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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 MARCH 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to
Commission Registrant; State of Incorporation; IRS Employer
File Number Address; and Telephone Number Identification No.
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1-9513 CMS ENERGY CORPORATION 38-2726431
(A Michigan Corporation)
One Energy Plaza, Jackson, Michigan 49201
(517) 788-0550
1-5611 CONSUMERS ENERGY COMPANY 38-0442310
(A Michigan Corporation)
One Energy Plaza, Jackson, Michigan 49201
(517) 788-0550
Indicate by check mark whether the Registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the Registrants are accelerated filers (as
defined in Rule 12b-2 of the Exchange Act).
CMS ENERGY CORPORATION: Yes [X] No [ ]
CONSUMERS ENERGY COMPANY: Yes [ ] No [X]
Number of shares outstanding of each of the issuer's classes of common stock at
May 2, 2005:
CMS ENERGY CORPORATION:
CMS Energy Common Stock, $.01 par value 218,780,859
CONSUMERS ENERGY COMPANY, $10 par value, privately held by CMS
Energy Corporation 84,108,789
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CMS ENERGY CORPORATION
AND
CONSUMERS ENERGY COMPANY
QUARTERLY REPORTS ON FORM 10-Q TO THE
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
FOR THE QUARTER ENDED MARCH 31, 2005
This combined Form 10-Q is separately filed by CMS Energy Corporation and
Consumers Energy Company. Information contained herein relating to each
individual registrant is filed by such registrant on its own behalf.
Accordingly, except for its subsidiaries, Consumers Energy Company makes no
representation as to information relating to any other companies affiliated with
CMS Energy Corporation.
TABLE OF CONTENTS
Page
----
Glossary........................................................................ 4
PART I: FINANCIAL INFORMATION
CMS Energy Corporation
Management's Discussion and Analysis
Executive Overview.................................................... CMS - 1
Forward-Looking Statements and Risk Factors........................... CMS - 2
Results of Operations................................................. CMS - 4
Critical Accounting Policies.......................................... CMS - 9
Capital Resources and Liquidity....................................... CMS - 14
Outlook............................................................... CMS - 15
Implementation of New Accounting Standards............................ CMS - 23
New Accounting Standards Not Yet Effective............................ CMS - 23
Consolidated Financial Statements
Consolidated Statements of Income .................................... CMS - 24
Consolidated Statements of Cash Flows................................. CMS - 27
Consolidated Balance Sheets........................................... CMS - 28
Consolidated Statements of Common Stockholders' Equity................ CMS - 30
Condensed Notes to Consolidated Financial Statements:
1. Corporate Structure and Accounting Policies...................... CMS - 31
2. Asset Sales and Impairment Charges............................... CMS - 33
3. Contingencies.................................................... CMS - 33
4. Financings and Capitalization.................................... CMS - 47
5. Earnings Per Share............................................... CMS - 51
6. Financial and Derivative Instruments............................. CMS - 52
7. Retirement Benefits.............................................. CMS - 57
8. Asset Retirements Obligations.................................... CMS - 58
9. Equity Method Investments........................................ CMS - 60
10. Reportable Segments ............................................. CMS - 61
11. Consolidation of Variable Interest Entities...................... CMS - 61
12. Implementation of New Accounting Standards....................... CMS - 62
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TABLE OF CONTENTS
(CONTINUED)
Page
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Consumers Energy Company
Management's Discussion and Analysis
Executive Overview.................................................... CE - 1
Forward-Looking Statements and Risk Factors........................... CE - 2
Results of Operations................................................. CE - 4
Critical Accounting Policies.......................................... CE - 7
Capital Resources and Liquidity....................................... CE - 10
Outlook............................................................... CE - 11
New Accounting Standards Not Yet Effective............................ CE - 17
Consolidated Financial Statements
Consolidated Statements of Income..................................... CE - 20
Consolidated Statements of Cash Flows................................. CE - 21
Consolidated Balance Sheets........................................... CE - 22
Consolidated Statements of Common Stockholder's Equity................ CE - 24
Condensed Notes to Consolidated Financial Statements:
1. Corporate Structure and Accounting Policies....................... CE - 25
2. Contingencies..................................................... CE - 26
3. Financings and Capitalization..................................... CE - 37
4. Financial and Derivative Instruments.............................. CE - 40
5. Retirement Benefits............................................... CE - 43
6. Asset Retirement Obligations...................................... CE - 44
7. Reportable Segments .............................................. CE - 45
8. Consolidation of Variable Interest Entities....................... CE - 46
9. New Accounting Standards Not Yet Effective........................ CE - 47
Quantitative and Qualitative Disclosures about Market Risk...................... CO - 1
Controls and Procedures......................................................... CO - 1
PART II: OTHER INFORMATION
Item 1. Legal Proceedings.................................................. CO - 1
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds........ CO - 5
Item 3. Defaults Upon Senior Securities.................................... CO - 5
Item 4. Submission of Matters to a Vote of Security Holders................ CO - 5
Item 5. Other Information.................................................. CO - 5
Item 6. Exhibits........................................................... CO - 5
Signatures................................................................. CO - 7
3
GLOSSARY
Certain terms used in the text and financial statements are defined below
Accumulated Benefit Obligation.......... The liabilities of a pension plan based on service and pay to date. This differs
from the Projected Benefit Obligation that is typically disclosed in that it
does not reflect expected future salary increases.
ALJ..................................... Administrative Law Judge
Alliance RTO............................ Alliance Regional Transmission Organization
APB..................................... Accounting Principles Board
APB Opinion No. 18...................... APB Opinion No. 18, "The Equity Method of Accounting for Investments in Common
Stock"
ARO..................................... Asset retirement obligation
Articles................................ Articles of Incorporation
Attorney General........................ Michigan Attorney General
bcf..................................... Billion cubic feet
Big Rock................................ Big Rock Point nuclear power plant, owned by Consumers
Board of Directors...................... Board of Directors of CMS Energy
CEO..................................... Chief Executive Officer
CFO..................................... Chief Financial Officer
Clean Air Act........................... Federal Clean Air Act, as amended
CMS Electric and Gas.................... CMS Electric and Gas Company, a subsidiary of Enterprises
CMS Energy.............................. CMS Energy Corporation, the parent of Consumers and Enterprises
CMS Energy Common Stock or
common stock.......................... Common stock of CMS Energy, par value $.01 per share
CMS ERM................................. CMS Energy Resource Management Company, formerly CMS MST, a
subsidiary of Enterprises
CMS Field Services...................... CMS Field Services, formerly a wholly owned subsidiary of CMS Gas Transmission.
The sale of this subsidiary closed in July 2003.
CMS Gas Transmission.................... CMS Gas Transmission Company, a subsidiary of Enterprises
CMS Generation.......................... CMS Generation Co., a subsidiary of Enterprises
CMS Holdings............................ CMS Midland Holdings Company, a subsidiary of Consumers
CMS Midland............................. CMS Midland Inc., a subsidiary of Consumers
CMS MST................................. CMS Marketing, Services and Trading Company, a wholly owned subsidiary of
Enterprises, whose name was changed to CMS ERM effective January 2004
CMS Oil and Gas......................... CMS Oil and Gas Company, formerly a subsidiary of Enterprises
CMS Viron............................... CMS Viron Energy Services, formerly a wholly owned subsidiary of CMS MST. The
sale of this subsidiary closed in June 2003.
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Common Stock............................ All classes of Common Stock of CMS Energy and each of its subsidiaries, or any
of them individually, at the time of an award or grant under the Performance
Incentive Stock Plan
Consumers............................... Consumers Energy Company, a subsidiary of CMS Energy
Court of Appeals........................ Michigan Court of Appeals
Customer Choice Act..................... Customer Choice and Electricity Reliability Act, a Michigan statute enacted in
June 2000 that allows all retail customers choice of alternative electric
suppliers as of January 1, 2002, provides for full recovery of net stranded
costs and implementation costs, establishes a five percent reduction in
residential rates, establishes rate freeze and rate cap, and allows for
Securitization
Detroit Edison.......................... The Detroit Edison Company, a non-affiliated company
DIG..................................... Dearborn Industrial Generation, LLC, a wholly owned subsidiary of CMS Generation
DOE..................................... U.S. Department of Energy
DOJ..................................... U.S. Department of Justice
Dow..................................... The Dow Chemical Company, a non-affiliated company
EBITDA.................................. Earnings before income taxes, depreciation, and amortization
EISP.................................... Executive Incentive Separation Plan
EITF.................................... Emerging Issues Task Force
EITF Issue No. 02-03.................... Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes
and Contracts Involved in Energy Trading and Risk Management Activities
Enterprises............................. CMS Enterprises Company, a subsidiary of CMS Energy
EPA..................................... U. S. Environmental Protection Agency
EPS..................................... Earnings per share
ERISA................................... Employee Retirement Income Security Act
Ernst & Young........................... Ernst & Young LLP
Exchange Act............................ Securities Exchange Act of 1934, as amended
FASB.................................... Financial Accounting Standards Board
FASB Interpretation No. 46.............. FASB Interpretation No. 46, Consolidation of Variable Interest Entities
FASB Staff Position, No. 106-2.......... Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 (May 19, 2004)
FERC.................................... Federal Energy Regulatory Commission
FMB..................................... First Mortgage Bonds
FMLP.................................... First Midland Limited Partnership, a partnership that holds a lessor interest in
the MCV facility
FSP..................................... FASB Staff Position
FTR..................................... Financial transmission right
GAAP.................................... Generally Accepted Accounting Principles
5
GasAtacama.............................. An integrated natural gas pipeline and electric generation project located in
Argentina and Chile, which includes 702 miles of natural gas pipeline and a 720
MW gross capacity power plant
GCR..................................... Gas cost recovery
Goldfields.............................. A pipeline business located in Australia, in which CMS Energy formerly held a
39.7 percent ownership interest
Guardian................................ Guardian Pipeline, LLC, in which CMS Gas Transmission owned a one-third interest
GVK..................................... GVK Facility, a 250 MW gas fired power plant located in South Central India, in
which CMS Generation held a 33 percent interest
Health Care Plan........................ The medical, dental, and prescription drug programs offered to eligible
employees of Consumers and CMS Energy
IPP..................................... Independent Power Production
Jorf Lasfar............................. The 1,356 MW coal-fueled power plant in Morocco, jointly owned by CMS Generation
and ABB Energy Ventures, Inc.
kWh..................................... kilowatt-hour
LIBOR................................... London Inter-Bank Offered Rate
Loy Yang................................ The 2,000 MW brown coal fueled Loy Yang A power plant and an associated coal
mine in Victoria, Australia, in which CMS Generation held a 50 percent ownership
interest
Ludington............................... Ludington pumped storage plant, jointly owned by Consumers and Detroit Edison
mcf..................................... Thousand cubic feet
MCV Facility............................ A natural gas-fueled, combined-cycle cogeneration facility operated by the MCV
Partnership
MCV Partnership......................... Midland Cogeneration Venture Limited Partnership in which Consumers has a 49
percent interest through CMS Midland
MCV PPA................................. The Power Purchase Agreement between Consumers and the MCV Partnership with a
35-year term commencing in March 1990, as amended, and as interpreted by the
Settlement Agreement dated as of January 1, 1999 between the MCV Partnership and
Consumers.
MD&A.................................... Management's Discussion and Analysis
MDEQ.................................... Michigan Department of Environmental Quality
Michigan Power.......................... CMS Generation Michigan Power, LLC, owner of the Kalamazoo River Generating
Station and the Livingston Generating Station
Midwest Energy Market................... An energy market developed by the MISO to provide day-ahead and real-time market
information and centralized dispatch for market participants
MISO.................................... Midwest Independent System Operator
Moody's................................. Moody's Investors Service, Inc.
MPSC.................................... Michigan Public Service Commission
MSBT.................................... Michigan Single Business Tax
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MTH..................................... Michigan Transco Holdings, Limited Partnership
MW...................................... Megawatts
NEIL.................................... Nuclear Electric Insurance Limited, an industry mutual insurance company owned
by member utility companies
NMC..................................... Nuclear Management Company, LLC, formed in 1999 by Northern States Power Company
(now Xcel Energy Inc.), Alliant Energy, Wisconsin Electric Power Company, and
Wisconsin Public Service Company to operate and manage nuclear generating
facilities owned by the four utilities
NRC..................................... Nuclear Regulatory Commission
NYMEX................................... New York Mercantile Exchange
OATT.................................... Open Access Transmission Tariff
OPEB.................................... Postretirement benefit plans other than pensions for retired employees
Palisades............................... Palisades nuclear power plant, which is owned by Consumers
Panhandle............................... Panhandle Eastern Pipe Line Company, including its subsidiaries Trunkline, Pan
Gas Storage, Panhandle Storage, and Panhandle Holdings. Panhandle was a wholly
owned subsidiary of CMS Gas Transmission. The sale of this subsidiary closed in
June 2003.
Parmelia................................ A business located in Australia comprised of a pipeline, processing facilities,
and a gas storage facility, a former subsidiary of CMS Gas Transmission
PCB..................................... Polychlorinated biphenyl
Pension Plan............................ The trusteed, non-contributory, defined benefit pension plan of Panhandle,
Consumers and CMS Energy
Price Anderson Act...................... Price Anderson Act, enacted in 1957 as an amendment to the Atomic Energy Act of
1954, as revised and extended over the years. This act stipulates between
nuclear licensees and the U.S. government the insurance, financial
responsibility, and legal liability for nuclear accidents.
PSCR.................................... Power supply cost recovery
PURPA................................... Public Utility Regulatory Policies Act of 1978
RCP..................................... Resource Conservation Plan
ROA..................................... Retail Open Access
RRP..................................... Renewable Resources Program
RTO..................................... Regional Transmission Organization
S&P..................................... Standard & Poor's Rating Group, a division of the McGraw Hill Companies, Inc.
SCP..................................... Southern Cross Pipeline in Australia, in which CMS Gas Transmission formerly
held a 45 percent ownership interest
SEC..................................... U.S. Securities and Exchange Commission
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Section 10d(4) Regulatory Asset......... Regulatory asset as described in Section 10d(4) of the Customer Choice Act, as
amended
Securitization.......................... A financing method authorized by statute and approved by the MPSC which allows a
utility to sell its right to receive a portion of the rate payments received
from its customers for the repayment of Securitization bonds issued by a special
purpose entity affiliated with such utility
SENECA.................................. Sistema Electrico del Estado Nueva Esparta C.A., a subsidiary of Enterprises
SERP.................................... Supplemental Executive Retirement Plan
SFAS.................................... Statement of Financial Accounting Standards
SFAS No. 5.............................. SFAS No. 5, "Accounting for Contingencies"
SFAS No. 52............................. SFAS No. 52, "Foreign Currency Translation"
SFAS No. 71............................. SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation"
SFAS No. 87............................. SFAS No. 87, "Employers' Accounting for Pensions"
SFAS No. 98............................. SFAS No. 98, "Accounting for Leases"
SFAS No. 106............................ SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions"
SFAS No. 115............................ SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
SFAS No. 123............................ SFAS No. 123, "Accounting for Stock-Based Compensation"
SFAS No. 133............................ SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities, as
amended and interpreted"
SFAS No. 143............................ SFAS No. 143, "Accounting for Asset Retirement Obligations"
Shuweihat............................... A power and desalination plant of Emirates CMS Power Company, in which CMS
Generation holds a 20 percent interest
Special Committee....................... A special committee of independent directors, established by CMS Energy's Board
of Directors, to investigate matters surrounding round-trip trading
Stranded Costs.......................... Costs incurred by utilities in order to serve their customers in a regulated
monopoly environment, which may not be recoverable in a competitive environment
because of customers leaving their systems and ceasing to pay for their costs.
These costs could include owned and purchased generation and regulatory assets.
Superfund............................... Comprehensive Environmental Response, Compensation and Liability Act
Taweelah................................ Al Taweelah A2, a power and desalination plant of Emirates CMS Power Company, in
which CMS Generation holds a 40 percent interest
Trust Preferred Securities.............. Securities representing an undivided beneficial interest in the assets of
statutory business trusts, the interests of which have a preference with respect
to certain trust distributions over the interests of either CMS Energy or
Consumers, as applicable, as owner of the common beneficial interests of the
trusts
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CMS Energy Corporation
CMS ENERGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
This MD&A is a consolidated report of CMS Energy and Consumers. The terms "we"
and "our" as used in this report refer to CMS Energy and its subsidiaries as a
consolidated entity, except where it is clear that such term means only CMS
Energy. This MD&A has been prepared in accordance with the instructions to Form
10-Q and Item 303 of Regulation S-K. This MD&A should be read in conjunction
with the MD&A contained in CMS Energy's Form 10-K for the year ended December
31, 2004.
EXECUTIVE OVERVIEW
CMS Energy is an integrated energy company with a business strategy focused
primarily in Michigan. We are the parent holding company of Consumers and
Enterprises. Consumers is a combination electric and gas utility company serving
Michigan's Lower Peninsula. Enterprises, through various subsidiaries and equity
investments, is engaged in domestic and international diversified energy
businesses including independent power production, electric distribution, and
natural gas transmission, storage, and processing. We manage our businesses by
the nature of services each provides. We operate principally in three business
segments: electric utility, gas utility, and enterprises.
We earn our revenue and generate cash from operations by providing electric and
natural gas utility services, electric power generation, gas transmission,
storage, and processing. Our businesses are affected primarily by:
- weather, especially during the traditional heating and cooling
seasons,
- economic conditions, primarily in Michigan,
- regulation and regulatory issues that affect our gas and electric
utility operations,
- interest rates,
- our debt credit rating, and
- energy commodity prices.
Our business strategy involves improving our balance sheet and maintaining focus
on our core strength: superior utility operation and service. Our primary focus
with respect to our non-utility businesses has been to optimize cash flow and
further reduce our business risk and leverage through the sale of non-strategic
assets, and to improve earnings and cash flow from the businesses we retain.
Over the next few years, we expect that this strategy will result in reduced
parent company debt, improved credit ratings, earnings growth, restoration of a
common stock dividend, and a company positioned to make new investments
consistent with our strengths. In the near term, our new investments will focus
principally on the utility.
We face important challenges in the future. As a result of Michigan's Customer
Choice Act, which allows alternative electric suppliers to sell electric power
directly to our customers, we have lost industrial and commercial customers. As
of April 2005, we have lost 893 MW, or 12 percent, of our electric load to these
alternative electric suppliers. Based on current trends, we predict total load
loss by the end of 2005 to be in the range of 925 MW to 1,000 MW. However, no
assurance can be made that the actual load loss will fall within that range.
Another important challenge relates to the economics of the MCV Partnership. The
MCV Partnership's costs of producing electricity are tied to the cost of natural
gas. Because natural gas prices have increased substantially in recent years and
the price the MCV Partnership can charge the utility for energy has not, the MCV
Partnership's financial performance has been impacted negatively. In 2005, the
MPSC issued an
CMS-1
CMS Energy Corporation
order approving the RCP to change the way the facility is used. The purpose of
the RCP is to conserve natural gas through a change in the dispatch of the MCV
Facility and thereby improve the financial performance of the MCV Partnership
without increased costs to customers.
Our business plan is targeted at predictable earnings growth and debt reduction.
Between 2001 and 2003, we reduced parent debt (ie: excluding Consumers' and
other subsidiaries' debt) by 50 percent. We are now in the second year of a
five-year plan to reduce further, by about half, the debt of CMS Energy. In
2005, we retired higher-interest rate debt through the use of proceeds from the
issuance of $150 million of CMS Energy senior notes and $550 million of
Consumers' FMBs. We also issued 23 million shares of common stock and infused an
additional $550 million into Consumers in 2005. These efforts and others are
designed to lead us to be a strong, reliable energy company that will be poised
to take advantage of opportunities for further growth.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
This Form 10-Q and other written and oral statements that we make contain
forward-looking statements as defined in Rule 3b-6 of the Securities Exchange
Act of 1934, as amended, Rule 175 of the Securities Exchange Act of 1933, as
amended, and relevant legal decisions. Our intention with the use of such words
as "may," "could," "anticipates," "believes," "estimates," "expects," "intends,"
"plans," and other similar words is to identify forward-looking statements that
involve risk and uncertainty. We designed this discussion of potential risks and
uncertainties to highlight important factors that may impact our business and
financial outlook. We have 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 our
actual results to differ materially from the results anticipated in these
statements. Such factors include our inability to predict and/or control:
- capital and financial market conditions, including the price of CMS
Energy Common Stock and the effect of such market conditions on the
Pension Plan, interest rates, and access to the capital markets as
well as availability of financing to CMS Energy, Consumers, or any
of their affiliates, and the energy industry,
- market perception of the energy industry, CMS Energy, Consumers, or
any of their affiliates,
- credit ratings of CMS Energy, Consumers, or any of their affiliates,
- currency fluctuations, transfer restrictions, and exchange controls,
- factors affecting utility and diversified energy operations such as
unusual weather conditions, catastrophic weather-related damage,
unscheduled generation outages, maintenance or repairs,
environmental incidents, or electric transmission or gas pipeline
system constraints,
- international, national, regional, and local economic, competitive,
and regulatory policies, conditions and developments,
- adverse regulatory or legal decisions, including those related to
environmental laws and regulations, and potential environmental
remediation costs associated with such decisions,
- potentially adverse regulatory treatment and/or regulatory lag
concerning a number of significant questions presently before the
MPSC including:
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CMS Energy Corporation
- recovery of future Stranded Costs incurred due to customers
choosing alternative energy suppliers,
- recovery of Clean Air Act costs and other environmental and
safety-related expenditures,
- power supply and natural gas supply costs when oil prices and
other fuel prices are rapidly increasing,
- timely recognition in rates of additional equity investments
in Consumers, and
- adequate and timely recovery of additional electric and gas
rate-based expenditures,
- the impact of adverse natural gas prices on the MCV Partnership
investment, and regulatory decisions that limit our recovery of
capacity and fixed energy payments,
- federal regulation of electric sales and transmission of
electricity, including periodic re-examination by federal regulators
of the market-based sales authorizations under which our
subsidiaries participate in wholesale power markets without price
restrictions,
- energy markets, including the timing and extent of changes in
commodity prices for oil, coal, natural gas, natural gas liquids,
electricity, and certain related products due to lower or higher
demand, shortages, transportation problems, or other developments,
- potential adverse impacts of the new MISO Midwest Energy Market upon
power supply and transmission costs,
- potential for the Midwest Energy Market to develop into an active
energy market in the state of Michigan, which may lead us to account
for electric capacity and energy contracts with the MCV Partnership
and other independent power producers as derivatives,
- the GAAP requirement that we utilize mark-to-market accounting on
certain of our energy commodity contracts and interest rate swaps,
which may have, in any given period, a significant positive or
negative effect on earnings, which could change dramatically or be
eliminated in subsequent periods and could add to earnings
volatility,
- potential disruption, expropriation or interruption of facilities or
operations due to accidents, war, terrorism, or changing political
conditions and the ability to obtain or maintain insurance coverage
for such events,
- nuclear power plant performance, decommissioning, policies,
procedures, incidents, and regulation, including the availability of
spent nuclear fuel storage,
- technological developments in energy production, delivery, and
usage,
- achievement of capital expenditure and operating expense goals,
- changes in financial or regulatory accounting principles or
policies,
- outcome, cost, and other effects of legal and administrative
proceedings, settlements, investigations and claims, including
particularly claims, damages, and fines resulting from round-trip
trading and inaccurate commodity price reporting, including
investigations by the DOJ regarding round-trip trading and price
reporting,
- limitations on our ability to control the development or operation
of projects in which our
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CMS Energy Corporation
subsidiaries have a minority interest,
- disruptions in the normal commercial insurance and surety bond
markets that may increase costs or reduce traditional insurance
coverage, particularly terrorism and sabotage insurance and
performance bonds,
- the efficient sale of non-strategic or under-performing domestic or
international assets and discontinuation of certain operations,
- other business or investment considerations that may be disclosed
from time to time in CMS Energy's or Consumers' SEC filings or in
other publicly issued written documents, and
- other uncertainties that are difficult to predict, and many of which
are beyond our control.
For additional information regarding these and other uncertainties, see Note 3,
Contingencies.
RESULTS OF OPERATIONS
CMS ENERGY CONSOLIDATED RESULTS OF OPERATIONS
In Millions (except for per share amounts)
- --------------------------------------------------------------------------------
Three months ended March 31 2005 2004 Change
- --------------------------------------------------------------------------------
Net Income (Loss) Available to Common
Stockholders $ 150 $ (9) $ 159
Basic Earnings (Loss) Per Share $0.77 $(0.06) $ 0.83
Diluted Earnings (Loss) Per Share $0.74 $(0.06) $ 0.80
- --------------------------------------------------------------------------------
Electric Utility $ 33 $ 48 $ (15)
Gas Utility 58 56 2
Enterprises 105 (60) 165
Corporate Interest and Other (46) (49) 3
Discontinued Operations - (2) 2
Accounting Changes - (2) 2
- --------------------------------------------------------------------------------
CMS Energy Net Income (Loss) Available to
Common Stockholders $ 150 $ (9) $ 159
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For the quarter ended March 31, 2005, our net income available to common
stockholders was $150 million, up from a $9 million loss for the quarter ended
March 31, 2004. The improvement reflects the absence of impairment charges
recorded in 2004 and the favorable effect of mark-to-market adjustments recorded
at the MCV Partnership resulting from the implementation of the RCP, slightly
offset by reduced income at our electric utility. At the electric utility, the
positive impact of increased surcharge revenue and direct savings from the RCP
was more than offset by increased operating expenses and customers choosing
alternative electric suppliers. At the gas utility, the increase in gas rates
authorized by the MPSC outpaced lower gas deliveries and higher operating
expenses.
Specific increases to net income available to common stockholders are:
- the absence in 2005, of an $81 million after-tax impairment charge
on our Loy Yang investment which we recorded in 2004,
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CMS Energy Corporation
- $65 million increase in favorable mark-to-market adjustments from
our ownership interest in the MCV Partnership due to the increase in
fair value of certain long-term gas contracts and financial hedges
under the implementation of the RCP,
- $12 million increase from earnings in our investment in Taweelah
primarily due to changes in mark-to-market valuations,
- $11 million reduction in corporate and other interest expenses
primarily due to lower average debt levels and a 68 basis point
reduction in the average rate of interest,
- $5 million from earnings in our investment in Shuweihat, as the
business achieved commercial operations in the fourth quarter of
2004,
- $2 million gain on the sale of GVK,
- $2 million increase in income from our gas utility, as the increase
in gas rates authorized by the MPSC more than offset reduced gas
deliveries, increased operation and maintenance cost, and increased
depreciation due to higher plant in service,
- the absence in 2005 of a $2 million loss related to accounting
changes, and
- the absence in 2005 of $2 million in net losses associated with
discontinued operations.
These increases were offset partially by:
- a $15 million reduction in income from our electric utility,
primarily due to power supply purchase costs exceeding power supply
revenue, and higher depreciation and amortization expense. These
expenses were offset partially by the return on capital expenditures
in excess of our depreciation base as allowed by the Customer Choice
Act, and
- the absence in 2005 of $8 million related to a settlement agreement
that DIG and CMS MST entered into with Ford Motor Company and Rouge
Steel Industries.
ELECTRIC UTILITY RESULTS OF OPERATIONS
In Millions
- ---------------------------------------------------------------------------------------
March 31 2005 2004 Change
- ---------------------------------------------------------------------------------------
Three months ended $33 $48 $(15)
=======================================================================================
Reasons for the change:
Electric deliveries $ 4
Power supply costs and related revenue (9)
Other operating expenses, other income and non-commodity revenue (22)
Regulatory return on capital expenditures 7
General taxes (3)
Income taxes 8
------------------
Total change $(15)
=======================================================================================
ELECTRIC DELIVERIES: Electric deliveries decreased 0.4 billion kWh or 4.2
percent in the first quarter of 2005 compared to 2004. Despite decreased
electric deliveries, electric delivery revenue increased due to increased
surcharge revenue, offset partially by reduced electric delivery revenue from
customers choosing alternative electric suppliers.
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CMS Energy Corporation
On July 1, 2004, Consumers started collecting a surcharge related to the
recovery of costs incurred in the transition to customer choice. This surcharge
increased electric delivery revenue by $5 million. Surcharge revenue related to
the recovery of security costs and stranded costs increased electric delivery
revenue by an additional $3 million.
POWER SUPPLY COSTS AND RELATED REVENUE: In the first quarter of 2005, our
recovery of power supply costs was capped for the residential class. Pretax
underrecoveries of $9 million are primarily due to power supply-related costs
exceeding power supply-related revenue recovered from capped customers. Power
supply-related costs increased in 2005 primarily due to higher priced purchased
power necessary to replace the generation loss from an outage at our Palisades
nuclear generating plant and increased coal costs versus the same period in
2004.
OTHER OPERATING EXPENSES, OTHER INCOME, AND NON-COMMODITY REVENUE: In the first
quarter of 2005, other operating expenses increased $24 million and
non-commodity revenue increased $2 million versus the same period in 2004
primarily due to higher transmission services revenue.
The increase in other operating expenses reflects higher depreciation and
amortization expense, higher pension and benefit expense, and higher
underrecovery expense related to the MCV PPA, offset partially by our direct
savings from the RCP. Depreciation and amortization expense increased $12
million due to higher plant in service and greater amortization of certain
regulatory assets. Pension and benefit expense increased $6 million primarily
due to higher plan expenses. Benefit expense also reflects the reinstatement of
the matching contribution to our 401(k) plan.
In 1992, a liability was established for estimated future underrecoveries of
power supply costs under the MCV PPA. In 2004, a portion of the cash
underrecoveries continued to reduce this liability until its depletion in
December. In 2005, all cash underrecoveries are expensed directly to income.
Consequently, the cost associated with the MCV PPA cash underrecoveries
increased operating expense $6 million in the first quarter of 2005 versus the
same period in 2004. Partially offsetting this increased operating expense was
the savings from the RCP approved by the MPSC in January 2005.
The RCP allows us to dispatch the MCV Facility on the basis of natural gas
prices, which will reduce MCV Facility's annual production of electricity and,
as a result, reduce the MCV Facility's consumption of natural gas. The MCV
Facility's fuel cost savings are first used to offset the cost of replacement
power and fund a renewable energy program. Remaining savings are split between
us and the MCV Partnership. Our direct savings are shared 50 percent with
customers in 2005 and 70 percent thereafter. Our direct savings, after
allocating a portion to customers, was $3 million in the first quarter of 2005.
REGULATORY RETURN ON CAPITAL EXPENDITURES: In the first quarter of 2005, the
return on capital expenditures in excess of our depreciation base as allowed by
the Customer Choice Act increased income by $7 million versus the same period in
2004.
GENERAL TAXES: In the first quarter of 2005, general taxes increased from the
same period in 2004 primarily due to higher MSBT expense.
INCOME TAXES: In the first quarter of 2005, income taxes decreased versus the
same period in 2004 primarily due to lower earnings by the electric utility.
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GAS UTILITY RESULTS OF OPERATIONS
In Millions
- -------------------------------------------------------------------------------
March 31 2005 2004 Change
- -------------------------------------------------------------------------------
Three months ended $ 58 $ 56 $ 2
===============================================================================
Reasons for the change:
Gas deliveries $ (3)
Gas rate increase 16
Gas wholesale and retail services and other gas revenue (2)
Operation and maintenance (5)
Depreciation and other deductions (1)
Fixed charges (2)
Income taxes (1)
--------------------
Total change $ 2
===============================================================================
GAS DELIVERIES: In the first quarter 2005 versus the same period in 2004, lower
gas delivery revenues reflect decreased deliveries to our residential,
commercial, and industrial customers. Gas deliveries, including miscellaneous
transportation to end-use customers, decreased 3.4 bcf or 2.3 percent.
GAS RATE INCREASE: In December 2003, the MPSC issued an interim gas rate order
authorizing a $19 million annual increase to gas tariff rates. In October 2004,
the MPSC issued a final order authorizing an annual increase of $58 million
through a two-year surcharge. As a result of these orders, first quarter 2005
pretax earnings increased $16 million compared to the same period in 2004.
GAS WHOLESALE AND RETAIL SERVICES AND OTHER GAS REVENUE: The decrease in gas
wholesale and retail services and other gas revenue relates primarily to
decreases in certain miscellaneous transportation and storage revenue.
OPERATION AND MAINTENANCE: In the first quarter 2005 versus the same period in
2004, operation and maintenance expenses increased primarily due to increases in
benefit costs and additional expenditures on safety, reliability, and customer
service.
DEPRECIATION AND OTHER DEDUCTIONS: In the first quarter 2005 versus the same
period in 2004, depreciation expense increased due to higher plant in service.
Increased other deductions reflect the recognition of expense associated with
the early retirement of debt in January 2005.
FIXED CHARGES: In the first quarter 2005 versus the same period in 2004, fixed
charges increased due to higher average debt levels, offset partially by a 28
basis point reduction in the average interest rate.
INCOME TAXES: In the first quarter of 2005, income taxes increased versus the
same period in 2004 primarily due to higher earnings by the gas utility.
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ENTERPRISES RESULTS OF OPERATIONS
In Millions
- --------------------------------------------------------------------------------
March 31 2005 2004 Change
- --------------------------------------------------------------------------------
Three months ended $ 105 $ (60) $ 165
================================================================================
Reasons for the change:
Operating revenues $ (7)
Cost of gas and purchased power 196
Earnings from equity method investees 12
Operation and maintenance 2
Gain on sale of assets 2
Asset impairment charges 136
Fixed charges 7
Minority interest (102)
Income taxes (81)
- --------------------------------------------------------------------------------
Total change $ 165
================================================================================
OPERATING REVENUES AND COST OF GAS AND PURCHASED POWER: For three months ended
March 31, 2005, operating revenues decreased $7 million versus the same period
in 2004. Related cost of gas and purchased power cost decreased $196 million
versus the same period in 2004 primarily due to mark-to-market gains at the MCV
Partnership. The MPSC's approval of the RCP provided that the MCV Partnership
recognize the increase in the fair value of certain long-term gas contracts and
related financial hedges, which accounted for $179 million of these gains.
EARNINGS FROM EQUITY METHOD INVESTEES: Equity earnings increased for the three
months ended March 31, 2005 versus the same period in 2004. The increase was
primarily due to mark-to-market gains on interest rate swaps associated with our
investment in Taweelah and earnings from Shuweihat as the business achieved
commercial operations in the fourth quarter of 2004. These increases were offset
by the absence of earnings from Goldfields, which was sold in 2004.
OPERATION AND MAINTENANCE: For the three months ended March 31, 2005, operation
and maintenance expenses decreased versus the same period in 2004. The decrease
in 2005 was primarily due to lower legal costs and the reduction of costs
related to businesses that have been sold.
GAIN ON SALE OF ASSETS: For the three months ended March 31, 2005, gains on
asset sales increased $2 million versus the same period in 2004. This is due to
a $3 million gain on the sale of GVK in 2005 versus a $1 million gain on the
sale of Bluewater Pipeline in 2004.
ASSET IMPAIRMENT CHARGES: For the three months ended March 31, 2005, asset
impairment charges decreased $136 million versus the same period in 2004. The
decrease relates to the absence in 2005 of the Loy Yang impairment recorded in
2004. The impairment recorded at the Enterprises segment was offset slightly by
the $11 million currency translation adjustment recorded at the Corporate
Interest and Other segment, for a net 2004 impairment of $125 million.
FIXED CHARGES: For the three months ended March 31, 2005, fixed charges
decreased versus the same period in 2004 due to lower expenses at the MCV
Partnership.
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MINORITY INTEREST: For the three months ended March 31, 2005, minority interest
increased versus the same period in 2004, primarily due to increased earnings at
the MCV Partnership.
INCOME TAXES: For the three months ended March 31, 2005, income tax expense
increased versus the same period in 2004. The increase was primarily due to
higher earnings in 2005, and the absence of tax benefits recorded in 2004
related to the Loy Yang impairment.
CORPORATE INTEREST AND OTHER RESULTS OF OPERATIONS
In Millions
- --------------------------------------------------------------------------------
March 31 2005 2004 Change
- --------------------------------------------------------------------------------
Three months ended $ (46) $ (49) $ 3
================================================================================
For the three months ended March 31, 2005, corporate interest and other net
expenses were $46 million, a decrease of $3 million versus the same period in
2004. The decrease reflects an $11 million reduction in interest primarily due
to lower average debt levels and a 68 basis point reduction in the average rate
of interest. These decreases were offset partially by an $8 million benefit from
the reversal of a currency translation adjustment related to the sale of Loy
Yang in 2004.
DISCONTINUED OPERATIONS: For the three months ended March 31, 2005, we had no
activity from operations accounted for as discontinued. For the three months
ended March 31, 2004, our net loss from Discontinued Operations was $2 million.
ACCOUNTING CHANGES: In 2004, we recorded a $2 million loss for the cumulative
effect of a change in accounting principle. The loss was the result of a change
in the measurement date on our benefit plans.
CRITICAL ACCOUNTING POLICIES
USE OF ESTIMATES AND ASSUMPTIONS
In preparing our financial statements, we use estimates and assumptions that may
affect reported amounts and disclosures. Accounting estimates are used for asset
valuations, depreciation, amortization, financial and derivative instruments,
employee benefits, and contingencies. For example, we estimate the rate of
return on plan assets and the cost of future health-care benefits to determine
our annual pension and other postretirement benefit costs. There are risks and
uncertainties that may cause actual results to differ from estimated results,
such as changes in the regulatory environment, competition, foreign exchange,
regulatory decisions, and lawsuits.
CONTINGENCIES: We are involved in various regulatory and legal proceedings that
arise in the ordinary course of our business. We record a liability for
contingencies based upon our assessment that the occurrence of loss is probable
and the amount of loss can be reasonably estimated. The recording of estimated
liabilities for contingencies is guided by the principles in SFAS No. 5. We
consider many factors in making these assessments, including history and the
specifics of each matter. The most significant of these contingencies are our
pending class actions arising out of round-trip trading and gas price reporting,
our electric and gas environmental estimates, our indemnity and environmental
remediation obligations at Bay Harbor, and the potential underrecoveries from
our power purchase contract with the MCV Partnership.
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The amount of income taxes we pay is subject to ongoing audits by federal,
state, and foreign tax authorities, which can result in proposed assessments.
Our estimate for the potential outcome for any uncertain tax issue is highly
judgmental. We believe we have adequately provided for any likely outcome
related to these matters. However, our future results may include favorable or
unfavorable adjustments to our estimated tax liabilities in the period the
assessments are made or resolved or when statutes of limitation on potential
assessments expire. As a result, our effective tax rate may fluctuate
significantly on a quarterly basis.
ACCOUNTING FOR FINANCIAL AND DERIVATIVE INSTRUMENTS, TRADING ACTIVITIES, AND
MARKET RISK INFORMATION
FINANCIAL INSTRUMENTS: We account for investments in debt and equity securities
using SFAS No. 115. There have been no material changes to the accounting for
financial instruments since the year ended December 31, 2004. For details on
financial instruments, see Note 6, Financial and Derivative Instruments.
DERIVATIVE INSTRUMENTS: We use SFAS No. 133 to account for derivatives. Except
as noted within this section, there have been no material changes to the
accounting for derivative instruments since the year ended December 31, 2004.
The MISO began operating the Midwest Energy Market on April 1, 2005, which
provides day-ahead and real-time energy market information and centralized
dispatch for market participants. At this time, we believe that the commencement
of this market does not constitute the development of an active energy market in
Michigan. However, after having adequate experience with the Midwest Energy
Market, we will reevaluate whether or not the activity level within this market
leads to the conclusion that an active energy market exists. If an active market
develops in the future, we may be required to account for certain electric
purchases and sales contracts as derivatives, and the resulting mark-to-market
impact on earnings could be material to our financial statements.
Also as part of the Midwest Energy Market, FTRs were established. FTRs are
financial instruments established to manage price risk relating to electricity
transmission congestion. An FTR entitles the holder to receive compensation (or
remit payment) for certain congestion-related transmission charges that arise
when the transmission grid is congested. We presently hold FTRs for certain
areas on the transmission grid within MISO's market area. We are presently
evaluating whether FTRs qualify as derivative instruments. If they are
determined to be derivative instruments, FTRs would be required to be recognized
on our Consolidated Balance Sheets as assets or liabilities at their fair value,
with any subsequent changes in fair value recognized in earnings. However, we
believe we may be able to offset the earnings impact with a regulatory asset or
liability. The Midwest Energy Market was not effective until April 1, 2005.
Therefore, FTRs had no value at March 31, 2005.
The MCV Partnership uses natural gas fuel contracts to buy gas as fuel for
generation, and to manage gas fuel costs. The MCV Partnership believes that
certain of its long-term gas contracts qualify as normal purchases under SFAS
No. 133, and therefore, these contracts are not recognized at fair value on our
Consolidated Balance Sheets. Due to the implementation of the RCP in January
2005, the MCV Partnership determined that a significant portion of its gas fuel
contracts no longer qualify as normal purchases because the contracted gas will
not be consumed as fuel for electric production. Accordingly, these contracts
are accounted for as derivatives, with changes in fair value recorded in
earnings each quarter. Additionally, the financial hedges associated with these
contracts no longer qualify as cash flow hedges. Thus, any changes in the fair
value of these financial hedges will no longer be recognized in Other
Comprehensive Income, but will be recorded in earnings each quarter. The MCV
Partnership expects future earnings volatility on both the gas fuel derivative
contracts and the related financial hedges, since gains and losses will be
recorded each quarter. For the three months ended March 31, 2005, we recorded a
$209 million gain associated with the increase in fair value of these
instruments on our Consolidated Statements of Income (Loss). The
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majority of this gain is expected to reverse through earnings during 2005 and
2006 as the gas is purchased and the financial hedges settle, with the remainder
reversing between 2007 and 2011.
To determine the fair value of our derivative contracts, we use a combination of
quoted market prices, prices obtained from external sources, such as brokers,
and mathematical valuation models. Valuation models require various inputs,
including forward prices, strike prices, volatilities, interest rates, and
maturity dates. Changes in forward prices or volatilities could change
significantly the calculated fair value of certain contracts. At March 31, 2005,
we assumed a market-based interest rate of 2.75 percent and monthly volatility
rates ranging between 33 percent and 35 percent to calculate the fair value of
our gas options. Also, at March 31, 2005, we assumed a market-based interest
rate of 2.75 percent and a daily volatility rate of 93 percent to calculate the
fair value of our electric options. At March 31, 2005, we assumed market-based
interest rates ranging between 2.87 percent and 4.83 percent (depending on the
term of the contract) and monthly volatility rates ranging between 25 percent
and 40 percent to calculate the fair value of the gas fuel derivative contracts
with volume optionality held by the MCV Partnership.
CMS ERM CONTRACTS: CMS ERM enters into and owns energy contracts that are
related to activities considered to be an integral part of CMS Energy's ongoing
operations. There have been no material changes to the accounting for CMS ERM's
contracts since the year ended December 31, 2004.
The fair value of the derivative contracts held by CMS ERM is included in either
Price risk management assets or Price risk management liabilities on our
Consolidated Balance Sheets. The following tables provide a summary of these
contracts at March 31, 2005:
In Millions
- ----------------------------------------------------------------------------------------------------
Non-
Trading Trading Total
- ----------------------------------------------------------------------------------------------------
Fair value of contracts outstanding at December 31, 2004 $ (199) $ 201 $ 2
Fair value of new contracts when entered into during the period (a) - 2 2
Changes in fair value attributable to changes in valuation techniques
and assumptions - - -
Contracts realized or otherwise settled during the period 18 (19) (1)
Other changes in fair value (b) (75) 83 8
- ----------------------------------------------------------------------------------------------------
Fair value of contracts outstanding at March 31, 2005 $ (256) $ 267 $ 11
====================================================================================================
(a) Reflects only the initial premium payments/(receipts) for new contracts. No
unrealized gains or losses were recognized at the inception of any new
contracts.
(b) Reflects changes in price and net increase/(decrease) of forward positions
as well as changes to mark-to-market and credit reserves.
Fair Value of Non-Trading Contracts at March 31, 2005 In Millions
- ----------------------------------------------------------------------------------------------------
Total Maturity (in years)
Source of Fair Value Fair Value Less than 1 1 to 3 4 to 5 Greater than 5
- ----------------------------------------------------------------------------------------------------
Prices actively quoted $ - $ - $ - $ - $ -
Prices obtained from external
sources or based on models and
other valuation methods (256) (77) (116) (54) (9)
- ----------------------------------------------------------------------------------------------------
Total $(256) $ (77) $(116) $(54) $ (9)
====================================================================================================
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Fair Value of Trading Contracts at March 31, 2005 In Millions
- ----------------------------------------------------------------------------------------------------
Total Maturity (in years)
Source of Fair Value Fair Value Less than 1 1 to 3 4 to 5 Greater than 5
- ----------------------------------------------------------------------------------------------------
Prices actively quoted $(42) $(9) $(22) $(11) $ -
Prices obtained from external
sources or based on models and
other valuation methods 309 97 142 62 8
- ----------------------------------------------------------------------------------------------------
Total $267 $88 $120 $ 51 $ 8
====================================================================================================
MARKET RISK INFORMATION: The following is an update of our risk sensitivities
since the year ended December 31, 2004. These risk sensitivities indicate the
potential loss in fair value, cash flows, or future earnings from our derivative
contracts and other financial instruments based upon a hypothetical 10 percent
adverse change in market rates or prices. Changes in excess of the amounts shown
in the sensitivity analyses could occur if market rates or prices exceed the 10
percent shift used for the analyses.
INTEREST RATE RISK SENSITIVITY ANALYSIS (assuming a 10 percent adverse change in
market interest rates):
In Millions
- ----------------------------------------------------------------------------------------------------
March 31, 2005 December 31, 2004
- ----------------------------------------------------------------------------------------------------
Variable-rate financing - before-tax annual earnings exposure $ 1 $ 2
Fixed-rate financing - potential loss in fair value (a) 233 216
====================================================================================================
(a) Fair value exposure could only be realized if we repurchased all of our
fixed-rate financing.
Certain equity method investees have entered into interest rate swaps. These
instruments are not required to be included in the sensitivity analysis, but can
have an impact on financial results.
COMMODITY PRICE RISK SENSITIVITY ANALYSIS (assuming a 10 percent adverse change
in market prices):
In Millions
- ----------------------------------------------------------------------------------------------------
March 31, 2005 December 31, 2004
- ----------------------------------------------------------------------------------------------------
Potential reduction in fair value:
Gas supply option contracts $ - $ 1
CMS ERM electric and gas forward contracts 12 10
Derivative contracts associated with the MCV Partnership:
Gas fuel contracts (a) 42 17
Gas fuel futures and swaps 47 41
====================================================================================================
(a) The increased potential reduction in fair value for the MCV Partnership's
gas fuel contracts is due to an increased number of contracts accounted for as
derivatives. This is a result of the implementation of the RCP, at which time
the MCV Partnership determined that a significant portion of its gas fuel
contracts no longer qualify as normal purchases and must now be accounted for as
derivatives.
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TRADING ACTIVITY COMMODITY PRICE RISK SENSITIVITY ANALYSIS (assuming a 10
percent adverse change in market prices):
In Millions
- ----------------------------------------------------------------------------------------------------
March 31, 2005 December 31, 2004
- ----------------------------------------------------------------------------------------------------
Potential reduction in fair value:
Electricity-related option contracts $ - $-
Gas-related option contracts 3 3
Gas-related swaps and futures 12 7
====================================================================================================
INVESTMENT SECURITIES PRICE RISK SENSITIVITY ANALYSIS
In Millions
- ----------------------------------------------------------------------------------------------------
March 31, 2005 December 31, 2004
- ----------------------------------------------------------------------------------------------------
Potential reduction in fair value of
available-for-sale equity securities (a)(b) $5 $5
====================================================================================================
(a) Primarily SERP Investments.
(b) Assumes a 10 percent adverse change in market prices.
Consumers maintains trust funds, as required by the NRC, which may only be used
to fund certain costs of nuclear plant decommissioning. At March 31, 2005 and
December 31, 2004, these funds were invested primarily in equity securities,
fixed-rate, fixed-income debt securities, and cash and cash equivalents, and are
recorded at fair value on our Consolidated Balance Sheets. Those investments are
exposed to price fluctuations in equity markets and changes in interest rates.
Because the accounting for nuclear plant decommissioning recognizes that costs
are recovered through Consumers' electric rates, fluctuations in equity prices
or interest rates do not affect earnings or cash flows.
For additional details on market risk and derivative activities, see Note 6,
Financial and Derivative Instruments.
OTHER
Other accounting policies that are important to an understanding of our results
of operations and financial condition include:
- accounting for long-lived assets and equity method investments,
- accounting for the effects of industry regulation,
- accounting for international operations and foreign currency,
- accounting for pension and OPEB,
- accounting for asset retirement obligations, and
- accounting for nuclear decommissioning costs.
There have been no material changes to these accounting policies since they were
described in our Form 10-K for the year ended December 31, 2004.
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CMS Energy Corporation
CAPITAL RESOURCES AND LIQUIDITY
Our liquidity and capital requirements are a function of our results of
operations, capital expenditures, contractual obligations, debt maturities,
working capital needs, and collateral requirements. During the summer months, we
purchase natural gas and store it for resale primarily during the winter heating
season. The market price for natural gas has increased. Although our natural gas
purchases are recoverable from our customers, the amount paid for natural gas
stored as inventory could require additional liquidity due to the timing of the
cost recoveries. In addition, a few of our commodity suppliers have requested
nonstandard payment terms or other forms of assurances, including margin calls,
in connection with maintenance of ongoing deliveries of gas and electricity.
Our current financial plan includes controlling our operating expenses and
capital expenditures and evaluating market conditions for financing
opportunities. We believe our current level of cash and access to borrowing
capacity in the capital markets, along with anticipated cash flows from
operating and investing activities, will be sufficient to meet our liquidity
needs through 2006. We have not made a specific determination concerning the
reinstatement of common stock dividends. The Board of Directors may reconsider
or revise its dividend policy based upon certain conditions, including our
results of operations, financial condition, and capital requirements, as well as
other relevant factors.
CASH POSITION, INVESTING, AND FINANCING
Our operating, investing, and financing activities meet consolidated cash needs.
At March 31, 2005, $985 million consolidated cash was on hand, which includes
$45 million of restricted cash and $144 million from the entities consolidated
pursuant to FASB Interpretation No. 46. For additional details, see Note 11,
Consolidation of Variable Interest Entities.
Our primary ongoing source of cash is dividends and other distributions from our
subsidiaries. For the three months ended March 31, 2005, Consumers paid $118
million in common stock dividends to CMS Energy.
SUMMARY OF CASH FLOWS:
In Millions
- --------------------------------------------------------------------------------
Three months ended March 31 2005 2004
- --------------------------------------------------------------------------------
Net cash provided by (used in):
Operating activities $ 262 $ 238
Investing activities (8) (165)
----------------
Net cash provided by operating and investing activities 254 73
Financing activities 17 (269)
Effect of exchange rates on cash - (9)
----------------
Net increase (decrease) in cash and cash equivalents $ 271 $(205)
================================================================================
OPERATING ACTIVITIES: For the three months ended March 31, 2005, net cash
provided by operating activities increased $24 million versus the same period in
2004 due to decreases in inventory from gas sales at higher prices and other
timing differences.
INVESTING ACTIVITIES: For the three months ended March 31, 2005, net cash used
in investing activities decreased $157 million primarily due to a net increase
in short-term investment proceeds of $159 million.
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CMS Energy Corporation
FINANCING ACTIVITIES: For the three months ended March 31, 2005, net cash
provided by financing activities increased $286 million primarily due to an
increase of $279 million in net proceeds from borrowings.
For additional details on long-term debt activity, see Note 4, Financings and
Capitalization.
SUBSEQUENT FINANCING ACTIVITIES: In April 2005, we issued 23 million shares of
common stock at a price of $12.25 per share. We realized net proceeds of $272
million. We used the net proceeds and other cash on hand to make a $350 million
capital infusion into Consumers on April 15, 2005.
In April 2005, Consumers redeemed $297 million of its 6.25 percent senior notes
with proceeds from its $300 million FMBs issued in March 2005. Also in April
2005, Consumers called the remaining $35 million 6.25 percent senior notes.
Later in April 2005, Consumers issued $150 million of 5.65 percent Insured
Quarterly notes due 2035. Consumers intends to use the net proceeds of $145
million to redeem its 6.50 percent Insured Quarterly notes due 2028. Finally, in
April 2005, through the Michigan Strategic Fund, Consumers issued $35 million
variable rate limited obligation revenue bonds, due 2035. Consumers will use the
proceeds to fund certain solid waste disposal expenditures.
OBLIGATIONS AND COMMITMENTS
REVOLVING CREDIT FACILITIES: For details on revolving credit facilities, see
Note 4, Financings and Capitalization.
OFF-BALANCE SHEET ARRANGEMENTS: There have been no material changes in
off-balance sheet arrangements since the year ended December 31, 2004. For
details on guarantee arrangements, see Note 4, Financings and Capitalization,
"FASB Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others."
DIVIDEND RESTRICTIONS: For details on dividend restrictions, see Note 4,
Financings and Capitalization.
OTHER: CMS ERM is a party to a certain gas supply contract whose performance is
backed by a bond issued by American Home Assurance Co. (AHA), a subsidiary of
American International Group, Inc. (AIG), as a jointly liable surety. AHA
currently has a surety obligation of $130 million pursuant to this contract.
This amount amortizes monthly. The gas supply contract requires that the surety
maintain minimum credit ratings of AA- or better from S&P and Aa3 or better from
Moody's. On March 30, 2005, the credit ratings of AIG and AHA were downgraded by
S&P from AAA to AA+ with negative watch. On March 31, 2005, Moody's lowered its
long-term senior debt ratings on AIG and AHA from Aaa to Aa1. On May 2, 2005,
Moody's again lowered their long-term senior debt ratings on AIG and AHA from
Aa1 to Aa2, and placed their ratings on review for possible further downgrade.
We cannot predict whether these ratings will further decline; however, we have
several alternatives in the event that AHA no longer meets the minimum rating
requirements. These alternatives include obtaining a letter of credit under our
existing revolving credit agreement, seeking an alternative letter of credit
arrangement or posting available cash as collateral. These alternatives may have
a negative impact on our liquidity.
OUTLOOK
CORPORATE OUTLOOK
During 2005, we will continue to implement a business strategy that involves
improving our balance sheet and providing superior utility operations and
service. This strategy is designed to generate cash to pay down debt and provide
for more predictable future operating revenues and earnings.
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CMS Energy Corporation
Our primary focus with respect to our non-utility businesses has been to
optimize cash flow and further reduce our business risk and leverage through the
sale of non-strategic assets, and to improve earnings and cash flow from
businesses we retain. Although much of our asset sales program is complete, we
still may sell certain remaining businesses that are not strategic to us. As
this continues, the percentage of our future earnings relating to our larger
equity method investments, including Jorf Lasfar, may increase and our total
future earnings may depend more significantly upon the performance of those
investments. For additional details, see Note 9, Equity Method Investments.
Over the next few years, we expect our business strategy to reduce parent
company debt substantially, improve our credit ratings, grow earnings, restore a
common stock dividend, and position the company to make new investments
consistent with our strengths. In the near term, our new investments will focus
principally on the utility.
ELECTRIC UTILITY BUSINESS OUTLOOK
GROWTH: In 2005, we project electric deliveries to grow almost three percent.
This short-term outlook for 2005 assumes a stronger economy than in 2004 and
normal weather conditions throughout the year.
Over the next five years, we expect electric deliveries to grow at an average
rate of approximately two percent per year, based primarily on a steadily
growing customer base and economy. This growth rate includes both full-service
sales and delivery service to customers who choose to buy generation service
from an alternative electric supplier, but excludes transactions with other
wholesale market participants and other electric utilities. This growth rate
reflects a long-range expected trend of growth. Growth from year to year may
vary from this trend due to customer response to fluctuations in weather
conditions and changes in economic conditions, including utilization and
expansion of manufacturing facilities.
POWER SUPPLY COSTS: To reduce the risk of high electric prices during peak
demand periods and to achieve our reserve margin target, we employ a strategy of
purchasing electric capacity and energy contracts for the physical delivery of
electricity primarily in the summer months and to a lesser degree in the winter
months. We are currently planning for a reserve margin of approximately 11
percent for summer 2005, or supply resources equal to 111 percent of projected
summer peak load. Of the 2005 supply resources target of 111 percent, we expect
to meet approximately 101 percent from our electric generating plants and
long-term power purchase contracts, and approximately 10 percent from short-term
contracts, options for physical deliveries, and other agreements. We have
purchased capacity and energy contracts partially covering the estimated reserve
margin requirements for 2005 through 2007. As a result, we have recognized an
asset of $11 million for unexpired capacity and energy contracts at March 31,
2005.
TRANSMISSION MARKET DEVELOPMENT: The MISO began operating the Midwest Energy
Market on April 1, 2005, which includes a day-ahead and real-time energy market
and centralized dispatch for market participants. We are a participant in this
energy market. These changes are anticipated to ensure that load requirements in
the region are met reliably and efficiently, to better manage congestion on the
grid, and to centralize dispatch of generation throughout the region. The MISO
is now responsible for the reliability and economic dispatch in the entire MISO
area, which includes 12 states and Manitoba, as well as our service territory.
We are presently evaluating what financial impact, if any, these changes are
having on our operations.
RENEWABLE RESOURCES PROGRAM: In January 2005, in collaboration with the MPSC, we
established a renewable resources program. Under the RRP, we will purchase
energy from approved renewable sources, which include solar, wind, geothermal,
biomass, and hydroelectric. Customers will be able to participate in the RRP in
accordance with tariffs approved by the MPSC. The MPSC has authorized recovery
of costs for
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the RRP by establishing a fund that consists of an annual contribution from
savings generated by the RCP, a surcharge imposed by the MPSC, and contributions
from customers. In February 2005, the Attorney General filed appeals of the MPSC
orders providing funding for the RRP in the Michigan Court of Appeals.
ELECTRIC RATE CASE: In December 2004, we filed an application with the MPSC to
increase our retail electric base rates. The electric rate case filing requests
an annual increase in revenues of approximately $320 million. In April 2005, we
filed updated debt and equity information in the electric rate case. This will
likely reduce our rate request. The primary reasons for the request are
increased system maintenance and improvement costs, Clean Air Act-related
expenditures, and employee pension costs. We expect the MPSC staff to file its
position in the case in June 2005. We expect a final order from the MPSC in late
2005. If approved as requested, the rate increase would go into effect in
January 2006 and would apply to all retail electric customers. We cannot predict
the amount or timing of the rate increase, if any, which the MPSC will approve.
ELECTRIC UTILITY BUSINESS UNCERTAINTIES
Several electric business trends or uncertainties may affect our financial
results and condition. These trends or uncertainties have, or we reasonably
expect could have, a material impact on revenues or income from continuing
electric operations.
ELECTRIC ENVIRONMENTAL ESTIMATES: Our operations are subject to environmental
laws and regulations. Costs to operate our facilities in compliance with these
laws and regulations generally have been recovered in customer rates.
Clean Air: Compliance with the federal Clean Air Act and resulting regulations
has been, and will continue to be, a significant focus for us. The Nitrogen
Oxide State Implementation Plan Call Regulation requires significant reductions
in nitrogen oxide emissions. To comply with the regulations, we expect to incur
capital expenditures totaling $815 million. The key assumptions included in the
capital expenditure estimate include:
- construction commodity prices, especially construction material and
labor,
- project completion schedules,
- cost escalation factor used to estimate future years' costs, and
- allowance for funds used during construction (AFUDC) rate.
Our current capital cost estimates include an escalation rate of 2.6 percent and
an AFUDC capitalization rate of 8.3 percent. As of March 2005, we have incurred
$543 million in capital expenditures to comply with these regulations and
anticipate that the remaining $272 million of capital expenditures will be made
between 2005 and 2011. These expenditures include installing selective catalytic
reduction technology at four of our coal-fired electric plants. In addition to
modifying the coal-fired electric plants, we expect to utilize nitrogen oxide
emissions allowances for years 2005 through 2009, of which 90 percent has been
purchased. The cost of the allowances is estimated to average $8 million per
year for 2005-2006. The estimated costs are based on the average cost of the
purchased, allocated, or swapped allowances. The need for allowances will
decrease after year 2006 with the installation of selective catalytic control
technology. The cost of the allowances is accounted for as inventory. The
allowance inventory is expensed as the coal-fired electric generating units emit
nitrogen oxide.
The EPA recently adopted a Clean Air Interstate Rule that requires additional
coal-fired electric plant emission controls for nitrogen oxides and sulfur
dioxide. The rule involves a two-phase program to reduce emissions of sulfur
dioxide by 71 percent and nitrogen oxides by 63 percent by 2015. The final rule
advanced the proposed year for nitrogen oxide compliance requirement by one year
to 2009. This change
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CMS Energy Corporation
will require that we run our Selective Catalytic Reduction units year round
beginning in 2009 and may require that we purchase additional nitrogen oxide
credits beginning in 2009. In addition to the selective catalytic reduction
control technology installed to meet the Nitrogen Oxide State Implementation
Plan Call Regulation, our current plan includes installation of flue gas
desulfurization scrubbers. The scrubbers are to be installed by 2014 at a cost
near that of the Selective Catalytic Reduction total cost in order to meet Phase
One emission reduction requirements.
In March 2005, the EPA issued the Clean Air Mercury Rule, which requires initial
reductions of mercury emissions from coal-fired electric power plants by 2010
and further reductions by 2018. While the industry has not reached a consensus
on the technical methods for curtailing mercury emissions, our capital and
operating costs for mercury emissions reductions could be significantly less
than is required for nitrogen oxide compliance.
Several legislative proposals have been introduced in the United States Congress
that would require reductions in emissions of greenhouse gases, however, none
have yet been enacted. We cannot predict whether any federal mandatory
greenhouse gas emission reduction rules ultimately will be enacted, or the
specific requirements of any such rules.
To the extent that greenhouse gas emission reduction rules come into effect,
such mandatory emissions reduction requirements could have far-reaching and
significant implications for the energy sectors. We cannot estimate the
potential effect of federal or state level greenhouse gas policy on our future
consolidated results of operations, cash flows, or financial position due to the
uncertain nature of the policies at this time. However, we stay abreast of and
engage in the greenhouse gas policy developments and will continue to assess and
respond to their potential implications on our business operations.
Water: In March 2004, the EPA issued rules that govern generating plant cooling
water intake systems. The new rules require significant reduction in fish killed
by operating equipment. Some of our facilities will be required to comply with
the new rules by 2006. We are currently studying the rules to determine the most
cost-effective solutions for compliance.
For additional details on electric environmental matters, see Note 3,
Contingencies, "Consumers' Electric Utility Contingencies - Electric
Environmental Matters."
COMPETITION AND REGULATORY RESTRUCTURING: The Customer Choice Act allows all of
our electric customers to buy electric generation service from us or from an
alternative electric supplier. As of April 2005, alternative electric suppliers
are providing 893 MW of generation supply to ROA customers. This amount
represents an increase of 9 percent compared to April 2004, and 12 percent of
our distribution load. Several customers have notified us of their intent to
return to our service after a notification period ending between June 2005 and
July 2005. We estimate that between 70 MW and 100 MW will return to our service.
Based on this and other current trends, we predict that total load loss by the
end of 2005 will be in the range of 925 MW to 1,000 MW. However, no assurance
can be made that the actual load loss will fall within that range.
Legislative Actions: In July 2004, several bills were introduced in the Michigan
Senate that could change Michigan's Customer Choice Act. This legislation was
not enacted before the end of the 2003-2004 legislative session. In March 2005,
one of the bills, proposing a service charge to fund the Low Income and Energy
Efficiency Fund, was reintroduced. We anticipate that legislation relating to
the Customer Choice Act and other energy issues may be introduced in the
2005-2006 legislative session. We cannot predict the content or outcome of any
such legislative actions.
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CMS Energy Corporation
Implementation Costs: Applications for recovery of $7 million of implementation
costs for 2002 and $1 million for 2003 are pending MPSC approval. In September
2004, the ALJ issued a Proposal for Decision recommending full recovery of these
costs. In parallel with these cost recovery efforts at the MPSC, we are also
pursuing an appeal of a FERC order denying recovery of costs incurred in the
development of the Alliance RTO. Although we believe these implementation costs
are fully recoverable in accordance with the Customer Choice Act, we cannot
predict the amount, if any, the MPSC or the FERC will approve as recoverable.
For additional details and material changes relating to the restructuring of the
electric utility industry and electric rate matters, see Note 3, Contingencies,
"Consumers' Electric Utility Restructuring Matters," and "Consumers' Electric
Utility Rate Matters."
OTHER ELECTRIC UTILITY BUSINESS UNCERTAINTIES
MCV UNDERRECOVERIES: The MCV Partnership, which leases and operates the MCV
Facility, contracted to sell electricity to Consumers for a 35-year period
beginning in 1990. We hold a 49 percent partnership interest in the MCV
Partnership, and a 35 percent lessor interest in the MCV Facility.
The cost that we incur under the MCV PPA exceeds the recovery amount allowed by
the MPSC. As a result, we estimate that cash underrecoveries of capacity and
fixed energy payments will aggregate $150 million from 2005 through 2007. After
September 15, 2007, we expect to claim relief under the regulatory out provision
in the MCV PPA, thereby limiting our capacity and fixed energy payments to the
MCV Partnership to the amounts collected from our customers. The effect of any
such action would be to:
- reduce cash flow to the MCV Partnership, which could have an adverse
effect on our investment, and
- eliminate our underrecoveries of capacity and fixed energy payments.
The MCV Partnership has indicated that it may take issue with our exercise of
the regulatory out clause after September 15, 2007. We believe that the clause
is valid and fully effective, but cannot assure that it will prevail in the
event of a dispute. The MPSC's future actions on the capacity and fixed energy
payments recoverable from customers subsequent to September 15, 2007 may affect
negatively the earnings of the MCV Partnership and the value of our investment
in the MCV Partnership.
Further, under the MCV PPA, variable energy payments to the MCV Partnership are
based on the cost of coal burned at our coal plants and our operation and
maintenance expenses. However, the MCV Partnership's costs of producing
electricity are tied to the cost of natural gas. Because natural gas prices have
increased substantially in recent years and the price the MCV Partnership can
charge us for energy has not, the MCV Partnership's financial performance has
been impacted negatively. Even with the approved RCP, if gas prices do not
decline from present levels, the economics of operating the MCV Facility may be
adverse enough to require us to recognize an impairment. There are several
factors which could alter significantly our future impairment analyses
including, but not limited to, the forward price of natural gas, energy payments
to the MCV Partnership, which are based on the cost of coal burned at our coal
plants, and any reduction in payments to the MCV Partnership subsequent to
September 15, 2007 due to underrecovery of contract costs by Consumers from its
customers as a result of past or future actions by the MPSC.
For additional details on the MCV Partnership, see Note 3, Contingencies, "Other
Consumers' Electric Utility Contingencies - The Midland Cogeneration Venture."
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CMS Energy Corporation
NUCLEAR MATTERS: Big Rock: Dismantlement of plant systems is essentially
complete and demolition of the remaining plant structures has begun. The
restoration project is on schedule to return approximately 530 acres of the
site, including the area formerly occupied by the nuclear plant, to a natural
setting for unrestricted use in mid-2006. An additional 30 acres, the area where
seven transportable dry casks loaded with spent nuclear fuel and an eighth cask
loaded with high-level radioactive waste material are stored, we would expect to
be returned to a natural state within two years from the date the DOE begins
removing the spent nuclear fuel from Big Rock.
Palisades: In March 2005, the NRC completed its end-of-cycle plant performance
assessment of Palisades, which covered the calendar year 2004. The NRC
determined that Palisades was operated in a manner that preserved public health
and safety and met all of the NRC's specific "cornerstone objectives." As of
March 2005, all inspection findings were classified as having very low safety
significance and all performance indicators show performance at a level
requiring no additional oversight. Based on the plant's performance, only
regularly scheduled inspections are planned through September 2006.
The amount of spent nuclear fuel at Palisades exceeds the plant's temporary
onsite storage pool capacity. We are using dry casks for temporary onsite
storage. As of March 2005, we have loaded 22 dry casks with spent nuclear fuel.
For additional information on disposal of spent nuclear fuel, see Note 3,
Contingencies, "Other Consumers' Electric Utility Contingencies - Nuclear
Matters."
Palisades' current license from the NRC expires in 2011. In March 2005, NMC,
which operates the Palisades plant, applied for a 20-year license renewal for
the plant on behalf of Consumers. The NRC typically takes 22-30 months to review
a license renewal application. Its decision is expected in 2007.
Palisades, like many other nuclear plants, has experienced cracking in reactor
head nozzle penetrations. Repairs to two nozzles were made in 2004. We have
authorized the purchase of a replacement reactor vessel closure head. The
replacement head is being manufactured and is scheduled to be installed in 2007.
The replacement head nozzles will be manufactured from materials less
susceptible to cracking and should minimize inspection and repair costs after
replacement.
Spent nuclear fuel complaint: In March 2003, the Michigan Environmental Council,
the Public Interest Research Group in Michigan, and the Michigan Consumer
Federation filed a complaint with the MPSC, which was served on us by the MPSC
in April 2003. The complaint asks the MPSC to initiate a generic investigation
and contested case to review all facts and issues concerning costs associated
with spent nuclear fuel storage and disposal. The complaint seeks a variety of
relief with respect to Consumers, Detroit Edison, Indiana & Michigan Electric
Company, Wisconsin Electric Power Company, and Wisconsin Public Service
Corporation. The complaint states that amounts collected from customers for
spent nuclear fuel storage and disposal should be placed in an independent
trust. The complaint also asks the MPSC to take additional actions. In May 2003,
Consumers and other named utilities each filed motions to dismiss the complaint.
In February 2004, an MPSC ALJ recommended that the complaint be dismissed. We
are unable to predict the outcome of this matter.
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CMS Energy Corporation
GAS UTILITY BUSINESS OUTLOOK
GROWTH: Over the next five years, we expect gas deliveries to grow at an average
rate of less than one percent per year. Actual gas deliveries in future periods
may be affected by:
- fluctuations in weather patterns,
- use by independent power producers,
- competition in sales and delivery,
- Michigan economic conditions,
- gas consumption per customer, and
- changes in gas commodity prices.
GAS UTILITY BUSINESS UNCERTAINTIES
Several gas business trends or uncertainties may affect our financial results
and conditions. These trends or uncertainties could have a material impact on
revenues or income from gas operations.
GAS ENVIRONMENTAL ESTIMATES: We expect to incur investigation and remedial
action costs at a number of sites, including 23 former manufactured gas plant
sites. For additional details, see Note 3, Contingencies, "Consumers' Gas
Utility Contingencies - Gas Environmental Matters."
GAS TITLE TRACKING FEES AND SERVICES: There has been no material change in the
Gas Title Tracking Fees and Services matter since the year ended December 31,
2004.
GAS COST RECOVERY: The GCR process is designed to allow us to recover all of our
purchased natural gas costs if incurred under reasonable and prudent policies
and practices. The MPSC reviews these costs for prudency in an annual
reconciliation proceeding. For additional details on gas cost recovery, see Note
3, Contingencies, "Consumers' Gas Utility Rate Matters - Gas Cost Recovery."
2001 GAS DEPRECIATION CASE: In December 2003, we filed an update to our gas
utility plant depreciation case originally filed in June 2001. On December 18,
2003, the MPSC ordered an annual $34 million reduction in our depreciation
expense and related taxes in an interim rate order issued in our 2003 gas rate
case.
In October and December 2004, the MPSC issued Opinions and Orders in our gas
depreciation case, which reaffirmed a previously ordered $34 million reduction
in our depreciation expense. The October 2004 order also required us to file an
application for new depreciation accrual rates for our natural gas utility plant
on, or no earlier than three months prior to, the date we file our next natural
gas general rate case. The MPSC also directed us to undertake a study to
determine why our removal costs are in excess of those of other regulated
Michigan natural gas utilities and file a report with the MPSC Staff on or
before December 31, 2005.
In February 2005, we requested a delay in the filing date for the next
depreciation case until 150 days after:
- the removal cost study is filed, and
- the MPSC issues an order in a pending case relating to ARO
accounting.
We proposed to incorporate the results of the gas depreciation case into gas
general rates using a surcharge mechanism if the depreciation case order was not
issued concurrently with a gas general rate case order.
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CMS Energy Corporation
In March 2005, the MPSC granted our waiver request and accepted our surcharge
proposal, but reduced the lead time allowed to prepare and file the depreciation
case to 90 days.
OTHER CONSUMERS' OUTLOOK
COLLECTIVE BARGAINING AGREEMENTS: Approximately 46 percent of our employees are
represented by the Utility Workers Union of America. The Union represents
Consumers' operating, maintenance, and construction employees and our call
center employees. The collective bargaining agreement with the Union for our
operating, maintenance, and construction employees will expire on June 1, 2005.
In April 2005, a new tentative Operating, Maintenance, and Construction
Agreement was reached between the Utility Workers Union of America and
Consumers. The Union membership has voted to ratify this agreement. The
collective bargaining agreement with the Union for our call center employees
will expire on August l, 2005.
ENTERPRISES OUTLOOK
We plan to continue the restructuring of our Enterprises business with the
objective of narrowing the focus of our operations to primarily North America,
South America, and the Middle East/North Africa. We will continue to sell
designated assets and investments that are not consistent with this focus.
SENECA operates an electric utility on Margarita Island, Venezuela under a
Concession Agreement with the Venezuelan Ministry of Energy and Mines, now the
Ministry of Energy and Petroleum (MEP). The Concession Agreement provides for
semi-annual customer tariff adjustments for the effects of inflation and
foreign exchange variations. The last tariff adjustment occurred in December
2003. It was less than the amount required by the Concession Agreement and no
tariff increases have been granted since then. In July 2003, the MEP approved a
fuel subsidy for SENECA to partially offset the effects of its lower tariff
revenues. The fuel subsidy expired on December 31, 2004. The MEP has advised
SENECA that it is not renewing the fuel subsidy. We are informed that the
government has under consideration whether to grant an industry-wide tariff
increase and that a decision will be made no later than July 2005. The outcome
is uncertain since all alternatives have not been fully explored. If timely
financial relief is not approved, the liquidity of SENECA and the value of our
investment in SENECA would be impacted adversely.
UNCERTAINTIES: The results of operations and the financial position of our
diversified energy businesses may be affected by a number of trends or
uncertainties. Those that could have a material impact on our income, cash
flows, or balance sheet and credit improvement include:
- our ability to sell or to improve the performance of assets and
businesses in accordance with our business plan,
- changes in exchange rates or in local economic or political
conditions, particularly in Argentina, Venezuela, Brazil, and the
Middle East,
- changes in foreign laws or in governmental or regulatory policies
that could reduce significantly the tariffs charged and revenues
recognized by certain foreign subsidiaries, or increase expenses,
- imposition of stamp taxes on South American contracts that could
increase project expenses substantially,
- impact of any future rate cases, FERC actions, or orders on
regulated businesses,
- impact of ratings downgrades on our liquidity, operating costs, and
cost of capital,
- impact of changes in commodity prices and interest rates on certain
derivative contracts that do not qualify for hedge accounting and
must be marked to market through earnings,
- changes in available gas supplies or Argentine government
regulations that could restrict natural gas exports to our
GasAtacama generating plant, and
- impact of indemnity and environmental remediation obligations at Bay
Harbor.
OTHER OUTLOOK
LITIGATION AND REGULATORY INVESTIGATION: We are the subject of an investigation
by the DOJ regarding round-trip trading transactions by CMS MST. Additionally,
we are named as a party in various litigation matters including, but not limited
to, a shareholder derivative lawsuit, a securities class action lawsuit, a class
action lawsuit alleging ERISA violations, and several lawsuits regarding alleged
false natural gas price reporting and price manipulation. For additional details
regarding these investigations and litigation, see Note 3, Contingencies.
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CMS Energy Corporation
IMPLEMENTATION OF NEW ACCOUNTING STANDARDS
FSP 109-2, ACCOUNTING AND DISCLOSURE GUIDANCE FOR THE FOREIGN EARNINGS
REPATRIATION PROVISION WITHIN THE AMERICAN JOBS CREATION ACT OF 2004: During
2005, we may have the ability to repatriate additional amounts that may qualify
for the repatriation tax benefit. If successful, our current estimate is that
additional amounts could range between $100 million and $120 million. The amount
of additional repatriation remains uncertain because it is based on future
foreign subsidiary operations, cash flow, financings, and repatriation
limitations. This potential additional repatriation could reduce our recorded
deferred tax liability $30 million to $36 million. We expect to be in a position
to finalize our assessment, which may be higher or lower, regarding any
potential repatriation in the fourth quarter of 2005. For further information,
refer to Note 12, Implementation of New Accounting Standards.
NEW ACCOUNTING STANDARDS NOT YET EFFECTIVE
SFAS NO. 123R, SHARE-BASED PAYMENT: This Statement requires companies to use the
fair value of employee stock options and similar awards at the grant date to
value the awards. Companies must expense this amount over the vesting period of
the awards. This Statement also clarifies and expands SFAS No. 123's guidance in
several areas, including measuring fair value, classifying an award as equity or
as a liability, and attributing compensation cost to reporting periods.
This Statement amends SFAS No. 95, Statement of Cash Flows, to require that
excess tax benefits related to the excess of the tax deductible amount over the
compensation cost recognized be classified as cash inflows from financing
activities rather than as a reduction of taxes paid in operating activities.
Excess tax benefits are recorded as adjustments to additional paid-in capital.
This Statement is effective for us as of the beginning of 2006. We adopted the
fair value method of accounting for share-based awards effective December 2002.
Therefore, we do not expect this statement to have a significant impact on our
results of operations when it becomes effective.
FASB INTERPRETATION NO. 47, ACCOUNTING FOR CONDITIONAL ASSET RETIREMENT
OBLIGATIONS: This Interpretation clarifies the term "conditional asset
retirement obligation" as used in SFAS No. 143. The term refers to a legal
obligation to perform an asset retirement activity in which the timing and (or)
method of settlement are conditional on a future event that may or may not be
within the control of the entity. The obligation to perform the asset retirement
activity is unconditional even though uncertainty exists about the timing and
(or) method of settlement. Accordingly, an entity is required to recognize a
liability for the fair value of a conditional asset retirement obligation if the
fair value of the liability can be reasonably estimated. The fair value of a
liability for the conditional asset retirement obligation should be recognized
when incurred. This Interpretation also clarifies when an entity would have
sufficient information to estimate reasonably the fair value of an asset
retirement obligation. For us, this Interpretation is effective no later than
December 31, 2005. We are in the process of determining the impact this
Interpretation will have on our financial statements upon adoption.
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CMS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(UNAUDITED)
THREE MONTHS ENDED
March 31 2005 2004
- ------------------------------------------------------------------------------------------
In Millions, Except Per Share Amounts
OPERATING REVENUE $ 1,845 $ 1,754
EARNINGS FROM EQUITY METHOD INVESTEES 31 19
OPERATING EXPENSES
Fuel for electric generation 177 178
Fuel costs mark-to-market at MCV (209) (6)
Purchased and interchange power 95 77
Cost of gas sold 839 761
Other operating expenses 234 218
Maintenance 58 57
Depreciation, depletion and amortization 156 144
General taxes 75 74
Asset impairment charges - 125
---------------------
1,425 1,628
- ------------------------------------------------------------------------------------------
OPERATING INCOME 451 145
OTHER INCOME (DEDUCTIONS)
Accretion expense (5) (6)
Gain on asset sales, net 3 2
Interest and dividends 10 7
Regulatory return on capital expenditures 16 9
Foreign currency losses, net (1) (3)
Other income 8 3
Other expense (7) (2)
---------------------
24 10
- ------------------------------------------------------------------------------------------
FIXED CHARGES
Interest on long-term debt 122 130
Interest on long-term debt - related parties 10 15
Other interest 4 5
Capitalized interest (1) (2)
Preferred dividends of subsidiaries 1 1
---------------------
136 149
- ------------------------------------------------------------------------------------------
INCOME BEFORE MINORITY INTERESTS 339 6
MINORITY INTERESTS 113 11
---------------------
INCOME (LOSS) BEFORE INCOME TAXES 226 (5)
INCOME TAX EXPENSE (BENEFIT) 74 (3)
---------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 152 (2)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF
$1 TAX BENEFIT IN 2004 - (2)
---------------------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING 152 (4)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR
RETIREMENT BENEFITS, NET OF $1 TAX BENEFIT IN 2004 - (2)
---------------------
NET INCOME (LOSS) 152 (6)
PREFERRED DIVIDENDS 2 3
---------------------
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS $ 150 $ (9)
==========================================================================================
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
CMS-24
THREE MONTHS ENDED
March 31 2005 2004
- ------------------------------------------------------------------------------------------------
In Millions, Except Per Share Amounts
CMS ENERGY
NET INCOME (LOSS)
Net Income (Loss) Available to Common Stockholders $ 150 $ (9)
====================
BASIC EARNINGS (LOSS) PER AVERAGE COMMON SHARE
Income (Loss) from Continuing Operations $ 0.77 $ (0.04)
Loss from Discontinued Operations - (0.01)
Loss from Changes in Accounting - (0.01)
--------------------
Net Income (Loss) Attributable to Common Stock $ 0.77 $ (0.06)
====================
DILUTED EARNINGS (LOSS) PER AVERAGE COMMON SHARE
Income (Loss) from Continuing Operations $ 0.74 $ (0.04)
Loss from Discontinued Operations - (0.01)
Loss from Changes in Accounting - (0.01)
--------------------
Net Income (Loss) Attributable to Common Stock $ 0.74 $ (0.06)
====================
DIVIDENDS DECLARED PER COMMON SHARE $- $-
- ------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
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CMS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
March 31 2005 2004
- --------------------------------------------------------------------------------------------------------
In Millions
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 152 $ (6)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Depreciation, depletion and amortization (includes nuclear 156 144
decommissioning of $1 per period)
Regulatory return on capital expenditures (16) (9)
Minority interest 113 11
Fuel costs mark-to-market at MCV (209) (6)
Asset impairment charges - 125
Capital lease and debt discount amortization 10 8
Accretion expense 5 6
Distributions from related parties less than earnings (2) (6)
Gain on the sale of assets (3) (2)
Cumulative effect of accounting changes - 2
Changes in other assets and liabilities:
Increase in accounts receivable and accrued revenues (317) (335)
Decrease in inventories 418 366
Decrease in accounts payable (25) (43)
Decrease in accrued expenses (79) (41)
Deferred income taxes and investment tax credit 68 70
Increase in other current and non-current assets (29) (4)
Increase (decrease) in other current and non-current liabilities 20 (42)
-----------------------
Net cash provided by operating activities $ 262 $ 238
- --------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under capital lease) $ (149) $ (113)
Cost to retire property (27) (18)
Restricted cash 11 (15)
Investment in Electric Restructuring Implementation Plan (1) (2)
Investments in nuclear decommissioning trust funds (1) (1)
Proceeds from nuclear decommissioning trust funds 7 20
Proceeds from short-term investments 295 713
Purchase of short-term investments (186) (763)
Maturity of MCV restricted investment securities held-to-maturity 126 115
Purchase of MCV restricted investment securities held-to-maturity (126) (115)
Proceeds from sale of assets 21 5
Other investing 22 9
-----------------------
Net cash used in investing activities $ (8) $ (165)
- --------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes, bonds, and other long-term debt $ 704 $ -
Issuance of common stock 6 -
Retirement of bonds and other long-term debt (678) (263)
Payment of preferred stock dividends (2) (3)
Payment of capital lease obligations (3) (3)
Other financing (10) -
-----------------------
Net cash provided by (used in) financing activities $ 17 $ (269)
- --------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATES ON CASH - (9)
- --------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 271 $ (205)
CASH AND CASH EQUIVALENTS FROM EFFECT OF REVISED FASB
INTERPRETATION NO. 46 CONSOLIDATION - 174
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 669 532
-----------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 940 $ 501
========================================================================================================
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CMS ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
MARCH 31
2005 DECEMBER 31
(UNAUDITED) 2004
- ----------------------------------------------------------------------------------------------
In Millions
PLANT AND PROPERTY (AT COST)
Electric utility $ 8,007 $ 7,967
Gas utility 3,010 2,995
Enterprises 3,348 3,517
Other 28 28
----------------------
14,393 14,507
Less accumulated depreciation, depletion and amortization 6,032 6,135
----------------------
8,361 8,372
Construction work-in-progress 437 370
----------------------
8,798 8,742
- ----------------------------------------------------------------------------------------------
INVESTMENTS
Enterprises 728 729
Other 13 23
----------------------
741 752
- ----------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents at cost, which approximates market 940 669
Restricted cash 45 56
Short-term investments at cost, which approximates market - 109
Accounts receivable, notes receivable and accrued revenue, less
allowances of $32 and $38, respectively 826 528
Accounts receivable and notes receivable - related parties 60 53
Inventories at average cost
Gas in underground storage 464 856
Materials and supplies 85 90
Generating plant fuel stock 63 84
Price risk management assets 139 91
Regulatory assets - postretirement benefits 19 19
Derivative instruments 253 96
Deferred property taxes 164 167
Prepayments and other 123 181
----------------------
3,181 2,999
- ----------------------------------------------------------------------------------------------
NON-CURRENT ASSETS
Regulatory Assets
Securitized costs 593 604
Additional minimum pension 371 372
Postretirement benefits 133 139
Abandoned Midland Project 10 10
Other 586 552
Price risk management assets 258 214
Nuclear decommissioning trust funds 561 575
Goodwill 22 23
Notes receivable - related parties 205 217
Notes receivable 179 178
Other 563 495
----------------------
3,481 3,379
- ----------------------------------------------------------------------------------------------
TOTAL ASSETS $ 16,201 $ 15,872
==============================================================================================
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STOCKHOLDERS' INVESTMENT AND LIABILITIES
MARCH 31
2005 DECEMBER 31
(UNAUDITED) 2004
- ------------------------------------------------------------------------------------------------------
In Millions
CAPITALIZATION
Common stockholders' equity
Common stock, authorized 350.0 shares; outstanding 195.6 shares and
195.0 shares, respectively $ 2 $ 2
Other paid-in capital 4,147 4,140
Accumulated other comprehensive loss (323) (336)
Retained deficit (1,584) (1,734)
-----------------------
2,242 2,072
Preferred stock of subsidiary 44 44
Preferred stock 261 261
Long-term debt 6,657 6,444
Long-term debt - related parties 307 504
Non-current portion of capital and finance lease obligations 315 315
-----------------------
9,826 9,640
- ------------------------------------------------------------------------------------------------------
MINORITY INTERESTS 844 733
- ------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt, capital and finance leases 487 296
Current portion of long-term debt - related parties - 180
Accounts payable 356 391
Accounts payable - related parties 2 1
Accrued interest 123 145
Accrued taxes 259 312
Price risk management liabilities 129 90
Current portion of gas supply contract obligations 33 32
Deferred income taxes 32 19
Other 245 289
-----------------------
1,666 1,755
- ------------------------------------------------------------------------------------------------------
NON-CURRENT LIABILITIES
Regulatory Liabilities
Regulatory liabilities for cost of removal 1,070 1,044
Income taxes, net 360 357
Other regulatory liabilities 169 173
Postretirement benefits 282 275
Deferred income taxes 730 671
Deferred investment tax credit 78 79
Asset retirement obligation 441 439
Price risk management liabilities 257 213
Gas supply contract obligations 163 176
Other 315 317
-----------------------
3,865 3,744
- ------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 3, 4 and 6)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $ 16,201 $ 15,872
======================================================================================================
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
CMS-29
CMS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
(UNAUDITED)
THREE MONTHS ENDED
March 31 2005 2004
- ---------------------------------------------------------------------------------------------
In Millions
COMMON STOCK
At beginning and end of period $ 2 $ 2
- ---------------------------------------------------------------------------------------------
OTHER PAID-IN CAPITAL
At beginning of period 4,140 3,846
Common stock issued 6 -
Common stock reissued 1 -
-----------------------
At end of period 4,147 3,846
- ---------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Minimum Pension Liability
At beginning of period (17) -
Minimum pension liability adjustments (a) - -
-----------------------
At end of period (17) -
-----------------------
Investments
At beginning of period 9 8
Unrealized gain (loss) on investments (a) (1) 1
-----------------------
At end of period 8 9
-----------------------
Derivative Instruments
At beginning of period (9) (8)
Unrealized gain (loss) on derivative instruments (a) 18 (3)
Realized gain on derivative instruments (a) (8) (2)
-----------------------
At end of period 1 (13)
-----------------------
Foreign Currency Translation
At beginning of period (319) (419)
Loy Yang sale - 110
Other foreign currency translations (a) 4 (4)
-----------------------
At end of period (315) (313)
-----------------------
At end of period (323) (317)
- ---------------------------------------------------------------------------------------------
RETAINED DEFICIT
At beginning of period (1,734) (1,844)
Consolidated net income (loss) (a) 152 (6)
Preferred stock dividends declared (2) (3)
-----------------------
At end of period (1,584) (1,853)
-----------------------
TOTAL COMMON STOCKHOLDERS' EQUITY $ 2,242 $ 1,678
=============================================================================================
(a) DISCLOSURE OF OTHER COMPREHENSIVE INCOME:
Minimum Pension Liability
Minimum pension liability adjustments, net of tax of
$- and $-, respectively $ - $ -
Investments
Unrealized gain (loss) on investments, net of tax
of $- and $-, respectively (1) 1
Derivative Instruments
Unrealized gain (loss) on derivative instruments,
net of tax of $9 and $5, respectively 18 (3)
Realized gain on derivative instruments, net of tax
of $(6) and $(1), respectively (8) (2)
Foreign currency translation, net 4 106
Consolidated net income (loss) 152 (6)
-----------------------
Total Other Comprehensive Income $ 165 $ 96
=======================
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
CMS-30
CMS Energy Corporation
CMS ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
These interim Consolidated Financial Statements have been prepared by CMS Energy
in accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. As such, certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States have been
condensed or omitted. Certain prior year amounts have been reclassified to
conform to the presentation in the current year. In management's opinion, the
unaudited information contained in this report reflects all adjustments of a
normal recurring nature necessary to assure the fair presentation of financial
position, results of operations and cash flows for the periods presented. The
Condensed Notes to Consolidated Financial Statements and the related
Consolidated Financial Statements should be read in conjunction with the
Consolidated Financial Statements and Notes to Consolidated Financial Statements
contained in CMS Energy's Form 10-K for the year ended December 31, 2004. Due to
the seasonal nature of CMS Energy's operations, the results as presented for
this interim period are not necessarily indicative of results to be achieved for
the fiscal year.
1: CORPORATE STRUCTURE AND ACCOUNTING POLICIES
CORPORATE STRUCTURE: CMS Energy is an integrated energy company with a business
strategy focused primarily in Michigan. We are the parent holding company of
Consumers and Enterprises. Consumers is a combination electric and gas utility
company serving Michigan's Lower Peninsula. Enterprises, through various
subsidiaries and equity investments, is engaged in domestic and international
diversified energy businesses, including independent power production and
natural gas transmission, storage and processing. We manage our businesses by
the nature of services each provides and operate principally in three business
segments: electric utility, gas utility, and enterprises.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of CMS Energy, Consumers, Enterprises, and all other entities in which
we have a controlling financial interest or are the primary beneficiary, in
accordance with Revised FASB Interpretation No. 46. We use the equity method of
accounting for investments in companies and partnerships that are not
consolidated, where we have significant influence over operations and financial
policies, but are not the primary beneficiary. Intercompany transactions and
balances have been eliminated.
USE OF ESTIMATES: We prepare our consolidated financial statements in conformity
with U.S. generally accepted accounting principles. We are required to make
estimates using assumptions that may affect the reported amounts and
disclosures. Actual results could differ from those estimates.
We are required to record estimated liabilities in the consolidated financial
statements when it is probable that a loss will be incurred in the future as a
result of a current event, and when an amount can be reasonably estimated. We
have used this accounting principle to record estimated liabilities as discussed
in Note 3, Contingencies.
INTERNATIONAL OPERATIONS AND FOREIGN CURRENCY: Our subsidiaries and affiliates
whose functional currency is not the U.S. dollar translate their assets and
liabilities into U.S. dollars at the exchange rates in effect at the end of the
fiscal period. We translate revenue and expense accounts of such subsidiaries
and affiliates into U.S. dollars at the average exchange rates that prevailed
during the period. The gains
CMS-31
CMS Energy Corporation
or losses that result from this process are shown in the stockholders' equity
section on our Consolidated Balance Sheets. Gains and losses that arise from
exchange rate fluctuations on transactions denominated in a currency other than
the functional currency, except those that are hedged, are included in
determining net income.
Argentina: At March 31, 2005, the net foreign currency loss due to the
unfavorable exchange rate of the Argentine peso recorded in the Foreign Currency
Translation component of stockholders' equity using an exchange rate of 2.923
pesos per U.S. dollar was $263 million. This amount also reflects the effect of
recording, at December 31, 2002, U.S. income taxes on temporary differences
between the book and tax bases of foreign investments, including the foreign
currency translation associated with our Argentine investments.
LONG-LIVED ASSETS AND EQUITY METHOD INVESTMENTS: Our assessment of the
recoverability of long-lived assets and equity method investments involves
critical accounting estimates. Tests of impairment are performed periodically if
certain conditions that are other than temporary exist that may indicate the
carrying value may not be recoverable. Of our total assets, recorded at $16.201
billion at March 31, 2005, 59 percent represent long-lived assets and equity
method investments that are subject to this type of analysis.
OTHER INCOME AND OTHER EXPENSE: The following tables show the components of
Other income and Other expense:
In Millions
- -------------------------------------------------------------------------------------
Three Months Ended March 31 2005 2004
- -------------------------------------------------------------------------------------
Other income
Interest and dividends - related parties $ 2 $ 1
Return on stranded costs 1 -
Electric restructuring return 1 2
Reversal of contingent liability 3 -
All other 1 -
- -------------------------------------------------------------------------------------
Total other income $ 8 $ 3
=====================================================================================
In Millions
- -------------------------------------------------------------------------------------
Three Months Ended March 31 2005 2004
- -------------------------------------------------------------------------------------
Other expense
Investment write-down $ (1) $ -
Loss on reacquired debt (5) -
Civic and political expenditures (1) (1)
All other - (1)
- -------------------------------------------------------------------------------------
Total other expense $ (7) $ (2)
=====================================================================================
RECLASSIFICATIONS: Certain prior year amounts have been reclassified for
comparative purposes. These reclassifications did not affect consolidated net
income for the years presented.
CMS-32
CMS Energy Corporation
2: ASSET SALES AND IMPAIRMENT CHARGES
Our continued focus on financial improvement has led to completing asset sales
and impairing some assets.
ASSET SALES
Gross cash proceeds received from the sale of assets totaled $21 million for the
three months ended March 31, 2005 and $5 million for the three months ended
March 31, 2004. The impacts of these sales are included in Gain on assets sales,
net in our Consolidated Statements of Income (Loss).
In February 2005, we sold our interest in GVK, a 250 MW gas fired power plant
located in South Central India, for $21 million. The gain on the sale was $3
million ($2 million, net of tax).
In February 2004, we sold our interest in Bluewater Pipeline. The gain on the
sale of Bluewater pipeline and other various asset sales was $2 million ($2
million, net of tax).
Although much of our asset sales program is complete, we still may sell certain
remaining businesses that are not strategic to us.
SUBSEQUENT EVENTS: In April 2005, we sold our investment in the Scudder Latin
American Power Fund and received gross cash proceeds of $23 million. The pretax
gain on the sale was approximately $2 million.
In April 2005, we received gross cash proceeds of $15 million for the sale of a
gas turbine and auxiliary equipment. There was no gain or loss on the sale.
ASSET IMPAIRMENT CHARGES
We record an asset impairment when we determine that the expected future cash
flows from an asset would be insufficient to provide for recovery of the asset's
carrying value. There were no asset impairments recorded for the three months
ended March 31, 2005.
In the first quarter of 2004, an impairment charge of $125 million ($81 million,
net of tax) was recorded to recognize the reduction in fair value as a result of
the sale of Loy Yang. The impairment included a cumulative net foreign currency
translation loss of approximately $110 million. The sale of Loy Yang was
completed in April 2004.
3: CONTINGENCIES
SEC AND OTHER INVESTIGATIONS: As a result of round-trip trading transactions by
CMS MST, CMS Energy's Board of Directors established a Special Committee to
investigate matters surrounding the transactions and retained outside counsel to
assist in the investigation. The Special Committee completed its investigation
and reported its findings to the Board of Directors in October 2002. The Special
Committee concluded, based on an extensive investigation, that the round-trip
trades were undertaken to raise CMS MST's profile as an energy marketer with the
goal of enhancing its ability to promote its services to new customers. The
Special Committee found no effort to manipulate the price of CMS Energy Common
Stock or affect energy prices. The Special Committee also made recommendations
designed to prevent any recurrence of this practice. Previously, CMS Energy
terminated its speculative trading business and revised its risk management
policy. The Board of Directors adopted, and CMS Energy implemented, the
recommendations of the Special Committee.
CMS-33
CMS Energy Corporation
CMS Energy is cooperating with an investigation by the DOJ concerning round-trip
trading. CMS Energy is unable to predict the outcome of this matter and what
effect, if any, this investigation will have on its business. In March 2004, the
SEC approved a cease-and-desist order settling an administrative action against
CMS Energy related to round-trip trading. The order did not assess a fine and
CMS Energy neither admitted nor denied the order's findings. The settlement
resolved the SEC investigation involving CMS Energy and CMS MST. Also in March
2004, the SEC filed an action against three former employees related to
round-trip trading by CMS MST. One of the individuals has settled with the SEC.
CMS Energy is currently advancing legal defense costs for the remaining two
individuals, in accordance with existing indemnification policies.
SECURITIES CLASS ACTION LAWSUITS: Beginning on May 17, 2002, a number of
complaints were filed against CMS Energy, Consumers, and certain officers and
directors of CMS Energy and its affiliates, including but not limited to
Consumers which, while established, operated and regulated as a separate legal
entity and publicly traded company, shares a parallel Board of Directors with
CMS Energy. The complaints were filed as purported class actions in the United
States District Court for the Eastern District of Michigan, by shareholders who
allege that they purchased CMS Energy's securities during a purported class
period running from May 2000 through March 2003. The cases were consolidated
into a single lawsuit. The consolidated lawsuit generally seeks unspecified
damages based on allegations that the defendants violated United States
securities laws and regulations by making allegedly false and misleading
statements about CMS Energy's business and financial condition, particularly
with respect to revenues and expenses recorded in connection with round-trip
trading by CMS MST. In January 2005, a motion was granted, dismissing Consumers
and three of the individual defendants, but the court denied the motions to
dismiss for CMS Energy and the 13 remaining individual defendants. Plaintiffs
filed a motion for class certification on April 15, 2005. CMS Energy and the
individual defendants will defend themselves vigorously in this litigation but
cannot predict its outcome.
DEMAND FOR ACTION AGAINST OFFICERS AND DIRECTORS: In May 2002, the Board of
Directors of CMS Energy received a demand, on behalf of a shareholder of CMS
Energy Common Stock, that it commence civil actions (i) to remedy alleged
breaches of fiduciary duties by certain CMS Energy officers and directors in
connection with round-trip trading by CMS MST, and (ii) to recover damages
sustained by CMS Energy as a result of alleged insider trades alleged to have
been made by certain current and former officers of CMS Energy and its
subsidiaries. In December 2002, two new directors were appointed to the Board.
The Board formed a special litigation committee in January 2003 to determine
whether it is in CMS Energy's best interest to bring the action demanded by the
shareholder. The disinterested members of the Board appointed the two new
directors to serve on the special litigation committee.
In December 2003, during the continuing review by the special litigation
committee, CMS Energy was served with a derivative complaint filed on behalf of
the shareholder in the Circuit Court of Jackson County, Michigan in furtherance
of his demands. CMS Energy will defend itself vigorously but cannot predict the
outcome of this matter.
ERISA LAWSUITS: CMS Energy is a named defendant, along with Consumers, CMS MST,
and certain named and unnamed officers and directors, in two lawsuits brought as
purported class actions on behalf of participants and beneficiaries of the CMS
Employees' Savings and Incentive Plan (the Plan). The two cases were filed in
July 2002 in United States District Court for the Eastern District of Michigan
and were later consolidated by the court. Plaintiffs allege breaches of
fiduciary duties under ERISA and seek restitution on behalf of the Plan with
respect to a decline in value of the shares of CMS Energy Common
CMS-34
CMS Energy Corporation
Stock held in the Plan. Plaintiffs also seek other equitable relief and legal
fees. In March 2004, the judge granted in part, but denied in part, CMS Energy's
motion to dismiss the complaint. CMS Energy, Consumers and a number of
individual defendants remain parties. The judge has conditionally granted
plaintiffs' motion for class certification. A trial date has not been set, but
is expected to be no earlier than mid 2006. CMS Energy and Consumers will defend
themselves vigorously in this litigation but cannot predict its outcome.
GAS INDEX PRICE REPORTING INVESTIGATION: CMS Energy has notified appropriate
regulatory and governmental agencies that some employees at CMS MST and CMS
Field Services appeared to have provided inaccurate information regarding
natural gas trades to various energy industry publications which compile and
report index prices. CMS Energy is cooperating with an ongoing investigation by
the DOJ regarding this matter. CMS Energy is unable to predict the outcome of
the DOJ investigation and what effect, if any, the investigation will have on
its business. The Commodity Futures Trading Commission filed a civil injunctive
action against two former CMS Field Services employees in Oklahoma federal
district court on February 1, 2005. The action alleges the two engaged in
reporting false natural gas trade information, and the action seeks to enjoin
such acts, compel compliance with the Commodities Exchange Act, and impose
monetary penalties.
BAY HARBOR: Certain subsidiaries of CMS Energy participated in the development
of Bay Harbor, a residential/commercial real estate project on the site of a
discontinued cement and quarry operation near Petoskey, Michigan. As part of the
development, which went forward under an agreement with the MDEQ, a golf course
was constructed over several abandoned cement kiln dust (CKD) piles, left over
from the former cement plant operation. Another former CKD area has been
converted into a park. Part of the agreement with the MDEQ required the
construction of a water collection system to recover seep water from one of the
CKD piles. In 2002, CMS Energy sold its interests in Bay Harbor, but retained
its obligations under previous environmental indemnifications entered into at
the inception of the project.
From January to September 2004, the seep collection system was down for
maintenance and/or awaiting permission to restart from the City of Petoskey. In
September 2004, the MDEQ issued a notice of noncompliance (NON), after finding
high pH-seep water in Lake Michigan adjacent to the project. The MDEQ also found
higher than acceptable levels of heavy metals, including mercury, in the seep
water.
Coincident with the MDEQ inspections, the EPA also assigned an inspector to the
site. In November 2004, the EPA issued a Notice of Potential Liability under the
Comprehensive Environmental Response, Compensation, and Liability Act, and
initiated discussions with the MDEQ, CMS Energy and other parties, toward
arriving at a suitable Administrative Order on Consent (AOC) to address problems
at Bay Harbor.
In February 2005, the EPA executed an AOC, upon the consent of CMS Land Company
and CMS Capital Corp., subsidiaries of Enterprises. Under the AOC, CMS Land
Company and CMS Capital Corp. are generally obligated, among other things, to:
(i) engage in measures to restrict access to seep areas, install methods to
interrupt the flow of seep water to Lake Michigan, and take other measures as
may be required by the EPA under an approved "removal action work plan"; (ii)
investigate and study the extent of hazardous substances at the site, evaluate
alternatives to address a long-term remedy, and issue a report of the
investigation and study; and (iii) within 120 days after EPA approval of the
investigation report, enter into an enforceable agreement with the MDEQ to
address a long-term remedy under certain criteria set forth in the AOC. CMS
Energy has submitted a draft removal action work plan, which is under review by
the EPA.
Several parties have issued demand letters to CMS Energy claiming breach of the
indemnification provisions, making requests for payment of their expenses
related to the NON, and/or claiming damages to property or personal injury with
regard to the matter. Several landowners have threatened litigation in
CMS-35
CMS Energy Corporation
the event their demands are not met. CMS Energy responded to the indemnification
claims by stating that it had not breached its indemnity obligations, it will
comply with the indemnities, it has restarted the seep water collection facility
and it has responded to the NON. CMS Energy has entered into negotiations with
several landowners at Bay Harbor for access as necessary to implement
remediation measures, and will defend vigorously any property damage and
personal injury claim or lawsuits.
Based on preliminary studies, CMS Energy has identified several remediation
options. The estimated potential capital and near-term expenditures for these
options range from $25 million to $40 million, with continuing yearly operating
and maintenance expenses ranging from $0.8 million to $1.6 million. Final
remediation and resulting claims against third parties for reimbursement of
remediation costs could increase or decrease these amounts. CMS Energy recorded
a liability for its obligations associated with this matter in the amount of $45
million, with a resultant charge to its income statement of $29 million, net of
deferred income taxes, in the fourth quarter of 2004, reflecting CMS Energy's
current best estimate of both the capital and near-term costs as well as the
present value of continuing future operating costs.
An adverse outcome of this matter could, depending on the size of any
indemnification obligation or liability under environmental laws, have a
potentially significant adverse effect on CMS Energy's financial condition and
liquidity and could negatively impact CMS Energy's financial results. CMS Energy
cannot predict the ultimate cost or outcome of this matter.
CONSUMERS' ELECTRIC UTILITY CONTINGENCIES
ELECTRIC ENVIRONMENTAL MATTERS: Our operations are subject to environmental laws
and regulations. Costs to operate our facilities in compliance with these laws
and regulations generally have been recovered in customer rates.
Clean Air: Compliance with the federal Clean Air Act and resulting regulations
has been, and will continue to be, a significant focus for us. The Nitrogen
Oxide State Implementation Plan Call Regulation requires significant reductions
in nitrogen oxide emissions. To comply with the regulations, we expect to incur
capital expenditures totaling $815 million. The key assumptions included in the
capital expenditure estimate include:
- construction commodity prices, especially construction material and
labor,
- project completion schedules,
- cost escalation factor used to estimate future years' costs, and
- allowance for funds used during construction (AFUDC) rate.
Our current capital cost estimates include an escalation rate of 2.6 percent and
an AFUDC capitalization rate of 8.3 percent. As of March 2005, we have
incurred $543 million in capital expenditures to comply with these regulations
and anticipate that the remaining $272 million of capital expenditures will be
made between 2005 and 2011. These expenditures include installing selective
catalytic reduction technology at four of our coal-fired electric plants. In
addition to modifying the coal-fired electric plants, we expect to utilize
nitrogen oxide emissions allowances for years 2005 through 2009, of which 90
percent has been purchased. The cost of the allowances is estimated to average
$8 million per year for 2005-2006. The estimated costs are based on the average
cost of the purchased, allocated, or swapped allowances. The need for allowances
will decrease after year 2006 with the installation of selective catalytic
control technology. The cost of the allowances is accounted for as inventory.
The allowance inventory is expensed as the coal-fired electric generating units
emit nitrogen oxide.
CMS-36
CMS Energy Corporation
The EPA recently adopted a Clean Air Interstate Rule that requires additional
coal-fired electric plant emission controls for nitrogen oxides and sulfur
dioxide. The rule involves a two-phase program to reduce emissions of sulfur
dioxide by 71 percent and nitrogen oxides by 63 percent by 2015. The final rule
advanced the proposed year for nitrogen oxide compliance requirement by one year
to 2009. This change will require that we run our Selective Catalytic Reduction
units year round beginning in 2009 and may require that we purchase additional
nitrogen oxide credits beginning in 2009. In addition to the selective catalytic
reduction control technology installed to meet the Nitrogen Oxide State
Implementation Plan Call Regulation, our current plan includes installation of
flue gas desulfurization scrubbers. The scrubbers are to be installed by 2014 at
a cost near that of the Selective Catalytic Reduction total cost in order to
meet Phase One emission reduction requirements.
In March 2005, the EPA issued the Clean Air Mercury Rule, which requires initial
reductions of mercury emissions from coal-fired electric power plants by 2010
and further reductions by 2018. While the industry has not reached a consensus
on the technical methods for curtailing mercury emissions, our capital and
operating costs for mercury emissions reductions could be significantly less
than is required for nitrogen oxide compliance.
The EPA has alleged that some utilities have incorrectly classified plant
modifications as "routine maintenance" rather than seeking modification permits
from the EPA. We have received and responded to information requests from the
EPA on this subject. We believe that we have properly interpreted the
requirements of "routine maintenance." If our interpretation is found to be
incorrect, we may be required to install additional pollution controls at some
or all of our coal-fired electric plants and potentially pay fines.
Additionally, the viability of certain plants remaining in operation could be
called into question.
Cleanup and Solid Waste: Under the Michigan Natural Resources and Environmental
Protection Act, we expect that we will ultimately incur investigation and
remedial action costs at a number of sites. We believe that these costs will be
recoverable in rates under current ratemaking policies.
We are a potentially responsible party at several contaminated sites
administered under Superfund. Superfund liability is joint and several, meaning
that many other creditworthy parties with substantial assets are potentially
responsible with respect to the individual sites. Based on past experience, we
estimate that our share of the total liability for the known Superfund sites
will be between $1 million and $9 million. At March 31, 2005, we have recorded a
liability for the minimum amount of our estimated Superfund liability.
In October 1998, during routine maintenance activities, we identified PCB as a
component in certain paint, grout, and sealant materials at the Ludington Pumped
Storage facility. We removed and replaced part of the PCB material. We have
proposed a plan to deal with the remaining materials and are awaiting a response
from the EPA.
MCV Environmental Issue: On July 12, 2004 the MDEQ, Air Control Division, issued
the MCV Partnership a Letter of Violation asserting that the MCV Facility
violated its Air Use Permit to Install (PTI) by exceeding the carbon monoxide
emission limit on the Unit 14 GTG duct burner and failing to maintain certain
records in the required format. On July 13, 2004, the MDEQ, Water Division,
issued the MCV Facility a Notice Letter asserting the MCV Facility violated its
National Pollutant Discharge Elimination System (NPDES) Permit by discharging
heated process waste water into the storm water system, failure to document
inspections, and other minor infractions (alleged NPDES violations).
The MCV Partnership has declared five of the six duct burners in the MCV
Facility as unavailable for operational use (which reduces the generation
capability of the MCV Facility by approximately 100 MW), is assessing the duct
burner issue and has begun other corrective action to address the MDEQ's
assertions. The one available duct burner was tested in April 2005 and its
emissions met permitted levels due to the unique configuration of that
particular unit. The MCV Partnership disagrees with certain of the MDEQ's
assertions. The MCV Partnership filed
CMS-37
CMS Energy Corporation
responses to these MDEQ letters in July and August 2004. On December 13, 2004,
the MDEQ informed the MCV Partnership that it was pursuing an escalated
enforcement action against the MCV Partnership regarding the alleged violations
of the MCV Facility's PTI. The MDEQ also stated that the alleged violations are
deemed federally significant and, as such, placed the MCV Partnership on the
EPA's High Priority Violators List (HPVL). The MDEQ and the MCV Partnership are
pursuing voluntary settlement of this matter, which will satisfy state and
federal requirements and remove the MCV Partnership from the HPVL. Any such
settlement is likely to involve a fine, but the MDEQ has not, at this time,
stated what, if any, fine they will seek to impose. At this time, the MCV
Partnership management cannot predict the financial impact or outcome of these
issues, however, the MCV Partnership believes it has resolved all issues
associated with the alleged NPDES violations and does not expect any further
MDEQ actions on this NPDES matter.
LITIGATION: In October 2003, a group of eight PURPA qualifying facilities
selling power to us filed a lawsuit in Ingham County Circuit Court. The lawsuit
alleges that we incorrectly calculated the energy charge payments made pursuant
to power purchase agreements with qualifying facilities. In February 2004, the
Ingham County Circuit Court judge deferred to the primary jurisdiction of the
MPSC, dismissing the circuit court case without prejudice. In February 2005, the
MPSC issued an order in the 2004 PSCR plan case concluding that we have been
correctly administering the energy charge calculation methodology.
The eight plaintiff qualifying facilities have appealed the dismissal of the
circuit court case to the Michigan Court of Appeals. The qualifying facilities
have also appealed the February 2005 MPSC order in the 2004 PSCR plan case to
the Michigan Court of Appeals, and have initiated separate legal actions in
federal district court and at the FERC concerning the energy charge calculation
issue. We cannot predict the outcome of these appeals and legal actions.
CONSUMERS' ELECTRIC UTILITY RESTRUCTURING MATTERS
ELECTRIC ROA: The revised tariffs approved by the MPSC allow ROA customers, upon
as little as 60 days notice to us, to return to our generation service at
current tariff rates. However, we may not have capacity available to serve these
customers that is sufficient or reasonably priced. As a result, we may be forced
to purchase electricity on the spot market at higher prices than we can recover
from our customers during the rate cap periods. We cannot predict the total
amount of electric supply load that may be lost to alternative electric
suppliers. As of April 2005, alternative electric suppliers are providing 893 MW
of generation supply to ROA customers. This amount represents an increase of 9
percent compared to April 2004, and 12 percent of our distribution load.
CMS-38
CMS Energy Corporation
ELECTRIC RESTRUCTURING PROCEEDINGS: Below is a discussion of our electric
restructuring proceedings.
The following chart summarizes our electric restructuring filings with the MPSC:
- ----------------------------------------------------------------------------------------------------------------
Year(s) Years Requested
Proceeding Filed Covered Amount Status
- ----------------------------------------------------------------------------------------------------------------
Stranded Costs 2002-2004 2000-2003 $137 million (a) The MPSC ruled that we experienced
zero Stranded Costs for 2000 through
2001. The MPSC approved recovery of
$63 million in Stranded Costs for
2002 through 2003.
Implementation 1999-2004 1997-2003 $91 million (b) The MPSC allowed $68 million for the
Costs years 1997-2001, plus $20 million
for the cost of money through 2003.
Implementation cost filings for 2002
and 2003 for $8 million, which
includes the cost of money through
2003, are pending MPSC approval.
Section 10d(4) 2004 2000-2005 $628 million Filed with the MPSC in October
Regulatory Assets 2004.
================================================================================================================
(a) Amount includes the cost of money through the year in which we expected to
receive recovery from the MPSC and assumes recovery of Clean Air Act costs
through the Section 10d(4) Regulatory Asset case.
(b) Amount includes the cost of money through the year prior to the year filed.
Section 10d(4) Regulatory Assets: Section 10d(4) of the Customer Choice Act
allows us to recover certain regulatory assets through deferred recovery of
annual capital expenditures in excess of depreciation levels and certain other
expenses incurred prior to and throughout the rate freeze and rate cap periods,
including the cost of money. The section also allows deferred recovery of
expenses incurred during the rate freeze and rate cap periods that result from
changes in taxes, laws, or other state or federal governmental actions. In
October 2004, we filed an application with the MPSC seeking recovery of $628
million of Section 10d(4) Regulatory Assets for the period June 2000 through
December 2005 consisting of:
- capital expenditures in excess of depreciation,
- Clean Air Act costs,
- other expenses related to changes in law or governmental action
incurred during the rate freeze and rate cap periods, and
- the associated cost of money through the period of collection.
Of the $628 million, $152 million relates to the cost of money.
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CMS Energy Corporation
As allowed by the Customer Choice Act, we accrue and defer for recovery a
portion of our Section 10d(4) Regulatory Assets. In March 2005, the MPSC Staff
filed testimony recommending the MPSC approve recovery of approximately $323
million in Section 10d(4) costs. However, we may have the opportunity to recover
certain costs included in our application alternatively in other cases pending
before the MPSC. We cannot predict the amount, if any, the MPSC will approve as
recoverable. At March 31, 2005, total recorded Section 10d(4) Regulatory Assets
were $160 million.
TRANSMISSION SALE: In May 2002, we sold our electric transmission system to MTH,
a non-affiliated limited partnership whose general partner is a subsidiary of
Trans-Elect, Inc. We are in arbitration with MTH regarding property tax items
used in establishing the selling price of our electric transmission system. An
unfavorable outcome could result in a reduction of sale proceeds previously
recognized of approximately $2 million to $3 million.
CONSUMERS' ELECTRIC UTILITY RATE MATTERS
ELECTRIC RATE CASE: In December 2004, we filed an application with the MPSC to
increase our retail electric base rates. The electric rate case filing requests
an annual increase in revenues of approximately $320 million. In April 2005, we
filed updated debt and equity information in the electric rate case. This will
likely reduce our rate request. The primary reasons for the request are
increased system maintenance and improvement costs, Clean Air Act-related
expenditures, and employee pension costs. We expect the MPSC staff to file its
position in the case in June 2005. We expect a final order from the MPSC in late
2005. If approved as requested, the rate increase would go into effect in
January 2006 and would apply to all retail electric customers. We cannot predict
the amount or timing of the rate increase, if any, which the MPSC will approve.
POWER SUPPLY COSTS: To reduce the risk of high electric prices during peak
demand periods and to achieve our reserve margin target, we employ a strategy of
purchasing electric capacity and energy contracts for the physical delivery of
electricity primarily in the summer months and to a lesser degree in the winter
months. We have purchased capacity and energy contracts partially covering the
estimated reserve margin requirements for 2005 through 2007. As a result, we
have recognized an asset of $11 million for unexpired capacity and energy
contracts at March 31, 2005. At April 2005, we expect the total premium cost of
electric capacity and energy contracts for 2005 to be approximately $6 million.
PSCR: The PSCR process assures recovery of all reasonable and prudent power
supply costs that we actually incur. In September 2004, we submitted our 2005
PSCR filing to the MPSC. The proposed PSCR charge would allow us to recover a
portion of our power supply costs from commercial and industrial customers and,
subject to the overall rate caps, from other customers. In January 2005, we
self-implemented the proposed 2005 PSCR charge. The revenues from the PSCR
charges are subject to reconciliation after review of actual costs for
reasonableness and prudence. In March 2005, we submitted our 2004 PSCR
reconciliation filing to the MPSC. We cannot predict the outcome of these PSCR
proceedings.
OTHER CONSUMERS' ELECTRIC UTILITY CONTINGENCIES
THE MIDLAND COGENERATION VENTURE: The MCV Partnership, which leases and operates
the MCV Facility, contracted to sell electricity to Consumers for a 35-year
period beginning in 1990. We hold a 49 percent partnership interest in the MCV
Partnership, and a 35 percent lessor interest in the MCV Facility.
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In 2004, we consolidated the MCV Partnership and the FMLP into our consolidated
financial statements in accordance with Revised FASB Interpretation No. 46. For
additional details, see Note 11, Consolidation of Variable Interest Entities.
Our consolidated retained earnings include undistributed earnings from the MCV
Partnership of $303 million at March 31, 2005 and $248 million at March 31,
2004.
The cost that we incur under the MCV PPA exceeds the recovery amount allowed by
the MPSC. We expense all cash underrecoveries directly to income. We estimate
cash underrecoveries of capacity and fixed energy payments as follows:
- -----------------------------------------------------------------------------
2005 2006 2007
- -----------------------------------------------------------------------------
Estimated cash underrecoveries $56 $55 $39
=============================================================================
Of the 2005 estimate, we expensed $13 million for the three months ended March
31, 2005.
After September 15, 2007, we expect to claim relief under the regulatory out
provision in the MCV PPA, limiting our capacity and fixed energy payments to the
MCV Partnership to the amount that we collect from our customers. The MCV
Partnership has indicated that it may take issue with our exercise of the
regulatory out clause after September 15, 2007. We believe that the clause is
valid and fully effective, but cannot assure that it will prevail in the event
of a dispute. The MPSC's future actions on the capacity and fixed energy
payments recoverable from customers subsequent to September 15, 2007 may affect
negatively the earnings of the MCV Partnership and the value of our investment
in the MCV Partnership.
Further, under the MCV PPA, variable energy payments to the MCV Partnership are
based on the cost of coal burned at our coal plants and our operation and
maintenance expenses. However, the MCV Partnership's costs of producing
electricity are tied to the cost of natural gas. Because natural gas prices have
increased substantially in recent years and the price the MCV Partnership can
charge us for energy has not, the MCV Partnership's financial performance has
been impacted negatively. Even with the approved RCP, if gas prices do not
decline from present levels, the economics of operating the MCV Facility may be
adverse enough to require us to recognize an impairment. There are several
factors which could alter significantly our future impairment analyses
including, but not limited to, the forward price of natural gas, energy payments
to the MCV Partnership, which are based on the cost of coal burned at our coal
plants, and any reduction in payments to the MCV Partnership subsequent to
September 15, 2007 due to underrecovery of contract costs by Consumers from its
customers as a result of past or future actions by the MPSC.
In January 2005, the MPSC issued an order approving the RCP, with modifications.
The RCP allows us to recover the same amount of capacity and fixed energy
charges from customers as approved in prior MPSC orders. However, we are able to
dispatch the MCV Facility on the basis of natural gas market prices, which
reduces the MCV Facility's annual production of electricity and, as a result,
reduces the MCV Facility's consumption of natural gas by an estimated 30 to 40
bcf annually. This decrease in the quantity of high-priced natural gas consumed
by the MCV Facility will benefit our ownership interest in the MCV Partnership.
The substantial MCV Facility fuel cost savings are first used to offset fully
the cost of replacement power. Second, $5 million annually, funded jointly by
Consumers and the MCV Partnership, are contributed to our RRP. Remaining savings
are split between the MCV Partnership and Consumers. Consumers' direct savings
are shared 50 percent with its customers in 2005 and 70 percent in 2006 and
beyond. Consumers' direct savings from the RCP, after allocating a portion to
customers, are used to offset our capacity and fixed energy underrecoveries
expense. Since the MPSC has excluded these
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underrecoveries from the rate making process, we anticipate that our savings
from the RCP will not affect our return on equity used in our base rate filings.
In January 2005, Consumers and the MCV Partnership's general partners accepted
the terms of the order and implemented the RCP. The underlying agreement for the
RCP between Consumers and the MCV Partnership extends through the term of the
MCV PPA. However, either party may terminate that agreement under certain
conditions. In February 2005, a group of intervenors in the RCP case filed for
rehearing of the MPSC order. The Attorney General also filed an appeal with the
Michigan Court of Appeals. We cannot predict the outcome of these matters.
MCV PARTNERSHIP PROPERTY TAXES: In January 2004, the Michigan Tax Tribunal
issued its decision in the MCV Partnership's tax appeal against the City of
Midland for tax years 1997 through 2000. The decision was appealed to the
Michigan Court of Appeals by the City of Midland and the MCV Partnership has
filed a cross-appeal at the Michigan Court of Appeals. The MCV Partnership also
has a pending case with the Michigan Tax Tribunal for tax years 2001 through
2004. The MCV Partnership estimates that the 1997 through 2004 tax year cases
will result in a refund to the MCV Partnership of approximately $77 million
inclusive of interest. The MCV Partnership cannot predict the outcome of these
proceedings; therefore, this refund has not been recognized in earnings.
NUCLEAR PLANT DECOMMISSIONING: Decommissioning funding practices approved by the
MPSC require us to file a report on the adequacy of funds for decommissioning at
three-year intervals. We prepared and filed updated cost estimates for Big Rock
and Palisades on March 31, 2004. Excluding additional costs for spent nuclear
fuel storage, due to the DOE's failure to accept this spent nuclear fuel on
schedule, these reports show a decommissioning cost of $361 million for Big Rock
and $868 million for Palisades. Since Big Rock is currently in the process of
decommissioning, the estimated cost includes historical expenditures in nominal
dollars and future costs in 2003 dollars, with all Palisades costs given in 2003
dollars.
In 1999, the MPSC orders for Big Rock and Palisades provided for fully funding
the decommissioning trust funds for both sites. In December 2000, funding of the
Big Rock trust fund stopped because the MPSC-authorized decommissioning
surcharge collection period expired. The MPSC order set the annual
decommissioning surcharge for Palisades at $6 million through 2007. Amounts
collected from electric retail customers and deposited in trusts, including
trust earnings, are credited to a regulatory liability and asset retirement
obligation.
Big Rock: Excluding the additional nuclear fuel storage costs due to the DOE's
failure to accept spent fuel on schedule, we are currently projecting that the
level of funds provided by the trust for Big Rock will fall short of the amount
needed to complete the decommissioning by $26 million. At this time, we plan to
provide the additional amounts needed from our corporate funds and, subsequent
to the completion of radiological decommissioning work, seek recovery of such
expenditures at the MPSC. We cannot predict how the MPSC will rule on our
request.
Palisades: Excluding additional nuclear fuel storage costs due to the DOE's
failure to accept spent fuel on schedule, we concluded, based on the costs
estimates filed in March 2004, that the existing surcharge for Palisades needed
to be increased to $25 million annually, beginning January 1, 2006, and
continuing through 2011, our current license expiration date. In June 2004, we
filed an application with the MPSC seeking approval to increase the surcharge
for recovery of decommissioning costs related to Palisades beginning in 2006. In
September 2004, we announced that we would seek a 20-year license renewal for
Palisades. In January 2005, we filed a settlement agreement with the MPSC that
was agreed to by four of
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the six parties involved in the proceeding. The settlement agreement provides
for the continuation of the existing $6 million annual decommissioning surcharge
through 2011 and for the next periodic review to be filed in March 2007. We are
seeking MPSC approval of the contested settlement, but cannot predict the
outcome.
In March 2005, NMC, which operates the Palisades plant, applied for a 20-year
license renewal for the plant on behalf of Consumers. The NRC typically takes
22-30 months to review a license renewal application. Its decision is expected
in 2007. At this time, we cannot determine what impact this will have on
decommissioning costs or the adequacy of funding.
NUCLEAR MATTERS: Nuclear Fuel Cost: We amortize nuclear fuel cost to fuel
expense based on the quantity of heat produced for electric generation. For
nuclear fuel used after April 6, 1983, we charge certain disposal costs to
nuclear fuel expense, recover these costs through electric rates, and remit them
to the DOE quarterly. We elected to defer payment for disposal of spent nuclear
fuel burned before April 7, 1983. At March 31, 2005, we have recorded a
liability to the DOE of $142 million, including interest, which is payable upon
the first delivery of spent nuclear fuel to the DOE. The amount of this
liability, excluding a portion of interest, was recovered through electric
rates.
DOE Litigation: In 1997, a U.S. Court of Appeals decision confirmed that the DOE
was to begin accepting deliveries of spent nuclear fuel for disposal by January
1998. Subsequent U.S. Court of Appeals litigation, in which we and other
utilities participated, has not been successful in producing more specific
relief for the DOE's failure to accept the spent nuclear fuel.
There are two court decisions that support the right of utilities to pursue
damage claims in the United States Court of Claims against the DOE for failure
to take delivery of spent nuclear fuel. Over 60 utilities have initiated
litigation in the United States Court of Claims. We filed our complaint in
December 2002. On April 29, 2005, the court ruled on various cross-motions for
summary judgment previously filed by the DOE and us. The court denied the DOE's
motions to dismiss Counts I and II of the complaint and the motion to recover
the one-time fee, which is due to be paid by us prior to delivery of the spent
nuclear fuel. The court, however, granted the DOE's motion to recoup the
one-time fee against any award of damages to us. The court granted our motion
for summary judgment on liability and our motion to dismiss the DOE's
affirmative defense alleging our failure to satisfy a condition precedent, but
the court denied our motion to dismiss the DOE's counterclaim for recoupment. In
a related case, a judge in one of many spent nuclear fuel cases now pending in
the United States Court of Claims, issued a decision and order suggesting that
the Standard Contract between the utilities and the DOE should be held void
because of mutual mistake and impossibility of performance and that restitution
of all waste fees paid by utilities should be made from the Nuclear Waste Fund.
The judge ordered the utility in that case and the DOE to file briefs addressing
the court's views and invited any interested party to file an amicus brief. We
are currently evaluating our options on the motion rulings in our case as well
as the advisability of filing an amicus brief in the related case. If our
litigation against the DOE is successful, we plan to use any recoveries to pay
the cost of spent nuclear fuel storage until the DOE takes possession as
required by law. We can make no assurance that the litigation against the DOE
will be successful.
In July 2002, Congress approved and the President signed a bill designating the
site at Yucca Mountain, Nevada, for the development of a repository for the
disposal of high-level radioactive waste and spent nuclear fuel. We expect that
the DOE will submit an application to the NRC sometime in 2005 for a license to
begin construction of the repository. The application and review process is
estimated to take several years.
Insurance: We maintain nuclear insurance coverage on our nuclear plants. At
Palisades, we maintain nuclear property insurance from NEIL totaling $2.750
billion and insurance that would partially cover the cost of replacement power
during certain prolonged accidental outages. Because NEIL is a mutual insurance
company, we could be subject to assessments of up to $27 million in any policy
year if insured losses in excess of NEIL's maximum policyholders surplus occur
at our, or any other member's, nuclear facility. NEIL's policies include
coverage for acts of terrorism.
At Palisades, we maintain nuclear liability insurance for third-party bodily
injury and off-site property damage resulting from a nuclear hazard for up to
approximately $10.761 billion, the maximum insurance liability limits
established by the Price-Anderson Act. The United States Congress enacted the
Price-Anderson Act to provide financial liability protection for those parties
who may be liable for a nuclear
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CMS Energy Corporation
accident or incident. Part of the Price-Anderson Act's financial protection is a
mandatory industry-wide program under which owners of nuclear generating
facilities could be assessed if a nuclear incident occurs at any nuclear
generating facility. The maximum assessment against us could be $101 million per
occurrence, limited to maximum annual installment payments of $10 million.
We also maintain insurance under a program that covers tort claims for bodily
injury to nuclear workers caused by nuclear hazards. The policy contains a $300
million nuclear industry aggregate limit. Under a previous insurance program
providing coverage for claims brought by nuclear workers, we remain responsible
for a maximum assessment of up to $6 million.
Big Rock remains insured for nuclear liability by a combination of insurance and
a NRC indemnity totaling $544 million, and a nuclear property insurance policy
from NEIL.
Insurance policy terms, limits, and conditions are subject to change during the
year as we renew our policies.
CONSUMERS' GAS UTILITY CONTINGENCIES
GAS ENVIRONMENTAL MATTERS: We expect to incur investigation and remediation
costs at a number of sites under the Michigan Natural Resources and
Environmental Protection Act, a Michigan statute that covers environmental
activities including remediation. These sites include 23 former manufactured gas
plant facilities. We operated the facilities on these sites for some part of
their operating lives. For some of these sites, we have no current ownership or
may own only a portion of the original site. We expect our remaining costs to be
between $37 million and $90 million, based on 2003 discounted costs, using a
discount rate of three percent. The discount rate represents a 10-year average
of U.S. Treasury bond rates reduced for increases in the consumer price index.
We expect to fund most of these costs through insurance proceeds and
MPSC-approved rates. At March 31, 2005, we have recorded a liability of $37
million, net of $44 million of expenditures incurred to date, and a regulatory
asset of $64 million. Any significant change in assumptions, such as an increase
in the number of sites, different remediation techniques, nature and extent of
contamination, and legal and regulatory requirements, could affect our estimate
of remedial action costs.
CONSUMERS' GAS UTILITY RATE MATTERS
GAS COST RECOVERY: The GCR process is designed to allow us to recover all of our
purchased natural gas costs if incurred under reasonable and prudent policies
and practices. The MPSC reviews these costs for prudency in an annual
reconciliation proceeding.
The following table summarizes our GCR reconciliation filing with the MPSC.
Additional details related to the proceeding follow the table.
Gas Cost Recovery Reconciliation
- ----------------------------------------------------------------------------------------------------------------
Net Over
GCR Year Date Filed Order Date Recovery Status
- ----------------------------------------------------------------------------------------------------------------
2003-2004 June 2004 February 2005 $31 million The net overrecovery includes $1 million
and $5 million GCR net overrecoveries
from prior GCR years and interest accrued
through March 2004
================================================================================================================
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Net overrecoveries included in the table above include refunds that we received
from our suppliers, which are required to be refunded to our customers.
GCR year 2003-2004: In February 2005, the MPSC approved a settlement agreement
that resulted in a credit to our GCR customers for a $28 million overrecovery,
plus $3 million interest, using a roll-in refund methodology. The roll-in
methodology incorporates a GCR over/underrecovery in the next GCR plan year.
GCR year 2004-2005: In December 2003, we filed an application with the MPSC
seeking approval of a GCR plan for the 12-month period of April 2004 through
March 2005. In June 2004, the MPSC issued a final Order in our GCR plan
approving a settlement. The settlement included a quarterly mechanism for
setting a GCR ceiling price. Actual gas costs and revenues will be subject to an
annual reconciliation proceeding which will be filed in June 2005.
GCR plan for year 2005-2006: In December 2004, we filed an application with the
MPSC seeking approval of a GCR plan for the 12-month period of April 2005
through March 2006. Our request proposes using a GCR factor consisting of:
- a base GCR factor of $6.98 per mcf, plus
- a quarterly GCR ceiling price adjustment contingent upon future
events.
The GCR factor can be adjusted monthly, provided it remains at or below the
current ceiling price. The quarterly adjustment mechanism allows an increase in
the GCR ceiling price to reflect a portion of cost increases if the average
NYMEX price for a specified period is greater than that used in calculating the
base GCR factor. The current ceiling price for 2005 is $7.40 per mcf. Actual gas
costs and revenues will be subject to an annual reconciliation proceeding. The
Attorney General filed a motion with the MPSC asking the MPSC to establish a
temporary factor of $6.98 per mcf and preclude use of a contingent mechanism
prior to a final MPSC order. The MPSC denied that request.
2001 GAS DEPRECIATION CASE: In December 2003, we filed an update to our gas
utility plant depreciation case originally filed in June 2001. On December 18,
2003, the MPSC ordered an annual $34 million reduction in our depreciation
expense and related taxes in an interim rate order issued in our 2003 gas rate
case.
In October and December 2004, the MPSC issued Opinions and Orders in our gas
depreciation case, which reaffirmed a previously ordered $34 million reduction
in our depreciation expense. The October 2004 order also required us to file an
application for new depreciation accrual rates for our natural gas utility plant
on, or no earlier than three months prior to, the date we file our next natural
gas general rate case. The MPSC also directed us to undertake a study to
determine why our removal costs are in excess of those of other regulated
Michigan natural gas utilities and file a report with the MPSC Staff on or
before December 31, 2005.
In February 2005, we requested a delay in the filing date for the next
depreciation case until 150 days after:
- the removal cost study is filed, and
- the MPSC issues an order in a pending case relating to ARO accounting.
We proposed to incorporate the results of the gas depreciation case into gas
general rates using a surcharge mechanism if the depreciation case order was not
issued concurrently with a gas general rate case order.
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CMS Energy Corporation
In March 2005, the MPSC granted our waiver request and accepted our surcharge
proposal, but reduced the lead time allowed to prepare and file the depreciation
case to 90 days.
OTHER CONTINGENCIES
EQUATORIAL GUINEA TAX CLAIM: CMS Energy received a request for indemnification
from Perenco, the purchaser of CMS Oil and Gas. The indemnification claim
relates to the sale by CMS Energy of its oil, gas, and methanol projects in
Equatorial Guinea and the claim of the government of Equatorial Guinea that $142
million in taxes is owed it in connection with that sale. Based on information
currently available, CMS Energy and its tax advisors have concluded that the
government's tax claim is without merit, and Perenco has submitted a response to
the government rejecting the claim. CMS Energy cannot predict the outcome of
this matter.
GAS INDEX PRICE REPORTING LITIGATION: CMS Energy, CMS MST, CMS Field Services,
Cantera Natural Gas, Inc. (the company that purchased CMS Field Services) and
Cantera Gas Company are named as defendants in various lawsuits arising as a
result of false natural gas price reporting. Allegations include manipulation of
NYMEX natural gas futures and options prices, price-fixing conspiracies, and
artificial inflation of natural gas retail prices in California and Tennessee.
CMS Energy and the other CMS defendants will defend themselves vigorously
against these matters but cannot predict their outcome.
DEARBORN INDUSTRIAL GENERATION: In October 2001, Duke/Fluor Daniel (DFD)
presented DIG with a change order to their construction contract and filed an
action in Michigan state court claiming damages in the amount of $110 million,
plus interest and costs, which DFD states represents the cumulative amount owed
by DIG for delays DFD believes DIG caused and for prior change orders that DIG
previously rejected. DFD also filed a construction lien for the $110 million.
DIG, in addition to drawing down on three letters of credit totaling $30 million
that it obtained from DFD, has filed an arbitration claim against DFD asserting
in excess of an additional $75 million in claims against DFD. The judge in the
Michigan state court case entered an order staying DFD's prosecution of its
claims in the court case and permitting the arbitration to proceed. DFD has
appealed the decision by the judge in the Michigan state court case to stay the
litigation. DIG will continue to defend itself vigorously and pursue its claims.
DIG cannot predict the outcome of this matter.
FORMER CMS OIL AND GAS OPERATIONS: A Michigan trial judge granted Star Energy,
Inc. and White Pine Enterprises, LLC a declaratory judgment in an action filed
in 1999 that claimed Terra Energy Ltd., a former CMS Oil and Gas subsidiary,
violated an oil and gas lease and other arrangements by failing to drill wells
it had committed to drill. A jury then awarded the plaintiffs a $7.6 million
award. Terra appealed this matter to the Michigan Court of Appeals. The Michigan
Court of Appeals reversed the trial court judgment with respect to the
appropriate measure of damages and remanded the case for a new trial on damages.
The trial judge reinstated the judgment against Terra and awarded Terra title to
the minerals. Terra has appealed this judgment. Enterprises has an indemnity
obligation with regard to losses to Terra that might result from this
litigation.
LEONARD FIELD DISPUTE: CMS Gas Transmission is involved in various disputes
related to the Leonard Storage Field in Addison Township, Michigan. The dispute
centers around excess odor discharge and untimely removal of certain equipment
from the Leonard Facility. CMS Gas Transmission cannot predict the outcome of
this matter, and the ultimate consequence of an adverse outcome would be our
inability to extract approximately 500,000 mcf of gas remaining in the Leonard
Field that has a $1 million book value at March 31, 2005.
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CMS Energy Corporation
CMS ENSENADA CUSTOMER DISPUTE: Pursuant to a long-term power purchase agreement,
CMS Ensenada sells power and steam to YPF Repsol at the YPF refinery in La
Plata, Argentina. As a result of the so-called "Emergency Laws," payments by YPF
Repsol under the power purchase agreement have been converted to pesos at the
exchange rate of one U.S. dollar to one Argentine peso. Such payments are
currently insufficient to cover CMS Ensenada's operating costs, including
quarterly debt service payments to the Overseas Private Investment Corporation
(OPIC). Enterprises is party to a Sponsor Support Agreement pursuant to which
Enterprises has guaranteed CMS Ensenada's debt service payments to OPIC up to an
amount which is in dispute, but which Enterprises estimates to be approximately
$7 million.
The Argentine commercial court granted injunctive relief to CMS Ensenada
pursuant to an ex parte action, and such relief will remain in effect until
completion of an arbitration on the matter, to be administered by the
International Chamber of Commerce.
OTHER: CMS Generation does not currently expect to incur material capital costs
at its power facilities for compliance with current U.S. environmental
regulatory standards.
In addition to the matters disclosed within this Note, Consumers and certain
other subsidiaries of CMS Energy are parties to certain lawsuits and
administrative proceedings before various courts and governmental agencies
arising from the ordinary course of business. These lawsuits and proceedings may
involve personal injury, property damage, contractual matters, environmental
issues, federal and state taxes, rates, licensing, and other matters.
We have accrued estimated losses for certain contingencies discussed within this
Note. Resolution of these contingencies is not expected to have a material
adverse impact on our financial position, liquidity, or future results of
operations.
4: FINANCINGS AND CAPITALIZATION
Long-term debt is summarized as follows:
In Millions
- ------------------------------------------------------------------------------
March 31, 2005 December 31, 2004
- ------------------------------------------------------------------------------
CMS ENERGY CORPORATION
Senior notes $2,325 $2,175
Other long-term debt 4 225
------ ------
Total - CMS Energy Corporation 2,329 2,400
------ ------
CONSUMERS ENERGY COMPANY
First mortgage bonds 2,850 2,300
Senior notes, bank debt and other 1,376 1,436
Securitization bonds 391 398
------ ------
Total - Consumers Energy Company 4,617 4,134
------ ------
ENTERPRISES 201 208
------ ------
TOTAL PRINCIPAL AMOUNTS OUTSTANDING 7,147 6,742
Current amounts (458) (267)
Net unamortized discount (32) (31)
- ------------------------------------------------------------------------------
Total Long-term debt $6,657 $6,444
==============================================================================
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CMS Energy Corporation
FINANCINGS: The following is a summary of significant long-term debt issuances
and retirements during the three months ended March 31, 2005:
- -------------------------------------------------------------------------------------------------------------------
Principal Interest Rate Issue/Retirement
(In millions) (%) Date Maturity Date
- -------------------------------------------------------------------------------------------------------------------
DEBT ISSUANCES:
CMS ENERGY
Senior notes $ 150 6.30 January 2005 February 2012
CONSUMERS
FMB 250 5.15 January 2005 February 2017
FMB 300 5.65 March 2005 April 2020
- -------------------------------------------------------------------------------------------------------------------
Total $ 700
===================================================================================================================
DEBT RETIREMENTS:
CMS ENERGY
General term notes $ 220 Various January and Various
February 2005
CONSUMERS
Long-term bank debt 60 Variable January 2005 November 2006
Long-term debt - related parties 180 9.25 January 2005 December 2029
Long-term debt - related parties 73 8.36 February 2005 December 2015
Long-term debt - related parties 124 8.20 February 2005 September 2027
- -------------------------------------------------------------------------------------------------------------------
Total $ 657
===================================================================================================================
SUBSEQUENT FINANCING ACTIVITIES: In April 2005, we issued 23 million shares of
common stock at a price of $12.25 per share. We realized net proceeds of $272
million. We used the net proceeds and other cash on hand to make a $350 million
capital infusion into Consumers on April 15, 2005.
In April 2005, Consumers redeemed $297 million of its 6.25 percent senior notes
with proceeds from its $300 million FMBs issued in March 2005. Also in April
2005, Consumers called the remaining $35 million 6.25 percent senior notes.
Later in April 2005, Consumers issued $150 million of 5.65 percent Insured
Quarterly notes due 2035. Consumers intends to use the net proceeds of $145
million to redeem its 6.50 percent Insured Quarterly notes due 2028. Finally, in
April 2005, through the Michigan Strategic Fund, Consumers issued $35 million
variable rate limited obligation revenue bonds, due 2035. Consumers will use the
proceeds to fund certain solid waste disposal expenditures.
REGULATORY AUTHORIZATION FOR FINANCINGS: On April 26, 2005, the FERC issued an
authorization to permit Consumers to issue up to an additional $1.0 billion
($2.0 billion in total) of long-term securities for refinancing or refunding
purposes, and up to an additional $1.0 billion ($2.5 billion in total) of
long-term securities for general corporate purposes during the period ending
June 30, 2006.
Combined with remaining availability from previously issued FERC authorizations,
Consumers can now issue up to $1.001 billion of long-term securities for
refinancing or refunding purposes, $1.709 billion of long-term securities for
general corporate purposes, and $2.435 billion of long-term FMBs to be issued
solely as collateral for other long-term securities during the period ending
June 30, 2006.
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CMS Energy Corporation
REVOLVING CREDIT FACILITIES: The following secured revolving credit facilities
with banks are available at March 31, 2005:
In Millions
- --------------------------------------------------------------------------------------------------------------------
Outstanding
Amount of Amount Letters-of- Amount
Company Expiration Date Facility Borrowed Credit Available
- --------------------------------------------------------------------------------------------------------------------
CMS Energy August 3, 2007 $ 300 $ - $ 105 $ 195
Consumers (a) 500 - 16 484
MCV Partnership August 27, 2005 50 - 2 48
====================================================================================================================
(a) This facility expires in August 2005 and may be extended annually at
Consumers' option to July 31, 2007.
CAPITAL AND FINANCE LEASE OBLIGATIONS: Our capital leases are comprised mainly
of leased service vehicles and office furniture. At March 31, 2005, capital
lease obligations totaled $56 million. In order to obtain permanent financing
for the MCV Facility, the MCV Partnership entered into a sale and lease back
agreement with a lessor group, which includes the FMLP, for substantially all of
the MCV Partnership's fixed assets. In accordance with SFAS No. 98, the MCV
Partnership accounted for the transaction as a financing arrangement. At March
31, 2005, finance lease obligations totaled $288 million, which represents the
third-party portion of the MCV Partnership's finance lease obligation.
SALE OF ACCOUNTS RECEIVABLE: Under a revolving accounts receivable sales
program, we currently sell certain accounts receivable to a wholly owned,
consolidated, bankruptcy remote special purpose entity. In turn, the special
purpose entity may sell an undivided interest in up to $325 million of the
receivables. We sold no receivables as of March 31, 2005 and $304 million as of
December 31, 2004. We continue to service the receivables sold to the special
purpose entity. The purchaser of the receivables has no recourse against our
other assets for failure of a debtor to pay when due and no right to any
receivables not sold. We have not recorded a gain or loss on the receivables
sold or retained interest in the receivables sold.
Certain cash flows under our accounts receivable sales program are shown in the
following table:
In Millions
- --------------------------------------------------------------------------------------------------------------------
Three months ended March 31 2005 2004
- --------------------------------------------------------------------------------------------------------------------
Net cash flow as a result of accounts receivable financing $ (304) $ (297)
Collections from customers $ 1,605 $ 1,549
====================================================================================================================
DIVIDEND RESTRICTIONS: Our amended and restated $300 million secured revolving
credit facility restricts payments of dividends on our common stock during a
12-month period to $75 million, dependent on the aggregate amounts of
unrestricted cash and unused commitments under the facility.
Under the provisions of its articles of incorporation, at March 31, 2005,
Consumers had $496 million of unrestricted retained earnings available to pay
common stock dividends. However, covenants in Consumers' debt facilities cap
common stock dividend payments at $300 million in a calendar year. For the three
months ended March 31, 2005, we received $118 million of common stock dividends
from Consumers.
CMS-49
CMS Energy Corporation
FASB INTERPRETATION NO. 45, GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS
FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS: The
Interpretation requires the guarantor, upon issuance of a guarantee, to
recognize a liability for the fair value of the obligation it undertakes in
issuing the guarantee. The initial recognition and measurement provision of this
Interpretation does not apply to some guarantee contracts, such as warranties,
derivatives, or guarantees between corporations under common control, although
disclosure of these guarantees is required. The disclosure requirements in this
Interpretation are effective for interim and annual financial statements issued
after December 15, 2002.
The following table describes our guarantees at March 31, 2005:
In Millions
- -------------------------------------------------------------------------------------------------------------------------
Issue Expiration Maximum Carrying Recourse
Guarantee Description Date Date Obligation Amount Provision (b)
- -------------------------------------------------------------------------------------------------------------------------
Indemnifications from asset sales and
other agreements (a) Various Various $1,201 $ 1 $ -
Standby Letters of Credit Various Various 154 - -
Surety bonds and other indemnifications Various Various 25 - -
Other guarantees Various Various 209 - -
Nuclear insurance retrospective premiums Various Various 134 - -
=========================================================================================================================
(a) The majority of this amount arises from routine provisions in stock and
asset sales agreements under which we indemnify the purchaser for losses
resulting from events such as failure of title to the assets or stock sold by us
to the purchaser. We believe the likelihood of a loss for any remaining
indemnifications to be remote.
(b) Recourse provision indicates the approximate recovery from third parties
including assets held as collateral.
The following table provides additional information regarding our guarantees:
- ---------------------------------------------------------------------------------------------------------------------
Events That Would Require
Guarantee Description How Guarantee Arose Performance
- ---------------------------------------------------------------------------------------------------------------------
Indemnifications from asset sales and Stock and asset sales agreements Findings of misrepresentation,
other agreements breach of warranties, and other
specific events or circumstances
- ---------------------------------------------------------------------------------------------------------------------
Standby letters of credit Normal operations of Noncompliance with environmental
coal power plants regulations and inadequate response
to demands for corrective action
Natural gas transportation Nonperformance
Self-insurance requirement Nonperformance
Nuclear plant closure Nonperformance
- ---------------------------------------------------------------------------------------------------------------------
Surety bonds and other indemnifications Normal operating activity, permits Nonperformance
and license
- ---------------------------------------------------------------------------------------------------------------------
Other guarantees Normal operating activity Nonperformance or non-payment by a
subsidiary under a related contract
- ---------------------------------------------------------------------------------------------------------------------
Nuclear insurance retrospective premiums Normal operations of nuclear plants Call by NEIL and Price-Anderson Act
for nuclear incident
- ---------------------------------------------------------------------------------------------------------------------
We have entered into typical tax indemnity agreements in connection with a
variety of transactions including transactions for the sale of subsidiaries and
assets, equipment leasing, and financing agreements. These indemnity agreements
generally are not limited in amount and, while a maximum amount of exposure
cannot be identified, the probability of liability is considered remote.
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CMS Energy Corporation
We have guaranteed payment of obligations through indemnities, surety bonds, and
other guarantees of unconsolidated affiliates and related parties of $388
million at March 31, 2005. We monitor these obligations and believe it is
unlikely that we would be required to perform or otherwise incur any material
losses associated with the above obligations.
CONTINGENTLY CONVERTIBLE SECURITIES: In March 2005, the $11.87 trigger price
contingency was met for our 4.50 percent contingently convertible preferred
stock since the price of our common stock remained at or above the applicable
trigger price for 20 of 30 consecutive trading days ending on the last trading
day of the calendar quarter. As a result, these securities are convertible at
the option of the security holders for the three months ending June 30, 2005. As
of April 2005, none of the security holders have notified us of their intention
to convert these securities.
5: EARNINGS PER SHARE
The following table presents the basic and diluted earnings per share
computations.
In Millions, Except Per Share Amounts
- ---------------------------------------------------------------------------------
Three Months Ended March 31 2005 2004
- ---------------------------------------------------------------------------------
EARNINGS AVAILABLE TO COMMON STOCK:
Income (Loss) from Continuing Operations $152 $(2)
Less Preferred Dividends (2) (3)
---------------------------
Income (Loss) from Continuing Operations
Available to Common Stock - Basic $150 $(5)
Add conversion of Trust Preferred
Securities (net of tax) 2 - (a)
---------------------------
Income (Loss) from Continuing Operations
Available to Common Stock - Diluted $152 $(5)
===========================
AVERAGE COMMON SHARES OUTSTANDING
APPLICABLE TO BASIC AND DILUTED EPS
Average Shares - Basic 195.3 161.1
Add conversion of Trust Preferred Securities 4.2 - (a)
Add dilutive impact of Contingently
Convertible Securities 6.1 - (b)
Add dilutive Stock Options and Warrants 0.7 (c) - (c)
---------------------------
Average Shares - Diluted 206.3 161.1
===========================
EARNINGS (LOSS) PER AVERAGE COMMON SHARE
AVAILABLE TO COMMON STOCK
Basic $0.77 $(0.04)
Diluted $0.74 $(0.04)
=================================================================================
(a) Due to antidilution, the computation of diluted earnings per share excluded
the conversion of our Trust Preferred Securities for the three months ended
March 31, 2004. We can revoke the conversion rights if certain conditions are
met.
(b) Due to antidilution, computation of diluted earnings per share excluded the
impact of our contingently convertible securities for the three months ended
March 31, 2004. Our contingently convertible securities have the potential to
dilute earnings per share to the extent that the conversion
CMS-51
CMS Energy Corporation
value exceeds the principal or par value.
(c) Since the exercise price was greater than the average market price of the
common stock, options and warrants to purchase 4.1 million shares of common
stock were excluded from the computation of diluted earnings per share for the
three months ended March 31, 2005. Due to antidilution, options and warrants to
purchase 5.7 million shares of common stock were excluded for the three months
ended March 31, 2004.
In April 2005, we issued 23 million shares of our common stock. For additional
details, see Note 4, Financings and Capitalization.
6: FINANCIAL AND DERIVATIVE INSTRUMENTS
FINANCIAL INSTRUMENTS: The carrying amounts of cash, short-term investments, and
current liabilities approximate their fair values because of their short-term
nature. We estimate the fair values of long-term financial instruments based on
quoted market prices or, in the absence of specific market prices, on quoted
market prices of similar instruments, or other valuation techniques.
The cost and fair value of our long-term financial instruments are as follows:
In Millions
- ----------------------------------------------------------------------------------------------------------------------------
March 31, 2005 December 31, 2004
- ----------------------------------------------------------------------------------------------------------------------------
Fair Unrealized Fair Unrealized
Cost Value Gain (Loss) Cost Value Gain (Loss)
- ----------------------------------------------------------------------------------------------------------------------------
Long-term debt,
including current amounts $7,115 $7,371 $(256) $6,711 $7,052 $(341)
Long-term debt - related parties 307 281 26 684 653 31
Available-for-sale securities:
SERP:
Equity securities 33 46 13 33 47 14
Debt securities 20 20 - 20 20 -
Nuclear decommissioning investments:
Equity securities 134 252 118 136 262 126
Debt securities 289 295 6 291 302 11
============================================================================================================================
DERIVATIVE INSTRUMENTS: We are exposed to market risks including, but not
limited to, changes in interest rates, commodity prices, currency exchange
rates, and equity security prices. We manage these risks using established
policies and procedures, under the direction of both an executive oversight
committee consisting of senior management representatives and a risk committee
consisting of business-unit managers. We may use various contracts to manage
these risks including swaps, options, futures, and forward contracts.
We intend that any gains or losses on these contracts will be offset by an
opposite movement in the value of the item at risk. Risk management contracts
are classified as either non-trading or trading. These contracts contain credit
risk if the counterparties, including financial institutions and energy
marketers, fail to perform under the agreements. We minimize such risk through
established credit policies that include performing financial credit reviews of
our counterparties. Determination of our counterparties' credit quality is based
upon a number of factors, including credit ratings, disclosed financial
condition, and collateral requirements. Where contractual terms permit, we
employ standard agreements that allow
CMS-52
CMS Energy Corporation
for netting of positive and negative exposures associated with a single
counterparty. Based on these policies, our current exposures, and our credit
reserves, we do not anticipate a material adverse effect on our financial
position or earnings as a result of counterparty nonperformance.
Contracts used to manage market risks may be considered derivative instruments
that are subject to derivative and hedge accounting pursuant to SFAS No. 133. If
a contract is accounted for as a derivative instrument, it is recorded in the
financial statements as an asset or a liability, at the fair value of the
contract. The recorded fair value is then adjusted quarterly to reflect any
change in the market value of the contract, a practice known as marking the
contract to market. Changes in fair value (that is, gains or losses) are
reported in Accumulated other comprehensive loss if the derivative qualifies for
cash flow hedge accounting treatment and in earnings if the derivative does not
qualify for such treatment.
For derivative instruments to qualify for hedge accounting, the hedging
relationship must be formally documented at inception and be highly effective in
achieving offsetting cash flows or offsetting changes in fair value attributable
to the risk being hedged. If hedging a forecasted transaction, the forecasted
transaction must be probable. If a derivative instrument, used as a cash flow
hedge, is terminated early because it is probable that a forecasted transaction
will not occur, any gain or loss as of such date is recognized immediately in
earnings. If a derivative instrument, used as a cash flow hedge, is terminated
early for other economic reasons, any gain or loss as of the termination date is
deferred and recorded when the forecasted transaction affects earnings. The
ineffective portion, if any, of all hedges is recognized in earnings.
We use a combination of quoted market prices, prices obtained from external
sources, such as brokers, and mathematical valuation models to determine the
fair value of those contracts requiring derivative accounting. In certain
contracts, long-term commitments may extend beyond the period in which market
quotations for such contracts are available. Mathematical models are developed
to determine various inputs into the fair value calculation including price and
other variables that may be required to calculate fair value. Realized cash
returns on these commitments may vary, either positively or negatively, from the
results estimated through application of the mathematical model. In connection
with the market valuation of our derivative contracts, we maintain reserves, if
necessary, for credit risks based on the financial condition of counterparties.
The majority of our contracts are not subject to derivative accounting under
SFAS No. 133 because they qualify for the normal purchases and sales exception,
or because there is not an active market for the commodity. Certain of our
electric capacity and energy contracts are not accounted for as derivatives due
to the lack of an active energy market in Michigan and the significant
transportation costs that would be incurred to deliver the power under the
contracts to the closest active energy market at the Cinergy hub in Ohio.
Similarly, our coal purchase contracts are not accounted for as derivatives due
to the lack of an active market for the coal that we purchase. If active markets
for these commodities develop in the future, we may be required to account for
these contracts as derivatives, and the resulting mark-to-market impact on
earnings could be material to our financial statements.
The MISO began operating the Midwest Energy Market on April 1, 2005, which
provides day-ahead and real-time energy market information and centralized
dispatch for market participants. At this time, we believe that the commencement
of this market does not constitute the development of an active energy market in
Michigan. However, after having adequate experience with the Midwest Energy
Market, we will reevaluate whether or not the activity level within this market
leads to the conclusion that an active energy market exists.
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CMS Energy Corporation
Also as part of the Midwest Energy Market, FTRs were established. FTRs are
financial instruments established to manage price risk relating to electricity
transmission congestion. An FTR entitles the holder to receive compensation (or
remit payment) for certain congestion-related transmission charges that arise
when the transmission grid is congested. We presently hold FTRs for certain
areas on the transmission grid within MISO's market area. We are presently
evaluating whether FTRs qualify as derivative instruments. If they are
determined to be derivative instruments, FTRs would be required to be recognized
on our Consolidated Balance Sheets as assets or liabilities at their fair value,
with any subsequent changes in fair value recognized in earnings. However, we
believe we may be able to offset the earnings impact with a regulatory asset or
liability. The Midwest Energy Market was not effective until April 1, 2005.
Therefore, FTRs had no value at March 31, 2005.
Derivative accounting is required for certain contracts used to limit our
exposure to commodity price risk, interest rate risk, and foreign exchange risk.
The following table reflects the fair value of all contracts requiring
derivative accounting:
In Millions
- -------------------------------------------------------------------------------------------------------------------------------
March 31, 2005 December 31, 2004
- -------------------------------------------------------------------------------------------------------------------------------
Fair Unrealized Fair Unrealized
Derivative Instruments Cost Value Gain (Loss) Cost Value Gain (Loss)
- -------------------------------------------------------------------------------------------------------------------------------
Non-trading:
Gas contracts $ - $ - $ - $ 2 $ - $ (2)
Interest rate risk contracts - (1) (1) - (1) (1)
Derivative contracts associated with the
MCV Partnership:
Gas fuel contracts - 201 201 - 56 56
Gas fuel futures and swaps - 146 146 - 64 64
CMS ERM contracts:
Non-trading electric / gas contracts - (256) (256) - (199) (199)
Trading electric / gas contracts - 267 267 (4) 201 205
Derivative contracts associated with equity
investments in:
Shuweihat - (22) (22) - (25) (25)
Taweelah (35) (20) 15 (35) (24) 11
Jorf Lasfar - (11) (11) - (11) (11)
===============================================================================================================================
The fair value of our non-trading gas contracts, interest rate risk contracts,
and the derivative contracts associated with the MCV Partnership is included in
Derivative instruments, Other assets, or Other liabilities on our Consolidated
Balance Sheets. The fair value of the derivative contracts held by CMS ERM is
included in either Price risk management assets or Price risk management
liabilities on our Consolidated Balance Sheets. The fair value of derivative
contracts associated with our equity investments is included in Investments -
Enterprises on our Consolidated Balance Sheets.
GAS CONTRACTS: Our gas utility business uses fixed-priced weather-based gas
supply call options and fixed-priced gas supply call and put options to meet our
regulatory obligation to provide gas to our customers at a reasonable and
prudent cost. Unrealized gains and losses associated with these options are
reported directly in earnings as part of Other income, and then directly offset
in earnings and recorded on the balance sheet as a regulatory asset or liability
as part of the GCR process. At March 31, 2005, we held no fixed-priced
weather-based gas supply call options and had not sold any fixed-priced gas
supply put options.
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CMS Energy Corporation
INTEREST RATE RISK CONTRACTS: We use interest rate swaps to hedge the risk
associated with forecasted interest payments on variable-rate debt and to reduce
the impact of interest rate fluctuations. Most of our interest rate swaps are
designated as cash flow hedges. As such, we record changes in the fair value of
these contracts in Accumulated other comprehensive loss unless the swaps are
sold. For interest rate swaps that did not qualify for hedge accounting
treatment, we record changes in the fair value of these contracts in earnings as
part of Other income.
The following table reflects the outstanding floating-to-fixed interest rates
swaps:
In Millions
- --------------------------------------------------------------------------------
Floating to Fixed Notional Maturity Fair
Interest Rate Swaps Amount Date Value
- --------------------------------------------------------------------------------
March 31, 2005 $24 2005-2006 $(1)
December 31, 2004 25 2005-2006 (1)
================================================================================
Notional amounts reflect the volume of transactions but do not represent the
amount exchanged by the parties to the financial instruments. Accordingly,
notional amounts do not necessarily reflect our exposure to credit or market
risks. The weighted average interest rate associated with outstanding swaps was
approximately 7.4 percent at March 31, 2005 and December 31, 2004.
There was no ineffectiveness associated with any of the interest rate swaps that
qualified for hedge accounting treatment. At March 31, 2005, we have recorded an
unrealized loss of $1 million, net of tax, in Accumulated other comprehensive
loss related to interest rate risk contracts accounted for as cash flow hedges.
We expect to reclassify this amount as a decrease to earnings during the next 12
months primarily to offset the variable-rate interest expense on hedged debt.
At March 31, 2005 and December 31, 2004, Shuweihat, Taweelah, and Jorf Lasfar,
three of our equity method investees, held interest rate swaps that hedged the
risk associated with variable-rate debt. These instruments are not included in
this analysis, but can have an impact on financial results. The accounting for
these instruments depends on whether they qualify for cash flow hedge accounting
treatment. The interest rate swaps held by Taweelah do not qualify as cash flow
hedges, and therefore, we record our proportionate share of the change in the
fair value of these contracts in Earnings from Equity Method Investees. The
remainder of these instruments do qualify as cash flow hedges, and we record our
proportionate share of the change in the fair value of these contracts in
Accumulated other comprehensive loss.
DERIVATIVE CONTRACTS ASSOCIATED WITH THE MCV PARTNERSHIP: Gas Fuel Contracts:
The MCV Partnership uses natural gas fuel contracts to buy gas as fuel for
generation, and to manage gas fuel costs. The MCV Partnership believes that
certain of its long-term gas contracts qualify as normal purchases under SFAS
No. 133, and therefore, these contracts were not recognized at fair value on our
Consolidated Balance Sheets at March 31, 2005.
The MCV Partnership also held certain long-term gas contracts that did not
qualify as normal purchases at March 31, 2005, because these contracts contained
volume optionality. In addition, due to the implementation of the RCP in January
2005, the MCV Partnership determined that a significant portion of its gas fuel
contracts no longer qualify as normal purchases because the contracted gas will
not be consumed for electric production. Accordingly, all of these contracts are
accounted for as derivatives, with changes in fair value recorded in earnings
each quarter. Additionally, the financial hedges associated with these contracts
no longer qualify as cash flow hedges. Thus, any changes in the fair value of
these financial hedges will no longer be recognized in Other Comprehensive
Income, but will be
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CMS Energy Corporation
recorded in earnings each quarter. The MCV Partnership expects future earnings
volatility on both the gas fuel derivative contracts and the related financial
hedges, since gains and losses will be recorded each quarter. For the three
months ended March 31, 2005, we recorded a $209 million gain associated with the
increase in fair value of these instruments in Fuel costs mark-to-market at MCV
on our Consolidated Statements of Income (Loss). The majority of this gain is
expected to reverse through earnings during 2005 and 2006 as the gas is
purchased and the financial hedges settle, with the remainder reversing between
2007 and 2011. For further details on the RCP, see Note 3, Contingencies, "Other
Consumers' Electric Utility Contingencies - The Midland Cogeneration Venture."
Gas Fuel Futures and Swaps: The MCV Partnership enters into natural gas futures
contracts, option contracts, and over-the-counter swap transactions in order to
hedge against unfavorable changes in the market price of natural gas in future
months when gas is expected to be needed. These financial instruments are used
principally to secure anticipated natural gas requirements necessary for
projected electric and steam sales, and to lock in sales prices of natural gas
previously obtained in order to optimize the MCV Partnership's existing gas
supply, storage, and transportation arrangements. At March 31, 2005, the MCV
Partnership held gas fuel futures and swaps.
The contracts that are used to secure anticipated natural gas requirements
necessary for projected electric and steam sales qualify as cash flow hedges
under SFAS No. 133. The MCV Partnership also engages in cost mitigation
activities to offset the fixed charges the MCV Partnership incurs in operating
the MCV Facility. These cost mitigation activities include the use of futures
and options contracts to purchase and/or sell natural gas to maximize the use of
the transportation and storage contracts when it is determined that they will
not be needed for the MCV Facility operation. Although these cost mitigation
activities do serve to offset the fixed monthly charges, these cost mitigation
activities are not considered a normal course of business for the MCV
Partnership and do not qualify as hedges. Therefore, the mark-to-market gains
and losses from these cost mitigation activities are recorded in earnings each
quarter.
There was no ineffectiveness associated with any of the gas contracts that
qualified for hedge accounting treatment. At March 31, 2005, we have recorded a
cumulative net gain of $27 million, net of tax, in Accumulated other
comprehensive loss relating to our proportionate share of the contracts held by
the MCV Partnership that qualify as cash flow hedges. This balance represents
natural gas futures, options, and swaps with maturities ranging from April 2005
to December 2009, of which $6 million of this gain is expected to be
reclassified as an increase to earnings during the next 12 months as the
contracts settle, offsetting the costs of gas purchases. In addition, for the
three months ended March 31, 2005, we recorded a net gain of $11 million in
earnings from hedging activities related to natural gas requirements for the MCV
Facility operations.
CMS ERM CONTRACTS: CMS ERM enters into and owns energy contracts that are
related to activities considered to be an integral part of CMS Energy's ongoing
operations. CMS ERM holds certain forward contracts for the purchase and sale of
electricity and natural gas that result in physical delivery of the underlying
commodity at contractual prices. These contracts are generally long-term in
nature and are classified as non-trading. CMS ERM also uses various financial
instruments, including swaps, options, and futures, to manage the commodity
price risks associated with its forward purchase and sales contracts as well as
generation assets owned by CMS Energy or its subsidiaries. These financial
contracts are classified as trading activities.
Non-trading and trading contracts that meet the definition of a derivative under
SFAS No. 133 are recorded as assets or liabilities in the financial statements
at the fair value of the contracts. Gains or losses arising from changes in fair
value of these contracts are recognized into earnings as a component
CMS-56
CMS Energy Corporation
of Operating Revenue in the period in which the changes occur. Gains and losses
on trading contracts are recorded net in accordance with EITF Issue No. 02-03.
Contracts that do not meet the definition of a derivative are accounted for as
executory contracts (i.e., on an accrual basis).
FOREIGN EXCHANGE DERIVATIVES: We may use forward exchange and option contracts
to hedge certain receivables, payables, long-term debt, and equity value
relating to our investments in foreign operations. The purpose of our foreign
currency hedging activities is to protect the company from the risk associated
with adverse changes in currency exchange rates that could affect cash flow
materially. These contracts would limit the risk from exchange rate movements
because gains and losses on such contracts offset losses and gains,
respectively, on assets and liabilities being hedged. At March 31, 2005 and
December 31, 2004, we had no outstanding foreign exchange contracts.
The impact of hedges on our investments in foreign operations is reflected in
Accumulated other comprehensive loss as a component of the foreign currency
translation adjustment on our Consolidated Balance Sheets. Gains or losses from
the settlement of these hedges are maintained in the foreign currency
translation adjustment until we sell or liquidate the investments on which the
hedges were taken. At March 31, 2005, the total foreign currency translation
adjustment was a net loss of $315 million, which included a net hedging loss of
$26 million, net of tax, related to settled contracts.
At March 31, 2005, both Shuweihat and Taweelah, two of our equity method
investees, held foreign exchange contracts that hedged the foreign currency risk
associated with payments to be made under operating and maintenance service
agreements. The contract held by Shuweihat qualified as a cash flow hedge, and
therefore, we record our proportionate share of the change in fair value of the
contract in Accumulated other comprehensive loss. The contract held by Taweelah,
also held at December 31, 2004, did not qualify as a cash flow hedge. As such,
we record our proportionate share of the change in the fair value of the
contract in Earnings from Equity Method Investees.
7: RETIREMENT BENEFITS
We provide retirement benefits to our employees under a number of different
plans, including:
- non-contributory, defined benefit Pension Plan,
- a cash balance pension plan for certain employees hired after June 30,
2003,
- benefits to certain management employees under SERP,
- a defined contribution 401(k) plan,
- benefits to a select group of management under EISP, and
- health care and life insurance benefits under OPEB.
Pension Plan: The Pension Plan includes funds for all of our employees, the
employees of our subsidiaries, and Panhandle, a former subsidiary. The Pension
Plan's assets are not distinguishable by company.
OPEB: We adopted SFAS No. 106, effective as of the beginning of 1992. Consumers
recorded a liability of $466 million for the accumulated transition obligation
and a corresponding regulatory asset for anticipated recovery in utility rates.
The MPSC authorized recovery of the electric utility portion of these costs in
1994 over 18 years and the gas utility portion in 1996 over 16 years.
CMS-57
CMS Energy Corporation
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 was
signed into law in December 2003. The Act establishes a prescription drug
benefit under Medicare (Medicare Part D), and a federal subsidy, which is tax
exempt, to sponsors of retiree health care benefit plans that provide a benefit
that is actuarially equivalent to Medicare Part D. We believe our plan is
actuarially equivalent to Medicare Part D.
Costs: The following table recaps the costs incurred in our retirement benefits
plans:
In Millions
- -------------------------------------------------------------------------------------------------------
Pension OPEB
Three Months Ended March 31 2005 2004 2005 2004
- -------------------------------------------------------------------------------------------------------
Service cost $10 $10 $6 $5
Interest expense 19 18 16 15
Expected return on plan assets (25) (27) (14) (12)
Plan amendments - - - -
Amortization of:
Net loss 7 3 4 2
Prior service cost 1 1 (2) (3)
--------------------------------------------
Net periodic pension and postretirement benefit cost $12 $5 $10 $7
=======================================================================================================
The MCV Partnership sponsors defined cost postretirement health care plans that
cover all full-time employees, except key management. Participants in the
postretirement health care plans become eligible for the benefits if they retire
on or after the attainment of age 65 or upon a qualified disability retirement,
or if they have 10 or more years of service and retire at age 55 or older. The
MCV Partnership's net periodic postretirement health care cost for the three
months ended March 31, 2005 was less than $1 million.
8: ASSET RETIREMENT OBLIGATIONS
SFAS NO. 143: This standard requires companies to record the fair value of the
cost to remove assets at the end of their useful life, if there is a legal
obligation to remove them. We have legal obligations to remove some of our
assets, including our nuclear plants, at the end of their useful lives. For our
regulated utility, as required by SFAS No. 71, we account for the implementation
of this standard by recording regulatory assets and liabilities instead of a
cumulative effect of a change in accounting principle.
The fair value of ARO liabilities has been calculated using an expected present
value technique. This technique reflects assumptions such as costs, inflation,
and profit margin that third parties would consider to assume the settlement of
the obligation. Fair value, to the extent possible, should include a market risk
premium for unforeseeable circumstances. No market risk premium was included in
our ARO fair value estimate since a reasonable estimate could not be made. If a
five percent market risk premium were assumed, our ARO liability would increase
by $22 million.
If a reasonable estimate of fair value cannot be made in the period in which the
ARO is incurred, such as for assets with indeterminate lives, the liability is
to be recognized when a reasonable estimate of fair value can be made.
Generally, electric and gas transmission and distribution assets have
indeterminate lives. Retirement cash flows cannot be determined and there is a
low probability of a retirement date. Therefore, no liability has been recorded
for these assets. Also, no liability has been recorded for assets that have
insignificant cumulative disposal costs, such as substation batteries. The
measurement of the
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CMS Energy Corporation
ARO liabilities for Palisades and Big Rock are based on decommissioning studies
that largely utilize third-party cost estimates.
The following tables describe our assets that have legal obligations to be
removed at the end of their useful life:
March 31, 2005 In Millions
- ---------------------------------------------------------------------------------------------------------------------
In Service Trust
ARO Description Date Long Lived Assets Fund
- ---------------------------------------------------------------------------------------------------------------------
Palisades-decommission plant site 1972 Palisades nuclear plant $518
Big Rock-decommission plant site 1962 Big Rock nuclear plant 43
JHCampbell intake/discharge water line 1980 Plant intake/discharge water line -
Closure of coal ash disposal areas Various Generating plants coal ash areas -
Closure of wells at gas storage fields Various Gas storage fields -
Indoor gas services equipment relocations Various Gas meters located inside structures -
Natural gas-fired power plant 1997 Gas fueled power plant -
Close gas treating plant and gas wells Various Gas transmission and storage -
=====================================================================================================================
In Millions
- -----------------------------------------------------------------------------------------------------------------------------
ARO ARO
Liability Cash flow Liability
ARO Description 12/31/04 Incurred Settled Accretion Revisions 3/31/05
- -----------------------------------------------------------------------------------------------------------------------------
Palisades-decommission $350 $- $- $6 $- $356
Big Rock-decommission 30 - (8) 4 - 26
JHCampbell intake line - - - - - -
Coal ash disposal areas 54 - (1) 1 - 54
Wells at gas storage fields 1 - - - - 1
Indoor gas services relocations 1 - - - - 1
Natural gas-fired power plant 1 - - - - 1
Close gas treating plant and gas wells 2 - - - - 2
----------------------------------------------------------------------------
Total $439 $- $(9) $11 $- $441
=============================================================================================================================
On October 14, 2004, the MPSC issued a generic proceeding to review SFAS No.
143, FERC Order No. 631, Accounting, Financial Reporting, and Rate Filing
Requirements for Asset Retirement Obligations, and their accounting and
ratemaking issues. Utilities responded to the Order in March 2005; MPSC Staff
and intervenor filings are due in May 2005. We consider the proceeding a
clarification of accounting and reporting issues that relate to all Michigan
utilities.
CMS-59
CMS Energy Corporation
9: EQUITY METHOD INVESTMENTS
Where ownership is more than 20 percent but less than a majority, we account for
certain investments in other companies, partnerships, and joint ventures by the
equity method of accounting in accordance with APB Opinion No. 18. Net income
from these investments included undistributed earnings of $2 million for the
three months ended March 31, 2005 and $6 million for the three months ended
March 31, 2004.
The most significant of these investments are:
- our 50 percent interest in Jorf Lasfar, and
- our 40 percent interest in Taweelah.
Summarized financial information for these equity method investments is as
follows:
Income Statement Data
In Millions
- --------------------------------------------------------------------------------
Three Months Ended March 31, 2005 Jorf Lasfar Taweelah
- --------------------------------------------------------------------------------
Operating revenue $ 130 $ 24
Operating expenses 83 4
---------------------------------------
Operating income 47 20
Other expense, net 14 1
---------------------------------------
Net income $ 33 $ 19
================================================================================
In Millions
- --------------------------------------------------------------------------------
Three Months Ended March 31, 2004 Jorf Lasfar Taweelah
- --------------------------------------------------------------------------------
Operating revenue $ 110 $ 22
Operating expenses 65 10
---------------------------------------
Operating income 45 12
Other expense, net 15 25
---------------------------------------
Net income $ 30 $ (13)
================================================================================
CMS-60
CMS Energy Corporation
10: REPORTABLE SEGMENTS
Our reportable segments consist of business units organized and managed by their
products and services. We evaluate performance based upon the net income of each
segment. We operate principally in three reportable segments: electric utility,
gas utility, and enterprises.
The "Other" segment includes corporate interest and other, discontinued
operations, and the cumulative effect of accounting changes. The following table
shows our financial information by reportable segment:
In Millions
- ---------------------------------------------------------------------------------------------
Three Months Ended March 31 2005 2004
- ---------------------------------------------------------------------------------------------
Operating Revenues
Electric utility $628 $630
Gas utility 992 905
Enterprises 225 219
-------------------------------------
$1,845 $1,754
=============================================================================================
Net Income (Loss) Available to Common Stockholders
Electric utility $33 $48
Gas utility 58 56
Enterprises 105 (60)
Other (46) (53)
-------------------------------------
$150 $(9)
=============================================================================================
In Millions
- ---------------------------------------------------------------------------------------------
March 31, 2005 December 31, 2004
- ---------------------------------------------------------------------------------------------
Total Assets
Electric utility (a) $7,498 $7,289
Gas utility (a) 2,856 3,187
Enterprises 5,088 4,980
Other 759 416
-------------------------------------
$16,201 $15,872
=============================================================================================
(a) Amounts include a portion of our other common assets attributable to both
the electric and gas utility businesses.
11: CONSOLIDATION OF VARIABLE INTEREST ENTITIES
We are the primary beneficiary of both the MCV Partnership and the FMLP. We have
a 49 percent partnership interest in the MCV Partnership and a 46.4 percent
partnership interest in the FMLP. Consumers is the primary purchaser of power
from the MCV Partnership through a long-term power purchase agreement. The FMLP
holds a 75.5 percent lessor interest in the MCV Facility, which results in
Consumers holding a 35 percent lessor interest in the MCV Facility.
Collectively, these interests make us the primary beneficiary of these entities.
Therefore, we consolidated these partnerships into our consolidated financial
statements for all periods presented. These partnerships have third-party
obligations totaling $584 million at March 31, 2005. Property, plant, and
equipment serving as collateral for these obligations has a carrying value of
$1.411 billion at March 31, 2005. The creditors of these partnerships do not
have recourse to the general credit of CMS Energy.
We are the primary beneficiary of three other variable interest entities. We
have 50 percent partnership
CMS-61
CMS Energy Corporation
interest in the T.E.S. Filer City Station Limited Partnership, the Grayling
Generating Station Limited Partnership, and the Genesee Power Station Limited
Partnership. Additionally, we have operating and management contracts and are
the primary purchaser of power from each partnership through long-term power
purchase agreements. Collectively, these interests make us the primary
beneficiary as defined by the Interpretation. Therefore, we consolidated these
partnerships into our consolidated financial statements for all periods
presented. These partnerships have third-party obligations totaling $112 million
at March 31, 2005. Property, plant, and equipment serving as collateral for
these obligations has a carrying value of $161 million at March 31, 2005. Other
than outstanding letters of credit and guarantees of $5 million, the creditors
of these partnerships do not have recourse to the general credit of CMS Energy.
Additionally, we hold interests in variable interest entities in which we are
not the primary beneficiary. The following chart details our involvement in
these entities at March 31, 2005:
- -----------------------------------------------------------------------------------------------------------------------------
Name Investment Operating Total
(Ownership Nature of the Involvement Balance Agreement with Generating
Interest) Entity Country Date (In Millions) CMS Energy Capacity
- -----------------------------------------------------------------------------------------------------------------------------
Taweelah United Arab
(40%) Generator Emirates 1999 $ 72 Yes 777 MW
Generator -
Jubail (25%) Under Saudi
Construction Arabia 2001 $ - Yes 250 MW
Shuweihat United Arab
(20%) Generator Emirates 2001 $ 47 Yes 1,500 MW
- -----------------------------------------------------------------------------------------------------------------------------
Total $119 2,527 MW
=============================================================================================================================
Our maximum exposure to loss through our interests in these variable interest
entities is limited to our investment balance of $119 million, and letters of
credit, guarantees, and indemnities relating to Taweelah and Shuweihat totaling
$84 million.
12: IMPLEMENTATION OF NEW ACCOUNTING STANDARDS
FSP 109-2, ACCOUNTING AND DISCLOSURE GUIDANCE FOR THE FOREIGN EARNINGS
REPATRIATION PROVISION WITHIN THE AMERICAN JOBS CREATION ACT OF 2004: The
American Jobs Creation Act of 2004 creates a one-year opportunity to receive a
tax benefit for U.S. corporations that reinvest dividends from controlled
foreign corporations in the U.S. in a 12-month period (calendar year 2005 for
CMS Energy). Although the tax benefit is subject to a number of limitations, we
believe that we have the information necessary to make an informed decision on
the impact of this act on our repatriation plan.
In January 2005, we repatriated $80 million in cash, $71 million of which should
qualify for the tax benefit. Historically, we recorded deferred taxes on these
repatriated earnings. Since this repatriation should qualify for the tax benefit
and our decision to repatriate was made in 2004, we have reversed $21 million of
our deferred tax liability. This adjustment was recorded as a component of
income from continuing operations in 2004.
CMS-62
CMS Energy Corporation
During 2005, we may have the ability to repatriate additional amounts that may
qualify for the repatriation tax benefit. If successful, our current estimate is
that additional amounts could range between $100 million and $120 million. The
amount of additional repatriation remains uncertain because it is based on
future foreign subsidiary operations, cash flow, financings, and repatriation
limitations. This potential additional repatriation could reduce our recorded
deferred tax liability $30 million to $36 million. We expect to be in a position
to finalize our assessment, which may be higher or lower, regarding any
potential repatriation in the fourth quarter of 2005.
NEW ACCOUNTING STANDARDS NOT YET EFFECTIVE
SFAS NO. 123R, SHARE-BASED PAYMENT: This Statement requires companies to use the
fair value of employee stock options and similar awards at the grant date to
value the awards. Companies must expense this amount over the vesting period of
the awards. This Statement also clarifies and expands SFAS No. 123's guidance in
several areas, including measuring fair value, classifying an award as equity or
as a liability, and attributing compensation cost to reporting periods.
This Statement amends SFAS No. 95, Statement of Cash Flows, to require that
excess tax benefits related to the excess of the tax deductible amount over the
compensation cost recognized be classified as cash inflows from financing
activities rather than as a reduction of taxes paid in operating activities.
Excess tax benefits are recorded as adjustments to additional paid-in capital.
This Statement is effective for us as of the beginning of 2006. We adopted the
fair value method of accounting for share-based awards effective December 2002.
Therefore, we do not expect this statement to have a significant impact on our
results of operations when it becomes effective.
FASB INTERPRETATION NO. 47, ACCOUNTING FOR CONDITIONAL ASSET RETIREMENT
OBLIGATIONS: This Interpretation clarifies the term "conditional asset
retirement obligation" as used in SFAS No. 143. The term refers to a legal
obligation to perform an asset retirement activity in which the timing and (or)
method of settlement are conditional on a future event that may or may not be
within the control of the entity. The obligation to perform the asset retirement
activity is unconditional even though uncertainty exists about the timing and
(or) method of settlement. Accordingly, an entity is required to recognize a
liability for the fair value of a conditional asset retirement obligation if the
fair value of the liability can be reasonably estimated. The fair value of a
liability for the conditional asset retirement obligation should be recognized
when incurred. This Interpretation also clarifies when an entity would have
sufficient information to estimate reasonably the fair value of an asset
retirement obligation. For us, this Interpretation is effective no later than
December 31, 2005. We are in the process of determining the impact this
Interpretation will have on our financial statements upon adoption.
CMS-63
CMS Energy Corporation
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CMS-64
Consumers Energy Company
CONSUMERS ENERGY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
In this MD&A, Consumers Energy, which includes Consumers Energy Company and all
of its subsidiaries, is at times referred to in the first person as "we," "our"
or "us." This MD&A has been prepared in accordance with the instructions to Form
10-Q and Item 303 of Regulation S-K. This MD&A should be read in conjunction
with the MD&A contained in Consumers Energy's Form 10-K for the year ended
December 31, 2004.
EXECUTIVE OVERVIEW
Consumers, a subsidiary of CMS Energy, a holding company, is a combination
electric and gas utility company that provides service to customers in
Michigan's Lower Peninsula. Our customer base includes a mix of residential,
commercial, and diversified industrial customers, the largest segment of which
is the automotive industry.
We manage our business by the nature of services each provides. We operate
principally in two business segments: electric utility and gas utility. Our
electric utility operations include the generation, purchase, distribution, and
sale of electricity. Our gas utility operations include the purchase,
transportation, storage, distribution, and sale of natural gas.
We earn our revenue and generate cash from operations by providing electric and
natural gas utility services, electric power generation, gas transmission and
storage, and other energy related services. Our businesses are affected
primarily by:
- weather, especially during the traditional heating and cooling
seasons,
- economic conditions,
- regulation and regulatory issues,
- interest rates,
- our debt credit rating, and
- energy commodity prices.
Our business strategy involves improving our balance sheet and maintaining focus
on our core strength: superior utility operation and service. Over the next few
years, we expect that this strategy will result in improved credit ratings,
earnings growth, and a company positioned to make new investments.
Despite strong financial and operational performance, we face important
challenges in the future. As a result of Michigan's Customer Choice Act, which
allows alternative electric suppliers to sell electric power directly to our
customers, we have lost industrial and commercial customers. As of April 2005,
we have lost 893 MW, or 12 percent, of our electric load to these alternative
electric suppliers. Based on current trends, we predict total load loss by the
end of 2005 to be in the range of 925 MW to 1,000 MW. However, no assurance can
be made that the actual load loss will fall within that range.
Another important challenge relates to the economics of the MCV Partnership. The
MCV Partnership's costs of producing electricity are tied to the cost of natural
gas. Because natural gas prices have increased substantially in recent years and
the price the MCV Partnership can charge us for energy has not, the MCV
Partnership's financial performance has been impacted negatively. In 2005, the
MPSC issued an order approving the RCP to change the way the facility is used.
The purpose of the RCP is to conserve natural gas through a change in the
dispatch of the MCV Facility and thereby improve the financial performance
CE-1
Consumers Energy Company
of the MCV Partnership without increased costs to customers.
We are focused on growing the equity base of our company and refinancing our
debt to reduce interest rate costs. In 2005, we retired higher-interest rate
debt through the use of proceeds from the issuance of $550 million of FMBs. We
also received cash contributions from CMS Energy of $550 million. These efforts,
and others, are designed to lead us to be a strong, reliable utility company
that will be poised to take advantage of opportunities for further growth.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
This Form 10-Q and other written and oral statements that we make contain
forward-looking statements as defined by the Private Securities Litigation
Reform Act of 1995. Our 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. We designed this discussion of potential risks and uncertainties to
highlight important factors that may impact our business and financial outlook.
We have 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 our actual results to differ
materially from the results anticipated in these statements. Such factors
include our inability to predict and/or control:
- capital and financial market conditions, including the price of CMS
Energy Common Stock and the effect of such market conditions on the
Pension Plan, interest rates, and access to the capital markets as
well as availability of financing to Consumers, CMS Energy, or any
of their affiliates and the energy industry,
- market perception of the energy industry, Consumers, CMS Energy, or
any of their affiliates,
- credit ratings of Consumers, CMS Energy, or any of their affiliates,
- factors affecting utility and diversified energy operations such as
unusual weather conditions, catastrophic weather-related damage,
unscheduled generation outages, maintenance or repairs,
environmental incidents, or electric transmission or gas pipeline
system constraints,
- international, national, regional, and local economic, competitive,
and regulatory policies, conditions and developments,
- adverse regulatory or legal decisions, including those related to
environmental laws and regulations, and potential environmental
remediation costs associated with such decisions,
- potentially adverse regulatory treatment and/or regulatory lag
concerning a number of significant questions presently before the
MPSC including:
- recovery of future Stranded Costs incurred due to customers
choosing alternative energy suppliers,
- recovery of Clean Air Act costs and other environmental and
safety-related expenditures,
- power supply and natural gas supply costs when oil prices and
other fuel prices are rapidly increasing,
- timely recognition in rates of additional equity investments
in Consumers, and
- adequate and timely recovery of additional electric and gas
rate-based expenditures,
CE-2
Consumers Energy Company
- the impact of adverse natural gas prices on the MCV Partnership
investment, and regulatory decisions that limit our recovery of
capacity and fixed energy payments,
- federal regulation of electric sales and transmission of
electricity, including periodic re-examination by federal regulators
of our market-based sales authorizations in wholesale power markets
without price restrictions,
- energy markets, including the timing and extent of changes in
commodity prices for oil, coal, natural gas, natural gas liquids,
electricity, and certain related products due to lower or higher
demand, shortages, transportation problems, or other developments,
- potential adverse impacts of the new MISO Midwest Energy Market upon
power supply and transmission costs,
- potential for the Midwest Energy Market to develop into an active
energy market in the state of Michigan, which may lead us to account
for electric capacity and energy contracts with the MCV Partnership
and other independent power producers as derivatives,
- the GAAP requirement that we utilize mark-to-market accounting on
certain of our energy commodity contracts and interest rate swaps,
which may have, in any given period, a significant positive or
negative effect on earnings, which could change dramatically or be
eliminated in subsequent periods and could add to earnings
volatility,
- potential disruption or interruption of facilities or operations due
to accidents or terrorism, and the ability to obtain or maintain
insurance coverage for such events,
- nuclear power plant performance, decommissioning, policies,
procedures, incidents, and regulation, including the availability of
spent nuclear fuel storage,
- technological developments in energy production, delivery, and
usage,
- achievement of capital expenditure and operating expense goals,
- changes in financial or regulatory accounting principles or
policies,
- outcome, cost, and other effects of legal and administrative
proceedings, settlements, investigations and claims,
- limitations on our ability to control the development or operation
of projects in which our subsidiaries have a minority interest,
- disruptions in the normal commercial insurance and surety bond
markets that may increase costs or reduce traditional insurance
coverage, particularly terrorism and sabotage insurance and
performance bonds,
CE-3
Consumers Energy Company
- other business or investment considerations that may be disclosed
from time to time in Consumers' or CMS Energy's SEC filings, or in
other publicly issued written documents, and
- other uncertainties that are difficult to predict, and many of which
are beyond our control.
For additional information regarding these and other uncertainties, see Note 2,
Contingencies.
RESULTS OF OPERATIONS
NET INCOME AVAILABLE TO COMMON STOCKHOLDER
In Millions
- --------------------------------------------------------------------------------
March 31 2005 2004 Change
- --------------------------------------------------------------------------------
Net Income Available to Common Stockholder
Electric $ 33 $ 48 $(15)
Gas 58 56 2
Other (Includes MCV Partnership interest) 66 - 66
- --------------------------------------------------------------------------------
Three months ended $157 $104 $ 53
================================================================================
2005 COMPARED TO 2004: For the three months ended March 31, 2005, our net income
available to the common stockholder increased $53 million versus the same period
in 2004. The $53 million increase in net income available to the common
stockholder reflects:
- a $63 million increase in earnings from our ownership interest in
the MCV Partnership primarily due to the increase in fair value of
certain long-term gas contracts and financial hedges (the MPSC's
approval of the RCP resulted in the MCV Partnership recognizing the
increase in the fair value of additional gas contracts beginning
January 2005), and
- a $10 million increase in gas utility earnings due to the MPSC's
October 2004 final gas rate order.
These increases in net income available to the common stockholder were offset
partially by reductions to net income available to the common stockholder from:
- a $17 million increase in operating expenses due primarily to higher
depreciation and amortization expense, higher pension and benefit
expense, and higher underrecovery expense related to the MCV PPA,
offset partially by our direct savings from the RCP, and
- a $6 million underrecovery of power supply revenue primarily due to
non-recoverable power supply costs related to capped customers.
For additional details, see "Electric Utility Results of Operations" and "Gas
Utility Results of Operations" within this section and Note 2, Contingencies.
For additional details regarding the increase in fair value of certain of the
MCV Partnership's long-term gas contracts, see the "Critical Accounting
Policies-Accounting for Financial and Derivative Instruments and Market Risk
Information-Derivative Instruments" section within this MD&A.
CE-4
Consumers Energy Company
ELECTRIC UTILITY RESULTS OF OPERATIONS
In Millions
- ---------------------------------------------------------------------------------------------
March 31 2005 2004 Change
- ---------------------------------------------------------------------------------------------
Three months ended $33 $48 $(15)
=============================================================================================
Reasons for the change:
Electric deliveries $ 4
Power supply costs and related revenue (9)
Other operating expenses, other income and non-commodity revenue (22)
Regulatory return on capital expenditures 7
General taxes (3)
Income taxes 8
------------------------
Total change $ (15)
=============================================================================================
ELECTRIC DELIVERIES: Electric deliveries decreased 0.4 billion kWh or 4.2
percent in the first quarter of 2005 compared to 2004. Despite decreased
electric deliveries, electric delivery revenue increased due to increased
surcharge revenue, offset partially by reduced electric delivery revenue from
customers choosing alternative electric suppliers.
On July 1, 2004, Consumers started collecting a surcharge related to the
recovery of costs incurred in the transition to customer choice. This surcharge
increased electric delivery revenue by $5 million. Surcharge revenue related to
the recovery of security costs and stranded costs increased electric delivery
revenue by an additional $3 million.
POWER SUPPLY COSTS AND RELATED REVENUE: In the first quarter of 2005, our
recovery of power supply costs was capped for the residential class. Pretax
underrecoveries of $9 million are primarily due to power supply-related costs
exceeding power supply-related revenue recovered from capped customers. Power
supply-related costs increased in 2005 primarily due to higher priced purchased
power necessary to replace the generation loss from an outage at our Palisades
nuclear generating plant and increased coal costs versus the same period in
2004.
OTHER OPERATING EXPENSES, OTHER INCOME, AND NON-COMMODITY REVENUE: In the first
quarter of 2005, other operating expenses increased $24 million and
non-commodity revenue increased $2 million versus the same period in 2004
primarily due to higher transmission services revenue.
The increase in other operating expenses reflects higher depreciation and
amortization expense, higher pension and benefit expense, and higher
underrecovery expense related to the MCV PPA, offset partially by our direct
savings from the RCP. Depreciation and amortization expense increased $12
million due to higher plant in service and greater amortization of certain
regulatory assets. Pension and benefit expense increased $6 million primarily
due to higher plan expenses. Benefit expense also reflects the reinstatement of
the matching contribution to our 401(k) plan.
CE-5
Consumers Energy Company
In 1992, a liability was established for estimated future underrecoveries of
power supply costs under the MCV PPA. In 2004, a portion of the cash
underrecoveries continued to reduce this liability until its depletion in
December. In 2005, all cash underrecoveries are expensed directly to income.
Consequently, the cost associated with the MCV PPA cash underrecoveries
increased operating expense $6 million in the first quarter of 2005 versus the
same period in 2004. Partially offsetting this increased operating expense was
the savings from the RCP approved by the MPSC in January 2005.
The RCP allows us to dispatch the MCV Facility on the basis of natural gas
prices, which will reduce MCV Facility's annual production of electricity and,
as a result, reduce the MCV Facility's consumption of natural gas. The MCV
Facility's fuel cost savings are first used to offset the cost of replacement
power and fund a renewable energy program. Remaining savings are split between
us and the MCV Partnership. Our direct savings are shared 50 percent with
customers in 2005 and 70 percent thereafter. Our direct savings, after
allocating a portion to customers, was $3 million in the first quarter of 2005.
REGULATORY RETURN ON CAPITAL EXPENDITURES: In the first quarter of 2005, the
return on capital expenditures in excess of our depreciation base as allowed by
the Customer Choice Act increased income by $7 million versus the same period in
2004.
GENERAL TAXES: In the first quarter of 2005, general taxes increased from the
same period in 2004 primarily due to higher MSBT expense.
INCOME TAXES: In the first quarter of 2005, income taxes decreased versus the
same period in 2004 primarily due to lower earnings by the electric utility.
GAS UTILITY RESULTS OF OPERATIONS
In Millions
- ---------------------------------------------------------------------------------
March 31 2005 2004 Change
- ---------------------------------------------------------------------------------
Three months ended $58 $56 $2
- ---------------------------------------------------------------------------------
Reasons for the change:
Gas deliveries $(3)
Gas rate increase 16
Gas wholesale and retail services and other gas revenue (2)
Operation and maintenance (5)
Depreciation and other deductions (1)
Fixed charges (2)
Income taxes (1)
---------------
Total change $ 2
=================================================================================
GAS DELIVERIES: In the first quarter 2005 versus the same period in 2004, lower
gas delivery revenues reflect decreased deliveries to our residential,
commercial, and industrial customers. Gas deliveries, including miscellaneous
transportation to end-use customers, decreased 3.4 bcf or 2.3 percent.
GAS RATE INCREASE: In December 2003, the MPSC issued an interim gas rate order
authorizing a $19 million annual increase to gas tariff rates. In October 2004,
the MPSC issued a final order authorizing an annual increase of $58 million
through a two-year surcharge. As a result of these orders, first quarter
CE-6
Consumers Energy Company
2005 pretax earnings increased $16 million compared to the same period in 2004.
GAS WHOLESALE AND RETAIL SERVICES AND OTHER GAS REVENUE: The decrease in gas
wholesale and retail services and other gas revenue relates primarily to
decreases in certain miscellaneous transportation and storage revenue.
OPERATION AND MAINTENANCE: In the first quarter 2005 versus the same period in
2004, operation and maintenance expenses increased primarily due to increases in
benefit costs and additional expenditures on safety, reliability, and customer
service.
DEPRECIATION AND OTHER DEDUCTIONS: In the first quarter 2005 versus the same
period in 2004, depreciation expense increased due to higher plant in service.
Increased other deductions reflect the recognition of expense associated with
the early retirement of debt in January 2005.
FIXED CHARGES: In the first quarter 2005 versus the same period in 2004, fixed
charges increased due to higher average debt levels, offset partially by a 28
basis point reduction in the average interest rate.
INCOME TAXES: In the first quarter of 2005, income taxes increased versus the
same period in 2004 primarily due to higher earnings by the gas utility.
CRITICAL ACCOUNTING POLICIES
USE OF ESTIMATES AND ASSUMPTIONS
In preparing our financial statements, we use estimates and assumptions that may
affect reported amounts and disclosures. Accounting estimates are used for asset
valuations, depreciation, amortization, financial and derivative instruments,
employee benefits, and contingencies. For example, we estimate the rate of
return on plan assets and the cost of future health-care benefits to determine
our annual pension and other postretirement benefit costs. There are risks and
uncertainties that may cause actual results to differ from estimated results,
such as changes in the regulatory environment, competition, regulatory
decisions, and lawsuits.
CONTINGENCIES: We are involved in various regulatory and legal proceedings that
arise in the ordinary course of our business. We record a liability for
contingencies based upon our assessment that the occurrence of loss is probable
and the amount of loss can be reasonably estimated. The recording of estimated
liabilities for contingencies is guided by the principles in SFAS No. 5. We
consider many factors in making these assessments, including history and the
specifics of each matter. The most significant of these contingencies are our
electric and gas environmental estimates, and the potential underrecoveries from
our power purchase contract with the MCV Partnership, all of which are discussed
in the "Outlook" section included in this MD&A.
ACCOUNTING FOR FINANCIAL AND DERIVATIVE INSTRUMENTS AND MARKET RISK INFORMATION
FINANCIAL INSTRUMENTS: We account for investments in debt and equity securities
using SFAS No. 115. There have been no material changes to the accounting for
financial instruments since the year ended December 31, 2004. For details on
financial instruments, see Note 4, Financial and Derivative Instruments.
CE-7
Consumers Energy Company
DERIVATIVE INSTRUMENTS: We use SFAS No. 133 to account for derivatives. Except
as noted within this section, there have been no material changes to the
accounting for derivative instruments since the year ended December 31, 2004.
The MISO began operating the Midwest Energy Market on April 1, 2005, which
provides day-ahead and real-time energy market information and centralized
dispatch for market participants. At this time, we believe that the commencement
of this market does not constitute the development of an active energy market in
Michigan. However, after having adequate experience with the Midwest Energy
Market, we will reevaluate whether or not the activity level within this market
leads to the conclusion that an active energy market exists. If an active market
develops in the future, we may be required to account for certain electric
purchases and sales contracts as derivatives, and the resulting mark-to-market
impact on earnings could be material to our financial statements.
Also as part of the Midwest Energy Market, FTRs were established. FTRs are
financial instruments established to manage price risk relating to electricity
transmission congestion. An FTR entitles the holder to receive compensation (or
remit payment) for certain congestion-related transmission charges that arise
when the transmission grid is congested. We presently hold FTRs for certain
areas on the transmission grid within MISO's market area. We are presently
evaluating whether FTRs qualify as derivative instruments. If they are
determined to be derivative instruments, FTRs would be required to be recognized
on our Consolidated Balance Sheets as assets or liabilities at their fair value,
with any subsequent changes in fair value recognized in earnings. However, we
believe we may be able to offset the earnings impact with a regulatory asset or
liability. The Midwest Energy Market was not effective until April 1, 2005.
Therefore, FTRs had no value at March 31, 2005.
The MCV Partnership uses natural gas fuel contracts to buy gas as fuel for
generation, and to manage gas fuel costs. The MCV Partnership believes that
certain of its long-term gas contracts qualify as normal purchases under SFAS
No. 133, and therefore, these contracts are not recognized at fair value on our
Consolidated Balance Sheets. Due to the implementation of the RCP in January
2005, the MCV Partnership determined that a significant portion of its gas fuel
contracts no longer qualify as normal purchases because the contracted gas will
not be consumed as fuel for electric production. Accordingly, these contracts
are accounted for as derivatives, with changes in fair value recorded in
earnings each quarter. Additionally, the financial hedges associated with these
contracts no longer qualify as cash flow hedges. Thus, any changes in the fair
value of these financial hedges will no longer be recognized in Other
Comprehensive Income, but will be recorded in earnings each quarter. The MCV
Partnership expects future earnings volatility on both the gas fuel derivative
contracts and the related financial hedges, since gains and losses will be
recorded each quarter. For the three months ended March 31, 2005, we recorded a
$209 million gain associated with the increase in fair value of these
instruments on our Consolidated Statements of Income. The majority of this gain
is expected to reverse through earnings during 2005 and 2006 as the gas is
purchased and the financial hedges settle, with the remainder reversing between
2007 and 2011.
To determine the fair value of our derivative contracts, we use a combination of
quoted market prices, prices obtained from external sources, such as brokers,
and mathematical valuation models. Valuation models require various inputs,
including forward prices, strike prices, volatilities, interest rates, and
maturity dates. Changes in forward prices or volatilities could change
significantly the calculated fair value of certain contracts. At March 31, 2005,
we assumed market-based interest rates ranging between 2.87 percent and 4.83
percent (depending on the term of the contract) and monthly volatility rates
ranging between 25 percent and 40 percent to calculate the fair value of the gas
fuel derivative contracts with volume optionality held by the MCV Partnership.
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Consumers Energy Company
MARKET RISK INFORMATION: The following is an update of our risk sensitivities
since the year ended December 31, 2004. These risk sensitivities indicate the
potential loss in fair value, cash flows, or future earnings from our derivative
contracts and other financial instruments based upon a hypothetical 10 percent
adverse change in market rates or prices. Changes in excess of the amounts shown
in the sensitivity analyses could occur if market rates or prices exceed the 10
percent shift used for the analyses.
INTEREST RATE RISK SENSITIVITY ANALYSIS (assuming a 10 percent adverse change in
market interest rates):
In Millions
- ----------------------------------------------------------------------------------------------------
March 31, 2005 December 31, 2004
- ----------------------------------------------------------------------------------------------------
Variable-rate financing - before tax annual earnings exposure $ 1 $ 2
Fixed-rate financing - potential loss in fair value (a) 151 138
====================================================================================================
(a) Fair value exposure could only be realized if we repurchased all of our
fixed-rate financing.
COMMODITY PRICE RISK SENSITIVITY ANALYSIS (assuming a 10 percent adverse change
in market prices):
In Millions
- ----------------------------------------------------------------------------------------------------
March 31, 2005 December 31, 2004
- ----------------------------------------------------------------------------------------------------
Potential reduction in fair value:
Gas supply option contracts $ - $ 1
Derivative contracts associated with the MCV Partnership:
Gas fuel contracts (a) 42 17
Gas fuel futures and swaps 47 41
====================================================================================================
(a) The increased potential reduction in fair value for the MCV Partnership's
gas fuel contracts is due to an increased number of contracts accounted for as
derivatives. This is a result of the implementation of the RCP, at which time
the MCV Partnership determined that a significant portion of its gas fuel
contracts no longer qualify as normal purchases and must now be accounted for as
derivatives.
INVESTMENT SECURITIES PRICE RISK SENSITIVITY ANALYSIS
In Millions
- ----------------------------------------------------------------------------------------------------
March 31, 2005 December 31, 2004
- ----------------------------------------------------------------------------------------------------
Potential reduction in fair value of
available-for-sale equity securities (a)(b) $ 5 $ 5
====================================================================================================
(a) Primarily SERP Investments.
(b) Assumes a 10 percent adverse change in market prices.
We maintain trust funds, as required by the NRC, which may only be used to fund
certain costs of nuclear plant decommissioning. At March 31, 2005 and December
31, 2004, these funds were invested primarily in equity securities, fixed-rate,
fixed-income debt securities, and cash and cash equivalents, and are recorded at
fair value on our Consolidated Balance Sheets. Those investments are exposed to
price fluctuations in equity markets and changes in interest rates. Because the
accounting for nuclear plant decommissioning recognizes that costs are recovered
through our electric rates, fluctuations in equity prices or interest rates do
not affect consolidated earnings or cash flows.
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Consumers Energy Company
For additional details on market risk and derivative activities, see Note 4,
Financial and Derivative Instruments.
OTHER
Other accounting policies that are important to an understanding of our results
of operations and financial condition include:
- accounting for the effects of industry regulation,
- accounting for pension and OPEB,
- accounting for asset retirement obligations,
- accounting for nuclear decommissioning costs, and
- accounting for related party transactions.
There have been no material changes to these accounting policies since the year
ended December 31, 2004.
CAPITAL RESOURCES AND LIQUIDITY
Our liquidity and capital requirements are a function of our results of
operations, capital expenditures, contractual obligations, debt maturities,
working capital needs, and collateral requirements. During the summer months, we
purchase natural gas and store it for resale primarily during the winter heating
season. The market price for natural gas has increased. Although our natural gas
purchases are recoverable from our customers, the amount paid for natural gas
stored as inventory could require additional liquidity due to the timing of the
cost recoveries. In addition, a few of our commodity suppliers have requested
nonstandard payment terms or other forms of assurances, including margin calls,
in connection with maintenance of ongoing deliveries of gas and electricity.
Our current financial plan includes controlling our operating expenses and
capital expenditures and evaluating market conditions for financing
opportunities. We believe our current level of cash and access to borrowing
capacity in the capital markets, along with anticipated cash flows from
operating and investing activities, will be sufficient to meet our liquidity
needs through 2006.
CASH POSITION, INVESTING, AND FINANCING
Our operating, investing, and financing activities meet consolidated cash needs.
At March 31, 2005, $540 million consolidated cash was on hand, which includes
$22 million of restricted cash and $140 million from the entities consolidated
pursuant to FASB Interpretation No. 46. For additional details, see Note 8,
Consolidation of Variable Interest Entities.
SUMMARY OF CASH FLOWS:
In Millions
- --------------------------------------------------------------------------------
Three Months Ended March 31 2005 2004
- --------------------------------------------------------------------------------
Net cash provided by (used in):
Operating activities $ 321 $ 263
Investing activities (152) (112)
---------------------
Net cash provided by operating and investing activities 169 151
Financing activities 178 (88)
---------------------
Net Increase in Cash and Cash Equivalents $ 347 $ 63
================================================================================
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Consumers Energy Company
OPERATING ACTIVITIES: For the three months ended March 31, 2005, net cash
provided by operating activities increased $58 million versus the same period in
2004 due to decreases in inventory from gas sales at higher prices and other
timing differences.
INVESTING ACTIVITIES: For the three months ended March 31, 2005, net cash used
in investing activities increased $40 million versus the same period in 2004 due
to an increase in capital expenditures of $35 million.
FINANCING ACTIVITIES: For the three months ended March 31, 2005, net cash
provided by financing activities increased $266 million versus the same period
in 2004 primarily due to an increase in net proceeds from borrowings of $106
million and a $200 million stockholder's contribution from the parent.
For additional details on long-term debt activity, see Note 3, Financings and
Capitalization.
SUBSEQUENT FINANCING ACTIVITIES: In April 2005, we redeemed $297 million of our
6.25 percent senior notes with proceeds from our $300 million FMBs issued in
March 2005. Also in April 2005, we called the remaining $35 million 6.25 percent
senior notes. Later in April 2005, we issued $150 million of 5.65 percent
Insured Quarterly notes due 2035. We intend to use the net proceeds of $145
million to redeem our 6.50 percent Insured Quarterly notes due 2028. Finally, in
April 2005, through the Michigan Strategic Fund, we issued $35 million variable
rate limited obligation revenue bonds, due 2035. We will use the proceeds to
fund certain solid waste disposal expenditures.
In April 2005, we received a $350 million capital contribution from our parent
company.
OBLIGATIONS AND COMMITMENTS
REVOLVING CREDIT FACILITIES: For details on revolving credit facilities, see
Note 3, Financings and Capitalization.
OFF-BALANCE SHEET ARRANGEMENTS: There have been no material changes in
off-balance sheet arrangements since the year ended December 31, 2004. For
details on guarantee arrangements, see Note 3, Financings and Capitalization,
"FASB Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others."
DIVIDEND RESTRICTIONS: For details on dividend restrictions, see Note 3,
Financings and Capitalization.
OUTLOOK
ELECTRIC BUSINESS OUTLOOK
GROWTH: In 2005, we project electric deliveries to grow almost three percent.
This short-term outlook for 2005 assumes a stronger economy than in 2004 and
normal weather conditions throughout the year.
Over the next five years, we expect electric deliveries to grow at an average
rate of approximately two percent per year, based primarily on a steadily
growing customer base and economy. This growth rate includes both full-service
sales and delivery service to customers who choose to buy generation service
from an alternative electric supplier, but excludes transactions with other
wholesale market participants and other electric utilities. This growth rate
reflects a long-range expected trend of growth. Growth from year to year may
vary from this trend due to customer response to fluctuations in weather
conditions and changes in economic conditions, including utilization and
expansion of manufacturing facilities.
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Consumers Energy Company
POWER SUPPLY COSTS: To reduce the risk of high electric prices during peak
demand periods and to achieve our reserve margin target, we employ a strategy of
purchasing electric capacity and energy contracts for the physical delivery of
electricity primarily in the summer months and to a lesser degree in the winter
months. We are currently planning for a reserve margin of approximately 11
percent for summer 2005, or supply resources equal to 111 percent of projected
summer peak load. Of the 2005 supply resources target of 111 percent, we expect
to meet approximately 101 percent from our electric generating plants and
long-term power purchase contracts, and approximately 10 percent from short-term
contracts, options for physical deliveries, and other agreements. We have
purchased capacity and energy contracts partially covering the estimated reserve
margin requirements for 2005 through 2007. As a result, we have recognized an
asset of $11 million for unexpired capacity and energy contracts at March 31,
2005.
TRANSMISSION MARKET DEVELOPMENT: The MISO began operating the Midwest Energy
Market on April 1, 2005, which includes a day-ahead and real-time energy market
and centralized dispatch for market participants. We are a participant in this
energy market. These changes are anticipated to ensure that load requirements in
the region are met reliably and efficiently, to better manage congestion on the
grid, and to centralize dispatch of generation throughout the region. The MISO
is now responsible for the reliability and economic dispatch in the entire MISO
area, which includes 12 states and Manitoba, as well as our service territory.
We are presently evaluating what financial impact, if any, these changes are
having on our operations.
RENEWABLE RESOURCES PROGRAM: In January 2005, in collaboration with the MPSC, we
established a renewable resources program. Under the RRP, we will purchase
energy from approved renewable sources, which include solar, wind, geothermal,
biomass, and hydroelectric. Customers will be able to participate in the RRP in
accordance with tariffs approved by the MPSC. The MPSC has authorized recovery
of costs for the RRP by establishing a fund that consists of an annual
contribution from savings generated by the RCP, a surcharge imposed by the MPSC,
and contributions from customers. In February 2005, the Attorney General filed
appeals of the MPSC orders providing funding for the RRP in the Michigan Court
of Appeals.
ELECTRIC RATE CASE: In December 2004, we filed an application with the MPSC to
increase our retail electric base rates. The electric rate case filing requests
an annual increase in revenues of approximately $320 million. In April 2005, we
filed updated debt and equity information in the electric rate case. This will
likely reduce our rate request. The primary reasons for the request are
increased system maintenance and improvement costs, Clean Air Act-related
expenditures, and employee pension costs. We expect the MPSC staff to file its
position in the case in June 2005. We expect a final order from the MPSC in late
2005. If approved as requested, the rate increase would go into effect in
January 2006 and would apply to all retail electric customers. We cannot predict
the amount or timing of the rate increase, if any, which the MPSC will approve.
ELECTRIC BUSINESS UNCERTAINTIES
Several electric business trends or uncertainties may affect our financial
results and condition. These trends or uncertainties have, or we reasonably
expect could have, a material impact on revenues or income from continuing
electric operations.
ELECTRIC ENVIRONMENTAL ESTIMATES: Our operations are subject to environmental
laws and regulations. Costs to operate our facilities in compliance with these
laws and regulations generally have been recovered in customer rates.
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Consumers Energy Company
Clean Air: Compliance with the federal Clean Air Act and resulting regulations
has been, and will continue to be, a significant focus for us. The Nitrogen
Oxide State Implementation Plan Call Regulation requires significant reductions
in nitrogen oxide emissions. To comply with the regulations, we expect to incur
capital expenditures totaling $815 million. The key assumptions included in the
capital expenditure estimate include:
- construction commodity prices, especially construction material and
labor,
- project completion schedules,
- cost escalation factor used to estimate future years' costs, and
- allowance for funds used during construction (AFUDC) rate.
Our current capital cost estimates include an escalation rate of 2.6 percent and
an AFUDC capitalization rate of 8.3 percent. As of March 2005, we have incurred
$543 million in capital expenditures to comply with these regulations and
anticipate that the remaining $272 million of capital expenditures will be made
between 2005 and 2011. These expenditures include installing selective catalytic
reduction technology at four of our coal-fired electric plants. In addition to
modifying the coal-fired electric plants, we expect to utilize nitrogen oxide
emissions allowances for years 2005 through 2009, of which 90 percent has been
purchased. The cost of the allowances is estimated to average $8 million per
year for 2005-2006. The estimated costs are based on the average cost of the
purchased, allocated, or swapped allowances. The need for allowances will
decrease after year 2006 with the installation of selective catalytic control
technology. The cost of the allowances is accounted for as inventory. The
allowance inventory is expensed as the coal-fired electric generating units emit
nitrogen oxide.
The EPA recently adopted a Clean Air Interstate Rule that requires additional
coal-fired electric plant emission controls for nitrogen oxides and sulfur
dioxide. The rule involves a two-phase program to reduce emissions of sulfur
dioxide by 71 percent and nitrogen oxides by 63 percent by 2015. The final rule
advanced the proposed year for nitrogen oxide compliance requirement by one year
to 2009. This change will require that we run our Selective Catalytic Reduction
units year round beginning in 2009 and may require that we purchase additional
nitrogen oxide credits beginning in 2009. In addition to the selective catalytic
reduction control technology installed to meet the Nitrogen Oxide State
Implementation Plan Call Regulation, our current plan includes installation of
flue gas desulfurization scrubbers. The scrubbers are to be installed by 2014 at
a cost near that of the Selective Catalytic Reduction total cost in order to
meet Phase One emission reduction requirements.
In March 2005, the EPA issued the Clean Air Mercury Rule, which requires initial
reductions of mercury emissions from coal-fired electric power plants by 2010
and further reductions by 2018. While the industry has not reached a consensus
on the technical methods for curtailing mercury emissions, our capital and
operating costs for mercury emissions reductions could be significantly less
than is required for nitrogen oxide compliance.
Several legislative proposals have been introduced in the United States Congress
that would require reductions in emissions of greenhouse gases, however, none
have yet been enacted. We cannot predict whether any federal mandatory
greenhouse gas emission reduction rules ultimately will be enacted, or the
specific requirements of any such rules.
To the extent that greenhouse gas emission reduction rules come into effect,
such mandatory emissions reduction requirements could have far-reaching and
significant implications for the energy sectors. We cannot estimate the
potential effect of federal or state level greenhouse gas policy on our future
consolidated results of operations, cash flows, or financial position due to the
uncertain nature of the policies at this time. However, we stay abreast of and
engage in the greenhouse gas policy developments and will continue to assess and
respond to their potential implications on our business operations.
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Consumers Energy Company
Water: In March 2004, the EPA issued rules that govern generating plant cooling
water intake systems. The new rules require significant reduction in fish killed
by operating equipment. Some of our facilities will be required to comply with
the new rules by 2006. We are currently studying the rules to determine the most
cost-effective solutions for compliance.
For additional details on electric environmental matters, see Note 2,
Contingencies, "Electric Contingencies - Electric Environmental Matters."
COMPETITION AND REGULATORY RESTRUCTURING: The Customer Choice Act allows all of
our electric customers to buy electric generation service from us or from an
alternative electric supplier. As of April 2005, alternative electric suppliers
are providing 893 MW of generation supply to ROA customers. This amount
represents an increase of 9 percent compared to April 2004, and 12 percent of
our distribution load. Several customers have notified us of their intent to
return to our service after a notification period ending between June 2005 and
July 2005. We estimate that between 70 MW and 100 MW will return to our service.
Based on this and other current trends, we predict that total load loss by the
end of 2005 will be in the range of 925 MW to 1,000 MW. However, no assurance
can be made that the actual load loss will fall within that range.
Legislative Actions: In July 2004, several bills were introduced in the Michigan
Senate that could change Michigan's Customer Choice Act. This legislation was
not enacted before the end of the 2003-2004 legislative session. In March 2005,
one of the bills, proposing a service charge to fund the Low Income and Energy
Efficiency Fund, was reintroduced. We anticipate that legislation relating to
the Customer Choice Act and other energy issues may be introduced in the
2005-2006 legislative session. We cannot predict the content or outcome of any
such legislative actions.
Implementation Costs: Applications for recovery of $7 million of implementation
costs for 2002 and $1 million for 2003 are pending MPSC approval. In September
2004, the ALJ issued a Proposal for Decision recommending full recovery of these
costs. In parallel with these cost recovery efforts at the MPSC, we are also
pursuing an appeal of a FERC order denying recovery of costs incurred in the
development of the Alliance RTO. Although we believe these implementation costs
are fully recoverable in accordance with the Customer Choice Act, we cannot
predict the amount, if any, the MPSC or the FERC will approve as recoverable.
For additional details and material changes relating to the restructuring of the
electric utility industry and electric rate matters, see Note 2, Contingencies,
"Electric Restructuring Matters," and "Electric Rate Matters."
OTHER ELECTRIC BUSINESS UNCERTAINTIES
MCV UNDERRECOVERIES: The MCV Partnership, which leases and operates the MCV
Facility, contracted to sell electricity to Consumers for a 35-year period
beginning in 1990. We hold a 49 percent partnership interest in the MCV
Partnership, and a 35 percent lessor interest in the MCV Facility.
The cost that we incur under the MCV PPA exceeds the recovery amount allowed by
the MPSC. As a result, we estimate that cash underrecoveries of capacity and
fixed energy payments will aggregate $150 million from 2005 through 2007. After
September 15, 2007, we expect to claim relief under the regulatory out provision
in the MCV PPA, thereby limiting our capacity and fixed energy payments to the
MCV Partnership to the amounts that we collect from our customers. The effect of
any such action would be to:
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Consumers Energy Company
- reduce cash flow to the MCV Partnership, which could have an adverse
effect on our investment, and
- eliminate our underrecoveries of capacity and fixed energy payments.
The MCV Partnership has indicated that it may take issue with our exercise of
the regulatory out clause after September 15, 2007. We believe that the clause
is valid and fully effective, but cannot assure that it will prevail in the
event of a dispute. The MPSC's future actions on the capacity and fixed energy
payments recoverable from customers subsequent to September 15, 2007 may affect
negatively the earnings of the MCV Partnership and the value of our investment
in the MCV Partnership.
Further, under the MCV PPA, variable energy payments to the MCV Partnership are
based on the cost of coal burned at our coal plants and our operation and
maintenance expenses. However, the MCV Partnership's costs of producing
electricity are tied to the cost of natural gas. Because natural gas prices have
increased substantially in recent years and the price the MCV Partnership can
charge us for energy has not, the MCV Partnership's financial performance has
been impacted negatively. Even with the approved RCP, if gas prices do not
decline from present levels, the economics of operating the MCV Facility may be
adverse enough to require us to recognize an impairment. There are several
factors which could alter significantly our future impairment analyses
including, but not limited to, the forward price of natural gas, energy payments
to the MCV Partnership, which are based on the cost of coal burned at our coal
plants, and any reduction in payments to the MCV Partnership subsequent to
September 15, 2007 due to underrecovery of contract costs by Consumers from its
customers as a result of past or future actions by the MPSC.
For additional details on the MCV Partnership, see Note 2, Contingencies, "Other
Electric Contingencies - The Midland Cogeneration Venture."
NUCLEAR MATTERS: Big Rock: Dismantlement of plant systems is essentially
complete and demolition of the remaining plant structures has begun. The
restoration project is on schedule to return approximately 530 acres of the
site, including the area formerly occupied by the nuclear plant, to a natural
setting for unrestricted use in mid-2006. An additional 30 acres, the area where
seven transportable dry casks loaded with spent nuclear fuel and an eighth cask
loaded with high-level radioactive waste material are stored, we would expect to
be returned to a natural state within two years from the date the DOE begins
removing the spent nuclear fuel from Big Rock.
Palisades: In March 2005, the NRC completed its end-of-cycle plant performance
assessment of Palisades, which covered the calendar year 2004. The NRC
determined that Palisades was operated in a manner that preserved public health
and safety and met all of the NRC's specific "cornerstone objectives." As of
March 2005, all inspection findings were classified as having very low safety
significance and all performance indicators show performance at a level
requiring no additional oversight. Based on the plant's performance, only
regularly scheduled inspections are planned through September 2006.
The amount of spent nuclear fuel at Palisades exceeds the plant's temporary
onsite storage pool capacity. We are using dry casks for temporary onsite
storage. As of March 2005, we have loaded 22 dry casks with spent nuclear fuel.
For additional information on disposal of spent nuclear fuel, see Note 2,
Contingencies, "Other Electric Contingencies - Nuclear Matters."
Palisades' current license from the NRC expires in 2011. In March 2005, NMC,
which operates the Palisades plant, applied for a 20-year license renewal for
the plant on behalf of Consumers. The NRC typically takes 22-30 months to review
a license renewal application. Its decision is expected in 2007.
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Consumers Energy Company
Palisades, like many other nuclear plants, has experienced cracking in reactor
head nozzle penetrations. Repairs to two nozzles were made in 2004. We have
authorized the purchase of a replacement reactor vessel closure head. The
replacement head is being manufactured and is scheduled to be installed in 2007.
The replacement head nozzles will be manufactured from materials less
susceptible to cracking and should minimize inspection and repair costs after
replacement.
Spent nuclear fuel complaint: In March 2003, the Michigan Environmental Council,
the Public Interest Research Group in Michigan, and the Michigan Consumer
Federation filed a complaint with the MPSC, which was served on us by the MPSC
in April 2003. The complaint asks the MPSC to initiate a generic investigation
and contested case to review all facts and issues concerning costs associated
with spent nuclear fuel storage and disposal. The complaint seeks a variety of
relief with respect to Consumers, Detroit Edison, Indiana & Michigan Electric
Company, Wisconsin Electric Power Company, and Wisconsin Public Service
Corporation. The complaint states that amounts collected from customers for
spent nuclear fuel storage and disposal should be placed in an independent
trust. The complaint also asks the MPSC to take additional actions. In May 2003,
Consumers and other named utilities each filed motions to dismiss the complaint.
In February 2004, an MPSC ALJ recommended that the complaint be dismissed. We
are unable to predict the outcome of this matter.
GAS BUSINESS OUTLOOK
GROWTH: Over the next five years, we expect gas deliveries to grow at an average
rate of less than one percent per year. Actual gas deliveries in future periods
may be affected by:
- fluctuations in weather patterns,
- use by independent power producers,
- competition in sales and delivery,
- Michigan economic conditions,
- gas consumption per customer, and
- changes in gas commodity prices.
GAS BUSINESS UNCERTAINTIES
Several gas business trends or uncertainties may affect our financial results
and conditions. These trends or uncertainties could have a material impact on
revenues or income from gas operations.
GAS ENVIRONMENTAL ESTIMATES: We expect to incur investigation and remedial
action costs at a number of sites, including 23 former manufactured gas plant
sites. For additional details, see Note 2, Contingencies, "Gas Contingencies -
Gas Environmental Matters."
GAS TITLE TRACKING FEES AND SERVICES: There has been no material change in the
Gas Title Tracking Fees and Services matter since the year ended December 31,
2004.
GAS COST RECOVERY: The GCR process is designed to allow us to recover all of our
purchased natural gas costs if incurred under reasonable and prudent policies
and practices. The MPSC reviews these costs for prudency in an annual
reconciliation proceeding. For additional details on gas cost recovery, see Note
2, Contingencies, "Gas Rate Matters - Gas Cost Recovery."
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Consumers Energy Company
2001 GAS DEPRECIATION CASE: In December 2003, we filed an update to our gas
utility plant depreciation case originally filed in June 2001. On December 18,
2003, the MPSC ordered an annual $34 million reduction in our depreciation
expense and related taxes in an interim rate order issued in our 2003 gas rate
case.
In October and December 2004, the MPSC issued Opinions and Orders in our gas
depreciation case, which reaffirmed a previously ordered $34 million reduction
in our depreciation expense. The October 2004 order also required us to file an
application for new depreciation accrual rates for our natural gas utility plant
on, or no earlier than three months prior to, the date we file our next natural
gas general rate case. The MPSC also directed us to undertake a study to
determine why our removal costs are in excess of those of other regulated
Michigan natural gas utilities and file a report with the MPSC Staff on or
before December 31, 2005.
In February 2005, we requested a delay in the filing date for the next
depreciation case until 150 days after:
- the removal cost study is filed, and
- the MPSC issues an order in a pending case relating to ARO
accounting.
We proposed to incorporate the results of the gas depreciation case into gas
general rates using a surcharge mechanism if the depreciation case order was not
issued concurrently with a gas general rate case order.
In March 2005, the MPSC granted our waiver request and accepted our surcharge
proposal, but reduced the lead time allowed to prepare and file the depreciation
case to 90 days.
OTHER OUTLOOK
COLLECTIVE BARGAINING AGREEMENTS: Approximately 46 percent of our employees are
represented by the Utility Workers Union of America. The Union represents
Consumers' operating, maintenance, and construction employees and our call
center employees. The collective bargaining agreement with the Union for our
operating, maintenance, and construction employees will expire on June 1, 2005.
In April 2005, a new tentative Operating, Maintenance, and Construction
Agreement was reached between the Utility Workers Union of America and
Consumers. The Union membership has voted to ratify this agreement. The
collective bargaining agreement with the Union for our call center employees
will expire on August l, 2005.
LITIGATION AND REGULATORY INVESTIGATION: CMS Energy is the subject of various
investigations as a result of round-trip trading transactions by CMS MST,
including an investigation by the DOJ. Additionally, CMS Energy and Consumers
are named as parties in various litigation matters including a shareholder
derivative lawsuit, a securities class action lawsuit, and a class action
lawsuit alleging ERISA violations. For additional details regarding these
investigations and litigation, see Note 2, Contingencies.
NEW ACCOUNTING STANDARDS NOT YET EFFECTIVE
SFAS NO. 123R, SHARE-BASED PAYMENT: This Statement requires companies to use the
fair value of employee stock options and similar awards at the grant date to
value the awards. Companies must expense this amount over the vesting period of
the awards. This Statement also clarifies and expands SFAS No. 123's guidance in
several areas, including measuring fair value, classifying an award as equity or
as a liability, and attributing compensation cost to reporting periods.
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Consumers Energy Company
This Statement amends SFAS No. 95, Statement of Cash Flows, to require that
excess tax benefits related to the excess of the tax deductible amount over the
compensation cost recognized be classified as cash inflows from financing
activities rather than as a reduction of taxes paid in operating activities.
Excess tax benefits are recorded as adjustments to additional paid-in capital.
This Statement is effective for us as of the beginning of 2006. We adopted the
fair value method of accounting for share-based awards effective December 2002.
Therefore, we do not expect this statement to have a significant impact on our
results of operations when it becomes effective.
FASB INTERPRETATION NO. 47, ACCOUNTING FOR CONDITIONAL ASSET RETIREMENT
OBLIGATIONS: This Interpretation clarifies the term "conditional asset
retirement obligation" as used in SFAS No. 143. The term refers to a legal
obligation to perform an asset retirement activity in which the timing and (or)
method of settlement are conditional on a future event that may or may not be
within the control of the entity. The obligation to perform the asset retirement
activity is unconditional even though uncertainty exists about the timing and
(or) method of settlement. Accordingly, an entity is required to recognize a
liability for the fair value of a conditional asset retirement obligation if the
fair value of the liability can be reasonably estimated. The fair value of a
liability for the conditional asset retirement obligation should be recognized
when incurred. This Interpretation also clarifies when an entity would have
sufficient information to estimate reasonably the fair value of an asset
retirement obligation. For us, this Interpretation is effective no later than
December 31, 2005. We are in the process of determining the impact this
Interpretation will have on our financial statements upon adoption.
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CONSUMERS ENERGY COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31 2005 2004
- --------------------------------------------------------------------------------------------------
In Millions
OPERATING REVENUE $ 1,632 $ 1,547
OPERATING EXPENSES
Fuel for electric generation 154 160
Fuel costs mark-to-market at MCV (209) (6)
Purchased and interchange power 64 50
Purchased power - related parties 17 16
Cost of gas sold 740 661
Cost of gas sold - related parties - 3
Other operating expenses 188 171
Maintenance 52 50
Depreciation, depletion and amortization 145 133
General taxes 65 62
----------------------
1,216 1,300
- --------------------------------------------------------------------------------------------------
OPERATING INCOME 416 247
OTHER INCOME (DEDUCTIONS)
Accretion expense - (1)
Interest and dividends 5 3
Regulatory return on capital expenditures 16 9
Other income 4 2
Other expense (6) (1)
----------------------
19 12
- --------------------------------------------------------------------------------------------------
INTEREST CHARGES
Interest on long-term debt 72 73
Interest on long-term debt - related parties 7 11
Other interest 2 3
Capitalized interest (1) (2)
----------------------
80 85
- --------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND MINORITY INTERESTS 355 174
MINORITY INTERESTS 111 10
----------------------
INCOME BEFORE INCOME TAXES 244 164
INCOME TAX EXPENSE 87 59
----------------------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 157 105
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR RETIREMENT BENEFITS,
NET OF $- TAX BENEFIT IN 2004 - (1)
----------------------
NET INCOME AVAILABLE TO COMMON STOCKHOLDER $ 157 $ 104
==================================================================================================
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
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CONSUMERS ENERGY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31 2005 2004
- --------------------------------------------------------------------------------------------------------
In Millions
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 157 $ 104
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization (includes nuclear
decommissioning of $1 per period) 145 133
Regulatory return on capital expenditures (16) (9)
Minority interest 111 10
Fuel costs mark-to-market at MCV (209) (6)
Capital lease and other amortization 8 7
Cumulative effect of change in accounting - 1
Changes in assets and liabilities:
Increase in accounts receivable and accrued revenue (325) (337)
Decrease in inventories 401 337
Decrease in accounts payable (8) (39)
Increase in accrued expenses (46) (37)
Deferred income taxes and investment tax credit 63 52
Decrease in other current and non-current assets 74 42
Increase (decrease) in other current and non-current liabilities (34) 5
------------------------
Net cash provided by operating activities $ 321 $ 263
- --------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under capital lease) $ (145) $ (110)
Cost to retire property (27) (18)
Restricted cash on hand (1) (1)
Investments in Electric Restructuring Implementation Plan (1) (2)
Investments in nuclear decommissioning trust funds (1) (1)
Proceeds from nuclear decommissioning trust funds 7 20
Proceeds from short-term investments 145 -
Purchase of short-term investments (141) -
Maturity of MCV restricted investment securities held-to-maturity 126 115
Purchase of MCV restricted investment securities held-to-maturity (126) (115)
Other investing 12 -
------------------------
Net cash used in investing activities $ (152) $ (112)
- --------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt $ 550 $ -
Retirement of long-term debt (444) (7)
Payment of common stock dividends (118) (78)
Payment of capital and finance lease obligations (3) (3)
Stockholder's contribution 200 -
Other financing (7) -
------------------------
Net cash provided by (used in) financing activities $ 178 $ (88)
- --------------------------------------------------------------------------------------------------------
Net Increase in Cash and Cash Equivalents $ 347 $ 63
Cash and Cash Equivalents from Effect of Revised FASB
Interpretation No. 46 Consolidation - 174
Cash and Cash Equivalents, Beginning of Period 171 46
------------------------
Cash and Cash Equivalents, End of Period $ 518 $ 283
========================================================================================================
CE-21
CONSUMERS ENERGY COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS MARCH 31
2005 DECEMBER 31
(UNAUDITED) 2004
- -----------------------------------------------------------------------------------------------------------
In Millions
PLANT AND PROPERTY (AT COST)
Electric $ 8,007 $ 7,967
Gas 3,010 2,995
Other 2,522 2,523
-------------------------
13,539 13,485
Less accumulated depreciation, depletion and amortization 5,733 5,665
-------------------------
7,806 7,820
Construction work-in-progress 426 353
-------------------------
8,232 8,173
- -----------------------------------------------------------------------------------------------------------
INVESTMENTS
Stock of affiliates 30 25
Other 7 19
-------------------------
37 44
- -----------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents at cost, which approximates market 518 171
Short-term investments at cost, which approximates market - 4
Restricted cash 22 21
Accounts receivable, notes receivable and accrued revenue, less allowances
of $10 and $10, respectively 702 374
Accounts receivable - related parties 12 18
Inventories at average cost
Gas in underground storage 463 855
Materials and supplies 68 67
Generating plant fuel stock 56 66
Deferred property taxes 161 165
Regulatory assets - postretirement benefits 19 19
Derivative instruments 253 96
Other 48 95
-------------------------
2,322 1,951
- -----------------------------------------------------------------------------------------------------------
NON-CURRENT ASSETS
Regulatory Assets
Securitized costs 593 604
Additional minimum pension 371 372
Postretirement benefits 133 139
Abandoned Midland Project 10 10
Other 586 552
Nuclear decommissioning trust funds 561 575
Other 435 391
-------------------------
2,689 2,643
-------------------------
TOTAL ASSETS $ 13,280 $ 12,811
===========================================================================================================
CE-22
STOCKHOLDER'S EQUITY AND LIABILITIES
MARCH 31
2005 DECEMBER 31
(UNAUDITED) 2004
- ----------------------------------------------------------------------------------------
In Millions
CAPITALIZATION
Common stockholder's equity
Common stock, authorized 125.0 shares; outstanding
84.1 shares for all periods $ 841 $ 841
Paid-in capital 1,132 932
Accumulated other comprehensive income 40 31
Retained earnings since December 31, 1992 647 608
------------------------
2,660 2,412
Preferred stock 44 44
Long-term debt 4,185 4,000
Long-term debt - related parties 129 326
Non-current portion of capital leases and finance lease
obligations 315 315
------------------------
7,333 7,097
- ----------------------------------------------------------------------------------------
MINORITY INTERESTS 777 657
- ----------------------------------------------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt, capital leases and
finance leases 444 147
Current portion of long-term debt - related parties - 180
Accounts payable 261 267
Accounts payable - related parties 12 14
Accrued interest 64 83
Accrued taxes 234 254
Deferred income taxes 32 20
Other 188 238
------------------------
1,235 1,203
- ----------------------------------------------------------------------------------------
NON-CURRENT LIABILITIES
Deferred income taxes 1,404 1,350
Regulatory Liabilities
Regulatory liabilities for cost of removal 1,070 1,044
Income taxes, net 360 357
Other 169 173
Postretirement benefits 213 207
Asset retirement obligations 438 436
Deferred investment tax credit 78 79
Other 203 208
------------------------
3,935 3,854
- ----------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 2, 3, and 4)
TOTAL STOCKHOLDER'S EQUITY AND LIABILITIES $ 13,280 $ 12,811
========================================================================================
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
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CONSUMERS ENERGY COMPANY
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31 2005 2004
- ---------------------------------------------------------------------------------------------------
In Millions
COMMON STOCK
At beginning and end of period (a) $ 841 $ 841
- ---------------------------------------------------------------------------------------------------
OTHER PAID-IN CAPITAL
At beginning of period 932 682
Stockholder's contribution 200 -
--------------------------
At end of period 1,132 682
--------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Minimum Pension Liability
At beginning and end of period (1) -
--------------------------
Investments
At beginning of period 12 9
Unrealized gain on investments (b) 3 1
--------------------------
At end of period 15 10
--------------------------
Derivative Instruments
At beginning of period 20 8
Unrealized gain on derivative instruments (b) 16 9
Realized gain on derivative instruments (b) (10) (2)
--------------------------
At end of period 26 15
- ---------------------------------------------------------------------------------------------------
Total Accumulated Other Comprehensive Income 40 25
- ---------------------------------------------------------------------------------------------------
RETAINED EARNINGS
At beginning of period 608 521
Net income 157 104
Cash dividends declared - Common Stock (118) (78)
--------------------------
At end of period 647 547
- ---------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKHOLDER'S EQUITY $ 2,660 $ 2,095
===================================================================================================
(a) Number of shares of common stock outstanding was 84,108,789 for all periods presented.
(b) Disclosure of Other Comprehensive Income:
Investments
Unrealized gain on investments, net of tax of
$2, and $-, respectively $ 3 $ 1
Derivative Instruments
Unrealized gain on derivative instruments, net of tax
of $9, and $4, respectively 16 9
Realized gain on derivative instruments, net of tax
of $(6), and $(1), respectively (10) (2)
Net income 157 104
--------------------------
Total Other Comprehensive Income $ 166 $ 112
==========================
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
CE-24
Consumers Energy Company
CONSUMERS ENERGY COMPANY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
These interim Consolidated Financial Statements have been prepared by Consumers
in accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. As such, certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States have been
condensed or omitted. Certain prior year amounts have been reclassified to
conform to the presentation in the current year. In management's opinion, the
unaudited information contained in this report reflects all adjustments of a
normal recurring nature necessary to assure the fair presentation of financial
position, results of operations and cash flows for the periods presented. The
Condensed Notes to Consolidated Financial Statements and the related
Consolidated Financial Statements should be read in conjunction with the
Consolidated Financial Statements and Notes to Consolidated Financial Statements
contained in the Consumers' Form 10-K for the year ended December 31, 2004. Due
to the seasonal nature of Consumers' operations, the results as presented for
this interim period are not necessarily indicative of results to be achieved for
the fiscal year.
1: CORPORATE STRUCTURE AND ACCOUNTING POLICIES
CORPORATE STRUCTURE: Consumers, a subsidiary of CMS Energy, a holding company,
is a combination electric and gas utility company that provides service to
customers in Michigan's Lower Peninsula. Our customer base includes a mix of
residential, commercial, and diversified industrial customers, the largest
segment of which is the automotive industry.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
Consumers, and all other entities in which we have a controlling financial
interest or are the primary beneficiary, in accordance with Revised FASB
Interpretation No. 46. We use the equity method of accounting for investments in
companies and partnerships that are not consolidated, where we have significant
influence over operations and financial policies, but are not the primary
beneficiary. Intercompany transactions and balances have been eliminated.
USE OF ESTIMATES: We prepare our consolidated financial statements in conformity
with U.S. generally accepted accounting principles. We are required to make
estimates using assumptions that may affect the reported amounts and
disclosures. Actual results could differ from those estimates.
We are required to record estimated liabilities in the consolidated financial
statements when it is probable that a loss will be incurred in the future as a
result of a current event, and when the amount can be reasonably estimated. We
have used this accounting principle to record estimated liabilities as discussed
in Note 2, Contingencies.
CE-25
Consumers Energy Company
OTHER INCOME AND OTHER EXPENSE: The following tables show the components of
Other income and Other expense:
In Millions
- --------------------------------------------------------------------------------
Three Months Ended March 31 2005 2004
- --------------------------------------------------------------------------------
Other income
Electric restructuring return $ 1 $ 2
Return on stranded costs 1 -
Gain on stock 1 -
All other 1 -
- --------------------------------------------------------------------------------
Total other income $ 4 $ 2
================================================================================
In Millions
- --------------------------------------------------------------------------------
Three Months Ended March 31 2005 2004
- --------------------------------------------------------------------------------
Other expense
Loss on reacquired debt $ (5) $ -
Civic and political expenditures (1) (1)
- --------------------------------------------------------------------------------
Total other expense $ (6) $ (1)
================================================================================
RECLASSIFICATIONS: Certain prior year amounts have been reclassified for
comparative purposes. These reclassifications did not affect consolidated net
income for the years presented.
2: CONTINGENCIES
SEC AND OTHER INVESTIGATIONS: As a result of round-trip trading transactions by
CMS MST, CMS Energy's Board of Directors established a Special Committee to
investigate matters surrounding the transactions and retained outside counsel to
assist in the investigation. The Special Committee completed its investigation
and reported its findings to the Board of Directors in October 2002. The Special
Committee concluded, based on an extensive investigation, that the round-trip
trades were undertaken to raise CMS MST's profile as an energy marketer with the
goal of enhancing its ability to promote its services to new customers. The
Special Committee found no effort to manipulate the price of CMS Energy Common
Stock or affect energy prices. The Special Committee also made recommendations
designed to prevent any recurrence of this practice. Previously, CMS Energy
terminated its speculative trading business and revised its risk management
policy. The Board of Directors adopted, and CMS Energy implemented the
recommendations of the Special Committee.
CMS Energy is cooperating with an investigation by the DOJ concerning round-trip
trading. CMS Energy is unable to predict the outcome of this matter and what
effect, if any, this investigation will have on its business. In March 2004, the
SEC approved a cease-and-desist order settling an administrative action against
CMS Energy related to round-trip trading. The order did not assess a fine and
CMS Energy neither admitted nor denied the order's findings. The settlement
resolved the SEC investigation involving CMS Energy and CMS MST. Also in March
2004, the SEC filed an action against three former employees related to
round-trip trading by CMS MST. One of the individuals has settled with the SEC.
CMS Energy is currently advancing legal defense costs for the remaining two
individuals, in accordance with existing indemnification policies.
CE-26
Consumers Energy Company
SECURITIES CLASS ACTION LAWSUITS: Beginning on May 17, 2002, a number of
complaints were filed against CMS Energy, Consumers, and certain officers and
directors of CMS Energy and its affiliates, including but not limited to
Consumers which, while established, operated and regulated as a separate legal
entity and publicly traded company, shares a parallel Board of Directors with
CMS Energy. The complaints were filed as purported class actions in the United
States District Court for the Eastern District of Michigan, by shareholders who
allege that they purchased CMS Energy's securities during a purported class
period running from May 2000 through March 2003. The cases were consolidated
into a single lawsuit. The consolidated lawsuit generally seeks unspecified
damages based on allegations that the defendants violated United States
securities laws and regulations by making allegedly false and misleading
statements about CMS Energy's business and financial condition, particularly
with respect to revenues and expenses recorded in connection with round-trip
trading by CMS MST. In January 2005, a motion was granted, dismissing Consumers
and three of the individual defendants, but the court denied the motions to
dismiss for CMS Energy and the 13 remaining individual defendants. Plaintiffs
filed a motion for class certification on April 15, 2005. CMS Energy and the
individual defendants will defend themselves vigorously in this litigation but
cannot predict its outcome.
ERISA LAWSUITS: CMS Energy is a named defendant, along with Consumers, CMS MST,
and certain named and unnamed officers and directors, in two lawsuits brought as
purported class actions on behalf of participants and beneficiaries of the CMS
Employees' Savings and Incentive Plan (the Plan). The two cases were filed in
July 2002 in United States District Court for the Eastern District of Michigan
and were later consolidated by the court. Plaintiffs allege breaches of
fiduciary duties under ERISA and seek restitution on behalf of the Plan with
respect to a decline in value of the shares of CMS Energy Common Stock held in
the Plan. Plaintiffs also seek other equitable relief and legal fees. In March
2004, the judge granted in part, but denied in part, CMS Energy's motion to
dismiss the complaint. CMS Energy, Consumers and a number of individual
defendants remain parties. The judge has conditionally granted plaintiffs'
motion for class certification. A trial date has not been set, but is expected
to be no earlier than mid 2006. CMS Energy and Consumers will defend themselves
vigorously in this litigation but cannot predict its outcome.
ELECTRIC CONTINGENCIES
ELECTRIC ENVIRONMENTAL MATTERS: Our operations are subject to environmental laws
and regulations. Costs to operate our facilities in compliance with these laws
and regulations generally have been recovered in customer rates.
Clean Air: Compliance with the federal Clean Air Act and resulting regulations
has been, and will continue to be, a significant focus for us. The Nitrogen
Oxide State Implementation Plan Call Regulation requires significant reductions
in nitrogen oxide emissions. To comply with the regulations, we expect to incur
capital expenditures totaling $815 million. The key assumptions included in the
capital expenditure estimate include:
- construction commodity prices, especially construction material and
labor,
- project completion schedules,
- cost escalation factor used to estimate future years' costs, and
- allowance for funds used during construction (AFUDC) rate.
Our current capital cost estimates include an escalation rate of 2.6 percent and
an AFUDC capitalization rate of 8.3 percent. As of March 2005, we have incurred
$543 million in capital expenditures to comply with these regulations and
anticipate that the remaining $272 million of capital expenditures will be made
between 2005 and 2011. These expenditures include installing selective catalytic
reduction
CE-27
Consumers Energy Company
technology at four of our coal-fired electric plants. In addition to modifying
the coal-fired electric plants, we expect to utilize nitrogen oxide emissions
allowances for years 2005 through 2009, of which 90 percent has been purchased.
The cost of the allowances is estimated to average $8 million per year for
2005-2006. The estimated costs are based on the average cost of the purchased,
allocated, or swapped allowances. The need for allowances will decrease after
year 2006 with the installation of selective catalytic control technology. The
cost of the allowances is accounted for as inventory. The allowance inventory is
expensed as the coal-fired electric generating units emit nitrogen oxide.
The EPA recently adopted a Clean Air Interstate Rule that requires additional
coal-fired electric plant emission controls for nitrogen oxides and sulfur
dioxide. The rule involves a two-phase program to reduce emissions of sulfur
dioxide by 71 percent and nitrogen oxides by 63 percent by 2015. The final rule
advanced the proposed year for nitrogen oxide compliance requirement by one year
to 2009. This change will require that we run our Selective Catalytic Reduction
units year round beginning in 2009 and may require that we purchase additional
nitrogen oxide credits beginning in 2009. In addition to the selective catalytic
reduction control technology installed to meet the Nitrogen Oxide State
Implementation Plan Call Regulation, our current plan includes installation of
flue gas desulfurization scrubbers. The scrubbers are to be installed by 2014 at
a cost near that of the Selective Catalytic Reduction total cost in order to
meet Phase One emission reduction requirements.
In March 2005, the EPA issued the Clean Air Mercury Rule, which requires initial
reductions of mercury emissions from coal-fired electric power plants by 2010
and further reductions by 2018. While the industry has not reached a consensus
on the technical methods for curtailing mercury emissions, our capital and
operating costs for mercury emissions reductions could be significantly less
than is required for nitrogen oxide compliance.
The EPA has alleged that some utilities have incorrectly classified plant
modifications as "routine maintenance" rather than seeking modification permits
from the EPA. We have received and responded to information requests from the
EPA on this subject. We believe that we have properly interpreted the
requirements of "routine maintenance." If our interpretation is found to be
incorrect, we may be required to install additional pollution controls at some
or all of our coal-fired electric plants and potentially pay fines.
Additionally, the viability of certain plants remaining in operation could be
called into question.
Cleanup and Solid Waste: Under the Michigan Natural Resources and Environmental
Protection Act, we expect that we will ultimately incur investigation and
remedial action costs at a number of sites. We believe that these costs will be
recoverable in rates under current ratemaking policies.
We are a potentially responsible party at several contaminated sites
administered under Superfund. Superfund liability is joint and several, meaning
that many other creditworthy parties with substantial assets are potentially
responsible with respect to the individual sites. Based on past experience, we
estimate that our share of the total liability for the known Superfund sites
will be between $1 million and $9 million. At March 31, 2005, we have recorded a
liability for the minimum amount of our estimated Superfund liability.
In October 1998, during routine maintenance activities, we identified PCB as a
component in certain paint, grout, and sealant materials at the Ludington Pumped
Storage facility. We removed and replaced part of the PCB material. We have
proposed a plan to deal with the remaining materials and are awaiting a response
from the EPA.
MCV Environmental Issue: On July 12, 2004 the MDEQ, Air Control Division, issued
the MCV Partnership a Letter of Violation asserting that the MCV Facility
violated its Air Use Permit to Install (PTI) by exceeding the carbon monoxide
emission limit on the Unit 14 GTG duct burner and failing to maintain certain
records in the required format. On July 13, 2004, the MDEQ, Water Division,
issued the MCV Facility a Notice Letter asserting the MCV Facility violated its
National Pollutant Discharge
CE-28
Consumers Energy Company
Elimination System (NPDES) Permit by discharging heated process waste water into
the storm water system, failure to document inspections, and other minor
infractions (alleged NPDES violations).
The MCV Partnership has declared five of the six duct burners in the MCV
Facility as unavailable for operational use (which reduces the generation
capability of the MCV Facility by approximately 100 MW), is assessing the duct
burner issue and has begun other corrective action to address the MDEQ's
assertions. The one available duct burner was tested in April 2005 and its
emissions met permitted levels due to the unique configuration of that
particular unit. The MCV Partnership disagrees with certain of the MDEQ's
assertions. The MCV Partnership filed responses to these MDEQ letters in July
and August 2004. On December 13, 2004, the MDEQ informed the MCV Partnership
that it was pursuing an escalated enforcement action against the MCV Partnership
regarding the alleged violations of the MCV Facility's PTI. The MDEQ also stated
that the alleged violations are deemed federally significant and, as such,
placed the MCV Partnership on the EPA's High Priority Violators List (HPVL). The
MDEQ and the MCV Partnership are pursuing voluntary settlement of this matter,
which will satisfy state and federal requirements and remove the MCV Partnership
from the HPVL. Any such settlement is likely to involve a fine, but the MDEQ has
not, at this time, stated what, if any, fine they will seek to impose. At this
time, the MCV Partnership management cannot predict the financial impact or
outcome of these issues, however, the MCV Partnership believes it has resolved
all issues associated with the alleged NPDES violations and does not expect any
further MDEQ actions on this NPDES matter.
LITIGATION: In October 2003, a group of eight PURPA qualifying facilities
selling power to us filed a lawsuit in Ingham County Circuit Court. The lawsuit
alleges that we incorrectly calculated the energy charge payments made pursuant
to power purchase agreements with qualifying facilities. In February 2004, the
Ingham County Circuit Court judge deferred to the primary jurisdiction of the
MPSC, dismissing the circuit court case without prejudice. In February 2005, the
MPSC issued an order in the 2004 PSCR plan case concluding that we have been
correctly administering the energy charge calculation methodology.
The eight plaintiff qualifying facilities have appealed the dismissal of the
circuit court case to the Michigan Court of Appeals. The qualifying facilities
have also appealed the February 2005 MPSC order in the 2004 PSCR plan case to
the Michigan Court of Appeals, and have initiated separate legal actions in
federal district court and at the FERC concerning the energy charge calculation
issue. We cannot predict the outcome of these appeals and legal actions.
ELECTRIC RESTRUCTURING MATTERS
ELECTRIC ROA: The revised tariffs approved by the MPSC allow ROA customers, upon
as little as 60 days notice to us, to return to our generation service at
current tariff rates. However, we may not have capacity available to serve these
customers that is sufficient or reasonably priced. As a result, we may be forced
to purchase electricity on the spot market at higher prices than we can recover
from our customers during the rate cap periods. We cannot predict the total
amount of electric supply load that may be lost to alternative electric
suppliers. As of April 2005, alternative electric suppliers are providing 893 MW
of generation supply to ROA customers. This amount represents an increase of 9
percent compared to April 2004, and 12 percent of our distribution load.
CE-29
Consumers Energy Company
ELECTRIC RESTRUCTURING PROCEEDINGS: Below is a discussion of our electric
restructuring proceedings.
The following chart summarizes our electric restructuring filings with the MPSC:
- ----------------------------------------------------------------------------------------------
Year(s) Years Requested
Proceeding Filed Covered Amount Status
- ----------------------------------------------------------------------------------------------
Stranded Costs 2002-2004 2000-2003 $137 million (a) The MPSC ruled that we
experienced zero Stranded
Costs for 2000 through 2001.
The MPSC approved recovery of
$63 million in Stranded Costs
for 2002 through 2003.
Implementation 1999-2004 1997-2003 $91 million (b) The MPSC allowed $68 million
Costs for the years 1997-2001, plus
$20 million for the cost of
money through 2003.
Implementation cost filings
for 2002 and 2003 for $8
million, which includes the
cost of money through 2003,
are pending MPSC approval.
Section 10d(4) 2004 2000-2005 $628 million Filed with the MPSC in October
Regulatory Assets 2004.
==============================================================================================
(a) Amount includes the cost of money through the year in which we expected to
receive recovery from the MPSC and assumes recovery of Clean Air Act costs
through the Section 10d(4) Regulatory Asset case.
(b) Amount includes the cost of money through the year prior to the year filed.
Section 10d(4) Regulatory Assets: Section 10d(4) of the Customer Choice Act
allows us to recover certain regulatory assets through deferred recovery of
annual capital expenditures in excess of depreciation levels and certain other
expenses incurred prior to and throughout the rate freeze and rate cap periods,
including the cost of money. The section also allows deferred recovery of
expenses incurred during the rate freeze and rate cap periods that result from
changes in taxes, laws, or other state or federal governmental actions. In
October 2004, we filed an application with the MPSC seeking recovery of $628
million of Section 10d(4) Regulatory Assets for the period June 2000 through
December 2005 consisting of:
- capital expenditures in excess of depreciation,
- Clean Air Act costs,
- other expenses related to changes in law or governmental action
incurred during the rate freeze and rate cap periods, and
- the associated cost of money through the period of collection.
Of the $628 million, $152 million relates to the cost of money.
CE-30
Consumers Energy Company
As allowed by the Customer Choice Act, we accrue and defer for recovery a
portion of our Section 10d(4) Regulatory Assets. In March 2005, the MPSC Staff
filed testimony recommending the MPSC approve recovery of approximately $323
million in Section 10d(4) costs. However, we may have the opportunity to recover
certain costs included in our application alternatively in other cases pending
before the MPSC. We cannot predict the amount, if any, the MPSC will approve as
recoverable. At March 31, 2005, total recorded Section 10d(4) Regulatory Assets
were $160 million.
TRANSMISSION SALE: In May 2002, we sold our electric transmission system to MTH,
a non-affiliated limited partnership whose general partner is a subsidiary of
Trans-Elect, Inc. We are in arbitration with MTH regarding property tax items
used in establishing the selling price of our electric transmission system. An
unfavorable outcome could result in a reduction of sale proceeds previously
recognized of approximately $2 million to $3 million.
ELECTRIC RATE MATTERS
ELECTRIC RATE CASE: In December 2004, we filed an application with the MPSC to
increase our retail electric base rates. The electric rate case filing requests
an annual increase in revenues of approximately $320 million. In April 2005, we
filed updated debt and equity information in the electric rate case. This will
likely reduce our rate request. The primary reasons for the request are
increased system maintenance and improvement costs, Clean Air Act-related
expenditures, and employee pension costs. We expect the MPSC staff to file its
position in the case in June 2005. We expect a final order from the MPSC in late
2005. If approved as requested, the rate increase would go into effect in
January 2006 and would apply to all retail electric customers. We cannot predict
the amount or timing of the rate increase, if any, which the MPSC will approve.
POWER SUPPLY COSTS: To reduce the risk of high electric prices during peak
demand periods and to achieve our reserve margin target, we employ a strategy of
purchasing electric capacity and energy contracts for the physical delivery of
electricity primarily in the summer months and to a lesser degree in the winter
months. We have purchased capacity and energy contracts partially covering the
estimated reserve margin requirements for 2005 through 2007. As a result, we
have recognized an asset of $11 million for unexpired capacity and energy
contracts at March 31, 2005. At April 2005, we expect the total premium cost of
electric capacity and energy contracts for 2005 to be approximately $6 million.
PSCR: The PSCR process assures recovery of all reasonable and prudent power
supply costs that we actually incur. In September 2004, we submitted our 2005
PSCR filing to the MPSC. The proposed PSCR charge would allow us to recover a
portion of our power supply costs from commercial and industrial customers and,
subject to the overall rate caps, from other customers. In January 2005, we
self-implemented the proposed 2005 PSCR charge. The revenues from the PSCR
charges are subject to reconciliation after review of actual costs for
reasonableness and prudence. In March 2005, we submitted our 2004 PSCR
reconciliation filing to the MPSC. We cannot predict the outcome of these PSCR
proceedings.
OTHER ELECTRIC CONTINGENCIES
THE MIDLAND COGENERATION VENTURE: The MCV Partnership, which leases and operates
the MCV Facility, contracted to sell electricity to Consumers for a 35-year
period beginning in 1990. We hold a 49 percent partnership interest in the MCV
Partnership, and a 35 percent lessor interest in the MCV Facility.
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Consumers Energy Company
In 2004, we consolidated the MCV Partnership and the FMLP into our consolidated
financial statements in accordance with Revised FASB Interpretation No. 46. For
additional details, see Note 8, Consolidation of Variable Interest Entities. Our
consolidated retained earnings include undistributed earnings from the MCV
Partnership of $303 million at March 31, 2005 and $248 million at March 31,
2004.
The cost that we incur under the MCV PPA exceeds the recovery amount allowed by
the MPSC. We expense all cash underrecoveries directly to income. We estimate
cash underrecoveries of capacity and fixed energy payments as follows:
- --------------------------------------------------------------------------------
2005 2006 2007
- --------------------------------------------------------------------------------
Estimated cash underrecoveries $56 $55 $39
================================================================================
Of the 2005 estimate, we expensed $13 million for the three months ended March
31, 2005.
After September 15, 2007, we expect to claim relief under the regulatory out
provision in the MCV PPA, thereby limiting our capacity and fixed energy
payments to the MCV Partnership to the amount that we collect from our
customers. The MCV Partnership has indicated that it may take issue with our
exercise of the regulatory out clause after September 15, 2007. We believe that
the clause is valid and fully effective, but cannot assure that it will prevail
in the event of a dispute. The MPSC's future actions on the capacity and fixed
energy payments recoverable from customers subsequent to September 15, 2007 may
affect negatively the earnings of the MCV Partnership and the value of our
investment in the MCV Partnership.
Further, under the MCV PPA, variable energy payments to the MCV Partnership are
based on the cost of coal burned at our coal plants and our operation and
maintenance expenses. However, the MCV Partnership's costs of producing
electricity are tied to the cost of natural gas. Because natural gas prices have
increased substantially in recent years and the price the MCV Partnership can
charge us for energy has not, the MCV Partnership's financial performance has
been impacted negatively. Even with the approved RCP, if gas prices do not
decline from present levels, the economics of operating the MCV Facility may be
adverse enough to require us to recognize an impairment. There are several
factors which could alter significantly our future impairment analyses
including, but not limited to, the forward price of natural gas, energy payments
to the MCV Partnership, which are based on the cost of coal burned at our coal
plants, and any reduction in payments to the MCV Partnership subsequent to
September 15, 2007 due to underrecovery of contract costs by Consumers from its
customers as a result of past or future actions by the MPSC.
In January 2005, the MPSC issued an order approving the RCP, with modifications.
The RCP allows us to recover the same amount of capacity and fixed energy
charges from customers as approved in prior MPSC orders. However, we are able to
dispatch the MCV Facility on the basis of natural gas market prices, which
reduces the MCV Facility's annual production of electricity and, as a result,
reduces the MCV Facility's consumption of natural gas by an estimated 30 to 40
bcf annually. This decrease in the quantity of high-priced natural gas consumed
by the MCV Facility will benefit our ownership interest in the MCV Partnership.
The substantial MCV Facility fuel cost savings are first used to offset fully
the cost of replacement power. Second, $5 million annually, funded jointly by
Consumers and the MCV Partnership, are contributed to our RRP. Remaining savings
are split between the MCV Partnership and Consumers. Consumers' direct savings
are shared 50 percent with its customers in 2005 and 70 percent in 2006 and
beyond. Consumers' direct savings from the RCP, after allocating a portion to
customers, are used to
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offset our capacity and fixed energy underrecoveries expense. Since the MPSC has
excluded these underrecoveries from the rate making process, we anticipate that
our savings from the RCP will not affect our return on equity used in our base
rate filings.
In January 2005, Consumers and the MCV Partnership's general partners accepted
the terms of the order and implemented the RCP. The underlying agreement for the
RCP between Consumers and the MCV Partnership extends through the term of the
MCV PPA. However, either party may terminate that agreement under certain
conditions. In February 2005, a group of intervenors in the RCP case filed for
rehearing of the MPSC order. The Attorney General also filed an appeal with the
Michigan Court of Appeals. We cannot predict the outcome of these matters.
MCV PARTNERSHIP PROPERTY TAXES: In January 2004, the Michigan Tax Tribunal
issued its decision in the MCV Partnership's tax appeal against the City of
Midland for tax years 1997 through 2000. The decision was appealed to the
Michigan Court of Appeals by the City of Midland, and the MCV Partnership has
filed a cross-appeal at the Michigan Court of Appeals. The MCV Partnership also
has a pending case with the Michigan Tax Tribunal for tax years 2001 through
2004. The MCV Partnership estimates that the 1997 through 2004 tax year cases
will result in a refund to the MCV Partnership of approximately $77 million
inclusive of interest. The MCV Partnership cannot predict the outcome of these
proceedings; therefore, this refund has not been recognized in earnings.
NUCLEAR PLANT DECOMMISSIONING: Decommissioning funding practices approved by the
MPSC require us to file a report on the adequacy of funds for decommissioning at
three-year intervals. We prepared and filed updated cost estimates for Big Rock
and Palisades on March 31, 2004. Excluding additional costs for spent nuclear
fuel storage, due to the DOE's failure to accept this spent nuclear fuel on
schedule, these reports show a decommissioning cost of $361 million for Big Rock
and $868 million for Palisades. Since Big Rock is currently in the process of
decommissioning, the estimated cost includes historical expenditures in nominal
dollars and future costs in 2003 dollars, with all Palisades costs given in 2003
dollars.
In 1999, the MPSC orders for Big Rock and Palisades provided for fully funding
the decommissioning trust funds for both sites. In December 2000, funding of the
Big Rock trust fund stopped because the MPSC-authorized decommissioning
surcharge collection period expired. The MPSC order set the annual
decommissioning surcharge for Palisades at $6 million through 2007. Amounts
collected from electric retail customers and deposited in trusts, including
trust earnings, are credited to a regulatory liability and asset retirement
obligation.
BIG ROCK: Excluding the additional nuclear fuel storage costs due to the DOE's
failure to accept spent fuel on schedule, we are currently projecting that the
level of funds provided by the trust for Big Rock will fall short of the amount
needed to complete the decommissioning by $26 million. At this time, we plan to
provide the additional amounts needed from our corporate funds and, subsequent
to the completion of radiological decommissioning work, seek recovery of such
expenditures at the MPSC. We cannot predict how the MPSC will rule on our
request.
Palisades: Excluding additional nuclear fuel storage costs due to the DOE's
failure to accept spent fuel on schedule, we concluded, based on the costs
estimates filed in March 2004, that the existing surcharge for Palisades needed
to be increased to $25 million annually, beginning January 1, 2006, and
continuing through 2011, our current license expiration date. In June 2004, we
filed an application with the MPSC seeking approval to increase the surcharge
for recovery of decommissioning costs related to Palisades beginning in 2006. In
September 2004, we announced that we would seek a 20-year license renewal for
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Consumers Energy Company
Palisades. In January 2005, we filed a settlement agreement with the MPSC that
was agreed to by four of the six parties involved in the proceeding. The
settlement agreement provides for the continuation of the existing $6 million
annual decommissioning surcharge through 2011 and for the next periodic review
to be filed in March 2007. We are seeking MPSC approval of the contested
settlement, but cannot predict the outcome.
In March 2005, NMC, which operates the Palisades plant, applied for a 20-year
license renewal for the plant on behalf of Consumers. The NRC typically takes
22-30 months to review a license renewal application. Its decision is expected
in 2007. At this time, we cannot determine what impact this will have on
decommissioning costs or the adequacy of funding.
NUCLEAR MATTERS: Nuclear Fuel Cost: We amortize nuclear fuel cost to fuel
expense based on the quantity of heat produced for electric generation. For
nuclear fuel used after April 6, 1983, we charge certain disposal costs to
nuclear fuel expense, recover these costs through electric rates, and remit them
to the DOE quarterly. We elected to defer payment for disposal of spent nuclear
fuel burned before April 7, 1983. At March 31, 2005, we have recorded a
liability to the DOE of $142 million, including interest, which is payable upon
the first delivery of spent nuclear fuel to the DOE. The amount of this
liability, excluding a portion of interest, was recovered through electric
rates.
DOE Litigation: In 1997, a U.S. Court of Appeals decision confirmed that the DOE
was to begin accepting deliveries of spent nuclear fuel for disposal by January
1998. Subsequent U.S. Court of Appeals litigation, in which we and other
utilities participated, has not been successful in producing more specific
relief for the DOE's failure to accept the spent nuclear fuel.
There are two court decisions that support the right of utilities to pursue
damage claims in the United States Court of Claims against the DOE for failure
to take delivery of spent nuclear fuel. Over 60 utilities have initiated
litigation in the United States Court of Claims. We filed our complaint in
December 2002. On April 29, 2005, the court ruled on various cross-motions for
summary judgment previously filed by the DOE and us. The court denied the DOE's
motions to dismiss Counts I and II of the complaint and the motion to recover
the one-time fee, which is due to be paid by us prior to delivery of the spent
nuclear fuel. The court, however, granted the DOE's motion to recoup the
one-time fee against any award of damages to us. The court granted our motion
for summary judgment on liability and our motion to dismiss the DOE's
affirmative defense alleging our failure to satisfy a condition precedent, but
the court denied our motion to dismiss the DOE's counterclaim for recoupment. In
a related case, a judge in one of many spent nuclear fuel cases now pending in
the United States Court of Claims, issued a decision and order suggesting that
the Standard Contract between the utilities and the DOE should be held void
because of mutual mistake and impossibility of performance and that restitution
of all waste fees paid by utilities should be made from the Nuclear Waste Fund.
The judge ordered the utility in that case and the DOE to file briefs addressing
the court's views and invited any interested party to file an amicus brief. We
are currently evaluating our options on the motion rulings in our case as well
as the advisability of filing an amicus brief in the related case. If our
litigation against the DOE is successful, we plan to use any recoveries to pay
the cost of spent nuclear fuel storage until the DOE takes possession as
required by law. We can make no assurance that the litigation against the DOE
will be successful.
In July 2002, Congress approved and the President signed a bill designating the
site at Yucca Mountain, Nevada, for the development of a repository for the
disposal of high-level radioactive waste and spent nuclear fuel. We expect that
the DOE will submit an application to the NRC sometime in 2005 for a license to
begin construction of the repository. The application and review process is
estimated to take several years.
Insurance: We maintain nuclear insurance coverage on our nuclear plants. At
Palisades, we maintain nuclear property insurance from NEIL totaling $2.750
billion and insurance that would partially cover the cost of replacement power
during certain prolonged accidental outages. Because NEIL is a mutual insurance
company, we could be subject to assessments of up to $27 million in any policy
year if insured losses in excess of NEIL's maximum policyholders surplus occur
at our, or any other member's, nuclear facility. NEIL's policies include
coverage for acts of terrorism.
At Palisades, we maintain nuclear liability insurance for third-party bodily
injury and off-site property damage resulting from a nuclear hazard for up to
approximately $10.761 billion, the maximum insurance liability limits
established by the Price-Anderson Act. The United States Congress enacted the
Price-
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Consumers Energy Company
Anderson Act to provide financial liability protection for those parties who may
be liable for a nuclear accident or incident. Part of the Price-Anderson Act's
financial protection is a mandatory industry-wide program under which owners of
nuclear generating facilities could be assessed if a nuclear incident occurs at
any nuclear generating facility. The maximum assessment against us could be $101
million per occurrence, limited to maximum annual installment payments of $10
million.
We also maintain insurance under a program that covers tort claims for bodily
injury to nuclear workers caused by nuclear hazards. The policy contains a $300
million nuclear industry aggregate limit. Under a previous insurance program
providing coverage for claims brought by nuclear workers, we remain responsible
for a maximum assessment of up to $6 million.
Big Rock remains insured for nuclear liability by a combination of insurance and
a NRC indemnity totaling $544 million, and a nuclear property insurance policy
from NEIL.
Insurance policy terms, limits, and conditions are subject to change during the
year as we renew our policies.
GAS CONTINGENCIES
GAS ENVIRONMENTAL MATTERS: We expect to incur investigation and remediation
costs at a number of sites under the Michigan Natural Resources and
Environmental Protection Act, a Michigan statute that covers environmental
activities including remediation. These sites include 23 former manufactured gas
plant facilities. We operated the facilities on these sites for some part of
their operating lives. For some of these sites, we have no current ownership or
may own only a portion of the original site. We expect our remaining costs to be
between $37 million and $90 million, based on 2003 discounted costs, using a
discount rate of three percent. The discount rate represents a 10-year average
of U.S. Treasury bond rates reduced for increases in the consumer price index.
We expect to fund most of these costs through insurance proceeds and
MPSC-approved rates. At March 31, 2005, we have recorded a liability of $37
million, net of $45 million of expenditures incurred to date, and a regulatory
asset of $64 million. Any significant change in assumptions, such as an increase
in the number of sites, different remediation techniques, nature and extent of
contamination, and legal and regulatory requirements, could affect our estimate
of remedial action costs.
GAS RATE MATTERS
GAS COST RECOVERY: The GCR process is designed to allow us to recover all of our
purchased natural gas costs if incurred under reasonable and prudent policies
and practices. The MPSC reviews these costs for prudency in an annual
reconciliation proceeding.
The following table summarizes our GCR reconciliation filing with the MPSC.
Additional details related to the proceeding follow the table.
Gas Cost Recovery Reconciliation
- -------------------------------------------------------------------------------------
Net Over
GCR Year Date Filed Order Date Recovery Status
- -------------------------------------------------------------------------------------
2003-2004 June 2004 February 2005 $31 million The net overrecovery includes
$1 million and $5 million GCR
net overrecoveries from prior
GCR years and interest accrued
through March 2004
=====================================================================================
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Consumers Energy Company
Net overrecoveries included in the table above include refunds that we received
from our suppliers, which are required to be refunded to our customers.
GCR year 2003-2004: In February 2005, the MPSC approved a settlement agreement
that resulted in a credit to our GCR customers for a $28 million overrecovery,
plus $3 million interest, using a roll-in refund methodology. The roll-in
methodology incorporates a GCR over/underrecovery in the next GCR plan year.
GCR year 2004-2005: In December 2003, we filed an application with the MPSC
seeking approval of a GCR plan for the 12-month period of April 2004 through
March 2005. In June 2004, the MPSC issued a final Order in our GCR plan
approving a settlement. The settlement included a quarterly mechanism for
setting a GCR ceiling price. Actual gas costs and revenues will be subject to an
annual reconciliation proceeding which will be filed in June 2005.
GCR plan for year 2005-2006: In December 2004, we filed an application with the
MPSC seeking approval of a GCR plan for the 12-month period of April 2005
through March 2006. Our request proposes using a GCR factor consisting of:
- a base GCR factor of $6.98 per mcf, plus
- a quarterly GCR ceiling price adjustment contingent upon future
events.
The GCR factor can be adjusted monthly, provided it remains at or below the
current ceiling price. The quarterly adjustment mechanism allows an increase in
the GCR ceiling price to reflect a portion of cost increases if the average
NYMEX price for a specified period is greater than that used in calculating the
base GCR factor. The current ceiling price for 2005 is $7.40 per mcf. Actual gas
costs and revenues will be subject to an annual reconciliation proceeding. The
Attorney General filed a motion with the MPSC asking the MPSC to establish a
temporary factor of $6.98 per mcf and preclude use of a contingent mechanism
prior to a final MPSC order. The MPSC denied that request.
2001 GAS DEPRECIATION CASE: In December 2003, we filed an update to our gas
utility plant depreciation case originally filed in June 2001. On December 18,
2003, the MPSC ordered an annual $34 million reduction in our depreciation
expense and related taxes in an interim rate order issued in our 2003 gas rate
case.
In October and December 2004, the MPSC issued Opinions and Orders in our gas
depreciation case, which reaffirmed a previously ordered $34 million reduction
in our depreciation expense. The October 2004 order also required us to file an
application for new depreciation accrual rates for our natural gas utility plant
on, or no earlier than three months prior to, the date we file our next natural
gas general rate case. The MPSC also directed us to undertake a study to
determine why our removal costs are in excess of those of other regulated
Michigan natural gas utilities and file a report with the MPSC Staff on or
before December 31, 2005.
In February 2005, we requested a delay in the filing date for the next
depreciation case until 150 days after:
- the removal cost study is filed, and
- the MPSC issues an order in a pending case relating to ARO
accounting.
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Consumers Energy Company
We proposed to incorporate the results of the gas depreciation case into gas
general rates using a surcharge mechanism if the depreciation case order was not
issued concurrently with a gas general rate case order.
In March 2005, the MPSC granted our waiver request and accepted our surcharge
proposal, but reduced the lead time allowed to prepare and file the depreciation
case to 90 days.
OTHER CONTINGENCIES
In addition to the matters disclosed within this Note, we are party to certain
lawsuits and administrative proceedings before various courts and governmental
agencies arising from the ordinary course of business. These lawsuits and
proceedings may involve personal injury, property damage, contractual matters,
environmental issues, federal and state taxes, rates, licensing, and other
matters.
We have accrued estimated losses for certain contingencies discussed within this
Note. Resolution of these contingencies is not expected to have a material
adverse impact on our financial position, liquidity, or results of operations.
3: FINANCINGS AND CAPITALIZATION
Long-term debt is summarized as follows:
In Millions
- -----------------------------------------------------------------------------------------------------------------------------------
March 31, 2005 December 31, 2004
- -----------------------------------------------------------------------------------------------------------------------------------
First mortgage bonds $ 2,850 $ 2,300
Senior notes, bank debt and other 1,376 1,436
Securitization bonds 391 398
-------------- -----------------
Principal amounts outstanding 4,617 4,134
Current amounts (414) (118)
Net unamortized discount (18) (16)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Long-term debt $ 4,185 $ 4,000
===================================================================================================================================
FINANCINGS: The following is a summary of significant long-term debt issuances
and retirements during the three months ended March 31, 2005:
- -----------------------------------------------------------------------------------------------------------------------------------
Principal Interest Rate Issue/Retirement
(In millions) (%) Date Maturity Date
- -----------------------------------------------------------------------------------------------------------------------------------
DEBT ISSUANCES
FMB $ 250 5.15 January 2005 February 2017
FMB 300 5.65 March 2005 April 2020
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 550
===================================================================================================================================
DEBT RETIREMENTS
Long-term bank debt $ 60 Variable January 2005 November 2006
Long-term debt - related parties 180 9.25 January 2005 December 2029
Long-term debt - related parties 73 8.36 February 2005 December 2015
Long-term debt - related parties 124 8.20 February 2005 September 2027
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 437
===================================================================================================================================
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Consumers Energy Company
SUBSEQUENT FINANCING ACTIVITIES: In April 2005, we redeemed $297 million of our
6.25 percent senior notes with proceeds from our $300 million FMBs issued in
March 2005. Also in April 2005, we called the remaining $35 million 6.25 percent
senior notes. Later in April 2005, we issued $150 million of 5.65 percent
Insured Quarterly notes due 2035. We intend to use the net proceeds of $145
million to redeem our 6.50 percent Insured Quarterly notes due 2028. Finally, in
April 2005, through the Michigan Strategic Fund, we issued $35 million variable
rate limited obligation revenue bonds, due 2035. We will use the proceeds to
fund certain solid waste disposal expenditures.
In April 2005, we received a $350 million capital contribution from our parent
company.
REGULATORY AUTHORIZATION FOR FINANCINGS: On April 26, 2005, the FERC issued an
authorization to permit us to issue up to an additional $1.0 billion ($2.0
billion in total) of long-term securities for refinancing or refunding purposes,
and up to an additional $1.0 billion ($2.5 billion in total) of long-term
securities for general corporate purposes during the period ending June 30,
2006.
Combined with remaining availability from previously issued FERC authorizations,
we can now issue up to $1.001 billion of long-term securities for refinancing or
refunding purposes, $1.709 billion of long-term securities for general corporate
purposes, and $2.435 billion of long-term FMBs to be issued solely as collateral
for other long-term securities during the period ending June 30, 2006.
REVOLVING CREDIT FACILITIES: The following secured revolving credit facilities
with banks are available at March 31, 2005:
In Millions
- ---------------------------------------------------------------------------------------
Outstanding
Amount of Amount Letters-of- Amount
Company Expiration Date Facility Borrowed Credit Available
- ---------------------------------------------------------------------------------------
Consumers (a) $ 500 $ - $ 16 $ 484
MCV Partnership August 27, 2005 50 - 2 48
=======================================================================================
(a) This facility expires in August 2005 and may be extended annually at
Consumers' option to July 31, 2007.
CAPITAL AND FINANCE LEASE OBLIGATIONS: Our capital leases are comprised mainly
of leased service vehicles and office furniture. At March 31, 2005, capital
lease obligations totaled $56 million. In order to obtain permanent financing
for the MCV Facility, the MCV Partnership entered into a sale and lease back
agreement with a lessor group, which includes the FMLP, for substantially all of
the MCV Partnership's fixed assets. In accordance with SFAS No. 98, the MCV
Partnership accounted for the transaction as a financing arrangement. At March
31, 2005, finance lease obligations totaled $288 million, which represents the
third-party portion of the MCV Partnership's finance lease obligation.
SALE OF ACCOUNTS RECEIVABLE: Under a revolving accounts receivable sales
program, we currently sell certain accounts receivable to a wholly owned,
consolidated, bankruptcy remote special purpose entity. In turn, the special
purpose entity may sell an undivided interest in up to $325 million of the
receivables. We sold no receivables as of March 31, 2005 and $304 million as of
December 31, 2004. We continue to service the receivables sold to the special
purpose entity. The purchaser of the receivables has no recourse against our
other assets for failure of a debtor to pay when due and no right to any
receivables not sold. We have not recorded a gain or loss on the receivables
sold or retained interest in the receivables sold.
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Consumers Energy Company
Certain cash flows under our accounts receivable sales program are shown in the
following table:
In Millions
- ----------------------------------------------------------------------------------------------------------------------------------
Three months ended March 31 2005 2004
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash flow as a result of accounts receivable financing $ (304) $ (297)
Collections from customers $ 1,605 $ 1,549
==================================================================================================================================
DIVIDEND RESTRICTIONS: Under the provisions of our articles of incorporation, at
March 31, 2005, we had $496 million of unrestricted retained earnings available
to pay common stock dividends. However, covenants in our debt facilities cap
common stock dividend payments at $300 million in a calendar year. For the three
months ended March 31, 2005, we paid $118 million in common stock dividends to
CMS Energy.
FASB INTERPRETATION NO. 45, GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS
FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS: The
Interpretation requires the guarantor, upon issuance of a guarantee, to
recognize a liability for the fair value of the obligation it undertakes in
issuing the guarantee. The initial recognition and measurement provision of this
Interpretation does not apply to some guarantee contracts, such as warranties,
derivatives, or guarantees between corporations under common control, although
disclosure of these guarantees is required. The disclosure requirements in this
Interpretation are effective for interim and annual financial statements issued
after December 15, 2002.
The following table describes our guarantees at March 31, 2005:
In Millions
- -----------------------------------------------------------------------------------------------------------------------------------
Issue Expiration Maximum Carrying Recourse
Guarantee Description Date Date Obligation Amount Provision (a)
- -----------------------------------------------------------------------------------------------------------------------------------
Standby letters of credit Various Various $16 $ - $ -
Surety bonds Various Various 6 - -
Nuclear insurance retrospective premiums Various Various 134 - -
===================================================================================================================================
(a) Recourse provision indicates the approximate recovery from third parties
including assets held as collateral.
The following table provides additional information regarding our guarantees:
- ---------------------------------------------------------------------------------------------------------------
Events That Would Require
Guarantee Description How Guarantee Arose Performance
- ---------------------------------------------------------------------------------------------------------------
Standby letters of credit Normal operations of coal power plants Noncompliance with environmental
regulations and inadequate response
to demands for corrective action
Natural gas transportation Nonperformance
Self-insurance requirement Nonperformance
Nuclear plant closure Nonperformance
Surety bonds Normal operating activity, permits and Nonperformance
license
Nuclear insurance retrospective Normal operations of nuclear plants Call by NEIL and Price-Anderson Act
premiums for nuclear incident
===============================================================================================================
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Consumers Energy Company
4: FINANCIAL AND DERIVATIVE INSTRUMENTS
FINANCIAL INSTRUMENTS: The carrying amounts of cash, short-term investments, and
current liabilities approximate their fair values because of their short-term
nature. We estimate the fair values of long-term financial instruments based on
quoted market prices or, in the absence of specific market prices, on quoted
market prices of similar instruments or other valuation techniques.
The cost and fair value of our long-term financial instruments are as follows:
In Millions
- -------------------------------------------------------------------------------------------------------------------
March 31, 2005 December 31, 2004
- -------------------------------------------------------------------------------------------------------------------
Fair Unrealized Fair Unrealized
Cost Value Gain (Loss) Cost Value Gain (Loss)
- -------------------------------------------------------------------------------------------------------------------
Long-term debt,
including current amounts $4,599 $4,664 $ (65) $4,118 $4,232 $ (114)
Long-term debt - related parties 129 135 (6) 506 518 (12)
Available-for-sale securities:
Common stock of CMS Energy 10 30 20 10 25 15
SERP:
Equity securities 15 21 6 15 21 6
Debt securities 9 9 - 9 9 -
Nuclear decommissioning investments:
Equity securities 134 252 118 136 262 126
Debt securities 289 295 6 291 302 11
===================================================================================================================
DERIVATIVE INSTRUMENTS: We are exposed to market risks including, but not
limited to, changes in interest rates, commodity prices, and equity security
prices. We manage these risks using established policies and procedures, under
the direction of both an executive oversight committee consisting of senior
management representatives and a risk committee consisting of business-unit
managers. We may use various contracts to manage these risks including swaps,
options, futures, and forward contracts.
We intend that any gains or losses on these contracts will be offset by an
opposite movement in the value of the item at risk. We enter into all risk
management contracts for purposes other than trading. These contracts contain
credit risk if the counterparties, including financial institutions and energy
marketers, fail to perform under the agreements. We minimize such risk through
established credit policies that include performing financial credit reviews of
our counterparties. Determination of our counterparties' credit quality is based
upon a number of factors, including credit ratings, disclosed financial
condition, and collateral requirements. Where contractual terms permit, we
employ standard agreements that allow for netting of positive and negative
exposures associated with a single counterparty. Based on these policies and our
current exposures, we do not anticipate a material adverse effect on our
financial position or earnings as a result of counterparty nonperformance.
Contracts used to manage market risks may be considered derivative instruments
that are subject to derivative and hedge accounting pursuant to SFAS No. 133. If
a contract is accounted for as a derivative instrument, it is recorded in the
financial statements as an asset or a liability, at the fair value of the
contract. The recorded fair value is then adjusted quarterly to reflect any
change in the market value of the contract, a practice known as marking the
contract to market. Changes in fair value (that is, gains or
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Consumers Energy Company
losses) are reported in Accumulated other comprehensive income if the derivative
qualifies for cash flow hedge accounting treatment and in earnings if the
derivative does not qualify for such treatment.
For derivative instruments to qualify for hedge accounting, the hedging
relationship must be formally documented at inception and be highly effective in
achieving offsetting cash flows or offsetting changes in fair value attributable
to the risk being hedged. If hedging a forecasted transaction, the forecasted
transaction must be probable. If a derivative instrument, used as a cash flow
hedge, is terminated early because it is probable that a forecasted transaction
will not occur, any gain or loss as of such date is recognized immediately in
earnings. If a derivative instrument, used as a cash flow hedge, is terminated
early for other economic reasons, any gain or loss as of the termination date is
deferred and recorded when the forecasted transaction affects earnings. The
ineffective portion, if any, of all hedges is recognized in earnings.
We use a combination of quoted market prices, prices obtained from external
sources, such as brokers, and mathematical valuation models to determine the
fair value of those contracts requiring derivative accounting. In certain
contracts, long-term commitments may extend beyond the period in which market
quotations for such contracts are available. Mathematical models are developed
to determine various inputs into the fair value calculation including price and
other variables that may be required to calculate fair value. Realized cash
returns on these commitments may vary, either positively or negatively, from the
results estimated through application of the mathematical model. In connection
with the market valuation of our derivative contracts, we maintain reserves, if
necessary, for credit risks based on the financial condition of counterparties.
The majority of our contracts are not subject to derivative accounting under
SFAS No. 133 because they qualify for the normal purchases and sales exception,
or because there is not an active market for the commodity. Our electric
capacity and energy contracts are not accounted for as derivatives due to the
lack of an active energy market in Michigan and the significant transportation
costs that would be incurred to deliver the power under the contracts to the
closest active energy market at the Cinergy hub in Ohio. Similarly, our coal
purchase contracts are not accounted for as derivatives due to the lack of an
active market for the coal that we purchase. If active markets for these
commodities develop in the future, we may be required to account for these
contracts as derivatives, and the resulting mark-to-market impact on earnings
could be material to our financial statements.
The MISO began operating the Midwest Energy Market on April 1, 2005, which
provides day-ahead and real-time energy market information and centralized
dispatch for market participants. At this time, we believe that the commencement
of this market does not constitute the development of an active energy market in
Michigan. However, after having adequate experience with the Midwest Energy
Market, we will reevaluate whether or not the activity level within this market
leads to the conclusion that an active energy market exists.
Also as part of the Midwest Energy Market, FTRs were established. FTRs are
financial instruments established to manage price risk relating to electricity
transmission congestion. An FTR entitles the holder to receive compensation (or
remit payment) for certain congestion-related transmission charges that arise
when the transmission grid is congested. We presently hold FTRs for certain
areas on the transmission grid within MISO's market area. We are presently
evaluating whether FTRs qualify as derivative instruments. If they are
determined to be derivative instruments, FTRs would be required to be recognized
on our Consolidated Balance Sheets as assets or liabilities at their fair value,
with any subsequent changes in fair value recognized in earnings. However, we
believe we may be able to offset the earnings impact with a regulatory asset or
liability. The Midwest Energy Market was not effective until April 1, 2005.
Therefore, FTRs had no value at March 31, 2005.
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Consumers Energy Company
Derivative accounting is required for certain contracts used to limit our
exposure to commodity price risk. The following table reflects the fair value of
all contracts requiring derivative accounting:
In Millions
- ---------------------------------------------------------------------------------------------------------------------
March 31, 2005 December 31, 2004
- ---------------------------------------------------------------------------------------------------------------------
Fair Unrealized Fair Unrealized
Derivative Instruments Cost Value Gain Cost Value Gain (Loss)
- ---------------------------------------------------------------------------------------------------------------------
GAS CONTRACTS $- $- $- $2 $- $ (2)
Derivative contracts associated with the MCV
Partnership:
Gas fuel contracts - 201 201 - 56 56
Gas fuel futures and swaps - 146 146 - 64 64
=====================================================================================================================
The fair value of our derivative contracts is included in Derivative
instruments, Other assets, or Other liabilities on our Consolidated Balance
Sheets.
GAS CONTRACTS: Our gas utility business uses fixed-priced weather-based gas
supply call options and fixed-priced gas supply call and put options to meet our
regulatory obligation to provide gas to our customers at a reasonable and
prudent cost. Unrealized gains and losses associated with these options are
reported directly in earnings as part of Other income, and then directly offset
in earnings and recorded on the balance sheet as a regulatory asset or liability
as part of the GCR process. At March 31, 2005, we held no fixed-priced
weather-based gas supply call options and had not sold any fixed-priced gas
supply put options.
DERIVATIVE CONTRACTS ASSOCIATED WITH THE MCV PARTNERSHIP: Gas Fuel Contracts:
The MCV Partnership uses natural gas fuel contracts to buy gas as fuel for
generation, and to manage gas fuel costs. The MCV Partnership believes that
certain of its long-term gas contracts qualify as normal purchases under SFAS
No. 133, and therefore, these contracts were not recognized at fair value on our
Consolidated Balance Sheets at March 31, 2005.
The MCV Partnership also held certain long-term gas contracts that did not
qualify as normal purchases at March 31, 2005, because these contracts contained
volume optionality. In addition, due to the implementation of the RCP in January
2005, the MCV Partnership determined that a significant portion of its gas fuel
contracts no longer qualify as normal purchases because the contracted gas will
not be consumed for electric production. Accordingly, all of these contracts are
accounted for as derivatives, with changes in fair value recorded in earnings
each quarter. Additionally, the financial hedges associated with these contracts
no longer qualify as cash flow hedges. Thus, any changes in the fair value of
these financial hedges will no longer be recognized in Other Comprehensive
Income, but will be recorded in earnings each quarter. The MCV Partnership
expects future earnings volatility on both the gas fuel derivative contracts and
the related financial hedges, since gains and losses will be recorded each
quarter. For the three months ended March 31, 2005, we recorded a $209 million
gain associated with the increase in fair value of these instruments in Fuel
costs mark-to-market at MCV on our Consolidated Statements of Income. The
majority of this gain is expected to reverse through earnings during 2005 and
2006 as the gas is purchased and the financial hedges settle, with the remainder
reversing between 2007 and 2011. For further details on the RCP, see Note 2,
Contingencies, "Other Electric Contingencies - The Midland Cogeneration
Venture."
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Consumers Energy Company
Gas Fuel Futures and Swaps: The MCV Partnership enters into natural gas futures
contracts, option contracts, and over-the-counter swap transactions in order to
hedge against unfavorable changes in the market price of natural gas in future
months when gas is expected to be needed. These financial instruments are used
principally to secure anticipated natural gas requirements necessary for
projected electric and steam sales, and to lock in sales prices of natural gas
previously obtained in order to optimize the MCV Partnership's existing gas
supply, storage, and transportation arrangements. At March 31, 2005, the MCV
Partnership held gas fuel futures and swaps.
The contracts that are used to secure anticipated natural gas requirements
necessary for projected electric and steam sales qualify as cash flow hedges
under SFAS No. 133. The MCV Partnership also engages in cost mitigation
activities to offset the fixed charges the MCV Partnership incurs in operating
the MCV Facility. These cost mitigation activities include the use of futures
and options contracts to purchase and/or sell natural gas to maximize the use of
the transportation and storage contracts when it is determined that they will
not be needed for the MCV Facility operation. Although these cost mitigation
activities do serve to offset the fixed monthly charges, these cost mitigation
activities are not considered a normal course of business for the MCV
Partnership and do not qualify as hedges. Therefore, the mark-to-market gains
and losses from these cost mitigation activities are recorded in earnings each
quarter.
There was no ineffectiveness associated with any of the gas contracts that
qualified for hedge accounting treatment. At March 31, 2005, we have recorded a
cumulative net gain of $27 million, net of tax, in Accumulated other
comprehensive income relating to our proportionate share of the contracts held
by the MCV Partnership that qualify as cash flow hedges. This balance represents
natural gas futures, options, and swaps with maturities ranging from April 2005
to December 2009, of which $6 million of this gain is expected to be
reclassified as an increase to earnings during the next 12 months as the
contracts settle, offsetting the costs of gas purchases. In addition, for the
three months ended March 31, 2005, we recorded a net gain of $11 million in
earnings from hedging activities related to natural gas requirements for the MCV
Facility operations.
5: RETIREMENT BENEFITS
We provide retirement benefits to our employees under a number of different
plans, including:
- non-contributory, defined benefit Pension Plan,
- a cash balance pension plan for certain employees hired after June
30, 2003,
- benefits to certain management employees under SERP,
- a defined contribution 401(k) plan,
- benefits to a select group of management under EISP, and
- health care and life insurance benefits under OPEB.
Pension Plan: The Pension Plan includes funds for our employees, our non-utility
affiliates, and Panhandle, a former affiliate. The Pension Plan's assets are not
distinguishable by company.
OPEB: We adopted SFAS No. 106, effective as of the beginning of 1992. We
recorded a liability of $466 million for the accumulated transition obligation
and a corresponding regulatory asset for anticipated recovery in utility rates.
The MPSC authorized recovery of the electric utility portion of these costs in
1994 over 18 years and the gas utility portion in 1996 over 16 years.
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Consumers Energy Company
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 was
signed into law in December 2003. The Act establishes a prescription drug
benefit under Medicare (Medicare Part D), and a federal subsidy, which is
tax-exempt, to sponsors of retiree health care benefit plans that provide a
benefit that is actuarially equivalent to Medicare Part D. We believe our plan
is actuarially equivalent to Medicare Part D.
Costs: The following table recaps the costs incurred in our retirement benefits
plans:
In Millions
- ---------------------------------------------------------------------------------------
Pension OPEB
Three Months Ended March 31 2005 2004 2005 2004
- ---------------------------------------------------------------------------------------
Service cost $ 9 $ 10 $ 5 $ 5
Interest expense 18 18 15 13
Expected return on plan assets (23) (27) (13) (12)
Plan amendments - - - -
Amortization of:
Net loss 7 3 5 3
Prior service cost 1 1 (2) (2)
-----------------------------
Net periodic pension and postretirement benefit cost $ 12 $ 5 $ 10 $ 7
=======================================================================================
The MCV Partnership sponsors defined cost postretirement health care plans that
cover all full-time employees, except key management. Participants in the
postretirement health care plans become eligible for the benefits if they retire
on or after the attainment of age 65 or upon a qualified disability retirement,
or if they have 10 or more years of service and retire at age 55 or older. The
MCV Partnership's net periodic postretirement health care cost for the three
months ended March 31, 2005 was less than $1 million.
6: ASSET RETIREMENT OBLIGATIONS
SFAS NO. 143: This standard requires companies to record the fair value of the
cost to remove assets at the end of their useful life, if there is a legal
obligation to remove them. We have legal obligations to remove some of our
assets, including our nuclear plants, at the end of their useful lives. As
required by SFAS No. 71, we accounted for the implementation of this standard by
recording regulatory assets and liabilities instead of a cumulative effect of a
change in accounting principle.
The fair value of ARO liabilities has been calculated using an expected present
value technique. This technique reflects assumptions such as costs, inflation,
and profit margin that third parties would consider to assume the settlement of
the obligation. Fair value, to the extent possible, should include a market risk
premium for unforeseeable circumstances. No market risk premium was included in
our ARO fair value estimate since a reasonable estimate could not be made. If a
five percent market risk premium were assumed, our ARO liability would increase
by $22 million.
If a reasonable estimate of fair value cannot be made in the period in which the
ARO is incurred, such as for assets with indeterminate lives, the liability is
to be recognized when a reasonable estimate of fair value can be made.
Generally, gas transmission and electric and gas distribution assets have
indeterminate lives. Retirement cash flows cannot be determined and there is a
low probability of a retirement date. Therefore, no liability has been recorded
for these assets. Also, no liability has been recorded for assets that have
insignificant cumulative disposal costs, such as substation batteries. The
measurement of the ARO liabilities for Palisades and Big Rock are based on
decommissioning studies
CE-44
Consumers Energy Company
that largely utilize third-party cost estimates.
The following tables describe our assets that have legal obligations to be
removed at the end of their useful life:
December 31, 2004 In Millions
- -----------------------------------------------------------------------------------------------------------
in Service Trust
Aro Description Date Long Lived Assets Fund
- -----------------------------------------------------------------------------------------------------------
Palisades - decommission plant site 1972 Palisades nuclear plant $518
Big Rock - decommission plant site 1962 Big Rock nuclear plant 43
JHCampbell intake/discharge water line 1980 Plant intake/discharge water line -
Closure of coal ash disposal areas Various Generating plants coal ash areas -
Closure of wells at gas storage fields Various Gas storage fields -
Indoor gas services equipment relocations Various Gas meters located inside structures -
===========================================================================================================
In Millions
- -------------------------------------------------------------------------------------------------------
ARO ARO
Liability Cash flow Liability
ARO Description 12/31/04 Incurred Settled Accretion Revisions 3/31/05
- -------------------------------------------------------------------------------------------------------
Palisades - decommission $350 $ - $ - $6 $ - $356
Big Rock - decommission 30 - (8) 4 - 26
JHCampbell intake line - - - - - -
Coal ash disposal areas 54 - (1) 1 - 54
Wells at gas storage fields 1 - - - - 1
Indoor gas services relocations 1 - - - - 1
----------------------------------------------------------------------
Total $436 $ - $(9) $11 $ - $438
=======================================================================================================
On October 14, 2004 the MPSC issued a generic proceeding to review SFAS No. 143,
FERC Order No. 631, Accounting, Financial Reporting, and Rate Filing
Requirements for Asset Retirement Obligations, and their accounting and
ratemaking issues. Utilities responded to the Order in March 2005; MPSC Staff
and intervenor filings are due in May 2005. We consider the proceeding a
clarification of accounting and reporting issues that relate to all Michigan
utilities.
7: REPORTABLE SEGMENTS
Our reportable segments are strategic business units organized and managed by
the nature of the products and services each provides. We evaluate performance
based upon the net income of each segment. We operate principally in two
segments: electric utility and gas utility.
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Consumers Energy Company
The following table shows our financial information by reportable segment:
In Millions
- --------------------------------------------------------------------------------
Three Months Ended March 31 2005 2004
- --------------------------------------------------------------------------------
Operating revenue
Electric $ 628 $ 631
Gas 992 905
Other 12 11
- --------------------------------------------------------------------------------
Total Operating Revenue $ 1,632 $ 1,547
================================================================================
Net income available to common stockholder
Electric $ 33 $ 48
Gas 58 56
Other 66 -
- --------------------------------------------------------------------------------
Total Net Income $ 157 $ 104
================================================================================
In Millions
- --------------------------------------------------------------------------------
March 31, 2005 December 31, 2004
- --------------------------------------------------------------------------------
Assets
Electric (a) $ 7,498 $ 7,289
Gas (a) 2,856 3,187
Other 2,926 2,335
- --------------------------------------------------------------------------------
Total Assets $ 13,280 $ 12,811
================================================================================
(a) Amounts include a portion of our other common assets attributable to both
the electric and gas utility businesses.
8: CONSOLIDATION OF VARIABLE INTEREST ENTITIES
We are the primary beneficiary of both the MCV Partnership and the FMLP. We have
a 49 percent partnership interest in the MCV Partnership and a 46.4 percent
partnership interest in the FMLP. Consumers is the primary purchaser of power
from the MCV Partnership through a long-term power purchase agreement. The FMLP
holds a 75.5 percent lessor interest in the MCV Facility, which results in
Consumers holding a 35 percent lessor interest in the MCV Facility.
Collectively, these interests make us the primary beneficiary of these entities.
Therefore, we consolidated these partnerships into our consolidated financial
statements for all period presented. These partnerships have third-party
obligations totaling $584 million at March 31, 2005. Property, plant, and
equipment serving as collateral for these obligations has a carrying value of
$1.411 billion at March 31, 2005. The creditors of these partnerships do not
have recourse to the general credit of Consumers.
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Consumers Energy Company
9: NEW ACCOUNTING STANDARDS NOT YET EFFECTIVE
SFAS NO. 123R, SHARE-BASED PAYMENT: This Statement requires companies to use the
fair value of employee stock options and similar awards at the grant date to
value the awards. Companies must expense this amount over the vesting period of
the awards. This Statement also clarifies and expands SFAS No. 123's guidance in
several areas, including measuring fair value, classifying an award as equity or
as a liability, and attributing compensation cost to reporting periods.
This Statement amends SFAS No. 95, Statement of Cash Flows, to require that
excess tax benefits related to the excess of the tax deductible amount over the
compensation cost recognized be classified as cash inflows from financing
activities rather than as a reduction of taxes paid in operating activities.
Excess tax benefits are recorded as an adjustment to additional paid-in capital.
This Statement is effective for us as of the beginning of 2006. We adopted the
fair value method of accounting for share-based awards effective December 2002.
Therefore, we do not expect this statement to have a significant impact on our
results of operations when it becomes effective.
FASB INTERPRETATION NO. 47, ACCOUNTING FOR CONDITIONAL ASSET RETIREMENT
OBLIGATIONS: This Interpretation clarifies the term "conditional asset
retirement obligation" as used in SFAS No. 143. The term refers to a legal
obligation to perform an asset retirement activity in which the timing and (or)
method of settlement are conditional on a future event that may or may not be
within the control of the entity. The obligation to perform the asset retirement
activity is unconditional even though uncertainty exists about the timing and
(or) method of settlement. Accordingly, an entity is required to recognize a
liability for the fair value of a conditional asset retirement obligation if the
fair value of the liability can be reasonably estimated. The fair value of a
liability for the conditional asset retirement obligation should be recognized
when incurred. This Interpretation also clarifies when an entity would have
sufficient information to estimate reasonably the fair value of an asset
retirement obligation. For us, this Interpretation is effective no later than
December 31, 2005. We are in the process of determining the impact this
Interpretation will have on our financial statements upon adoption.
CE-47
Item 3. Quantitative and Qualitative Disclosures About Market Risk
CMS ENERGY
Quantitative and Qualitative Disclosures about Market Risk is contained in PART
I: CMS Energy Corporation's Management's Discussion and Analysis, which is
incorporated by reference herein.
CONSUMERS
Quantitative and Qualitative Disclosures about Market Risk is contained in PART
I: Consumers Energy Company's Management's Discussion and Analysis, which is
incorporated by reference herein.
Item 4. Controls and Procedures
CMS ENERGY
Disclosure Controls and Procedures: CMS Energy's management, with the
participation of its CEO and CFO, has evaluated the effectiveness of its
disclosure controls and procedures (as such term is defined in Rules 13a-15(e)
and 15d-15(e) under the Exchange Act) as of the end of the period covered by
this report. Based on such evaluation, CMS Energy's CEO and CFO have concluded
that, as of the end of such period, its disclosure controls and procedures are
effective.
Internal Control Over Financial Reporting: There have not been any changes in
CMS Energy's internal control over financial reporting (as such term is defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the last fiscal
quarter that have materially affected, or are reasonably likely to materially
affect, its internal control over financial reporting.
CONSUMERS
Disclosure Controls and Procedures: Consumers' management, with the
participation of its CEO and CFO, has evaluated the effectiveness of its
disclosure controls and procedures (as such term is defined in Rules 13a-15(e)
and 15d-15(e) under the Exchange Act) as of the end of the period covered by
this report. Based on such evaluation, Consumers' CEO and CFO have concluded
that, as of the end of such period, its disclosure controls and procedures are
effective.
Internal Control Over Financial Reporting: There have not been any changes in
Consumers' internal control over financial reporting (as such term is defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the last fiscal
quarter that have materially affected, or are reasonably likely to materially
affect, its internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The discussion below is limited to an update of developments that have occurred
in various judicial and administrative proceedings, many of which are more fully
described in CMS Energy's and Consumers' Forms 10-K for the year ended December
31, 2004. Reference is also made to the CONDENSED NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS, in particular, Note 3, Contingencies, for CMS Energy and
Note 2, Contingencies, for Consumers, included herein for additional information
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regarding various pending administrative and judicial proceedings involving
rate, operating, regulatory and environmental matters.
CMS ENERGY
SEC REQUEST
On August 5, 2004, CMS Energy received a request from the SEC that CMS Energy
voluntarily produce all documents and data relating to the SEC's inquiry into
payments made to the government and officials of the government of Equatorial
Guinea. On August 17, 2004, CMS Energy submitted its response, advising the SEC
of the information and documentation it had available. On March 8, 2005, CMS
Energy received a request from the SEC that CMS Energy voluntarily produce
certain of such documents. On March 31, April 7, April 18, and April 19, 2005,
CMS Energy sent responsive documents to the SEC. CMS Energy is currently
reviewing its electronic records in further response to the SEC's request.
GAS INDEX PRICE REPORTING LITIGATION
In August 2003, Cornerstone Propane Partners, L.P. (Cornerstone) filed a
putative class action complaint in the United States District Court for the
Southern District of New York against CMS Energy and dozens of other energy
companies. The Cornerstone complaint was subsequently consolidated with two
similar complaints filed by other plaintiffs. The plaintiffs filed a
consolidated complaint on January 20, 2004. The consolidated complaint alleges
that false natural gas price reporting by the defendants manipulated the prices
of NYMEX natural gas futures and options. The complaint contains two counts
under the Commodity Exchange Act, one for manipulation and one for aiding and
abetting violations. Plaintiffs are seeking to have a class certified and to
have the class recover actual damages and costs, including attorneys fees. CMS
Energy is no longer a defendant, however, CMS MST and CMS Field Services are
named as defendants. (CMS Energy sold CMS Field Services to Cantera Natural Gas,
LLC, which changed the name of CMS Field Services to Cantera Gas Company. CMS
Energy is required to indemnify Cantera Natural Gas, LLC with respect to this
action.)
In a similar but unrelated matter, Texas-Ohio Energy, Inc. filed a putative
class action lawsuit in the United States District Court for the Eastern
District of California in November 2003 against a number of energy companies
engaged in the sale of natural gas in the United States (including CMS Energy).
The complaint alleged defendants entered into a price-fixing scheme by engaging
in activities to manipulate the price of natural gas in California. The
complaint also alleged violations of the federal Sherman Act, the California
Cartwright Act, and the California Business and Professions Code relating to
unlawful, unfair and deceptive business practices. The complaint sought both
actual and exemplary damages for alleged overcharges, attorneys fees and
injunctive relief regulating defendants' future conduct relating to pricing and
price reporting. In April 2004, a Nevada Multidistrict Litigation (MDL) Panel
ordered the transfer of the Texas-Ohio case to a pending MDL matter in the
Nevada federal district court that at the time involved seven complaints
originally filed in various state courts in California. These complaints make
allegations similar to those in the Texas-Ohio case regarding price reporting,
although none contain a federal Sherman Act claim. In November 2004, those seven
complaints, as well as a number of others that were originally filed in various
state courts in California and subsequently transferred to the MDL proceeding,
were remanded back to California state court. The Texas-Ohio case remained in
Nevada federal district court, and defendants, with CMS Energy joining, filed a
motion to dismiss. The court issued an order granting the motion to dismiss on
April 8, 2005 and entered a judgment in favor of the defendants on April 11,
2005.
Three federal putative class actions, Fairhaven Power Company v. Encana Corp. et
al., Utility Savings & Refund Services LLP v. Reliant Energy Resources Inc. et
al., and Abelman Art Glass v. Encana Corp. et
CO-2
al., all of which make allegations similar to those in the Texas-Ohio case
regarding price manipulation and seek similar relief, were originally filed in
the United States District Court for the Eastern District of California in
September 2004, November 2004 and December 2004, respectively. The Fairhaven and
Abelman Art Glass cases also include claims for unjust enrichment and a
constructive trust. The three complaints were filed against CMS Energy and many
of the other defendants named in the Texas-Ohio case. In addition, the Utility
Savings case names CMS MST and Cantera Resources Inc. (Cantera Resources Inc. is
the parent of Cantera Natural Gas, LLC. and CMS Energy is required to indemnify
Cantera Natural Gas, LLC and Cantera Resources Inc. with respect to these
actions.)
The Fairhaven, Utility Savings and Abelman Art Glass cases have been transferred
to the MDL proceeding, where the Texas-Ohio case was pending. Pursuant to
stipulation by the parties and court order, defendants were not required to
respond to the Fairhaven, Utility Savings and Abelman Art Glass complaints until
the court ruled on defendants' motion to dismiss in the Texas-Ohio case. The
motion to dismiss was granted on April 8, 2005, and the parties in the
Fairhaven, Utility Savings and Abelman Art Glass cases are considering whether
plaintiffs should file a consolidated complaint or whether defendants should
respond to the existing complaints.
Commencing in or about February 2004, 15 state law complaints containing
allegations similar to those made in the Texas-Ohio case, but generally limited
to the California Cartwright Act and unjust enrichment, were filed in various
California state courts against many of the same defendants named in the federal
price manipulation cases discussed above. In addition to CMS Energy, CMS MST is
named in all of the 15 state law complaints. Cantera Gas Company and Cantera
Natural Gas, LLC (erroneously sued as Cantera Natural Gas, Inc.) are named in
all but the Benscheidt complaint.
In February 2005, these 15 separate actions, as well as nine other similar
actions that were filed in California state court but do not name CMS Energy or
any of its former or current subsidiaries, were ordered coordinated with pending
coordinated proceedings in the San Diego Superior Court. The 24 state court
complaints involving price reporting were coordinated as Natural Gas Antitrust
Cases V. Plaintiffs in Natural Gas Antitrust Cases V were ordered to file a
consolidated complaint, but a consolidated complaint was filed only for the two
putative class action lawsuits. On April 8, 2005, defendants filed a demurrer to
the master class action complaint and the individual complaints.
Samuel D. Leggett, et al v. Duke Energy Corporation, et al, a class action
complaint brought on behalf of retail and business purchasers of natural gas in
Tennessee, was filed in the Chancery Court of Fayette County, Tennessee in
January 2005. The complaint contains claims for violations of the Tennessee
Trade Practices Act based upon allegations of false reporting of price
information by defendants to publications that compile and publish indices of
natural gas prices for various natural gas hubs. The complaint seeks statutory
full consideration damages and attorneys fees and injunctive relief regulating
defendants' future conduct. The defendants include CMS Energy, CMS MST and CMS
Field Services. On March 7, 2005, defendants removed the case to the United
States District Court for the Western District of Tennessee, Western Division.
On April 6, 2005, plaintiffs filed a motion to remand the case back to the
Chancery Court in Tennessee. The parties are considering further extending the
time to answer or otherwise respond to the complaint until after the motion to
remand is decided.
CMS Energy and the other CMS defendants will defend themselves vigorously
against these matters but cannot predict their outcome.
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CMS ENERGY AND CONSUMERS
SECURITIES CLASS ACTION LAWSUITS
Beginning on May 17, 2002, a number of complaints were filed against CMS Energy,
Consumers, and certain officers and directors of CMS Energy and its affiliates,
including but not limited to Consumers which, while established, operated and
regulated as a separate legal entity and publicly traded company, shares a
parallel Board of Directors with CMS Energy. The complaints were filed as
purported class actions in the United States District Court for the Eastern
District of Michigan, by shareholders who allege that they purchased CMS
Energy's securities during a purported class period running from May 2000
through March 2003. The cases were consolidated into a single lawsuit. The
consolidated lawsuit generally seeks unspecified damages based on allegations
that the defendants violated United States securities laws and regulations by
making allegedly false and misleading statements about CMS Energy's business and
financial condition, particularly with respect to revenues and expenses recorded
in connection with round-trip trading by CMS MST. In January 2005, a motion was
granted, dismissing Consumers and three of the individual defendants, but the
court denied the motions to dismiss for CMS Energy and the 13 remaining
individual defendants. Plaintiffs filed a motion for class certification on
April 15, 2005. CMS Energy and the individual defendants will defend themselves
vigorously in this litigation but cannot predict its outcome.
ERISA LAWSUITS
CMS Energy is a named defendant, along with Consumers, CMS MST, and certain
named and unnamed officers and directors, in two lawsuits brought as purported
class actions on behalf of participants and beneficiaries of the CMS Employees'
Savings and Incentive Plan (the Plan). The two cases, filed in July 2002 in
United States District Court for the Eastern District of Michigan, were
consolidated by the trial judge and an amended consolidated complaint was filed.
Plaintiffs allege breaches of fiduciary duties under ERISA and seek restitution
on behalf of the Plan with respect to a decline in value of the shares of CMS
Energy Common Stock held in the Plan. Plaintiffs also seek other equitable
relief and legal fees. In March 2004, the judge granted in part, but denied in
part, CMS Energy's motion to dismiss the complaint. CMS Energy, Consumers and a
number of individual defendants remain parties. The judge has conditionally
granted plaintiffs' motion for class certification. A trial date has not been
set, but is expected to be no earlier than mid 2006. CMS Energy and Consumers
will defend themselves vigorously in this litigation but cannot predict its
outcome.
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ENVIRONMENTAL MATTERS
CMS Energy, Consumers and their subsidiaries and affiliates are subject to
various federal, state and local laws and regulations relating to the
environment. Several of these companies have been named parties to various
actions involving environmental issues. Based on their present knowledge and
subject to future legal and factual developments, CMS Energy and Consumers
believe that it is unlikely that these actions, individually or in total, will
have a material adverse effect on their financial condition. See CMS Energy's
and Consumers' MANAGEMENT'S DISCUSSION AND ANALYSIS and CMS Energy's and
Consumers' CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the first quarter of 2005, neither CMS Energy nor Consumers submitted any
matters to a vote of security holders.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
(4)(a) 101st Supplemental Indenture dated as of April 1, 2005, supplement
to Indenture dated as of September 1, 1945, between Consumers and
JPMorgan Chase Bank, N.A., a national banking association
(10)(a) Annual Officer Incentive Compensation Plan for CMS Energy
Corporation and its Subsidiaries, effective January 1, 2005
(10)(b) Annual Management Incentive Compensation Plan for CMS Energy
Corporation and its Subsidiaries, effective January 1, 2005
(10)(c) Annual Employee Incentive Compensation Plan for CMS Energy
Corporation and its Subsidiaries, effective January 1, 2005
(31)(a) CMS Energy Corporation's certification of the CEO pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
(31)(b) CMS Energy Corporation's certification of the CFO pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
(31)(c) Consumers Energy Company's certification of the CEO pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
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(31)(d) Consumers Energy Company's certification of the CFO pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
(32)(a) CMS Energy Corporation's certifications pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
(32)(b) Consumers Energy Company's certifications pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. The signature for each undersigned
company shall be deemed to relate only to matters having reference to such
company or its subsidiary.
CMS ENERGY CORPORATION
(Registrant)
Dated: May 5, 2005 By: /s/ Thomas J.Webb
--------------------------------
Thomas J. Webb
Executive Vice President and
Chief Financial Officer
CONSUMERS ENERGY COMPANY
(REGISTRANT)
Dated: May 5, 2005 By: /s/ Thomas J.Webb
--------------------------------
Thomas J. Webb
Executive Vice President and
Chief Financial Officer
EXHIBIT INDEX
EX NO. DESCRIPTION
- ------ -----------
(4)(a) 101st Supplemental Indenture dated as of April 1, 2005, supplement
to Indenture dated as of September 1, 1945, between Consumers and
JPMorgan Chase Bank, N.A., a national banking association
(10)(a) Annual Officer Incentive Compensation Plan for CMS Energy
Corporation and its Subsidiaries, effective January 1, 2005
(10)(b) Annual Management Incentive Compensation Plan for CMS Energy
Corporation and its Subsidiaries, effective January 1, 2005
(10)(c) Annual Employee Incentive Compensation Plan for CMS Energy
Corporation and its Subsidiaries, effective January 1, 2005
(31)(a) CMS Energy Corporation's certification of the CEO pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
(31)(b) CMS Energy Corporation's certification of the CFO pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
(31)(c) Consumers Energy Company's certification of the CEO pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
(31)(d) Consumers Energy Company's certification of the CFO pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
(32)(a) CMS Energy Corporation's certifications pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
(32)(b) Consumers Energy Company's certifications pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002