate dated October 15, 2004
10(d) Quarterly Servicer's Certificate dated October 15, 2004
31 Consumers Funding LLC's certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32 Consumers Funding LLC's certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
15