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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,JUNE 30, 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]|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]|X|
Number of shares outstanding of each of the issuer's classes of common stock at
MayAugust 2, 2005:
CMS ENERGY CORPORATION:
CMS Energy Common Stock, $.01 par value 218,780,859219,270,380
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,JUNE 30, 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
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Glossary........................................................................Glossary................................................................... 4
PART I: FINANCIAL INFORMATION
CMS Energy Corporation
Management's Discussion and Analysis
Executive Overview....................................................Overview............................................... CMS - 1
Forward-Looking Statements and Risk Factors...........................Factors...................... CMS - 2
Results of Operations.................................................Operations............................................ CMS - 4
Critical Accounting Policies..........................................Policies..................................... CMS - 913
Capital Resources and Liquidity.......................................Liquidity.................................. CMS - 14
Outlook...............................................................18
Outlook.......................................................... CMS - 1520
Implementation of New Accounting Standards............................Standards....................... CMS - 2328
New Accounting Standards Not Yet Effective............................Effective....................... CMS - 2329
Consolidated Financial Statements
Consolidated Statements of Income ................................................................... CMS - 2430
Consolidated Statements of Cash Flows.................................Flows............................ CMS - 2733
Consolidated Balance Sheets...........................................Sheets...................................... CMS - 2834
Consolidated Statements of Common Stockholders' Equity................Equity........... CMS - 3036
Condensed Notes to Consolidated Financial Statements:
1. Corporate Structure and Accounting Policies......................Policies................. CMS - 3137
2. Asset Sales and Impairment Charges...............................Charges.......................... CMS - 3339
3. Contingencies....................................................Contingencies............................................... CMS - 3340
4. Financings and Capitalization....................................Capitalization............................... CMS - 4755
5. Earnings Per Share...............................................Share.......................................... CMS - 5159
6. Financial and Derivative Instruments.............................Instruments........................ CMS - 5260
7. Retirement Benefits..............................................Benefits......................................... CMS - 5766
8. Asset Retirements Obligations....................................Obligations............................... CMS - 5868
9. Equity Method Investments........................................Investments................................... CMS - 6070
10. Reportable Segments ..................................................................................... CMS - 6171
11. Consolidation of Variable Interest Entities......................Entities................. CMS - 6172
12. Implementation of New Accounting Standards.......................Standards.................. CMS - 6273
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TABLE OF CONTENTS
(CONTINUED)
Page
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Consumers Energy Company
Management's Discussion and Analysis
Executive Overview....................................................Overview................................................... CE - 1
Forward-Looking Statements and Risk Factors...........................Factors.......................... CE - 2
Results of Operations.................................................Operations................................................ CE - 4
Critical Accounting Policies..........................................Policies......................................... CE - 79
Capital Resources and Liquidity.......................................Liquidity...................................... CE - 10
Outlook...............................................................13
Outlook.............................................................. CE - 1115
New Accounting Standards Not Yet Effective............................Effective........................... CE - 1722
Consolidated Financial Statements
Consolidated Statements of Income.....................................Income.................................... CE - 2024
Consolidated Statements of Cash Flows.................................Flows................................ CE - 2125
Consolidated Balance Sheets...........................................Sheets.......................................... CE - 2226
Consolidated Statements of Common Stockholder's Equity................Equity............... CE - 2428
Condensed Notes to Consolidated Financial Statements:
1. Corporate Structure and Accounting Policies.......................Policies...................... CE - 2529
2. Contingencies.....................................................Contingencies.................................................... CE - 2630
3. Financings and Capitalization.....................................Capitalization.................................... CE - 3742
4. Financial and Derivative Instruments..............................Instruments............................. CE - 4045
5. Retirement Benefits...............................................Benefits.............................................. CE - 4348
6. Asset Retirement Obligations......................................Obligations..................................... CE - 4450
7. Reportable Segments ........................................................................................... CE - 4551
8. Consolidation of Variable Interest Entities.......................Entities...................... CE - 4652
9. New Accounting Standards Not Yet Effective........................Effective....................... CE - 4753
Quantitative and Qualitative Disclosures about Market Risk......................Risk..................... CO - 1
Controls and Procedures.........................................................Procedures........................................................ CO - 1
PART II: OTHER INFORMATION
Item 1. Legal Proceedings..................................................Proceedings................................................. CO - 1
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds........Proceeds....... CO - 5
Item 3. Defaults Upon Senior Securities....................................Securities................................... CO - 5
Item 4. Submission of Matters to a Vote of Security Holders................Holders............... CO - 5
Item 5. Other Information..................................................Information................................................. CO - 56
Item 6. Exhibits...........................................................Exhibits.......................................................... CO - 5
Signatures.................................................................6
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.....................................ALJ................................................ Administrative Law Judge
Alliance RTO............................RTO....................................... Alliance Regional Transmission Organization
APB.....................................APB................................................ Accounting Principles Board
APB Opinion No. 18......................18................................. APB Opinion No. 18, "The Equity Method of Accounting for
Investments in Common Stock"
ARO.....................................ARO................................................ Asset retirement obligation
Articles................................Articles........................................... Articles of Incorporation
Attorney General........................General................................... Michigan Attorney General
bcf.....................................Bay Harbor......................................... a residential/commercial real estate area located near
Petoskey, Michigan. In 2002, CMS Energy sold its interest in
Bay Harbor.
bcf................................................ Billion cubic feet
Big Rock................................Rock........................................... Big Rock Point nuclear power plant, owned by Consumers
Bluewater Pipeline................................. Bluewater Pipeline, a 24.9-mile pipeline that extends from
Marysville, Michigan to Armada, Michigan.
Board of Directors......................Directors................................. Board of Directors of CMS Energy
CEO.....................................CEO................................................ Chief Executive Officer
CFO.....................................CFO................................................ Chief Financial Officer
Clean Air Act...........................Act...................................... Federal Clean Air Act, as amended
CMS Electric and Gas.................... CMS Electric and Gas Company, a subsidiary of Enterprises
CMS Energy..............................Energy......................................... CMS Energy Corporation, the parent of Consumers and Enterprises
CMS Energy Common Stock or
common stock..........................stock..................................... Common stock of CMS Energy, par value $.01 per share
CMS ERM.................................ERM............................................ CMS Energy Resource Management Company, formerly CMS MST, a
subsidiary of Enterprises
CMS Field Services......................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....................Transmission............................... CMS Gas Transmission Company, a subsidiary of Enterprises
CMS Generation..........................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.................................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.........................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.
4
Common Stock............................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.......................................... Consumers Energy Company, a subsidiary of CMS Energy CourtCompany, a subsidiary of Appeals........................ Michigan Court of AppealsCMS Energy
4
Customer Choice Act.....................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..........................Edison..................................... The Detroit Edison Company, a non-affiliated company
DIG.....................................DIG................................................ Dearborn Industrial Generation, LLC, a wholly owned
subsidiary of CMS Generation
DOE.....................................DOE................................................ U.S. Department of Energy
DOJ.....................................DOJ................................................ U.S. Department of Justice
Dow.....................................Dow................................................ The Dow Chemical Company, a non-affiliated company
EBITDA..................................EBITDA............................................. Earnings before income taxes, depreciation, and amortization
EISP....................................EISP............................................... Executive Incentive Separation Plan
EITF....................................EITF............................................... Emerging Issues Task Force
EITF Issue No. 02-03....................02-03............................... Issues Involved in Accounting for Derivative Contracts Held
for Trading Purposes and Contracts Involved in Energy Trading
and Risk Management Activities
Enterprises.............................Enterprises........................................ CMS Enterprises Company, a subsidiary of CMS Energy
EPA.....................................EPA................................................ U. S. Environmental Protection Agency
EPS.....................................EPS................................................ Earnings per share
ERISA...................................ERISA.............................................. Employee Retirement Income Security Act
Ernst & Young...........................Young...................................... Ernst & Young LLP
Exchange Act............................Act....................................... Securities Exchange Act of 1934, as amended
FASB....................................FASB............................................... Financial Accounting Standards Board
FASB Interpretation No. 46..............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....................................FERC............................................... Federal Energy Regulatory Commission
FMB.....................................FMB................................................ First Mortgage Bonds
FMLP....................................FMLP............................................... First Midland Limited Partnership, a partnership that holds a
lessor interest in the MCV facility
FSP.....................................FSP................................................ FASB Staff Position
FTR.....................................FTR................................................ Financial transmission right
GAAP.................................... Generally Accepted Accounting Principles
5
GasAtacama..............................GAAP............................................... Generally Accepted Accounting Principles
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.....................................GCR................................................ Gas cost recovery
Goldfields..............................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................................................ GVK Facility, a 250 MW gas fired power plant located in South
Central India, in which CMS Generation formerly held a 33
percent interest
5
Health Care Plan........................Plan................................... The medical, dental, and prescription drug programs offered
to eligible employees of Consumers and CMS Energy
IPP..................................... Independent Power ProductionIRS................................................ Internal Revenue Service
Jorf Lasfar.............................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 RatekWh................................................ Kilowatt-hour
LORB............................................... Limited Obligation Revenue Bonds
Loy Yang................................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.......................................... Ludington pumped storage plant, jointly owned by Consumers
and Detroit Edison
mcf.....................................mcf................................................ Thousand cubic feet
MCV Facility............................Facility....................................... A natural gas-fueled, combined-cycle cogeneration facility
operated by the MCV Partnership
MCV Partnership.........................Partnership.................................... Midland Cogeneration Venture Limited Partnership in which
Consumers has a 49 percent interest through CMS Midland
MCV PPA.................................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....................................&A............................................... Management's Discussion and Analysis
MDEQ....................................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...................Market.............................. An energy market developed by the MISO to provide day-ahead
and real-time market information and centralized dispatch for
market participants
MISO....................................MISO............................................... Midwest Independent System Operator
Moody's.................................Moody's............................................ Moody's Investors Service, Inc.
MPSC....................................MPSC............................................... Michigan Public Service Commission
MSBT.................................... Michigan Single Business Tax
6
MTH.....................................MSBT............................................... Michigan Single Business Tax
MTH................................................ Michigan Transco Holdings, Limited Partnership
MW......................................MW................................................. Megawatts
NEIL....................................NEIL............................................... Nuclear Electric Insurance Limited, an industry mutual
insurance company owned by member utility companies
NMC.....................................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.....................................NOL................................................ Net Operating Loss
NRC................................................ Nuclear Regulatory Commission
NYMEX................................... New York Mercantile Exchange
OATT.................................... Open Access Transmission Tariff
OPEB....................................NYMEX.............................................. New York Mercantile Exchange
6
OPEB............................................... Postretirement benefit plans other than pensions for retired employees
Palisades...............................Palisades.......................................... Palisades nuclear power plant, which is owned by Consumers
Panhandle...............................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.....................................PCB................................................ Polychlorinated biphenyl
Pension Plan............................Plan....................................... The trusteed, non-contributory, defined benefit pension plan
of Panhandle, Consumers and CMS Energy
Price Anderson Act......................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....................................PSCR............................................... Power supply cost recovery
PURPA...................................PURPA.............................................. Public Utility Regulatory Policies Act of 1978
RCP.....................................RCP................................................ Resource Conservation Plan
ROA.....................................ROA................................................ Retail Open Access
RRP.....................................RRP................................................ Renewable Resources Program
RTO.....................................RTO................................................ Regional Transmission Organization
S&P.....................................&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.....................................SEC................................................ U.S. Securities and Exchange Commission
7
Section 10d(4) Regulatory Asset.........Asset.................... Regulatory asset as described in Section 10d(4) of the
Customer Choice Act, as amended
Securitization..........................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..................................SENECA............................................. Sistema Electrico del Estado Nueva Esparta C.A.C.S., a subsidiary of Enterprises
SERP....................................SERP............................................... Supplemental Executive Retirement Plan
SFAS....................................SFAS............................................... Statement of Financial Accounting Standards
SFAS No. 5..............................5......................................... SFAS No. 5, "Accounting for Contingencies"
SFAS No. 52............................. SFAS No. 52, "Foreign Currency Translation"
SFAS No. 71.............................71........................................ SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation"
SFAS No. 87.............................87........................................ SFAS No. 87, "Employers' Accounting for Pensions"
SFAS No. 98.............................98........................................ SFAS No. 98, "Accounting for Leases"
SFAS No. 106............................106....................................... SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions"
SFAS No. 115............................115....................................... SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities"
7
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
SFAS No. 123............................123....................................... SFAS No. 123, "Accounting for Stock-Based Compensation"
SFAS No. 133............................133....................................... SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities, as amended and interpreted"
SFAS No. 143............................143....................................... SFAS No. 143, "Accounting for Asset Retirement Obligations"
Shuweihat............................... AShuweihat...........................................A power and desalination plant of Emirates CMS Power Company, in
which CMS Generation holds a 20 percent interest
SLAP............................................... Scudder Latin American Power Fund
Special Committee.......................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..................................... 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...............................Superfund.......................................... Comprehensive Environmental Response, Compensation and Liability Act
Taweelah................................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......................... 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 thisour business strategy will result in reducedto reduce parent
company debt improvedsubstantially, improve our credit ratings, grow earnings, growth, restoration ofrestore a
common stock dividend, and a company positionedposition us 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 AprilJuly 2005, we have lost 893alternative electric suppliers provide 811 MW, or 1211 percent, of
our electric load to these
alternative electric suppliers.load. Based on current trends, we predict total load loss by the
end of 2005 to be in the range of 925900 MW to 1,000950 MW. However, no
assurance can be madewe cannot assure
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 naturalNatural gas prices have increased substantially in recent years andyears.
Because the price the MCV Partnership can charge the utility for energy has not
increased to reflect current natural gas prices, 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
CMS-1
CMS Energy Corporation
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.FMB, and $150 million of Consumers' senior insured quarterly notes. 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:
CMS-2
CMS Energy Corporation
- recovery of future Stranded Costs incurred due to customers
choosing alternative energy suppliers,
CMS-2
CMS Energy Corporation
- 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 certain electric capacity and energy contracts with the MCV Partnership
and other independent power producersat CMS ERM 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 subsidiaries have a minority interest,
CMS-3
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 31June 30 2005 2004 Change
- --------------------------------------------------------------------------------
Net Income (Loss) Available to Common Stockholders $ 15027 $ (9)16 $ 15911
Basic Earnings (Loss) Per Share $0.77 $(0.06) $ 0.830.12 $ 0.10 $ 0.02
Diluted Earnings (Loss) Per Share $0.74 $(0.06) $ 0.800.12 $ 0.10 $ 0.02
- --------------------------------------------------------------------------------
Electric Utility $ 3346 $ 4827 $ (15)19
Gas Utility 58 56 2(3) 1 (4)
Enterprises 105 (60) 16529 37 (8)
Corporate Interest and Other (46)(45) (49) 34
- --------------------------------------------------------------------------------
CMS Energy Net Income Available to
Common Stockholders $ 27 $ 16 $ 11
================================================================================
For the three months ended June 30, 2005, our net income available to common
stockholders was $27 million, up from $16 million for the three months ended
June 30, 2004. The increase reflects non-recurring tax benefits associated with
the American Jobs Creation Act of 2004 and an improvement at our electric
utility, primarily due to weather driven higher than normal residential electric
utility sales in June and the collection of an electric surcharge related to the
recovery of costs incurred in the transition to customer choice. Partially
offsetting these increases were the reduction of mark-to-market impacts
associated with gas contracts at the MCV Partnership and changes in
mark-to-market adjustments on interest rate swaps associated with our investment
in Taweelah. Further offsetting the increase was a reduction in net income at
our gas utility, as higher operating and maintenance costs exceeded the benefits
derived from increased deliveries and the increase in revenue resulting from the
MPSC gas rate surcharge authorized in October of 2004.
CMS-4
CMS Energy Corporation
Specific changes to net income available to common stockholders for the three
months ended June 30, 2005 versus the same period in 2004 are:
In Millions
- --------------------------------------------------------------------------------
- non-recurring income tax benefit recorded at Enterprises
resulting from the American Jobs Creation Act of
2004, $ 24
- increase at our electric utility primarily due to increased
deliveries driven by higher than normal electric
utility sales in June and the collection of an
electric surcharge related to the recovery of
security costs, Stranded Costs, and costs incurred in
the transition to customer choice, offset partially
by increased operating expenses and power supply
costs in excess of the amount which we are allowed to
recover from our residential customers, whose rates
are capped, 19
- reduction in corporate and other interest expenses primarily
due to lower average debt levels and a 47 basis point
reduction in the average rate of interest, 4
- change in mark-to-market valuation adjustments associated with
our investment in Taweelah, as losses on interest
rate swaps in the current period replaced the gains
recorded on these instruments in the same period of
2004, (22)
- reduction in income from our ownership interest in the MCV
Partnership primarily due to the settlement of
certain gas contracts and mark-to-market adjustments
on financial hedges and the remaining gas contracts,
and (10)
- decrease in net income from our gas utility primarily due to
increases in benefit costs and safety, reliability
and customer service expenses offset partially by
increased deliveries and increased revenue associated
with the gas rate surcharge authorized by the MPSC in
October of 2004. (4)
- --------------------------------------------------------------------------------
Total Change $ 11
================================================================================
In Millions (except for per share amounts)
- --------------------------------------------------------------------------------
Six months ended June 30 2005 2004 Change
- --------------------------------------------------------------------------------
Net Income Available to Common Stockholders $ 177 $ 7 $ 170
Basic Earnings Per Share $ 0.86 $ 0.04 $ 0.82
Diluted Earnings Per Share $ 0.82 $ 0.04 $ 0.78
- --------------------------------------------------------------------------------
Electric Utility $ 79 $ 75 $ 4
Gas Utility 55 57 (2)
Enterprises 134 (23) 157
Corporate Interest and Other (91) (98) 7
Discontinued Operations - (2) 2
Accounting Changes - (2) 2
- --------------------------------------------------------------------------------
CMS Energy Net Income (Loss) Available to
Common Stockholders $ 150177 $ (9)7 $ 159170
================================================================================
For the quartersix months ended March 31,June 30, 2005, our net income available to common
stockholders was $150$177 million, up from a $9$7 million loss for the quartersix months ended March 31,June
30, 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, resultingnon-recurring tax benefits from the
implementationAmerican Jobs Creation Act of 2004, reduced corporate interest expense, and the
RCP, slightly
offset by reduced income at our electric utility. Atabsence in 2005 of impairment charges recorded in 2004. Also contributing to the
electric utility,improvement was the positive impact of an increase in the collection of an
electric surcharge related to the recovery of costs incurred in the transition
to customer choice, increased surcharge revenueregulatory return on capital expenditures, and
direct savings from the RCP
was moreweather driven higher than
offset by increased operating expensesCMS-5
CMS Energy Corporation
normal residential electric utility sales in June 2005. Partially offsetting
these increases were changes in mark-to-market adjustments on interest rate
swaps associated with our investment in Taweelah and customers choosing
alternative electric suppliers. At thea decrease in net income at
our gas utility the increase in gas rates
authorized by the MPSC outpaced lower gas deliveries anddue to higher operating, MSBT and depreciation expenses.
Specific increaseschanges to net income available to common stockholders are:
-for the absence insix
months ended June 30, 2005 of an $81 million after-tax impairment charge
on our Loy Yang investment which we recordedversus the same period in 2004 CMS-4are:
In Millions
- --------------------------------------------------------------------------------
- the absence in 2005 of an $81 million after-tax impairment
charge related to the sale of our Loy Yang investment
that was recorded in 2004, $ 81
- increase in earnings from our ownership interest in the MCV
Partnership primarily due to the increase in
mark-to-market adjustments of certain long-term gas
contracts and financial hedges, 53
- non-recurring income tax benefit recorded at Enterprises
resulting from the American Jobs Creation Act of
2004, 24
- reduction in corporate interest expenses primarily due to lower
average debt levels and a 53 basis point reduction in
the average rate of interest, 12
- earnings from our investment in Shuweihat, as the business
achieved commercial operation in the fourth quarter
of 2004, 9
- increase in income from our electric utility, primarily due to
higher than normal electric utility sales in June
2005, the return on capital expenditures in excess of
our depreciation base as allowed by the Customer
Choice Act, and the collection of an electric
surcharge related to the recovery of security costs,
Stranded Costs, and costs incurred in the transition
to customer choice. These increases were offset
partially by increased operating expenses, customers
choosing alternative suppliers, and power supply
purchase costs exceeding power supply revenue, 4
- reduction in other corporate expenses, 3
- the absence in 2005 of a loss related to accounting changes, 2
- the absence in 2005 of net losses associated with discontinued
operations, 2
- change in mark-to-market valuation adjustments associated with
our investment in Taweelah, as losses on interest
rate swaps in the current period replaced the gains
recorded on these instruments in the same period of
2004, (10)
- the absence in 2005 of the settlement agreement that DIG and
CMS MST entered into with the purchasers of electric
power and steam from DIG, and (8)
- decrease in net income from our gas utility, as increases in
operation and maintenance cost, MSBT expense, and
depreciation expense outpaced the increase in gas
rates authorized by the MPSC in October of 2004. (2)
- --------------------------------------------------------------------------------
Total Change $ 170
================================================================================
CMS-6
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-----------------------------------------------------------------------------------------------------
June 30 2005 2004 Change
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Three months ended $33 $48 $(15)
=======================================================================================$ 46 $ 27 $ 19
Six months ended $ 79 $ 75 $ 4
=====================================================================================================
Three Months Ended Six Months Ended
Reasons for the change: June 30, 2005 vs. 2004 June 30, 2005 vs. 2004
- -----------------------------------------------------------------------------------------------------
Electric deliveries $ 434 $ 38
Power supply costs and related revenue (9)(2) (11)
Other operating expenses, other income, and non-commoditynon-
commodity revenue (22)(8) (31)
Regulatory return on capital expenditures 76 13
General taxes (3)(1) (4)
Fixed charges 1 2
Income taxes 8
------------------(11) (3)
--------------------------------------------------
Total change $(15)
=======================================================================================$ 19 $ 4
=====================================================================================================
ELECTRIC DELIVERIES: ElectricFor the three months ended June 30, 2005, electric
deliveries decreased 0.4increased 0.5 billion kWh or 4.25.1 percent versus the same period in
2004. For the first quarter ofsix months ended June 30, 2005, compared to 2004. Despite decreased electric deliveries increased 0.1
billion kWh or 0.4 percent versus the same period in 2004. The corresponding
increases in electric delivery revenue increasedfor both periods were due to increased
sales to residential customers due to warmer weather and increased surcharge
revenue, offset partially by reduced electric delivery revenue from customers
choosing alternative electric suppliers.
CMS-5
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.$6 million for the three months ended
June 30, 2005 and $11 million for the six months ended June 30, 2005. Surcharge
revenue related to the recovery of security costs and stranded costsStranded Costs increased
electric delivery revenue by an additional $3 million.million for the three months ended
June 30, 2005 and $6 million for the six months ended June 30, 2005.
POWER SUPPLY COSTS AND RELATED REVENUE: In the first quarter of 2005, ourOur recovery of power supply costs wasis
capped for our residential customers. For the residential class. Pretax
underrecoveriesthree months ended June 30, 2005,
our underrecovery of $9power costs allocated to these capped customers increased
by $6 million are primarily dueversus the same period in 2004. For the six months ended June 30,
2005, our underrecovery of power costs allocated to power supply-related costs
exceeding power supply-related revenue recovered fromthese capped customers.customers
increased by $20 million versus the same period in 2004. Power supply-related
costs increased in 2005 primarily due to higher coal costs and higher priced
purchased power necessary to replace the generation loss from an outageoutages at our Palisades nuclearand
Campbell 3 generating plantplants.
Partially offsetting these underrecoveries are transmission and increased coal costs versusnitrogen oxide
allowance expenditures related to our capped customers, which we have deferred
for future recovery. For the same period in
2004.three months ended June 30, 2005, we deferred $4
million of these costs. For the six months ended June 30, 2005, we deferred $9
million of these costs.
CMS-7
CMS Energy Corporation
OTHER OPERATING EXPENSES, OTHER INCOME, AND NON-COMMODITY REVENUE: InFor the first
quarter ofthree
months ended June 30, 2005, other operating expenses increased $24$14 million,
other income increased $4 million, and non-commodity revenue increased $2
million versus the same period in 2004
primarily due to higher transmission services revenue.2004. For the six months ended June 30, 2005,
other operating expenses increased $39 million, other income increased $4
million, and non-commodity revenue increased $4 million versus the same period
in 2004.
The increase in other operating expenses reflects higher depreciation and
amortization expense, and higher pension and benefit expense, and higher
underrecovery expense related to the MCV PPA, offset partially by our direct
savings from the RCP.expense. 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.changes in actuarial assumptions and the remeasurement of our
pension and OPEB plans to reflect the new collective bargaining agreement
between the Utility Workers Union of America and Consumers. Benefit expense also
reflects the reinstatement of the employer matching contribution to our 401(k)
plan.
In addition, the increase in other operating expenses reflects increased
underrecovery expense related to the MCV PPA, offset partially by our direct
savings from the RCP. 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 waswere 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 the 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.Partnership and us. Our direct savings are shared 50 percent with
customers in 2005 and 70 percent thereafter.
OurThe cost associated with the MCV PPA cash underrecoveries, net of our direct
savings after
allocating a portionfrom the RCP, increased operating expense $2 million for the three
months ended June 30, 2005 and $4 million for the six months ended June 30, 2005
versus the same periods in 2004.
The increase in other income is primarily due to customers, was $3 millionhigher interest income on
short-term cash investments, offset partially by expenses associated with the
early retirement of debt in the first quarter of 2005. The increase in non-commodity revenue is
primarily due to higher transmission services revenue.
REGULATORY RETURN ON CAPITAL EXPENDITURES: In the first quarter of 2005, theThe return on capital expenditures in
excess of our depreciation base as allowed by the Customer Choice Act increased
income by $7$6 million for the three months ended June 30, 2005 and $13 million
for the six months ended June 30, 2005 versus the same periodperiods in 2004.
GENERAL TAXES: InFor the first quarter ofthree and six months ended June 30, 2005, general taxes
increased fromversus the same periodperiods in 2004 primarily due to higher MSBT expense.
INCOME TAXES: InFIXED CHARGES: For the first quarterthree months ended June 30, 2005, fixed charges reflect a
36 basis point reduction in the average rate of 2005, income taxes decreasedinterest on our debt and higher
average debt levels versus the same period in 2004. For the six months ended
June 30, 2005, fixed charges reflect a 32 basis point reduction in the average
rate of interest on our debt and higher average debt levels versus the same
period in 2004.
INCOME TAXES: For the three and six months ended June 30, 2005, income taxes
increased versus the same periods in 2004 primarily due to lowerhigher earnings by
the electric utility.
CMS-6CMS-8
CMS Energy Corporation
GAS UTILITY RESULTS OF OPERATIONS
In Millions
- -------------------------------------------------------------------------------
March 31-------------------------------------------------------------------------------------------------
June 30 2005 2004 Change
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Three months ended $ 58(3) $ 561 $ 2
===============================================================================(4)
Six months ended $ 55 $ 57 $ (2)
=================================================================================================
Reasons for the change: Three Months Ended Six Months Ended
June 30, 2005 vs. 2004 June 30, 2005 vs. 2004
- -------------------------------------------------------------------------------------------------
Gas deliveries $ (3)2 $ (1)
Gas rate increase 165 21
Gas wholesale and retail services, other gas
revenues and other gas revenue (2)income 1 (1)
Operation and maintenance (5)
Depreciation(12) (17)
General taxes and other deductions (1)depreciation (2) (3)
Fixed charges - (2)
Income taxes (1)
--------------------2 1
--------------------------------------------------
Total change $ 2
===============================================================================(4) $ (2)
=================================================================================================
GAS DELIVERIES: InFor the first quarterthree months ended June 30, 2005, higher gas delivery
revenues reflect increased deliveries to our residential, commercial, and
industrial customers versus the same period in 2004,2004. Gas deliveries, including
miscellaneous transportation to end-use customers, increased 1.4 bcf or 3.1
percent.
For the six months ending June 30, 2005, lower gas delivery revenues reflect
decreased deliveries to our residential commercial, and industrial transportation customers.
Gas deliveries, including miscellaneous transportation to end-use customers,
decreased 3.42.0 bcf or 2.31.0 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 quartergas revenues
increased $5 million for the three months ended June 30, 2005 pretax earnings increased $16and $21 million
compared tofor the six months ended June 30, 2005 versus the same periodperiods in 2004.
GAS WHOLESALE AND RETAIL SERVICES, OTHER GAS REVENUES AND OTHER GAS REVENUE: The decreaseINCOME: For the
three months ended June 30, 2005, other income increased $1 million primarily
due to higher interest income on short-term cash investments versus the same
period in 2004. For the six months ended June 30, 2005, gas wholesale and retail
services and other gas revenue relatesdecreased primarily due to decreases in certain miscellaneous
transportation and storage revenue.
OPERATION AND MAINTENANCE: InFor the first quarterthree and six months ended June 30, 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.
DEPRECIATIONservice expense.
Pension and benefit expense increased primarily due to changes in actuarial
assumptions and the remeasurement of our pension and OPEB plans to reflect the
new collective bargaining agreement between the Utility Workers Union of America
and Consumers. Benefit expense also reflects the reinstatement of the employer
matching contribution to our 401(k) plan.
CMS-9
CMS Energy Corporation
GENERAL TAXES AND OTHER DEDUCTIONS: InDEPRECIATION: For the first quarterthree and six months ended June 30,
2005, versus the same
period in 2004, depreciationgeneral tax expense increased primarily due to higher MSBT expense.
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: InFor the first quartersix months ended June 30, 2005, versus the same period in 2004, fixed charges increased due to higher average debt levels, offset partially byreflect a
2832 basis point reduction in the average rate of interest rate.
INCOME TAXES: In the first quarter of 2005, income taxes increasedon our debt and higher
average debt levels versus the same period in 20042004.
INCOME TAXES: For the three and six months ended June 30, 2005, income taxes
decreased primarily due to higherlower earnings by the gas utility.
CMS-7
CMS Energy Corporation
ENTERPRISES RESULTS OF OPERATIONS
In Millions
- --------------------------------------------------------------------------------
March 31--------------------------------------------------------------------------------------------------
June 30 2005 2004 Change
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Three months ended $ 10529 $ (60)37 $ 165
================================================================================(8)
Six months ended $ 134 $ (23) $ 157
==================================================================================================
Three Months Ended Six Months Ended
Reasons for the change: June 30, 2005 vs. 2004 June 30, 2005 vs. 2004
- -------------------------------------------------------------------------------------------------
Operating revenues $ (7)39 $ 32
Cost of gas and purchased power 196(76) 120
Earnings from equity method investees 12
Operation and maintenance 2(19) (7)
Gain on sale of assets 2 4
Operation and maintenance (5) (3)
General taxes, depreciation, and other income 3 3
Asset impairment charges - 136
Fixed charges 75 12
Minority interest (102)15 (87)
Income taxes (81)
- --------------------------------------------------------------------------------28 (53)
-------------------------------------------------
Total change $ 165
================================================================================(8) $ 157
=================================================================================================
OPERATING REVENUES AND COST OF GAS AND PURCHASED POWER: For the three months
ended March 31,June 30, 2005, operating revenues decreased $7increased $39 million versus the same
period in 2004 and the related cost of gas and purchased power increased $76
million versus the same period in 2004. These increases were primarily due to
the impact of increased customer demand on deliveries, fuel costs, and purchased
power primarily at our South American subsidiaries and increased wholesale power
and gas sales at CMS ERM. Also contributing to the increase in cost of gas and
purchase power were mark-to-market losses at the MCV Partnership.
For the six months ended June 30, 2005, operating revenues increased $32 million
versus the same period in 2004 due to increased demand at our South American
subsidiaries and an increase in wholesale power and gas sales at CMS ERM.
Related cost of gas and purchased power cost decreased $196$120 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-termThis decrease was partially offset by increased fuel cost and increased purchase
power associated with higher demand at our South American subsidiaries, and
higher wholesale power and gas contracts and
related financial hedges, which accounted for $179 million of these gains.costs at CMS ERM.
EARNINGS FROM EQUITY METHOD INVESTEES: Equity earnings increasedEarnings from equity method investees
decreased $19 million for the three months ended March 31,June 30, 2005 versus the same
period in 2004. The increasedecrease was primarily due
CMS-10
CMS Energy Corporation
to a $22 million change in mark-to-market gains on interest rate swapsadjustments associated with our
investment in Taweelah as losses on interest rate swaps in the current period
replaced the gains recorded on these instruments in the same period of 2004.
Also contributing to the decrease was a $3 million reduction in earnings from
our investment in Jorf Lasfar primarily due to higher operating and maintenance
costs, the absence of $3 million of earnings from Goldfields, which we sold in
August of 2004, and $2 million of other decreases in earnings. These decreases
were offset partially by a $7 million increase in earnings from GasAtacama, as
the Argentine Government lifted its natural gas export restrictions in the third
quarter of 2004 and $4 million of earnings from Shuweihat, as the businesswhich achieved
commercial operationsoperation in the fourth quarter of 2004.
These increases were offset
byEarnings from equity method investees decreased $7 million for the absence of earnings from Goldfields, which was sold in 2004.
OPERATION AND MAINTENANCE: For the threesix months
ended March 31,June 30, 2005 operation
and maintenance expenses decreased versus the same period in 2004. The decrease in 2005 was primarily
due to a $10 million change in mark-to-market adjustments associated with our
investment in Taweelah as losses on interest rate swaps in the current period
replaced the gains recorded on these instruments in the same period of 2004.
Also contributing to the decrease was the absence of $6 million in earnings from
Goldfields, which we sold in August of 2004, $5 million in lower legalearnings at
Neyveli primarily due to costs associated with refinancing, and $3 million of
other decreases in earnings. These decreases were offset partially by $9 million
in earnings from Shuweihat, which achieved commercial operation in the reductionfourth
quarter of costs
related to businesses that have been sold.2004 and an $8 million increase in earnings from GasAtacama, as the
Argentine Government lifted its natural gas export restrictions in the third
quarter of 2004.
GAIN ON SALE OF ASSETS: For the three months ended March 31,June 30, 2005, gains on asset
sales were $2 million due to the gain on the sale of our investment in the SLAP
Fund in 2005. There were no significant gains or losses on asset sales during
this period in 2004.
For the six months ended June 30, 2005, gains on asset sales increased $2$4
million versus the same period in 2004. This is due to a $3 million gain on the
sale of GVK and a $2 million gain on the sale of the SLAP Fund in 2005 versus a
$1 million gain on the sale of the Bluewater Pipeline in 2004.
OPERATION AND MAINTENANCE: For the three months ended June 30, 2005, operation
and maintenance expenses increased $5 million versus the same period in 2004.
The increase was primarily due to maintenance expense on a turbine shaft at
T.E.S. Filer City Station Limited Partnership and profit sharing payments made
to union employees at our CPEE subsidiary.
For the six months ended June 30, 2005, operation and maintenance expenses
increased $3 million versus the same period in 2004. The increase was primarily
due to costs related to higher electrical production and higher professional
fees at our South American subsidiaries, offset partially by lower legal fees in
connection with an arbitration in Argentina.
GENERAL TAXES, DEPRECIATION AND OTHER INCOME: For the three months ended June
30, 2005, the net of general tax expense, depreciation and other income
increased operating income primarily as a result of net positive foreign
exchange activity.
For the six months ended June 30, 2005, the net of general tax expense,
depreciation and other income increased operating income primarily as a result
of the reversal of a contingent liability at our gas storage facility at Leonard
Field and net positive foreign exchange activity.
ASSET IMPAIRMENT CHARGES: For the threesix months ended March 31,June 30, 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 and six months ended March 31,June 30, 2005, fixed charges
decreased versus the same
periodCMS-11
CMS Energy Corporation
periods in 2004 primarily due to lower expenses at the MCV Partnership.
CMS-8
CMS Energy Corporation
MINORITY INTEREST: For the three months ended March 31,June 30, 2005, earnings attributed
to minority interest increasedowners in our subsidiaries decreased versus the same
periodperiods in 2004, primarily due to the impact of mark-to-market losses at the MCV
Partnership.
For the six months ended June 30, 2005, earnings attributed to minority interest
owners in our subsidiaries increased earningsversus the same periods in 2004, primarily
due to the impact of mark-to-market gains at the MCV Partnership.
INCOME TAXES: For the three months ended March 31,June 30, 2005, income tax expense
decreased versus the same period in 2004. The decrease was due to non-recurring
income tax benefits related to the American Jobs Creation Act of 2004.
For the six months ended June 30, 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.
This increase was offset partially by non-recurring income tax benefits related
to the American Jobs Creation Act of 2004.
CORPORATE INTEREST AND OTHER RESULTS OF OPERATIONS
In Millions
- --------------------------------------------------------------------------------
March 31------------------------------------------------------------------------------
June 30 2005 2004 Change
- --------------------------------------------------------------------------------------------------------------------------------------------------------------
Three months ended $ (46)(45) $ (49) $ 3
================================================================================4
Six months ended $ (91) $ (98) $ 7
==============================================================================
For the three months ended March 31,June 30, 2005, corporate interest and other net
expenses were $46$45 million, a decrease of $3$4 million versus the same period in
2004. The decrease reflects an $11a $4 million reduction in corporate interest
primarily due to lower average debt levels and a 6847 basis point reduction in the
average rate of interest.
For the six months ended June 30, 2005, corporate interest and other net
expenses were $91 million, a decrease of $7 million versus the same period in
2004. The decrease reflects a $12 million reduction in corporate interest
primarily due to lower average debt levels and a 53 basis point reduction in the
average rate of interest as well as a $4 million reduction in other interest
expenses allocated from the utilities. These decreases were offset partially by
a $1 million increase in other expenses and the absence in 2005 of an $8 million
benefit from the reversal of a currency translation adjustment related to the
sale of Loy Yang that was recorded in 2004.
DISCONTINUED OPERATIONS: For the three and six months ended March 31,June 30, 2005, we
had no activity from operations accounted for as discontinued. For the threesix
months ended March 31,June 30, 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 onof our benefit plans.
CMS-12
CMS Energy Corporation
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 the 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,liabilities, our indemnity and environmental remediation
obligations at Bay Harbor, and the potential underrecoveries from our power
purchase contract with the MCV Partnership.
CMS-9
CMS Energy Corporation
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 provided 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, which2005. The Midwest
Energy Market provides day-ahead and real-time energy market information and
centralized generation 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 adequateas we gain additional
experience with the Midwest Energy Market, we will reevaluatecontinue to evaluate 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
of our electric purchases and sales contracts may qualify as derivatives,derivatives.
However, we believe that we will be able to apply the normal purchases and sales
exception to the resulting mark-to-market
impact on earnings could be materialmajority of these contracts (including the MCV PPA), which
would not require us to our financial statements.mark these contracts to market.
Also as part of the Midwest Energy Market, FTRs were established. FTRs are
financial instruments
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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 the MISO's market area. WeFTRs are presently
evaluating whether FTRs qualify as derivative instruments. If they are
determined to be derivative instruments
FTRs would beand are required to be recognized on our Consolidated Balance Sheets as assets
or liabilities at their fair value,values, with any subsequent changes in fair value
recognized in earnings. However,As of June 30, 2005, we believe we may be able to offsetrecorded an asset of $1 million
associated with the earnings impact with a regulatory asset or
liability. The Midwest Energy Market was not effective until April 1, 2005.
Therefore,fair value of FTRs had no value at March 31, 2005.on our Consolidated Balance Sheets.
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, as of January 2005, any
changes in the fair value of these financial hedges will no longer be recognized in Other
Comprehensive Income, but will beare 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 threesix months ended March 31,June 30, 2005, we
recorded a $209$170 million gain associated with the increase in fair value of these
instruments on our Consolidated Statements of Income, (Loss).resulting in a cumulative
mark-to-market gain through June 30, 2005 of $226 million. The
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mark-to-market 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,June 30, 2005,
we assumed market-based interest rates ranging between 2.873.34 percent and 4.834.22
percent (depending on the term of the contract) and monthly volatility rates
ranging between 25 percent and 4042 percent to calculate the fair value of the gas
fuel derivative contracts
with volume optionality held by the MCV Partnership. Also, at June 30, 2005, we assumed a
market-based interest rate of 3.00 percent and monthly volatility rates ranging
between 35 percent and 39 percent to calculate the fair value of our gas
options.
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,June 30, 2005:
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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)31 (35) (4)
Other changes in fair value (b) (75) 83 8(105) 116 11
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Fair value of contracts outstanding at March 31,June 30, 2005 $ (256)(273) $ 267284 $ 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,June 30, 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)(273) (73) (130) (61) (9)
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total $(256) $ (77) $(116) $(54)(273) $ (73) $ (130) $ (61) $ (9)
======================================================================================================================================================================================================================
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Fair Value of Trading Contracts at March 31,June 30, 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) $(11)$ (44) $ (7) $ (27) $ (10) $ -
Prices obtained from external
sources or based on models and
other valuation methods 309 97 142 62 8328 92 158 69 9
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total $267 $88 $120 $ 51284 $ 8
====================================================================================================85 $ 131 $ 59 $ 9
==================================================================================================================
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,------------------------------------------------------------------------------------------------------------------
June 30, 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 ====================================================================================================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
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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,-------------------------------------------------------------------------------
June 30, 2005 December 31, 2004
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Potential reductionREDUCTION in fair value:
Gas supply option contracts $ - $ 1
FTRs - -
CMS ERM electric and gas forward contracts 12 10
Derivative contracts associated with the MCV
Partnership:
Gas fuel contracts (a) 4238 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,-------------------------------------------------------------------------------
June 30, 2005 December 31, 2004
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Potential reductionREDUCTION in fair value:
Electricity-related option contracts $ - $-$ -
Gas-related option contracts 31 3
Gas-related swaps and futures 1213 7
===================================================================================================================================================================================
INVESTMENT SECURITIES PRICE RISK SENSITIVITY ANALYSIS (assuming a 10 percent
adverse change in market prices):
In Millions
- ----------------------------------------------------------------------------------------------------
March 31,-------------------------------------------------------------------------------
June 30, 2005 December 31, 2004
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Potential reductionREDUCTION in fair value of
available-for-sale equity securities
(a)(b) $5 $5
====================================================================================================(primarily SERP investments) $ 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, theseThese funds wereare 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.
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INTERNATIONAL OPERATIONS AND FOREIGN CURRENCY
Argentina: As part of its energy privatization incentives, Argentina directed
CMS Gas Transmission to calculate tariffs in U.S. dollars then convert them to
pesos at the prevailing exchange rate, and to adjust tariffs every six months to
reflect changes in inflation. Starting in early 2000, Argentina suspended the
inflation adjustments.
In January 2002, the Republic of Argentina enacted the Public Emergency and
Foreign Exchange System Reform Act. This law repealed the fixed exchange rate of
one U.S. dollar to one Argentine peso, converted all dollar-denominated utility
tariffs and energy contract obligations into pesos at the same one-to-one
exchange rate, and directed the Government of Argentina to renegotiate such
tariffs.
CMS Gas Transmission began arbitration with the International Centre for the
Settlement of Investment Disputes (ICSID) in mid-2001, citing breaches by
Argentina under the Argentine - U.S. Bilateral Investment Treaty. In May 2005,
an ICSID tribunal concluded, among other things, that Argentina's economic
emergency did not excuse Argentina from liability. The ICSID tribunal found in
favor of CMS Gas Transmission, and awarded damages of U.S. $133 million, plus
interest.
Under the rules of the ICSID Convention, either party may seek an annulment of
the award from a newly constituted tribunal. Argentina has indicated its intent
to seek such an annulment.
ACCOUNTING FOR PENSION AND OPEB
Pension: We have established external trust funds to provide retirement pension
benefits to our employees under a non-contributory, defined benefit Pension
Plan. We implemented a cash balance plan for certain employees hired after June
30, 2003. On September 1, 2005, we will implement the Defined Company
Contribution Plan.
The Defined Company Contribution Plan will provide an employer cash contribution
of 5 percent of base pay to the existing Employees' Savings Plan. No employee
contribution is required to receive the plan's employer contribution. All
employees hired on and after September 1, 2005 will participate in this plan as
part of their retirement benefit program. Cash balance pension plan participants
will also participate in the Defined Company Contribution Plan on September 1,
2005. Additional pay credits under the cash balance pension plan will be
discontinued as of that date. We use SFAS No. 87 to account for pension costs.
401(k): We resumed the employer's match on our 401(k) Savings Plan on January 1,
2005. The plan provides for an employer match of 50 percent on eligible
contributions up to the first six percent of an employee's wages. Effective
September 1, 2005, employees enrolled in the company's 401(k) Savings Plan will
have the employer match increased from 50 percent to 60 percent.
OPEB: We provide postretirement health and life benefits under our OPEB plan to
substantially all our retired employees. We use SFAS No. 106 to account for
other postretirement benefit costs.
Liabilities for both pension and OPEB are recorded on the balance sheet at the
present value of their future obligations, net of any plan assets. The
calculation of the liabilities and associated expenses requires the expertise of
actuaries. Many assumptions are made including:
- life expectancies,
- present-value discount rates,
- expected long-term rate of return on plan assets,
- rate of compensation increases, and
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- anticipated health care costs.
Any change in these assumptions can change significantly the liability and
associated expenses recognized in any given year.
The following table provides an estimate of our pension cost, OPEB cost, and
cash contributions for the next three years:
In Millions
- -----------------------------------------------------------------------------
Expected Costs Pension Cost OPEB Cost Contributions
- -----------------------------------------------------------------------------
2006 $ 95 $ 38 $ 82
2007 104 34 184
2008 99 30 112
=============================================================================
Actual future pension cost and contributions will depend on future investment
performance, changes in future discount rates, and various other factors related
to the populations participating in the Pension Plan.
For additional details on postretirement benefits, see Note 7, Retirement
Benefits.
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.recoveries as gas prices increase. 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.
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CASH POSITION, INVESTING, AND FINANCING
Our operating, investing, and financing activities meet consolidated cash needs.
At March 31,June 30, 2005, $985 million$1.080 billion consolidated cash was on hand, which includes
$45$67 million of restricted cash and $144$214 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 threesix months ended March 31,June 30, 2005, Consumers paid $118$167
million in common stock dividends to CMS Energy.
SUMMARY OF CASH FLOWS:
In Millions
- --------------------------------------------------------------------------------
Three-------------------------------------------------------------------------------
Six months ended March 31June 30 2005 2004
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in):
Operating activities $ 262506 $ 238478
Investing activities (8) (165)
----------------(136) (403)
---------------
Net cash provided by operating and investing activities 254 73370 75
Financing activities 17 (269)(27) (276)
Effect of exchange rates on cash - (9)
----------------1 (1)
---------------
Net increase (decrease) in cash and cash equivalents $ 271 $(205)
================================================================================344 $ (202)
===============================================================================
OPERATING ACTIVITIES: For the threesix months ended March 31,June 30, 2005, net cash provided
by operating activities increased $24$28 million versus the same period in 2004 due
to decreases in inventory from lower volumes of gas sales at higher pricespurchased and other timing
differences.
INVESTING ACTIVITIES: For the threesix months ended March 31,June 30, 2005, net cash used in
investing activities decreased $157$267 million primarily due to a net increase in
short-term investment proceeds of $159$301 million, offset by an increase in capital
expenditures of $43 million.
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FINANCING ACTIVITIES: For the threesix months ended March 31,June 30, 2005, net cash provided byused in
financing activities increased $286decreased $249 million primarily due to an
increasenet proceeds from
the issuance of $279common stock of $283 million, offset by a decrease of $34
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
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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 June 3, 2005, S&P downgraded AIG further from
AA+ to AA. 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. On May 31, 2005, Moody's
confirmed the Aa2 rating for AIG and revised its outlook to stable. AHA remained
under review for possible 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.
BOND REPURCHASE: In July and through August 4, 2005, we have purchased in the
open market $73 million principal amount of our 9.875 percent senior notes due
2007.
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, theThe 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 companyus 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 almostapproximately three
percent. This short-term outlook for 2005 assumes a stronger economy than in
2004 and normal weather conditions throughoutduring the remainder of 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 or contraction 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 establish a reserve margin target to address various scenarios and
contingencies so that the probability of interrupting service to retail
customers because of a supply shortage is no greater than an industry-recognized
standard. However, even with the reserve margin target, additional spot
purchases during periods when electric prices are high may be required. 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
101100 percent from our electric generating plants and long-term
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CMS Energy Corporation
power purchase contracts, and approximately 1011 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 and covering partially the estimated reserve margin
requirements for 2006 through 2007. As a result, we have recognized an asset of
$11$12 million for unexpired capacity and energy contracts at March 31,June 30, 2005.
COAL DELIVERY DISRUPTIONS: In May 2005, western coal rail carriers experienced
derailments and significant service disruptions due to heavy snow and rain
conditions. These disruptions affected all shippers of western coal from Wyoming
mines as well as coal producers from May 2005 through June 2005. We received
notification that, under contractual Force Majeure provisions, the coal tonnage
not delivered during this period will not be made up. According to recent
announcements, rail repairs will extend through November 2005. Although we
expect some impact on coal shipments during the repair period, and as a result
our coal inventories may drop below historical levels this winter, based on our
current delivery experience, projections, and inventory, we believe we will have
adequate coal supply to allow for normal dispatch of our coal-fired generating
units. However, we are unable to predict other potential industry-wide
shortages, which could affect the ability of our suppliers to deliver on their
commitments.
TRANSMISSION MARKET DEVELOPMENT: The MISO began operating the Midwest Energy
Market on April 1, 2005, which2005. The Midwest Energy Market includes a day-ahead and
real-time energy market and centralized generation dispatch for market
participants. We are a participant in this energy market. TheseThe intention of these
changes are anticipatedis to ensure thatmeet load requirements in the region are met reliably and efficiently, to
better manageimprove management of 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 12covers parts of
15 states and Manitoba, as well asincluding 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 CMS-16
CMS Energy Corporation
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. In March 2005, we issued a request for proposal for long-term
renewable energy supply contracts. We are in negotiations with certain
respondents to this request.
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 load migration to alternative electric suppliers,
increased system maintenance and improvement costs, Clean Air Act-related
expenditures, and employee pension costs. We expectIn April 2005, we filed updated debt
and equity information in this case.
In June 2005, the MPSC staff to fileStaff filed its position in thethis case, recommending a
base rate increase of $98 million. The MPSC Staff also recommended an 11.25
percent return on equity to establish rates and recognized all of our projected
equity investment (infusions and retained earnings) in June 2005.2006. 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.
BURIAL OF OVERHEAD POWER LINES: In September 2004, the Michigan Court of Appeals
upheld a lower court decision that requires Detroit Edison to obey a municipal
ordinance enacted by the City of Taylor,
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CMS Energy Corporation
Michigan. The ordinance requires Detroit Edison to bury a section of its
overhead power lines at its own expense. Detroit Edison has filed an appeal with
the Michigan Supreme Court. Unless overturned by the Michigan Supreme Court, the
decision could encourage other municipalities to adopt similar ordinances, as
has occurred or is under discussion in a few municipalities in our service
territory. If incurred, we would seek recovery of these costs from our customers
located in the municipality affected, subject to MPSC approval. This case has
potentially broad ramifications for the electric utility industry in Michigan.
In a similar matter, in May 2005, we filed a request with the MPSC that asks the
MPSC to rule that the City of East Grand Rapids, Michigan must pay for the
relocation of electric utility facilities required by an ordinance adopted by
the city. At this time, we cannot predict the outcome of these matters.
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 MarchJune 2005, we have incurred
$543$563 million in capital expenditures to comply with these regulations and
anticipate that the remaining $272$252 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 hashave 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, orand 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 to meet the phase I
reduction requirements of the Clean Air Interstate Rule at a cost near that of
the Selective Catalytic Reduction total cost in order to meet Phase
One emission reduction requirements.Nitrogen Oxide State Implementation Plan.
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CMS Energy Corporation
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 couldare expected to be
significantly less than what 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.sector. 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 2006.2007. We are currently studyingperforming the rulesrequired studies 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 AprilJuly 2005, alternative electric suppliers
are providing 893811 MW of generation supply to ROA customers. This amount
represents an increasea decrease of 95 percent compared to AprilJuly 2004, and 1211 percent of our
total distribution load. Several customers have notified us of their intent to return
to our service after a notification period ending betweenthat ended in June 2005 and July
2005. We estimate that between 70Customers representing 106 MW and 100 MW will returnreturned to our service.service during this period.
Based on this and other current trends, we predict that total load loss by the
end of 2005 will be in the range of 925900 MW to 1,000950 MW. However, no assurance
can be madewe cannot assure
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 ofIn June 2005, the MPSC issued an order that authorizes us
to recover implementation costs forincurred during 2002 and $12003 totaling $6
million, for 2003 are pending MPSC approval. In September
2004,plus the ALJ issued a Proposal for Decision recommending full recoverycost of these
costs. In parallel with these cost recovery efforts atmoney through the MPSC, weperiod of collection.
We are also pursuing an appealauthorization at the FERC for the MISO to reimburse us for
Alliance RTO development costs. Included in this amount is $2 million that the
MPSC did not approve as part of a FERC order denying recovery of costs incurred in the
development of the Alliance RTO. Although we believe theseour 2002 implementation costs application. The
FERC denied our request for reimbursement and we are fully recoverable in accordance withappealing the Customer Choice Act, weFERC ruling
at the United States Court of Appeals for the District of Columbia. We cannot
predict the amount, if any, the FERC will approve as recoverable.
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CMS Energy Corporation
Section 10d(4) Regulatory Assets: In October 2004, we filed an application with
the MPSC orseeking recovery of $628 million of Section 10d(4) Regulatory Assets
for the FERCperiod June 2000 through December 2005. Of the $628 million, $152
million relates to the cost of money. In March 2005, the MPSC Staff filed
testimony recommending the MPSC approve recovery of approximately $323 million
in Section 10d(4) costs, which includes the cost of money through the period of
collection. In June 2005, the ALJ issued a proposal for decision recommending
the MPSC approve recovery of the same Section 10d(4) costs recommended by the
MPSC Staff. 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.
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 collectedthat we collect 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 naturalNatural gas prices have
increased substantially in recent years andyears. NYMEX forward natural gas prices
through 2010 recently were approximately $2 per mcf higher than they were at
year-end 2004. Because the price the MCV Partnership can charge us for energy
has not increased to reflect current natural gas prices, the MCV Partnership's
financial performance has been impacted negatively. Even with the approved RCP, ifIf forward gas prices for
2010 and beyond do not decline from present levels,to the $4 to $6 per mcf range currently
anticipated by various government and private natural gas price forecasts, and
remain in that range for the remaining life of the MCV PPA, the economics of
operating the MCV Facility maywould be adverse enough to require usthe MCV
Partnership to recognize an impairment. Therea substantial impairment of its property, plant and
equipment, which are severalincluded in our Consolidated Balance Sheets. However,
forecasting future natural gas prices is extremely difficult and there are
currently differing views among forecasters as to whether such prices will
increase, decrease or remain at current levels over any period of time. At
present, some of the forecasts indicate natural gas prices in excess of the $4
to $6 per mcf range during the years after 2010. At June 30, 2005, the net book
value of the MCV Partnership's property, plant
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CMS Energy Corporation
and equipment was $1.396 billion. Several other factors which could alter
significantly ourthe MCV Partnership's 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. Any such impairment would be required to be recognized in the period
when management's analysis of the factors described above meets the accounting
standards for impairment recognition. We will continue to monitor the current
and long-term trends in natural gas prices and their effect on the economics of
operating the MCV Facility.
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, theby early 2007. We expect a 30-acre area where
seven transportable drycontaining
eight casks loaded with spent nuclear fuel and an eighth cask
loaded withother 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
MarchJune 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 wet storage pool capacity. We are using dry casks for temporary onsite
storage.dry storage to supplement the wet storage pool capacity. As of MarchJune 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. ItsA 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.costs.
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,March 2005, an MPSC ALJ recommended that the complaint be dismissed.
Exceptions to
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CMS Energy Corporation
this proposal for decision have been filed, and the matter is now before the
MPSC for a decision. 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,
- the price of competing energy sources or fuels,
- gas consumption per customer, and
- changes in gas commodity prices.
In February 2004, we filed an application with the MPSC for a Certificate of
Public Convenience and Necessity to construct a 25-mile gas transmission
pipeline in northern Oakland County. The project is necessary to meet estimated
peak load beginning in the winter of 2005 through 2006. We started construction
of the pipeline in June 2005 and it is expected to be completed and in service
by November 2005.
In October 2004, we filed an application with the MPSC for a Certificate of
Public Convenience and Necessity to construct a 10.8-mile gas transmission
pipeline in northwestern Wayne County. The project is necessary to meet the
projected capacity demands beginning in the winter of 2007. If we are unable to
construct the pipeline, we will need to pursue more costly alternatives or
curtail serving the system's load growth in that area. On July 8, 2005, the
Administrative Law Judge hearing the case issued a proposal for decision
supporting the project as filed.
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.
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CMS Energy Corporation
In October and December 2004, the MPSC issued Opinions and Orders in our gas
depreciation case, which reaffirmed athe 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 theThe MPSC has directed us to file our next gas depreciation case until 150within 90 days
after:after the latter of:
- the removal cost study is filed, andfiling or
- the MPSC issues anissuance of a final order in athe pending case relatingrelated to ARO
accounting.
The MPSC order on the pending case related to ARO accounting is expected in the
first quarter of 2006. 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.
CMS-21
CMS Energy Corporation2005 GAS RATE CASE: In MarchJuly 2005, we filed an application with the MPSC grantedseeking
a 12 percent authorized return on equity along with a $132 million annual
increase in our waivergas delivery and transportation rates. The primary reasons for
the request are recovery of new investments, carrying costs on natural gas
inventory related to higher gas prices, system maintenance, employee benefits,
and accepted our surcharge
proposal, but reducedlow-income assistance. If approved, the lead time allowedrequest would add approximately 5
percent to preparethe typical residential customer's average monthly bill. The increase
would also affect commercial and file the depreciation
case to 90 days.industrial customers. As part of this filing,
we also requested interim rate relief of $75 million.
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 expireexpired 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 expireexpired on August l, 2005. In July 2005,
Consumers and the Union reached and ratified a new collective bargaining
agreement for our call center employees.
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 offset partially offset the effects of its lower tariff revenues.
The fuel subsidy expired on December 31, 2004. TheSENECA has sent several letters
to the MEP has advised
SENECAindicating that it is not renewingthe economic circumstances that required the
implementation of the fuel subsidy.subsidy persist. In the letters, SENECA has informed
the MEP that, unless it objects, SENECA will continue to apply the fuel subsidy
as a credit against a portion of its fuel bills from its fuel supplier,
Deltaven, a governmental body
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CMS Energy Corporation
regulated by the MEP. SENECA has not received any response to the letters from
the MEP; therefore, SENECA is taking the fuel subsidy as a credit against
billings from Deltaven. We are informed that the government has under considerationis considering
whether to grant an industry-wide tariff
increase and that a decision will be made no later than July 2005.financial relief to SENECA pursuant to its Concession Agreement
obligations. The outcome is uncertain since all alternatives have not been fullyare still being
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 taxes or 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: DuringThe
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). In June 2005, we may havedecided on a plan to repatriate $79 million of
foreign earnings during the abilityremainder of 2005. Historically, we recorded
deferred taxes on these earnings. Since this planned repatriation is expected to
qualify for the tax benefit, we reversed $24 million of our deferred tax
liability. This adjustment was recorded as a component of income from continuing
operations in the second quarter of 2005.
We may repatriate additional amounts that may qualify for the repatriation tax
benefit.benefit during the remainder of 2005. If successful, our current estimate is
that additional amounts could range between $100$50 million and $120$150 million. The
amount of additional repatriation remains uncertain because it is based on
future foreign
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CMS Energy Corporation
subsidiary operations, cash flow,flows, financings, and repatriation limitations.
This potential additional repatriation could reduce our recorded deferred tax
liability $30by $15 million to $36$45 million. We expect to be in a position to
finalize our assessment regarding any potential repatriation, 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 deductibletax-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-23CMS-29
CMS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(LOSS)
(UNAUDITED)
THREE MONTHS ENDED March 31SIX MONTHS ENDED
JUNE 30 2005 2004 2005 2004
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
In Millions, Except Per Share Amounts
OPERATING REVENUE $ 1,8451,241 $ 1,7541,093 $ 3,086 $ 2,847
EARNINGS FROM EQUITY METHOD INVESTEES 31 1921 41 52 60
OPERATING EXPENSES
Fuel for electric generation 177 178 184 355 362
Fuel costs mark-to-market at MCV (209)39 - (170) (6)
Purchased and interchange power 95 77113 80 208 157
Cost of gas sold 839 761334 263 1,173 1,024
Other operating expenses 234 218257 224 491 442
Maintenance 58 5765 116 122
Depreciation, depletion and amortization 156 144122 108 278 252
General taxes 75 7466 62 141 136
Asset impairment charges - - - 125
---------------------
1,425 1,628-----------------------------------------------------
1,167 986 2,592 2,614
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 451 14595 148 546 293
OTHER INCOME (DEDUCTIONS)
Accretion expense (5) (6) (10) (12)
Gain on asset sales, net 2 1 5 3 2
Interest and dividends 1015 7 25 14
Regulatory return on capital expenditures 1615 9 31 18
Foreign currency losses, net (1) (3) (3) (4) (6)
Other income 8 310 6 18 9
Other expense (7)(5) (2) ---------------------
24 10(12) (4)
-----------------------------------------------------
29 12 53 22
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
FIXED CHARGES
Interest on long-term debt 122 130121 126 243 256
Interest on long-term debt - related parties 10 156 14 16 29
Other interest 4 56 7 10 12
Capitalized interest (1) (1) (2) (3)
Preferred dividends of subsidiaries 1 1 ---------------------
136 1492 2
-----------------------------------------------------
133 147 269 296
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE MINORITY INTERESTS 339 6(9) 13 330 19
MINORITY INTERESTS 113 11
---------------------(14) 1 99 12
-----------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES 226 (5)5 12 231 7
INCOME TAX EXPENSE (BENEFIT) 74 (3)
---------------------(25) (7) 49 (10)
-----------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 152 (2)
INCOME (LOSS)30 19 182 17
LOSS FROM DISCONTINUED OPERATIONS, NET OF
$- AND $1 TAX BENEFIT IN 2004 - - - (2)
--------------------------------------------------------------------------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING 152 (4)30 19 182 15
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR
RETIREMENT BENEFITS, NET OF $1 TAX BENEFIT IN 2004 - - - (2)
--------------------------------------------------------------------------
NET INCOME (LOSS) 152 (6)30 19 182 13
PREFERRED DIVIDENDS 2 3 ---------------------3 5 6
-----------------------------------------------------
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS $ 15027 $ (9)
==========================================================================================16 $ 177 $ 7
================================================================================================================================
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
CMS-24CMS-30
THREE MONTHS ENDED March 31SIX MONTHS ENDED
JUNE 30 2005 2004 2005 2004
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
In Millions, Except Per Share Amounts
CMS ENERGY
NET INCOME
(LOSS)
Net Income (Loss) Available to Common Stockholders $ 15027 $ (9)
====================16 $ 177 $ 7
====================================================
BASIC EARNINGS (LOSS) PER AVERAGE COMMON SHARE
Income (Loss) from Continuing Operations $ 0.770.12 $ (0.04)0.10 $ 0.86 $ 0.06
Loss from Discontinued Operations - - - (0.01)
Loss from Changes in Accounting - - - (0.01)
------------------------------------------------------------------------
Net Income (Loss) Attributable to Common Stock $ 0.770.12 $ (0.06)
====================0.10 $ 0.86 $ 0.04
====================================================
DILUTED EARNINGS (LOSS) PER AVERAGE COMMON SHARE
Income (Loss) from Continuing Operations $ 0.740.12 $ (0.04)0.10 $ 0.82 $ 0.06
Loss from Discontinued Operations - - - (0.01)
Loss from Changes in Accounting - - - (0.01)
------------------------------------------------------------------------
Net Income (Loss) Attributable to Common Stock $ 0.740.12 $ (0.06)
====================0.10 $ 0.82 $ 0.04
====================================================
DIVIDENDS DECLARED PER COMMON SHARE $- $-$ - ------------------------------------------------------------------------------------------------$ - $ - $ -
- ------------------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
CMS-25CMS-31
[This(This page intentionally left blank]
CMS-26blank)
CMS-32
CMS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREESIX MONTHS ENDED
March 31JUNE 30 2005 2004
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
In Millions
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 152182 $ (6)13
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Depreciation, depletion and amortization (includes nuclear
156 144
decommissioning of $1$3 per period) 278 252
Regulatory return on capital expenditures (16) (9)(31) (18)
Minority interest 113 1199 12
Fuel costs mark-to-market at MCV (209)(170) (6)
Asset impairment charges - 125
Capital lease and debt discount amortization 10 821 14
Accretion expense 5 610 12
Distributions from related parties less than earnings (2) (6)(16) (44)
Gain on the sale of assets (5) (3) (2)
Cumulative effect of accounting changes - 2
Changes in other assets and liabilities:
Increase in accounts receivable and accrued revenues (317) (335)(78) (112)
Decrease in inventories 418 366
Decrease112 81
Increase in accounts payable (25) (43)
Decrease29 61
Increase (decrease) in accrued expenses (79) (41)(50) 5
Deferred income taxes and investment tax credit 68 7058 44
Decrease in other current and non-current assets 11 37
Increase in other current and non-current assets (29) (4)
Increase (decrease) in other current and non-current liabilities 20 (42)
-----------------------56 3
--------------------------
Net cash provided by operating activities $ 262506 $ 238478
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under capital lease) $ (149)(280) $ (113)(237)
Cost to retire property (27) (18)(44) (37)
Restricted cash 11 (15)
Investment in Electric Restructuring Implementation Plan (1) (2)(20) (12)
Investments in nuclear decommissioning trust funds (1) (1)(3) (3)
Proceeds from nuclear decommissioning trust funds 7 2024 23
Proceeds from short-term investments 295 7131,072
Purchase of short-term investments (186) (763)(1,264)
Maturity of MCV restricted investment securities held-to-maturity 126 115222 300
Purchase of MCV restricted investment securities held-to-maturity (126) (115)(223) (300)
Proceeds from sale of assets 21 559 66
Other investing 22 9
-----------------------20 (11)
--------------------------
Net cash used in investing activities $ (8)(136) $ (165)(403)
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes, bonds, and other long-term debt $ 704900 $ -9
Issuance of common stock 6283 -
Retirement of bonds and other long-term debt (678) (263)(1,169) (274)
Payment of preferred stock dividends (2) (3)(6) (6)
Payment of capital lease obligations (3) (3)
Other(5) (5)
Debt issuance costs and financing (10)fees (30) -
-------------------------------------------------
Net cash provided by (used in)used in financing activities $ 17(27) $ (269)(276)
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATES ON CASH 1 (1)
- (9)
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 271344 $ (205)(202)
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 $ 9401,013 $ 501
========================================================================================================504
================================================================================================================================
CMS-27CMS-33
CMS ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
MARCH 31JUNE 30
2005 DECEMBER 31
(UNAUDITED) 2004
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
In Millions
PLANT AND PROPERTY (AT COST)
Electric utility $ 8,0078,044 $ 7,967
Gas utility 3,0103,028 2,995
Enterprises 3,3483,360 3,517
Other 27 28
28
----------------------
14,393-----------------------------
14,459 14,507
Less accumulated depreciation, depletion and amortization 6,0326,115 6,135
----------------------
8,361-----------------------------
8,344 8,372
Construction work-in-progress 437490 370
----------------------
8,798-----------------------------
8,834 8,742
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
INVESTMENTS
Enterprises 728698 729
Other 13 23
----------------------
741-----------------------------
711 752
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents at cost, which approximates market 9401,013 669
Restricted cash 4567 56
Short-term investments at cost, which approximates market - 109
Accounts receivable, notes receivable and accrued revenue, less
allowances of $32 and $38, respectively 826601 528
Accounts receivable and notes receivable - related parties 6047 53
Inventories at average cost
Gas in underground storage 464738 856
Materials and supplies 8589 90
Generating plant fuel stock 6391 84
Price risk management assets 139131 91
Regulatory assets - postretirement benefits 19 19
Derivative instruments 253241 96
Deferred property taxes 164139 167
Prepayments and other 123117 181
----------------------
3,181-----------------------------
3,293 2,999
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
NON-CURRENT ASSETS
Regulatory Assets
Securitized costs 593583 604
Additional minimum pension 371466 372
Postretirement benefits 133128 139
Abandoned Midland Project 10 10
Other 586636 552
Price risk management assets 258283 214
Nuclear decommissioning trust funds 561555 575
Goodwill 2227 23
Notes receivable - related parties 205 217
Notes receivable 179168 178
Other 563562 495
----------------------
3,481-----------------------------
3,623 3,379
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 16,20116,461 $ 15,872
===========================================================================================================================================================================================================
CMS-28CMS-34
STOCKHOLDERS' INVESTMENT AND LIABILITIES
MARCH 31JUNE 30
2005 DECEMBER 31
(UNAUDITED) 2004
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
In Millions
CAPITALIZATION
Common stockholders' equity
Common stock, authorized 350.0 shares; outstanding 195.6219.2 shares and
195.0 shares, respectively $ 2 $ 2
Other paid-in capital 4,1474,422 4,140
Accumulated other comprehensive loss (323)(333) (336)
Retained deficit (1,584)(1,557) (1,734)
-----------------------
2,242------------------------------
2,534 2,072
Preferred stock of subsidiary 44 44
Preferred stock 261 261
Long-term debt 6,6576,516 6,444
Long-term debt - related parties 307 504
Non-current portion of capital and finance lease obligations 315 315
-----------------------
9,826------------------------------
9,977 9,640
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
MINORITY INTERESTS 844 733
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt, capital and finance leases 487343 296
Current portion of long-term debt - related parties - 180
Accounts payable 356412 391
Accounts payable - related parties 2- 1
Accrued interest 123159 145
Accrued taxes 259256 312
Price risk management liabilities 129118 90
Current portion of gas supply contract obligations 3334 32
Deferred income taxes 3233 19
Other 245266 289
-----------------------
1,666------------------------------
1,621 1,755
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
NON-CURRENT LIABILITIES
Regulatory Liabilities
Regulatory liabilities for cost of removal 1,0701,084 1,044
Income taxes, net 360365 357
Other regulatory liabilities 169173 173
Postretirement benefits 282440 275
Deferred income taxes 730713 671
Deferred investment tax credit 7877 79
Asset retirement obligation 441434 439
Price risk management liabilities 257285 213
Gas supply contract obligations 163156 176
Other 315292 317
-----------------------
3,865------------------------------
4,019 3,744
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 3, 4 and 6)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $ 16,20116,461 $ 15,872
====================================================================================================================================================================================================================
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
CMS-29CMS-35
CMS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
(UNAUDITED)
THREE MONTHS ENDED March 31SIX MONTHS ENDED
JUNE 30 2005 2004 2005 2004
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
In Millions In Millions
COMMON STOCK
At beginning and end of period $ 2 $ 2 $ 2 $ 2
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
OTHER PAID-IN CAPITAL
At beginning of period 4,147 3,846 4,140 3,846
Common stock reacquired - (1) - (1)
Common stock issued 6 -275 3 281 3
Common stock reissued - - 1 -
---------------------------------------------------------------------
At end of period 4,147 3,8464,422 3,848 4,422 3,848
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Minimum Pension Liability
At beginning of period (17) - (17) -
Minimum pension liability adjustments (a) (9) - (9) -
---------------------------------------------------------------------
At end of period (17)(26) - -----------------------(26) -
----------------------------------------------
Investments
At beginning of period 8 9 9 8
Unrealized gain (loss) on investments (a) - (1) 1
-----------------------(1) -
----------------------------------------------
At end of period 8 9
-----------------------8 8 8
----------------------------------------------
Derivative Instruments
At beginning of period 1 (13) (9) (8)
Unrealized gain (loss) on derivative instruments (a) 18(6) 22 12 19
Reclassification adjustments included in net income (a) 2 (3) Realized gain on derivative instruments (a) (8) (2)
-----------------------(6) (5)
----------------------------------------------
At end of period 1 (13)
-----------------------(3) 6 (3) 6
----------------------------------------------
Foreign Currency Translation
At beginning of period (315) (313) (319) (419)
Loy Yang sale - - - 110
Other foreign currency translations (a) 4 (4)
-----------------------3 (14) 7 (18)
----------------------------------------------
At end of period (315) (313)
-----------------------(312) (327) (312) (327)
----------------------------------------------
At end of period (323) (317)(333) (313) (333) (313)
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
RETAINED DEFICIT
At beginning of period (1,584) (1,853) (1,734) (1,844)
Consolidated netNet income (loss) (a) 152 (6)30 19 182 13
Preferred stock dividends declared (2) (3) -----------------------(3) (5) (6)
----------------------------------------------
At end of period (1,584) (1,853)
-----------------------(1,557) (1,837) (1,557) (1,837)
----------------------------------------------
TOTAL COMMON STOCKHOLDERS' EQUITY $ 2,2422,534 $ 1,678
=============================================================================================
(a)1,700 $ 2,534 $ 1,700
===================================================================================================================================
(A) DISCLOSURE OF OTHER COMPREHENSIVE INCOME:
Minimum Pension Liability
Minimum pension liability adjustments, net of tax benefit of
$(5), $-, $(5) and $-, respectively $ (9) $ - $ (9) $ -
Investments
Unrealized gain (loss) on investments, net of tax of
$-, $-, $- and $-, respectively - (1) 1(1) -
Derivative Instruments
Unrealized gain (loss) on derivative instruments, net of tax
of $9$4, $2, $13 and $5,$7, respectively 18 (3)
Realized gain on derivative instruments,(6) 22 12 19
Reclassification adjustments included in net income, net of tax benefit
of $-, $(2), $(6) and $(1)$(3), respectively (8) (2)2 (3) (6) (5)
Foreign currency translation, net 4 106
Consolidated net3 (14) 7 92
Net income (loss) 152 (6)
-----------------------30 19 182 13
----------------------------------------------
Total Other Comprehensive Income $ 16520 $ 96
=======================23 $ 185 $ 119
==============================================
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
CMS-30CMS-36
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, electric
distribution, 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. IntercompanyWe eliminate intercompany transactions and
balances have been eliminated.balances.
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-31CMS-37
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,June 30, 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 2.9232.895
pesos per U.S. dollar was $263$262 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$16.461
billion at March 31,June 30, 2005, 5958 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 31Six Months Ended
----------------------------------------------------
June 30 2005 2004 2005 2004
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Other income
Interest and dividends - related parties $ 23 $ 1 $ 5 $ 2
Electric restructuring return 3 1 4 3
Return on stranded costs 1 - Electric restructuring return2 -
Return on security costs 1 21 1 1
Nitrogen oxide allowance sales 1 - 1 -
Investment sale gain - 1 - 1
Reversal of contingent liability - - 3 -
All other 1 2 2 2
- - -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total other income $ 810 $ 3
=====================================================================================6 $ 18 $ 9
==================================================================================================================
In Millions
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31Six Months Ended
----------------------------------------------------
June 30 2005 2004 2005 2004
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Other expense
Investment write-down $ - $ - $ (1) $ -
Loss on SERP investment (1) (1) (1) (1)
Loss on reacquired debt (5)(1) - (6) -
Plant maintenance shut-down (2) - (2) -
Civic and political expenditures - - (1) (1)
All other (1) (1) (1) (2)
- (1)
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total other expense $ (7)(5) $ (2) =====================================================================================$ (12) $ (4)
==================================================================================================================
CMS-38
CMS Energy Corporation
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$59 million for the
threesix months ended March 31,June 30, 2005 and $5$66 million for the threesix months ended March 31,June 30,
2004. The impacts of these sales are included in Gain on assets sales, net inon
our Consolidated Statements of Income (Loss).
In FebruaryIncome.
For the six months ended June 30, 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).following assets:
In Millions
- --------------------------------------------------------------------------------------------------------------
Pretax After-tax
Date sold Business/Project Gain Gain
- --------------------------------------------------------------------------------------------------------------
February GVK $ 3 $ 2
April Scudder Latin American Power Fund 2 1
April Gas turbine and auxiliary equipment - -
- --------------------------------------------------------------------------------------------------------------
Total gain on asset sales $ 5 $ 3
==============================================================================================================
For the six months ended June 30, 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).following assets:
In Millions
- --------------------------------------------------------------------------------------------------------------
Pretax After-tax
Date sold Business/Project Gain Gain
- --------------------------------------------------------------------------------------------------------------
February Bluewater Pipeline $ 1 $ 1
April Loy Yang - -
May American Gas Index fund 1 1
Various Other 1 -
- --------------------------------------------------------------------------------------------------------------
Total gain on asset sales $ 3 $ 2
==============================================================================================================
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 threesix months
ended March 31,June 30, 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.
CMS-39
CMS Energy Corporation
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.trading, which the DOJ commenced in May 2002. 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 and an amended motion
for class certification on June 20, 2005. CMS Energy and the individual
defendants will defend themselves vigorously in this litigation but cannot
predict its outcome.
PROPOSED SETTLEMENT OF 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 iswas 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.
CMS-40
CMS Energy Corporation
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.
On July 7, 2005, CMS Energy filed with the court a Stipulation of Settlement
that was signed by all parties as well as the special litigation committee.
Under the terms of the settlement, CMS Energy will defend itself vigorously but cannot predictreceive $12 million under its
directors and officers liability insurance program, $7 million of which will be
used to pay costs associated with the outcomesecurities class action lawsuits. CMS
Energy may use the remaining $5 million to pay attorneys' fees and expenses
arising out of the derivative proceeding. The terms of the settlement are
subject to court approval and the hearing for final approval is scheduled for
August 26, 2005. The impact of this matter.settlement is not material to our June 30,
2005 consolidated financial statements.
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.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
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.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 developed on the
site of a discontinued cement plant 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 overleftover 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 interestsinterest 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
CMS-41
noncompliance (NON), after finding high pH-seep water in Lake Michigan adjacent
to the project.property. 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.,LLC, subsidiaries of Enterprises. Under the AOC, CMS Land
Company and CMS Capital Corp. areEnergy is
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.
In June and July 2005, the EPA approved the removal action work plan insofar as
it provided for fencing of affected beachfront areas and the installation of an
underground leachate collection system, among other elements. The EPA's
approvals also specify that a backup "containment and isolation system,"
involving dams or barriers, could be required in certain areas if the collection
system is ineffective. The EPA approved the balance of the work plan on July 28,
2005. CMS Energy continues to have discussions with the EPA over the
implementation of the work plan.
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
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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
claimclaims or lawsuits.
Based on initial 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.
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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 MarchJune 2005, we have incurred
$543$563 million in capital expenditures to comply with these regulations and
anticipate that the remaining $272$252 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 hashave 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, orand 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.
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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 to meet the phase I
reduction requirements of the Clean Air Interstate Rule at a cost near that of
the Selective Catalytic Reduction total cost in order to
meet Phase One emission reduction requirements.Nitrogen Oxide State Implementation Plan.
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 couldare expected to be
significantly less than what 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
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CMS Energy Corporation
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,June 30, 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 waterwastewater 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 at this
time, 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, sellingwhich
sell 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.
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CMS Energy Corporation
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. In June 2005, the FERC issued a notice of intent not to act on this
issue. We cannot predict the outcome of these appeals andor the remaining legal
actions.action.
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 AprilJuly 2005, alternative
electric suppliers are providing 893811 MW of generation supply to ROA customers.
This amount represents an increasea decrease of 95 percent compared to AprilJuly 2004, and 1211
percent of our total distribution load.
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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 2003.2003, plus
the cost of money through the period of
collection.
Implementation 1999-2004 1997-2003 $91 million (b) The MPSC allowed $68 million for
Costs the
Costs years 1997-2001, plus $20 million
for the cost of
money through 2003.
Implementation cost filingsthe period of collection.
The MPSC allowed $6 million for 2002
and 2003 for $8 million, which
includesthe years
2002-2003, plus the cost of money through
2003, are pending MPSC approval.the period of collection.
Section 10d(4) 2004 2000-2005 $628 million FiledApplication 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.
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CMS Energy Corporation
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.costs, which includes the cost of money through the
period of collection. In June 2005, the ALJ issued a Proposal for Decision
recommending that the MPSC approve recovery of the same Section 10d(4) costs
recommended by the MPSC Staff. 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,June 30, 2005, total recorded Section 10d(4) Regulatory Assets
were $160$179 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 load migration to alternative electric suppliers,
increased system maintenance and improvement costs, Clean Air Act-related
expenditures, and employee pension costs. We expectIn April 2005, we filed updated debt
and equity information in this case.
In June 2005, the MPSC staff to fileStaff filed its position in thethis case, recommending a
base rate increase of $98 million. The MPSC Staff also recommended an 11.25
percent return on equity to establish rates and recognized all of our projected
equity investment (infusions and retained earnings) in June 2005.2006. 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
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CMS Energy Corporation
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
and covering partially the estimated reserve margin requirements for 2006
through 2007. As a result, we have recognized an asset of $11$12 million for
unexpired capacity and energy contracts at March 31,June 30, 2005. At AprilAs of July 2005, we
expect the total premium cost of electric capacity and energy contracts for 2005
to be approximately $6$8 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. In June 2005, the MPSC issued an
order that approves our 2005 PSCR plan. 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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CMS Energy Corporation
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$292 million at March 31,June 30, 2005 and $248$246 million at March 31,June 30, 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 $39
=============================================================================$ 56 $ 55 $ 39
=========================================================================
Of the 2005 estimate, we expensed $13$29 million for the threesix months ended March
31,June 30,
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 naturalNatural gas prices have
increased substantially in recent years andyears. NYMEX forward natural gas prices
through 2010 recently were approximately $2 per mcf higher than they were at
year-end 2004. Because the price the MCV
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CMS Energy Corporation
Partnership can charge us for energy has not increased to reflect current
natural gas prices, the MCV Partnership's financial performance has been
impacted negatively. Even with the approved RCP, ifIf forward gas prices for 2010 and beyond do not decline from present levels,to
the $4 to $6 per mcf range currently anticipated by various government and
private natural gas price forecasts, and remain in that range for the remaining
life of the MCV PPA, the economics of operating the MCV Facility maywould be
adverse enough to require usthe MCV Partnership to recognize an impairment. Therea substantial
impairment of its property, plant and equipment, which are severalincluded in our
Consolidated Balance Sheets. However, forecasting future natural gas prices is
extremely difficult and there are currently differing views among forecasters as
to whether such prices will increase, decrease or remain at current levels over
any period of time. At present, some of the forecasts indicate natural gas
prices in excess of the $4 to $6 per mcf range during the years after 2010. At
June 30, 2005, the net book value of the MCV Partnership's property, plant and
equipment was $1.396 billion. Several other factors which could alter significantly
ourthe MCV Partnership's 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.
Any such impairment would be required to be recognized in the period when
management's analysis of the factors described above meets the accounting
standards for impairment recognition. We will continue to monitor the current
and long-term trends in natural gas prices and their effect on the economics of
operating the MCV Facility.
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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CMS Energy Corporation 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.
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CMS Energy Corporation
NUCLEAR PLANT DECOMMISSIONING: Decommissioning fundingDecommissioning-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, in 2007, 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 CMS-42
CMS Energy Corporation
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. ItsA 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,June 30, 2005, we have recorded a liability
to the DOE of $142$143 million, including interest, which is payable uponprior to 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
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CMS Energy Corporation
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 theits motion to recover
theseeking
recovery of a one-time fee whichthat 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 further 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, butprecedent. We
filed a motion for reconsideration of the court denied our motion to dismissportion of the DOE's counterclaim for recoupment.Court's order dealing
with recoupment, which the Court denied. 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 Contractstandard 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 filinghave filed an amicus
brief inopposing holding the related case.standard contract void. 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 energy 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
CMS-43
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. This requirement will end December
31, 2007.
CMS-50
CMS Energy Corporation
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 expectIn 2003, we estimated 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. We have expended $12 million on these sites since the 2003
estimates were made. At March 31,June 30, 2005, we have recorded a liability of $37$36 million, net
of $44$46 million of expenditures incurred to date, and a regulatory asset of $64$63
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 filingfilings with the MPSC.
Additional details related to the proceedingproceedings 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
================================================================================================================2004-2005 June 2005 Pending $2 million
==================================================================================================================
CMS-44
CMS Energy Corporation
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.
CMS-51
CMS Energy Corporation
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 beare subject to an
annual reconciliation proceeding, which will bewas filed in June 2005. We proposed to
refund to our customers $2 million using a roll-in methodology. The $2 million
reflects an underrecovery of $1 million, offset by interest owed to customers of
$3 million. The roll-in methodology incorporates a GCR over/underrecovery in the
next GCR plan year.
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$7.61 per mcf. Actual gas
costs and revenues will be subject to an annual reconciliation proceeding.
The
Attorney GeneralIn June 2005, four of the five parties filed a motion withsettlement agreement; the MPSC asking the MPSC to establishfifth
party filed a temporary factorstatement of $6.98 per mcf and preclude use ofnon-objection. The settlement agreement includes a
GCR ceiling price adjustment contingent mechanism
prior to a final MPSC order. The MPSC denied that request.upon future events.
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 athe 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 theThe MPSC has directed us to file our next gas depreciation case until 150within 90 days
after:after the latter of:
- the removal cost study is filed, andfiling or
- the MPSC issues anissuance of a final order in athe pending case relatingrelated to
ARO accounting.
The MPSC order on the pending case related to ARO accounting is expected in the
first quarter of 2006. 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.
CMS-45CMS-52
CMS Energy Corporation
2005 GAS RATE CASE: In MarchJuly 2005, we filed an application with the MPSC grantedseeking
a 12 percent authorized return on equity along with a $132 million annual
increase in our waivergas delivery and transportation rates. The primary reasons for
the request are recovery of new investments, carrying costs on natural gas
inventory related to higher gas prices, system maintenance, employee benefits,
and accepted our surcharge
proposal, but reducedlow-income assistance. If approved, the lead time allowedrequest would add approximately 5
percent to preparethe typical residential customer's average monthly bill. The increase
would also affect commercial and file the depreciation
case to 90 days.industrial customers. As part of this filing,
we also requested interim rate relief of $75 million.
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 Energy 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.
DIGCMS Energy 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. The court of appeals heard arguments
on May 19, 2005 and issued an opinion on May 26, 2005 remanding the case to the
trial court for a new trial on damages. 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.
CMS-46CMS-53
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.
IRS RULING: On August 2, 2005, the IRS issued Revenue Ruling 2005-53 and
regulations to provide guidance with respect to the use of the "simplified
service cost" method of tax accounting. We use this tax accounting method,
generally allowed by the IRS under Section 263A of the Internal Revenue Code,
with respect to the allocation of certain corporate overheads to the tax basis
of self-constructed utility assets. We are studying the IRS guidance to
determine its effect on us. We cannot predict the impact of this ruling on
future earnings, cash flows, or our present NOL carryforwards.
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.
CMS-54
CMS Energy Corporation
4: FINANCINGS AND CAPITALIZATION
Long-term debt is summarized as follows:
In Millions
- ------------------------------------------------------------------------------
March 31,-------------------------------------------------------------------------------
June 30, 2005 December 31, 2004
- -------------------------------------------------------------------------------------------------------------------------------------------------------------
CMS ENERGY CORPORATION
CMS ENERGY CORPORATION
Senior notes $2,325 $2,175$ 2,325 $ 2,175
Other long-term debt 4 225
------ ------------- -------
Total - CMS Energy Corporation 2,329 2,400
------ ------------- -------
CONSUMERS ENERGY COMPANY
First mortgage bonds 2,8503,000 2,300
Senior notes, bank debt and other 1,376938 1,436
Securitization bonds 391384 398
------ ------------- -------
Total - Consumers Energy Company 4,6174,322 4,134
------ ------
ENTERPRISES 201------- -------
OTHER SUBSIDIARIES 200 208
------ ------------- -------
TOTAL PRINCIPAL AMOUNTS OUTSTANDING 7,1476,851 6,742
Current amounts (458)(314) (267)
Net unamortized discount (32)(21) (31)
- -------------------------------------------------------------------------------------------------------------------------------------------------------------
Total Long-term debt $6,657 $6,444
==============================================================================$ 6,516 $ 6,444
===============================================================================
CMS-47
CMS Energy Corporation
FINANCINGS: The following is a summary of significant long-term debt issuances
and retirements during the threesix months ended March 31,June 30, 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
FMB insured quarterly notes 150 5.65 April 2005 April 2035
LORB 35 Variable April 2005 April 2035
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total $ 700
===================================================================================================================885
==================================================================================================================
DEBT RETIREMENTS:
CMS ENERGY
General term notes $ 220 Various January and February 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
Senior notes 332 6.25 April and May 2005 September 2006
Senior insured quarterly notes 141 6.50 May 2005 October 2028
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total $ 657
===================================================================================================================1,130
==================================================================================================================
SUBSEQUENT FINANCING ACTIVITIES:CMS-55
CMS Energy Corporation
CAPITALIZATION: In April 2005, we issued 23 million shares of our 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: OnIn 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 toto:
- $1.001 billion of long-term securities for refinancing or refunding
purposes,
$1.709- $1.209 billion of long-term securities for general corporate purposes,
and
$2.435- $1.935 billion of long-term FMBsFMB to be issued solely as collateral for
other long-term securities during the period ending
June 30, 2006.
CMS-48
CMS Energy Corporationsecurities.
REVOLVING CREDIT FACILITIES: The following secured revolving credit facilities
with banks are available at March 31,June 30, 2005:
In Millions
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Outstanding
Amount of Amount Letters-of- Amount
Company Expiration Date Facility Borrowed Credit Available
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
CMS Energy August 3, 2007May 18, 2010 $ 300 $ - $ 105102 $ 195198
Consumers (a)May 18, 2010 500 - 16 48431 469
MCV Partnership August 27, 2005 50 - 2 48
====================================================================================================================3 47
======================================================================================================================
(a) This facility expiresCMS Energy and Consumers amended their credit facilities in August 2005May 2005. The
amendments extended the terms of the agreements to 2010, reduced certain fees
and may be extended annually at
Consumers' option to July 31, 2007.interest margins, and reduced CMS Energy's restriction on payment of common
stock dividends.
CAPITAL AND FINANCE LEASE OBLIGATIONS: Our capital leases are comprised mainly
of leased service vehicles and office furniture. At March 31,June 30, 2005, capital lease
obligations totaled $56$54 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,June 30, 2005,
finance lease obligations totaled $288$290 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. WeThe special purpose entity sold no receivables as of March 31,June 30, 2005
and $304 million as of December 31, 2004. We continueConsumers continues 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 haveConsumers has not recorded a gain or
loss on the receivables sold or retained interest in the receivables sold.
CMS-56
CMS Energy Corporation
Certain cash flows under our accounts receivable sales program are shown in the
following table:
In Millions
- --------------------------------------------------------------------------------------------------------------------
Three-------------------------------------------------------------------------------------------------------------
Six months ended March 31June 30 2005 2004
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Net cash flow as a result of accounts receivable financing $ (304) $ (297)
Collections from customers $ 1,6052,787 $ 1,549
====================================================================================================================2,645
=============================================================================================================
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$150 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,June 30, 2005,
Consumers had $496$479 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 threesix
months ended March 31,June 30, 2005, we received $118$167 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,June 30, 2005:
In Millions
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Issue Expiration Maximum Carrying Recourse
Guarantee Description Date Date Obligation Amount Provision (b)
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Indemnifications from asset sales and
other agreements (a)agreements(a) Various Various $1,201$ 1,192 $ 1 $ -
Standby Lettersletters of Creditcredit Various Various 15465 - -
Surety bonds and other indemnifications Various Various 25 - -
Other guarantees Various Various 209225 - -
Subsidiary guarantee of parent debt May 2005 May 2010 102 - -
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.
CMS-57
CMS Energy Corporation
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 coal power 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
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Subsidiary guarantee of parent's debt Loan agreement Non-payment by CMS Energy and CMS
Enterprises of obligations under the
loan agreement
- -----------------------------------------------------------------------------------------------------------------------
Nuclear insurance retrospective premiums Normal operations of nuclear plants Call by NEIL and Price-Anderson Act
for nuclear incident
- ---------------------------------------------------------------------------------------------------------------------=======================================================================================================================
We have enteredIn the ordinary course of business, we enter into typicalagreements containing tax indemnity agreementsand
other indemnification provisions 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 aWhile we cannot estimate our maximum amount of exposure
cannot be identified,under these indemnities, we consider the probability of liability is considered remote.
CMS-50
CMS Energy Corporation
We have guaranteed payment of obligations through indemnities, surety bonds, and
other guarantees of unconsolidated affiliates and related parties of $388$417
million at March 31,June 30, 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 MarchJune 2005, the $11.87 trigger price
contingency was met for our $250 million 4.50 percent contingently convertible
preferred stock and the $12.81 trigger price contingency was met for our $150
million 3.375 percent contingently convertible senior notes. The contingency was
met since the price of our common stock remained at or above the applicable
trigger price for 20 of 30 consecutive trading days endingended on the last trading
day of the calendar quarter. As a result, these securities are convertible at
the option of the security holders, with the principal or par amount payable in
cash, for the three months ending Juneended September 30, 2005. Once the 3.375 percent
contingently convertible senior notes became convertible, they held the
characteristics of a current liability. Therefore, in June 2005, we reclassified
the 3.375 percent contingently convertible senior notes from Long-term debt to
Current portion of long-term debt, where they will remain during the period that
they are outstanding and convertible. As of AprilJuly 2005, none of the security
holders have notified us of their intention to convert these securities.
CMS-58
CMS Energy Corporation
5: EARNINGS PER SHARE
The following table presentstables present the basic and diluted earnings per share
computations.computations:
In Millions, Except Per Share Amounts
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31June 30 2005 2004
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
EARNINGS AVAILABLE TO COMMON STOCK:STOCK
Income (Loss) from Continuing Operations $152 $(2)$ 30 $ 19
Less Preferred Dividends (2) (3) ---------------------------(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 -and Diluted $152 $(5)
===========================$ 27 $ 16
===================================
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)217.9 161.2
Add dilutive impact of Contingently
Convertible Securities 6.1 - (b)10.2 (a) 2.5 (a)
Add dilutive Stock Options and Warrants 0.7 (c) - (c)
---------------------------0.8 (b) 0.5 (b)
-----------------------------------
Average Shares - Diluted 206.3 161.1
===========================228.9 164.2
===================================
EARNINGS (LOSS) PER AVERAGE COMMON SHARE
AVAILABLE TO COMMON STOCK
Basic $0.77 $(0.04)$ 0.12 $ 0.10
Diluted $0.74 $(0.04)
=================================================================================$ 0.12 $ 0.10
==============================================================================================
In Millions, Except Per Share Amounts
- ----------------------------------------------------------------------------------------------
Six Months Ended June 30 2005 2004
- ----------------------------------------------------------------------------------------------
EARNINGS AVAILABLE TO COMMON STOCK
Income from Continuing Operations $ 182 $ 17
Less Preferred Dividends (5) (6)
-----------------------------------
Income from Continuing Operations
Available to Common Stock - Basic and Diluted $ 177 $ 11
===================================
AVERAGE COMMON SHARES OUTSTANDING
APPLICABLE TO BASIC AND DILUTED EPS
Average Shares - Basic 206.7 161.2
Add dilutive impact of Contingently
Convertible Securities 8.2 (a) - (c)
Add dilutive Stock Options and Warrants 0.8 (b) 0.5 (b)
-----------------------------------
Average Shares - Diluted 215.7 161.7
===================================
EARNINGS PER AVERAGE COMMON SHARE
AVAILABLE TO COMMON STOCK
Basic $ 0.86 $ 0.06
Diluted $ 0.82 $ 0.06
==============================================================================================
CMS-59
CMS Energy Corporation
(a) DueOur contingently convertible securities dilute EPS to antidilution, the computation of diluted earnings per share excludedextent that the
conversion value, which is based on the average market price of our Trust Preferred Securitiescommon
stock, exceeds the principal or par value.
(b) Since the exercise price was greater than the average market price of our
common stock, there was no impact to diluted EPS for options and warrants to
purchase 3.4 million shares of common stock for the three months ended March 31,June 30,
2005, and 5.4 million shares of common stock for the three months ended June 30,
2004. There was also no impact to diluted EPS for options and warrants to
purchase 3.5 million shares of common stock for the six months ended June 30,
2005, and 5.1 million shares of common stock for the six months ended June 30,
2004.
(c) Since the conversion price was greater than the average market price of our
common stock, there was no impact to diluted EPS from our contingently
convertible securities for the six months ended June 30, 2004.
Due to antidilution, the following impacts from our 7.75 percent convertible
subordinated debentures were not reflected in diluted EPS:
- an additional 4.2 million shares of common stock for the three and six
months ended June 30, 2004 and the three and six months ended June 30,
2005,
- a $2 million reduction of interest expense, net of tax, for the three
months ended June 30, 2005 and the three months ended June 30, 2004, and
- a $4 million reduction of interest expense, net of tax, for the six
months ended June 30, 2005 and the six months ended June 30, 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
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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.
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The cost and fair value of our long-term financial instruments are as follows:
In Millions
- ----------------------------------------------------------------------------------------------------------------------------
March 31,----------------------------------------------------------------------------------------------------------------------
June 30, 2005 December 31, 2004
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Fair Unrealized Fair Unrealized
Cost Value Gain (Loss) Cost Value Gain (Loss)
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Long-term debt, $ 6,830 $ 7,287 $ (457) $ 6,711 $ 7,052 $ (341)
including current amounts $7,115 $7,371 $(256) $6,711 $7,052 $(341)
Long-term debt - related parties 307 281 26286 21 684 653 31
Available-for-sale securities:
SERP:
Equity securities 33 4634 47 13 33 47 14
Debt securities 20 2019 19 - 20 20 -
Nuclear decommissioning investments:
Equity securities 134 252 118132 246 114 136 262 126
Debt securities 289 295 6284 294 10 291 302 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 lossOther 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
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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. CertainOur coal purchase
contracts are not accounted for as derivatives due to the lack of an active
market for the coal that we purchase. Similarly, 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, andderivatives. For our coal purchase contracts, the resulting
mark-to-market impact on earnings could be material to our financial statements.
For our electric capacity and energy contracts, we believe that we will be able
to apply the normal purchases and sales exception to the majority of these
contracts (including the MCV PPA), which would not require us to mark these
contracts to market.
The MISO began operating the Midwest Energy Market on April 1, 2005, which2005. The Midwest
Energy Market provides day-ahead and real-time energy market information and
centralized generation 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 adequateas we gain additional
experience with the Midwest Energy Market, we will reevaluatecontinue to evaluate whether
or not the activity level within this market leads to the conclusion that an
active energy market exists.
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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 the MISO's market area. WeFTRs are presently
evaluating whether FTRs qualify as derivative instruments. If they are
determined to be
derivative instruments FTRs would beand are required to be recognized on our Consolidated
Balance Sheets as assets or liabilities at their fair value,values, with any
subsequent changes in fair value recognized in earnings. However,As of June 30, 2005, we
believe we may be able to offsetrecorded an asset of $1 million associated with the earnings impact with a regulatory asset or
liability. The Midwestfair value of FTRs on our
Consolidated Balance Sheets.
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CMS Energy Market was not effective until April 1, 2005.
Therefore, FTRs had no value at March 31, 2005.Corporation
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,-----------------------------------------------------------------------------------------------------------------------------
June 30, 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)
FTRs - 1 1 - - -
Derivative contracts associated with the
MCV Partnership:
Gas fuel contracts - 201 201181 181 - 56 56
Gas fuel futures and swaps - 146 146145 145 - 64 64
CMS ERM contracts:
Non-trading electric / gas contracts - (256) (256)(273) (273) - (199) (199)
Trading electric / gas contracts - 267 267284 284 (4) 201 205
Derivative contracts associated with equity
investments in:
Shuweihat - (22) (22)(32) (32) - (25) (25)
Taweelah (35) (20) 15(25) 10 (35) (24) 11
Jorf Lasfar - (11) (11) - (11) (11)
============================================================================================================================================================================================================================================================
The fair value of our non-trading gas contracts, interest rate risk contracts,
FTRs, 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,June 30, 2005, we had purchased a fixed-priced
gas supply call option and had sold a fixed-priced gas supply put option. 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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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 lossOther Comprehensive Income 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.
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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,June 30, 2005 $24$ 24 2005-2006 $(1)$ -
December 31, 2004 25 2005-2006 (1)
=================================================================================================================================================================================================
Notional amounts reflect the volumeprincipal amount of transactionsvariable debt being fixed but
do not represent the principal 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 7.3 percent at June 30, 2005
and 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,June 30, 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,June 30, 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.Other
Comprehensive Income.
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,June 30, 2005.
The MCV Partnership also held certain long-term gas contracts that did not
qualify as normal purchases at March 31,June 30, 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 as fuel 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, as of January 2005,
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 Corporationare 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 threesix months ended March 31,June 30, 2005, we
recorded a $209$170 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).resulting in a cumulative mark-to-market gain through June 30, 2005
of $226 million. This cumulative amount consists of a $181 million gain related
to gas fuel derivative contracts. The remaining gain of $45 million relates to
the financial hedges associated with these contracts, which is included in the
Gas
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fuel futures and swaps amount in the Derivative Instruments table above. The
majority of this mark-to-market 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,June 30, 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,June 30, 2005, we have recorded a
cumulative net gain of $27$32 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 AprilJuly 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
threesix months ended March 31,June 30, 2005, we recorded a net gain of $11$22 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 intoin earnings as a component
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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).
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CMS Energy Corporation
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,June 30, 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,June 30, 2005, the total foreign currency translation
adjustment was a net loss of $315$312 million, which included a net hedging loss of
$26 million, net of tax, related to settled contracts.
At March 31,June 30, 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.Other Comprehensive Income. 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 thethis 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,
- a defined company contribution plan for employees hired on or after
September 1, 2005,
- 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 current employees,
the employees of our subsidiaries, and Panhandle, a former subsidiary. The
Pension Plan's assets are not distinguishable by company.
On September 1, 2005, we will implement the Defined Company Contribution Plan.
The Defined Company Contribution Plan will provide an employer contribution of 5
percent of base pay to the existing Employees' Savings Plan. No employee
contribution is required to receive the plan's employer contribution. All
employees hired on and after September 1, 2005 will participate in this plan as
part of their retirement benefit program. Cash balance pension plan participants
will also participate in the Defined Company Contribution Plan on September 1,
2005. Additional pay credits under the cash balance pension plan will be
discontinued as of that date.
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
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CMS Energy Corporation
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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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,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 31Six Months Ended
2005 2004 2005 2004
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Service cost $10 $10 $6 $5$ 15 $ 9 $ 25 $ 19
Interest expense 1930 18 16 1549 36
Expected return on plan assets (25)(38) (27) (14) (12)
Plan amendments - - - -(63) (54)
Amortization of:
Net loss 7 3 4 214 7
Prior service cost 1 1 (2) (3)
--------------------------------------------3 2 4 3
---------------------------------------
Net periodic pension and postretirement benefit cost $12 $5 $10 $7
=======================================================================================================$ 17 $ 6 $ 29 $ 11
==========================================================================================================
In Millions
- -----------------------------------------------------------------------------------------------------------
OPEB
Three Months Ended Six Months Ended
2005 2004 2005 2004
- -----------------------------------------------------------------------------------------------------------
Service cost $ 5 $ 5 $ 11 $ 10
Interest expense 16 14 32 29
Expected return on plan assets (14) (12) (28) (24)
Amortization of:
Net loss 5 3 9 5
Prior service cost (2) (2) (4) (5)
----------------------------------------
Net periodic pension and postretirement benefit cost $ 10 $ 8 $ 20 $ 15
===========================================================================================================
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 threesix
months ended March 31,June 30, 2005 was less than $1 million.
We remeasured our Pension and OPEB obligations as of April 30, 2005 to
incorporate the effects of the collective bargaining agreement reached between
the Utility Workers Union of America and Consumers. The Pension plan
remeasurement increased our accumulated benefit obligation (ABO) by $127
million. Net periodic pension cost increased $4 million for the six months ended
June 30, 2005, with an expected total increase in net periodic pension costs of
$14 million for 2005.
The Pension plan remeasurement resulted in an unfunded accumulated benefit
obligation of $208 million. The unfunded accumulated benefit obligation is the
amount by which the ABO exceeds the fair value of the plan assets. SFAS No. 87
states that the pension liability shown on the balance sheet must be at least
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CMS Energy Corporation
equal to the unfunded accumulated benefit obligation. As such, we increased our
additional minimum liability by $145 million to $564 million at June 30, 2005.
Consistent with MPSC guidance, Consumers recognized the cost of its minimum
pension liability adjustment as a regulatory asset. This adjustment increased
our regulatory assets by $94 million and intangible assets by $38 million and
reduced accumulated other comprehensive income by $9 million (net of income
taxes).
The OPEB plan remeasurement increased our accumulated postretirement benefit
obligation by $50 million, with an expected total increase in benefit costs of
$3 million for 2005.
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 CMS-58
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,June 30, 2005 In Millions
- ---------------------------------------------------------------------------------------------------------------------
In Service Trust
ARO Description Date Long Lived Assets Fund
- ---------------------------------------------------------------------------------------------------------------------
Palisades-decommission plant site 1972 Palisades nuclear plant $518$ 529
Big Rock-decommission plant site 1962 Big Rock nuclear plant 4326
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 -
=====================================================================================================================
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In Millions
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
ARO ARO
Liability Cash flow Liability
ARO Description 12/31/04 Incurred Settled Accretion Revisions 3/31/6/30/05
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Palisades-decommission $350 $- $- $6 $- $356$ 350 $ - $ - $ 12 $ - $ 362
Big Rock-decommission 30 - (8) 4(25) 7 - 2612
JHCampbell intake line - - - - - -
Coal ash disposal areas 54 - (1) 12 - 5455
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 $- $441
=============================================================================================================================$ 439 $ - $ (26) $ 21 $ - $ 434
==============================================================================================================================
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 duefiled responses in May 2005. We consider the proceeding a
clarification of accounting and reporting issues that relate to all Michigan
utilities.
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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$14 million for the
three months ended March 31,June 30, 2005 and $6$38 million for the three months ended March 31,June
30, 2004 and $16 million for the six months ended June 30, 2005 and $44 million
for the six months ended June 30, 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
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
JORF LASFAR Three Months Ended March 31,Six Months Ended
- -------------------------------------------------------------------------------------------------------------------
June 30 2005 Jorf Lasfar Taweelah2004 2005 2004
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Operating revenue $ 130129 $ 24102 $ 259 $ 212
Operating expenses 83 4
---------------------------------------(90) (56) (173) (121)
----------------------------------------------------------
Operating income 47 2039 46 86 91
Other expense, net 14 1
---------------------------------------(14) (14) (28) (29)
----------------------------------------------------------
Net income $ 3325 $ 19
================================================================================32 $ 58 $ 62
===================================================================================================================
Income Statement Data
In Millions
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
TAWEELAH Three Months Ended March 31,Six Months Ended
- -------------------------------------------------------------------------------------------------------------------
June 30 2005 2004 Jorf Lasfar Taweelah2005 2004
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Operating revenue $ 11026 $ 2226 $ 50 $ 48
Operating expenses 65 10
---------------------------------------(15) (12) (19) (22)
----------------------------------------------------------
Operating income 45 1211 14 31 26
Other expense,income (expense), net 15 25
---------------------------------------(23) 33 (24) 8
----------------------------------------------------------
Net income (loss) $ 30(12) $ (13)
================================================================================47 $ 7 $ 34
===================================================================================================================
CMS-60CMS-70
CMS Energy Corporation
10: REPORTABLE SEGMENTS
Our reportable segments consist of business units organized and managed by theirthe
nature of the products and services.services each provides. 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 31Six Months Ended
- -----------------------------------------------------------------------------------------------------------------------
June 30 2005 2004 2005 2004
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Operating Revenue
Operating Revenues
Electric utility $628 $630$ 644 $ 611 $ 1,272 $ 1,241
Gas utility 992 905355 300 1,347 1,205
Enterprises 225 219
-------------------------------------
$1,845 $1,754
=============================================================================================242 182 467 401
- -----------------------------------------------------------------------------------------------------------------------
Total Operating Revenue $ 1,241 $ 1,093 $ 3,086 $ 2,847
=======================================================================================================================
Net Income (Loss) Available to Common Stockholders
Electric utility $33 $48$ 46 $ 27 $ 79 $ 75
Gas utility 58 56(3) 1 55 57
Enterprises 105 (60)29 37 134 (23)
Other (46) (53)
-------------------------------------
$150 $(9)
=============================================================================================(45) (49) (91) (102)
- -----------------------------------------------------------------------------------------------------------------------
Total Net Income Available to Common Stockholders $ 27 $ 16 $ 177 $ 7
=======================================================================================================================
In Millions
- ---------------------------------------------------------------------------------------------
March 31,-----------------------------------------------------------------------------------------------------------------------
June 30, 2005 December 31, 2004
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total
Assets
Electric utility (a) $7,498 $7,289$ 7,646 $ 7,289
Gas utility (a) 2,8563,209 3,187
Enterprises 5,0885,084 4,980
Other 759522 416
-------------------------------------
$16,201 $15,872
=============================================================================================- -----------------------------------------------------------------------------------------------------------------------
Total Assets $ 16,461 $ 15,872
=======================================================================================================================
(a) Amounts include a portion of our other common assets attributable to both
the electric and gas utility businesses.
CMS-71
CMS Energy Corporation
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$586 million at March 31,June 30, 2005. Property, plant, and
equipment serving as collateral for these obligations has a carrying value of
$1.411$1.396 billion at March 31,June 30, 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$111 million at March 31,June 30, 2005. Property, plant, and
equipment serving as collateral for these obligations has a carrying value of
$161$165 million at March 31,June 30, 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,June 30, 2005:
- -----------------------------------------------------------------------------------------------------------------------------
Name-------------------------------------------------------------------------------------------------------------------------
Investment Operating Total
Name (Ownership Nature of the Involvement Balance Agreement with Generating
Interest) Entity Country Date (In Millions) CMS Energy Capacity
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Taweelah United Arab
(40%) Generator EmiratesUnited Arab 1999 $ 7268 Yes 777 MW
Generator -Emirates
Jubail
(25%) UnderGenerator Saudi
Construction Arabia 2001 $ - Yes 250 MW
Shuweihat United Arab
Shuweihat (20%) Generator Emirates 2001 $ 4740 Yes 1,500 MW
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total $119$ 108 2,527 MW
======================================================================================================================================================================================================================================================
Our maximum exposure to loss through our interests in these variable interest
entities is limited to our investment balance of $119$108 million, and letters of
credit, guarantees, and indemnities relating to Taweelah and Shuweihat totaling
$84$86 million.
CMS-72
CMS Energy Corporation
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 JanuaryJune 2005, we repatriated $80 million in cash, $71decided on a plan to repatriate $79 million of
which should
qualify forforeign earnings during the tax benefit.remainder of 2005. Historically, we recorded
deferred taxes on these repatriated earnings. Since this planned repatriation shouldis expected to
qualify for the tax benefit, and our decision to repatriate was made in 2004, we have reversed $21$24 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, wethe second quarter of 2005.
We may have the ability to repatriate additional amounts that may qualify for the repatriation tax
benefit.benefit during the remainder of 2005. If successful, our current estimate is
that additional amounts could range between $100$50 million and $120$150 million. The
amount of additional repatriation remains uncertain because it is based on
future foreign subsidiary operations, cash flow,flows, financings, and repatriation
limitations. This potential additional repatriation could reduce our recorded
deferred tax liability $30by $15 million to $36$45 million. We expect to be in a
position to finalize our assessment regarding any potential repatriation, 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 deductibletax-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-63CMS-73
CMS Energy Corporation
(This page intentionally left blank)
CMS-64CMS-74
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 inserving 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 thisour strategy will result in improvedto improve credit ratings, grow earnings, growth, and
a company positionedposition us 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.load. As of AprilJuly 2005,
we have lost 893alternative electric suppliers provide 811 MW, or 1211 percent, of our electric
load to these alternative
electric suppliers.load. Based on current trends, we predict total load loss by the end of 2005 to
be in the range of 925900 MW to 1,000950 MW. However, no assurance can
be madewe cannot assure 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 naturalNatural gas prices have increased substantially in recent years andyears. Because
the price the MCV Partnership can charge us for energy has not increased to
reflect current natural gas prices, 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.
CE-1
Consumers Energy Company
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.FMB and
$150 million of senior insured quarterly notes. We also received cash
contributions from CMS Energy of $550 million.million in 2005. 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
CE-2
Consumers Energy Company
- 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 31June 30 2005 2004 Change
- --------------------------------------------------------------------------------
Net Income Availableincome available to Common Stockholdercommon stockholder
Electric $ 3346 $ 48 $(15)27 $ 19
Gas 58 56 2(3) 1 (4)
Other (Includes MCV Partnership interest) 66 - 66(11) (5) (6)
- --------------------------------------------------------------------------------
Three months ended $157 $104 $ 5332 $ 23 $ 9
================================================================================
2005 COMPARED TO 2004:
For the three months ended March 31,June 30, 2005, our net income available to the common
stockholder increased $53$9 million versus the same period in 2004. The $53$9 million
increase in net income available to the common stockholder reflects:
- a $63$22 million increase in electric delivery revenue due to warmer
weather and increased surcharge revenue,
- a $4 million increase in electric utility earnings due to the return
on capital expenditures in excess of our depreciation base as
allowed by the Customer Choice Act, and
- a $5 million increase in gas delivery revenue due to higher
deliveries and 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 $15 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 $10 million decrease in earnings from our ownership interest in
the MCV Partnership primarily due to the decrease in fair value of
certain long-term gas contracts and financial hedges.
CE-4
Consumers Energy Company
In Millions
- --------------------------------------------------------------------------------
June 30 2005 2004 Change
- --------------------------------------------------------------------------------
Net income available to common stockholder
Electric $ 79 $ 75 $ 4
Gas 55 57 (2)
Other (Includes MCV Partnership interest) 55 (5) 60
- --------------------------------------------------------------------------------
Six months ended $ 189 $ 127 $ 62
================================================================================
For the six months ended June 30, 2005, our net income available to the common
stockholder increased $62 million versus the same period in 2004. The $62
million increase in net income available to the common stockholder reflects:
- a $53 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$25 million increase in electric delivery revenue due to warmer
weather and increased surcharge revenue,
- a $14 million increase in gas utility earningsdelivery revenue due to the MPSC's
October 2004 final gas rate order.order, and
- an $8 million increase in electric utility earnings due to the
return on capital expenditures in excess of our depreciation base as
allowed by the Customer Choice Act.
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$30 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$7 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"Operations," "Gas
Utility Results of Operations," and "Gas
Utility"Other 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-4CE-5
Consumers Energy Company
ELECTRIC UTILITY RESULTS OF OPERATIONS
In Millions
- ---------------------------------------------------------------------------------------------
March 31-------------------------------------------------------------------------------------------------------------------
June 30 2005 2004 Change
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Three months ended $33 $48 $(15)
=============================================================================================$ 46 $ 27 $ 19
Six months ended $ 79 $ 75 $ 4
===================================================================================================================
Three Months Ended Six Months Ended
Reasons for the change: June 30, 2005 vs. 2004 June 30, 2005 vs. 2004
- -------------------------------------------------------------------------------------------------------------------
Electric deliveries $ 434 $ 38
Power supply costs and related revenue (9)(2) (11)
Other operating expenses, other income, and non-commoditynon-
commodity revenue (22)(8) (31)
Regulatory return on capital expenditures 76 13
General taxes (3)(1) (4)
Fixed charges 1 2
Income taxes 8
------------------------(11) (3)
---------------------------------------------------------
Total change $ (15)
=============================================================================================19 $ 4
===================================================================================================================
ELECTRIC DELIVERIES: ElectricFor the three months ended June 30, 2005, electric
deliveries decreased 0.4increased 0.5 billion kWh or 4.25.1 percent versus the same period in
2004. For the first quarter ofsix months ended June 30, 2005, compared to 2004. Despite decreased electric deliveries increased 0.1
billion kWh or 0.4 percent versus the same period in 2004. The corresponding
increases in electric delivery revenue increasedfor both periods were due to increased
sales to residential customers due to warmer weather and 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.$6 million for the three months ended
June 30, 2005 and $11 million for the six months ended June 30, 2005. Surcharge
revenue related to the recovery of security costs and stranded costsStranded Costs increased
electric delivery revenue by an additional $3 million.million for the three months ended
June 30, 2005 and $6 million for the six months ended June 30, 2005.
POWER SUPPLY COSTS AND RELATED REVENUE: In the first quarter of 2005, ourOur recovery of power supply costs wasis
capped for our residential customers. For the residential class. Pretax
underrecoveriesthree months ended June 30, 2005,
our underrecovery of $9power costs allocated to these capped customers increased
by $6 million are primarily dueversus the same period in 2004. For the six months ended June 30,
2005, our underrecovery of power costs allocated to power supply-related costs
exceeding power supply-related revenue recovered fromthese capped customers.customers
increased by $20 million versus the same period in 2004. Power supply-related
costs increased in 2005 primarily due to higher coal costs and higher priced
purchased power necessary to replace the generation loss from an outageoutages at our Palisades nuclearand
Campbell 3 generating plantplants.
Partially offsetting these underrecoveries are transmission and increased coal costs versusnitrogen oxide
allowance expenditures related to our capped customers, which we have deferred
for future recovery. For the same period in
2004.three months ended June 30, 2005, we deferred $4
million of these costs. For the six months ended June 30, 2005, we deferred $9
million of these costs.
CE-6
Consumers Energy Company
OTHER OPERATING EXPENSES, OTHER INCOME, AND NON-COMMODITY REVENUE: InFor the first
quarter ofthree
months ended June 30, 2005, other operating expenses increased $24$14 million,
other income increased $4 million, and non-commodity revenue increased $2
million versus the same period in 2004
primarily due to higher transmission services revenue.2004. For the six months ended June 30, 2005,
other operating expenses increased $39 million, other income increased $4
million, and non-commodity revenue increased $4 million versus the same period
in 2004.
The increase in other operating expenses reflects higher depreciation and
amortization expense, and higher pension and benefit expense, and higher
underrecovery expense related to the MCV PPA, offset partially by our direct
savings from the RCP.expense. 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.changes in actuarial assumptions and the remeasurement of our
pension and OPEB plans to reflect the new collective bargaining agreement
between the Utility Workers Union of America and Consumers. Benefit expense also
reflects the reinstatement of the employer matching contribution to our 401(k)
plan.
CE-5
Consumers Energy CompanyIn addition, the increase in other operating expenses reflects increased
underrecovery expense related to the MCV PPA, offset partially by our direct
savings from the RCP. 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 waswere 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 the 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.Partnership and us. Our direct savings are shared 50 percent with
customers in 2005 and 70 percent thereafter.
OurThe cost associated with the MCV PPA cash underrecoveries, net of our direct
savings after
allocating a portionfrom the RCP, increased operating expense $2 million for the three
months ended June 30, 2005 and $4 million for the six months ended June 30, 2005
versus the same periods in 2004.
The increase in other income is primarily due to customers, was $3 millionhigher interest income on
short-term cash investments, offset partially by expenses associated with the
early retirement of debt in the first quarter of 2005. The increase in non-commodity revenue is
primarily due to higher transmission services revenue.
REGULATORY RETURN ON CAPITAL EXPENDITURES: In the first quarter of 2005, theThe return on capital expenditures in
excess of our depreciation base as allowed by the Customer Choice Act increased
income by $7$6 million for the three months ended June 30, 2005 and $13 million
for the six months ended June 30, 2005 versus the same periodperiods in 2004.
GENERAL TAXES: InFor the first quarter ofthree and six months ended June 30, 2005, general taxes
increased fromversus the same periodperiods in 2004 primarily due to higher MSBT expense.
INCOME TAXES: InFIXED CHARGES: For the first quarterthree months ended June 30, 2005, fixed charges reflect a
36 basis point reduction in the average rate of 2005, income taxes decreasedinterest on our debt and higher
average debt levels versus the same period in 2004. For the six months ended
June 30, 2005, fixed charges reflect a 32 basis point reduction in the average
rate of interest on our debt and higher average debt levels versus the same
period in 2004.
CE-7
Consumers Energy Company
INCOME TAXES: For the three and six months ended June 30, 2005, income taxes
increased versus the same periods in 2004 primarily due to lowerhigher earnings by
the electric utility.
GAS UTILITY RESULTS OF OPERATIONS
In Millions
- ---------------------------------------------------------------------------------
March 31-------------------------------------------------------------------------------------------------------------------
June 30 2005 2004 Change
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Three months ended $58 $56 $2
- ---------------------------------------------------------------------------------$ (3) $ 1 $ (4)
Six months ended $ 55 $ 57 $ (2)
===================================================================================================================
Reasons for the change: Three Months Ended Six Months Ended
June 30, 2005 vs. 2004 June 30, 2005 vs. 2004
- -------------------------------------------------------------------------------------------------------------------
Gas deliveries $(3)$ 2 $ (1)
Gas rate increase 165 21
Gas wholesale and retail services, other gas
revenues and other gas revenue (2)income 1 (1)
Operation and maintenance (5)
Depreciation(12) (17)
General taxes and other deductions (1)depreciation (2) (3)
Fixed charges - (2)
Income taxes (1)
---------------2 1
---------------------------------------------------------
Total change $ 2
=================================================================================(4) $ (2)
===================================================================================================================
GAS DELIVERIES: InFor the first quarterthree months ended June 30, 2005, higher gas delivery
revenues reflect increased deliveries to our residential, commercial, and
industrial customers versus the same period in 2004,2004. Gas deliveries, including
miscellaneous transportation to end-use customers, increased 1.4 bcf or 3.1
percent.
For the six months ending June 30, 2005, lower gas delivery revenues reflect
decreased deliveries to our residential commercial, and industrial transportation customers.
Gas deliveries, including miscellaneous transportation to end-use customers,
decreased 3.42.0 bcf or 2.31.0 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
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Consumers Energy Companygas revenues
increased $5 million for the three months ended June 30, 2005 pretax earnings increased $16and $21 million
compared tofor the six months ended June 30, 2005 versus the same periodperiods in 2004.
GAS WHOLESALE AND RETAIL SERVICES, OTHER GAS REVENUES AND OTHER GAS REVENUE: The decreaseINCOME: For the
three months ended June 30, 2005, other income increased $1 million primarily
due to higher interest income on short-term cash investments versus the same
period in 2004. For the six months ended June 30, 2005, gas wholesale and retail
services and other gas revenue relatesdecreased primarily due to decreases in certain miscellaneous
transportation and storage revenue.
OPERATION AND MAINTENANCE: InFor the first quarterthree and six months ended June 30, 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.
DEPRECIATIONservice expense.
Pension and benefit expense increased primarily due to changes in actuarial
assumptions and the remeasurement of our pension and OPEB plans to reflect the
new collective bargaining agreement between the Utility Workers Union of America
and Consumers. Benefit expense
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Consumers Energy Company
also reflects the reinstatement of the employer matching contribution to our
401(k) plan.
GENERAL TAXES AND OTHER DEDUCTIONS: InDEPRECIATION: For the first quarterthree and six months ended June 30,
2005, versus the same
period in 2004, depreciationgeneral tax expense increased primarily due to higher MSBT expense.
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: InFor the first quartersix months ended June 30, 2005, versus the same period in 2004, fixed charges increased due to higher average debt levels, offset partially byreflect a
2832 basis point reduction in the average rate of interest rate.
INCOME TAXES: In the first quarter of 2005, income taxes increasedon our debt and higher
average debt levels versus the same period in 20042004.
INCOME TAXES: For the three and six months ended June 30, 2005, income taxes
decreased primarily due to higherlower earnings by the gas utility.
OTHER RESULTS OF OPERATIONS
In Millions
- ------------------------------------------------------------------------------------------------------------
June 30 2005 2004 Change
- ------------------------------------------------------------------------------------------------------------
Three months ended $ (11) $ (5) $ (6)
Six months ended $ 55 $ (5) $ 60
============================================================================================================
For the three months ended June 30, 2005, other operations reduced net income by
$11 million, a decrease of $6 million versus the same period in 2004. The change
reflects a $10 million decrease in earnings from our ownership interest in the
MCV Partnership, primarily due to a decrease in the fair value of certain
long-term gas contracts and related financial hedges. The reduction in earnings
at the MCV Partnership was offset partially by a $4 million reduction in other
expenses.
For the six months ended June 30, 2005, other operations increased net income by
$55 million, an increase of $60 million versus the same period in 2004. The
change reflects a $53 million increase in earnings from our ownership interest
in the MCV Partnership, primarily due to an increase in the fair value of
certain long-term gas contracts and related financial hedges. Also contributing
to the increase in earnings was a $7 million reduction in other expenses.
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 the history and the specifics of each
matter. The most significant of these contingencies are our electric and gas
environmental estimates,liabilities, and the potential underrecoveries from our
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Consumers Energy Company
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.
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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, which2005. The Midwest
Energy Market provides day-ahead and real-time energy market information and
centralized generation 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 adequateas we gain additional
experience with the Midwest Energy Market, we will reevaluatecontinue to evaluate 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
of our electric purchases and sales contracts may qualify as derivatives,derivatives.
However, we believe that we will be able to apply the normal purchases
and the resulting mark-to-market
impact on earnings could be materialsales exception, which would not require us to our financial statements.mark these contracts to
market.
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 the MISO's market area. WeFTRs are presently
evaluating whether FTRs qualify as derivative instruments. If they are
determined to be
derivative instruments FTRs would beand are required to be recognized on our Consolidated
Balance Sheets as assets or liabilities at their fair value,values, with any
subsequent changes in fair value recognized in earnings. However,As of June 30, 2005, we
believe we may be able to offsetrecorded an asset of $1 million associated with the earnings impact with a regulatory asset or
liability. The Midwest Energy Market was not effective until April 1, 2005.
Therefore,fair value of FTRs had no value at March 31, 2005.on our
Consolidated Balance Sheets.
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, as of January 2005, any
changes in the fair value of these financial hedges will no longer be recognized in Other
Comprehensive Income, but will beare 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 threesix months ended March 31,June 30, 2005, we
recorded a $209$170 million gain associated with the increase in fair value of these
instruments on our Consolidated Statements of Income.Income, resulting in a cumulative
mark-to-market gain through June 30, 2005 of $226 million. The majority of this
mark-to-market 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.
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Consumers Energy Company
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,June 30, 2005,
we assumed market-based interest rates ranging between 2.873.34 percent and 4.834.22
percent (depending on the term of the contract) and monthly volatility rates
ranging between 25 percent and 4042 percent to calculate the fair value of the gas
fuel derivative contracts with volume optionality held by the MCV Partnership. CE-8
Consumers Energy CompanyAlso, at June 30, 2005, we assumed a
market-based interest rate of 3.00 percent and monthly volatility rates ranging
between 35 percent and 39 percent to calculate the fair value of our gas
options.
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,-----------------------------------------------------------------------------------------------------
June 30, 2005 December 31, 2004
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Variable-rate financing - before taxbefore-tax annual earnings exposure $ 1 $ 2
Fixed-rate financing - potential loss in fair value (a) 151145 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,-----------------------------------------------------------------------------------------------------
June 30, 2005 December 31, 2004
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Potential reductionREDUCTION in fair value:
Gas supply option contracts $ - $ 1
FTRs - -
Derivative contracts associated with the MCV Partnership:
Gas fuel contracts (a) 4238 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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Consumers Energy Company
INVESTMENT SECURITIES PRICE RISK SENSITIVITY ANALYSIS (assuming a 10 percent
adverse change in market prices):
In Millions
- ----------------------------------------------------------------------------------------------------
March 31,-------------------------------------------------------------------------------------------------
June 30, 2005 December 31, 2004
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Potential reductionREDUCTION in fair value of available-for-sale equity
securities (a)(b)(SERP investments and investments in CMS Energy
common stock) $ 6 $ 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, theseThese funds wereare 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.
ACCOUNTING FOR PENSION AND OPEB
Pension: We have established external trust funds to provide retirement pension
benefits to our employees under a non-contributory, defined benefit Pension
Plan. We implemented a cash balance plan for certain employees hired after June
30, 2003. On September 1, 2005, we will implement the Defined Company
Contribution Plan.
The Defined Company Contribution Plan will provide an employer contribution of 5
percent of base pay to the existing Employees' Savings Plan. No employee
contribution is required to receive the plan's employer cash contribution. All
employees hired on and after September 1, 2005 will participate in this plan as
part of their retirement benefit program. Cash balance pension plan participants
will also participate in the Defined Company Contribution Plan on September 1,
2005. Additional pay credits under the cash balance pension plan will be
discontinued as of that date. We use SFAS No. 87 to account for pension costs.
401(k): We resumed the employer's match on our 401(k) Savings Plan on January 1,
2005. The plan provides for an employer match of 50 percent on eligible
contributions up to the first six percent of an employee's wages. Effective
September 1, 2005, employees enrolled in the company's 401(k) Savings Plan will
have the employer match increased from 50 percent to 60 percent.
OPEB: We provide postretirement health and life benefits under our OPEB plan to
substantially all our retired employees. We use SFAS No. 106 to account for
other postretirement benefit costs.
Liabilities for both pension and OPEB are recorded on the balance sheet at the
present value of their future obligations, net of any plan assets. The
calculation of the liabilities and associated expenses requires the expertise of
actuaries. Many assumptions are made including:
- life expectancies,
- present-value discount rates,
- expected long-term rate of return on plan assets,
- rate of compensation increases, and
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Consumers Energy Company
- anticipated health care costs.
Any change in these assumptions can change significantly the liability and
associated expenses recognized in any given year.
The following table provides an estimate of our pension cost, OPEB cost, and
cash contributions for the next three years:
In Millions
- -------------------------------------------------------------------------------
Expected Costs Pension Cost OPEB Cost Contributions
- -------------------------------------------------------------------------------
2006 $ 88 $ 38 $ 81
2007 97 34 176
2008 92 30 109
===============================================================================
Actual future pension cost and contributions will depend on future investment
performance, changes in future discount rates, and various other factors related
to the populations participating in the Pension Plan.
For additional details on postretirement benefits, see Note 5, Retirement
Benefits.
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.recoveries as gas prices increase. 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.
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Consumers Energy Company
CASH POSITION, INVESTING, AND FINANCING
Our operating, investing, and financing activities meet consolidated cash needs.
At March 31,June 30, 2005, $540$667 million consolidated cash was on hand, which includes $22$54
million of restricted cash and $140$209 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------------------------------------------------------------------------------
Six Months Ended March 31June 30 2005 2004
- --------------------------------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in):
Operating activities $ 321590 $ 263561
Investing activities (152) (112)
---------------------(310) (251)
----------------
Net cash provided by operating and investing activities 169 151280 310
Financing activities 178 (88)
---------------------162 (125)
----------------
Net Increase in Cash and Cash Equivalents $ 347442 $ 63
================================================================================185
==============================================================================
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Consumers Energy Company
OPERATING ACTIVITIES: For the threesix months ended March 31,June 30, 2005, net cash provided
by operating activities increased $58$29 million versus the same period in 2004 due
to decreases in inventory from lower volumes of gas sales at higher pricespurchased and other timing
differences.
INVESTING ACTIVITIES: For the threesix months ended March 31,June 30, 2005, net cash used in
investing activities increased $40$59 million versus the same period in 2004 due to
an increase in capital expenditures of $35$38 million and an increase in restricted
cash on hand of $31 million.
FINANCING ACTIVITIES: For the threesix months ended March 31,June 30, 2005, net cash provided
by financing activities increased $266$287 million versus the same period in 2004
primarily due to an increasea $550 million stockholder's contribution from the parent, offset by a
decrease in net proceeds from borrowings of $106$201 million and a $200 million stockholder's contribution from the parent.an increase in
common stock dividends of $62 million.
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.
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Consumers Energy Company
OUTLOOK
ELECTRIC BUSINESS OUTLOOK
GROWTH: In 2005, we project electric deliveries to grow almostapproximately three
percent. This short-term outlook for 2005 assumes a stronger economy than in
2004 and normal weather conditions throughoutduring the remainder of 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 or contraction 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 establish a reserve margin target to address various scenarios and
contingencies so that the probability of interrupting service to retail
customers because of a supply shortage is no greater than an industry-recognized
standard. However, even with the reserve margin target, additional spot
purchases during periods when electric prices are high may be required. 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
101100 percent from our electric generating plants and long-term power purchase
contracts, and approximately 1011 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 and
covering partially the estimated reserve margin requirements for 2006 through
2007. As a result, we have recognized an asset of $11$12 million for unexpired
capacity and energy contracts at March 31,June 30, 2005.
COAL DELIVERY DISRUPTIONS: In May 2005, western coal rail carriers experienced
derailments and significant service disruptions due to heavy snow and rain
conditions. These disruptions affected all shippers of western coal from Wyoming
mines as well as coal producers from May 2005 through June 2005. We received
notification that, under contractual Force Majeure provisions, the coal tonnage
not delivered during this period will not be made up. According to recent
announcements, rail repairs will extend through November 2005. Although we
expect some impact on coal shipments during the repair period, and as a result
our coal inventories may drop below historical levels this winter, based on our
current delivery experience, projections, and inventory, we believe we will have
adequate coal supply to allow for normal dispatch of our coal-fired generating
units. However, we are unable to predict other potential industry-wide
shortages, which could affect the ability of our suppliers to deliver on their
commitments.
TRANSMISSION MARKET DEVELOPMENT: The MISO began operating the Midwest Energy
Market on April 1, 2005, which2005. The Midwest Energy Market includes a day-ahead and
real-time energy market and centralized generation dispatch for market
participants. We are a participant in this energy market. TheseThe intention of these
changes are anticipatedis to ensure thatmeet load requirements in the region are met reliably and efficiently, to
better manageimprove management of 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 12covers parts of
15 states and Manitoba, as well asincluding our service territory. We are presently
evaluating what financial impact, if any, these changes are having on our
operations.
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Consumers Energy Company
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. In March 2005, we issued a request for proposal for long-term
renewable energy supply contracts. We are in negotiations with certain
respondents to this request.
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 load migration to alternative electric suppliers,
increased system maintenance and improvement costs, Clean Air Act-related
expenditures, and employee pension costs. We expectIn April 2005, we filed updated debt
and equity information in this case.
In June 2005, the MPSC staff to fileStaff filed its position in thethis case, recommending a
base rate increase of $98 million. The MPSC Staff also recommended an 11.25
percent return on equity to establish rates and recognized all of our projected
equity investment (infusions and retained earnings) in June 2005.2006. 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.
BURIAL OF OVERHEAD POWER LINES: In September 2004, the Michigan Court of Appeals
upheld a lower court decision that requires Detroit Edison to obey a municipal
ordinance enacted by the City of Taylor, Michigan. The ordinance requires
Detroit Edison to bury a section of its overhead power lines at its own expense.
Detroit Edison has filed an appeal with the Michigan Supreme Court. Unless
overturned by the Michigan Supreme Court, the decision could encourage other
municipalities to adopt similar ordinances, as has occurred or is under
discussion in a few municipalities in our service territory. If incurred, we
would seek recovery of these costs from our customers located in the
municipality affected, subject to MPSC approval. This case has potentially broad
ramifications for the electric utility industry in Michigan. In a similar
matter, in May 2005, we filed a request with the MPSC that asks the MPSC to rule
that the City of East Grand Rapids, Michigan must pay for the relocation of
electric utility facilities required by an ordinance adopted by the city. At
this time, we cannot predict the outcome of these matters.
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:
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Consumers Energy Company
- 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 MarchJune 2005, we have incurred
$543$563 million in capital expenditures to comply with these regulations and
anticipate that the remaining $272$252 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 hashave 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, orand 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 to meet the phase I
reduction requirements of the Clean Air Interstate Rule at a cost near that of
the Selective Catalytic Reduction total cost in order to
meet Phase One emission reduction requirements.Nitrogen Oxide State Implementation Plan.
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 couldare expected to be
significantly less than what 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.sector. 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 2006.2007. We are currently studyingperforming the rulesrequired studies 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 AprilJuly 2005, alternative electric suppliers
are providing 893811 MW of generation supply to ROA customers. This amount
represents an increasea decrease of 95 percent compared to AprilJuly 2004, and 1211 percent of our
total distribution load. Several customers have notified us of their intent to return
to our service after a notification period ending betweenthat ended in June 2005 and July
2005. We estimate that between 70Customers representing 106 MW and 100 MW will returnreturned to our service.service during this period.
Based on this and other current trends, we predict that total load loss by the
end of 2005 will be in the range of 925900 MW to 1,000950 MW. However, no assurance
can be madewe cannot assure
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 ofIn June 2005, the MPSC issued an order that authorizes us
to recover implementation costs forincurred during 2002 and $12003 totaling $6
million, for 2003 are pending MPSC approval. In September
2004,plus the ALJ issued a Proposal for Decision recommending full recoverycost of these
costs. In parallel with these cost recovery efforts atmoney through the MPSC, weperiod of collection.
We are also pursuing an appealauthorization at the FERC for the MISO to reimburse us for
Alliance RTO development costs. Included in this amount is $2 million that the
MPSC did not approve as part of a FERC order denying recovery of costs incurred in the
development of the Alliance RTO. Although we believe theseour 2002 implementation costs application. The
FERC denied our request for reimbursement and we are fully recoverable in accordance withappealing the Customer Choice Act, weFERC ruling
at the United States Court of Appeals for the District of Columbia. We cannot
predict the amount, if any, the FERC will approve as recoverable.
Section 10d(4) Regulatory Assets: In October 2004, we filed an application with
the MPSC orseeking recovery of $628 million of Section 10d(4) Regulatory Assets
for the FERCperiod June 2000 through December 2005. Of the $628 million, $152
million relates to the cost of money. In March 2005, the MPSC Staff filed
testimony recommending the MPSC approve recovery of approximately $323 million
in Section 10d(4) costs, which includes the cost of money through the period of
collection. In June 2005, the ALJ issued a proposal for decision recommending
the MPSC approve recovery of the same Section 10d(4) costs recommended by the
MPSC Staff. 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.
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
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Consumers Energy Company
$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:
CE-14
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 naturalNatural gas prices have
increased substantially in recent years andyears. NYMEX forward natural gas prices
through 2010 recently were approximately $2 per mcf higher than they were at
year-end 2004. Because the price the MCV Partnership can charge us for energy
has not increased to reflect current natural gas prices, the MCV Partnership's
financial performance has been impacted negatively. Even with the approved RCP, ifIf forward gas prices for
2010 and beyond do not decline from present levels,to the $4 to $6 per mcf range currently
anticipated by various government and private natural gas price forecasts, and
remain in that range for the remaining life of the MCV PPA, the economics of
operating the MCV Facility maywould be adverse enough to require usthe MCV
Partnership to recognize an impairment. Therea substantial impairment of its property, plant and
equipment, which are severalincluded in our Consolidated Balance Sheets. However,
forecasting future natural gas prices is extremely difficult and there are
currently differing views among forecasters as to whether such prices will
increase, decrease or remain at current levels over any period of time. At
present, some of the forecasts indicate natural gas prices in excess of the $4
to $6 per mcf range during the years after 2010. At June 30, 2005, the net book
value of the MCV Partnership's property, plant and equipment was $1.396 billion.
Several other factors which could alter significantly ourthe MCV Partnership's 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. Any such impairment would be
required to be recognized in the period when management's analysis of the
factors described above meets the accounting standards for impairment
recognition. We will continue to monitor the current and long-term trends in
natural gas prices and their effect on the economics of operating the MCV
Facility.
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, theby early 2007. We expect a 30-acre area where
seven transportable drycontaining
eight casks loaded with spent nuclear fuel and an eighth cask
loaded withother 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
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Consumers Energy Company
manner that preserved public health and safety and met all of the NRC's specific
"cornerstone objectives." As of MarchJune 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 wet storage pool capacity. We are using dry casks for temporary onsite
storage.dry storage to supplement the wet storage pool capacity. As of MarchJune 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. ItsA 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.costs.
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,March 2005, an MPSC ALJ recommended that the complaint be dismissed.
Exceptions to this proposal for decision have been filed, and the matter is now
before the MPSC for a decision. 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,
- the price of competing energy sources or fuels,
- gas consumption per customer, and
- changes in gas commodity prices.
In February 2004, we filed an application with the MPSC for a Certificate of
Public Convenience and Necessity to construct a 25-mile gas transmission
pipeline in northern Oakland County. The project is
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Consumers Energy Company
necessary to meet estimated peak load beginning in the winter of 2005 through
2006. We started construction of the pipeline in June 2005 and it is expected to
be completed and in service by November 2005.
In October 2004, we filed an application with the MPSC for a Certificate of
Public Convenience and Necessity to construct a 10.8-mile gas transmission
pipeline in northwestern Wayne County. The project is necessary to meet the
projected capacity demands beginning in the winter of 2007. If we are unable to
construct the pipeline, we will need to pursue more costly alternatives or
curtail serving the system's load growth in that area. On July 8, 2005, the
Administrative Law Judge hearing the case issued a proposal for decision
supporting the project as filed.
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 athe 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 theThe MPSC has directed us to file our next gas depreciation case until 150within 90 days
after:after the latter of:
- the removal cost study is filed, andfiling or
- the MPSC issues anissuance of a final order in athe pending case relatingrelated to ARO
accounting.
The MPSC order on the pending case related to ARO accounting is expected in the
first quarter of 2006. 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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Consumers Energy Company
2005 GAS RATE CASE: In MarchJuly 2005, we filed an application with the MPSC grantedseeking
a 12 percent authorized return on equity along with a $132 million annual
increase in our waivergas delivery and transportation rates. The primary reasons for
the request are recovery of new investments, carrying costs on natural gas
inventory related to higher gas prices, system maintenance, employee benefits,
and accepted our surcharge
proposal, but reducedlow-income assistance. If approved, the lead time allowedrequest would add approximately 5
percent to preparethe typical residential customer's average monthly bill. The increase
would also affect commercial and file the depreciation
case to 90 days.industrial customers. As part of this filing,
we also requested interim rate relief of $75 million.
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 expireexpired 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 expireexpired on August l, 2005. In July 2005,
Consumers and the Union reached and ratified a new collective bargaining
agreement for our call center employees.
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.
CE-17
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 deductibletax-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
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Consumers Energy Company
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
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CE-19CE-23
CONSUMERS ENERGY COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED MARCH 31SIX MONTHS ENDED
JUNE 30 2005 2004 2005 2004
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
In Millions
OPERATING REVENUE $ 1,6321,016 $ 1,547923 $ 2,648 $ 2,470
OPERATING EXPENSES
Fuel for electric generation 154 160157 170 311 330
Fuel costs mark-to-market at MCV (209)39 - (170) (6)
Purchased and interchange power 6463 50 127 100
Purchased power - related parties 17 1614 15 31 31
Cost of gas sold 740 661242 195 982 858
Cost of gas sold - related parties - 3- - 1
Other operating expenses 188 171201 177 389 348
Maintenance 52 50 57 102 107
Depreciation, depletion and amortization 145 133111 98 256 231
General taxes 65 62
----------------------
1,216 1,30053 50 118 112
---------------------------------------------
930 812 2,146 2,112
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 416 24786 111 502 358
OTHER INCOME (DEDUCTIONS)
Accretion expense - (1) (1) (1) (2)
Interest and dividends 5 310 4 15 7
Regulatory return on capital expenditures 1615 9 31 18
Other income 6 2 10 4 2
Other expense (6)(2) (1) ----------------------
19 12(8) (2)
---------------------------------------------
28 13 47 25
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
INTEREST CHARGES
Interest on long-term debt 75 72 73147 145
Interest on long-term debt - related parties 72 11 9 22
Other interest 2 34 4 7
Capitalized interest (1) (1) (2) ----------------------
80 85(3)
---------------------------------------------
78 86 158 171
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND MINORITY INTERESTS 355 17436 38 391 212
MINORITY INTERESTS 111 10
----------------------(14) 1 97 11
---------------------------------------------
INCOME BEFORE INCOME TAXES 244 16450 37 294 201
INCOME TAX EXPENSE 87 59
----------------------17 13 104 72
---------------------------------------------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 157 10533 24 190 129
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR RETIREMENT BENEFITS,
NET OF $- TAX BENEFIT IN 2004 - - - (1)
-------------------------------------------------------------------
NET INCOME 33 24 190 128
PREFERRED STOCK DIVIDENDS 1 1 1 1
---------------------------------------------
NET INCOME AVAILABLE TO COMMON STOCKHOLDER $ 15732 $ 104
==================================================================================================23 $ 189 $ 127
===================================================================================================================================
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
CE-20CE-24
CONSUMERS ENERGY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREESIX MONTHS ENDED
MARCH 31JUNE 30 2005 2004
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
In Millions
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 157190 $ 104128
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization (includes nuclear
decommissioning of $1$3 per period) 145 133256 231
Regulatory return on capital expenditures (16) (9)(31) (18)
Minority interest 111 1097 11
Fuel costs mark-to-market at MCV (209)(170) (6)
Capital lease and other amortization 8 717 13
Cumulative effect of change in accounting - 1
Changes in assets and liabilities:
Increase in accounts receivable and accrued revenue (325) (337)(94) (112)
Decrease in inventories 401 337
Decrease107 75
Increase in accounts payable (8) (39)41 44
Increase (decrease) in accrued expenses (46) (37)(26) 16
Deferred income taxes and investment tax credit 63 5278 72
Decrease in other current and non-current assets 74 42125 79
Increase (decrease) in other current and non-current liabilities (34) 5- 27
------------------------
Net cash provided by operating activities $ 321590 $ 263561
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under capital lease) $ (145)(270) $ (110)(232)
Cost to retire property (27) (18)(44) (37)
Restricted cash on hand (1) (1)
Investments in Electric Restructuring Implementation Plan (1)(33) (2)
Investments in nuclear decommissioning trust funds (1) (1)(3) (3)
Proceeds from nuclear decommissioning trust funds 7 2024 23
Proceeds from short-term investments 145 -
Purchase of short-term investments (141) -
Maturity of MCV restricted investment securities held-to-maturity 126 115222 300
Purchase of MCV restricted investment securities held-to-maturity (126) (115)(223) (300)
Cash proceeds from sale of assets 1 -
Other investing 12 -
------------------------
Net cash used in investing activities $ (152)(310) $ (112)(251)
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt $ 550735 $ -
Retirement of long-term debt (444) (7)(925) (14)
Payment of common stock dividends (118) (78)(167) (105)
Payment of preferred stock dividends (1) (1)
Payment of capital and finance lease obligations (3) (3)(5) (5)
Stockholder's contribution 200550 -
OtherDebt issuance costs and financing (7)fees (25) -
------------------------
Net cash provided by (used in) financing activities $ 178162 $ (88)(125)
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Net Increase in Cash and Cash Equivalents $ 347442 $ 63185
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 $ 518613 $ 283
========================================================================================================405
===========================================================================================================
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CONSUMERS ENERGY COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS MARCH 31JUNE 30
2005 DECEMBER 31
(UNAUDITED) 2004
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
In Millions
PLANT AND PROPERTY (AT COST)
Electric $ 8,0078,044 $ 7,967
Gas 3,0103,028 2,995
Other 2,5222,521 2,523
-------------------------
13,539--------------------------
13,593 13,485
Less accumulated depreciation, depletion and amortization 5,7335,804 5,665
-------------------------
7,806--------------------------
7,789 7,820
Construction work-in-progress 426476 353
-------------------------
8,232--------------------------
8,265 8,173
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
INVESTMENTS
Stock of affiliates 3034 25
Other 7 19
-------------------------
37--------------------------
41 44
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents at cost, which approximates market 518613 171
Short-term investments at cost, which approximates market - 4
Restricted cash 2254 21
Accounts receivable, notes receivable and accrued revenue, less allowances
of $10 and $10, respectively 702469 374
Accounts receivable - related parties 1211 18
Inventories at average cost
Gas in underground storage 463737 855
Materials and supplies 6871 67
Generating plant fuel stock 5673 66
Deferred property taxes 161139 165
Regulatory assets - postretirement benefits 19 19
Derivative instruments 253241 96
Other 4843 95
-------------------------
2,322--------------------------
2,470 1,951
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
NON-CURRENT ASSETS
Regulatory Assets
Securitized costs 593583 604
Additional minimum pension 371466 372
Postretirement benefits 133128 139
Abandoned Midland Project 10 10
Other 586636 552
Nuclear decommissioning trust funds 561555 575
Other 435430 391
-------------------------
2,689--------------------------
2,808 2,643
---------------------------------------------------
TOTAL ASSETS $ 13,28013,584 $ 12,811
=========================================================================================================================================================================================================================
CE-22CE-26
STOCKHOLDER'S EQUITY AND LIABILITIES
MARCH 31JUNE 30
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 1,1321,482 932
Accumulated other comprehensive income 4048 31
Retained earnings since December 31, 1992 647630 608
------------------------
2,660----------------------------
3,001 2,412
Preferred stock 44 44
Long-term debt 4,1854,196 4,000
Long-term debt - related parties 129 326
Non-current portion of capital leases and finance lease
obligations 315 315
------------------------
7,333----------------------------
7,685 7,097
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
MINORITY INTERESTS 777773 657
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt, capital leases and
finance leases 444147 147
Current portion of long-term debt - related parties - 180
Accounts payable 261312 267
Accounts payable - related parties 1210 14
Accrued interest 6495 83
Accrued taxes 234224 254
Deferred income taxes 3233 20
Other 188213 238
------------------------
1,235----------------------------
1,034 1,203
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
NON-CURRENT LIABILITIES
Deferred income taxes 1,4041,418 1,350
Regulatory Liabilities
Regulatory liabilities for cost of removal 1,0701,084 1,044
Income taxes, net 360365 357
Other 169173 173
Postretirement benefits 213353 207
Asset retirement obligations 438431 436
Deferred investment tax credit 7877 79
Other 203191 208
------------------------
3,935----------------------------
4,092 3,854
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 2, 3, and 4)
TOTAL STOCKHOLDER'S EQUITY AND LIABILITIES $ 13,28013,584 $ 12,811
==============================================================================================================================================================================================
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
CE-23CE-27
CONSUMERS ENERGY COMPANY
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
(UNAUDITED)
THREE MONTHS ENDED MARCH 31SIX MONTHS ENDED
JUNE 30 2005 2004 2005 2004
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
In Millions
In Millions
COMMON STOCK
At beginning and end of period (a) $ 841 $ 841 $ 841 $ 841
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
OTHER PAID-IN CAPITAL
At beginning of period 1,132 682 932 682
Stockholder's contribution 200350 - --------------------------550 -
-------------------------------------------
At end of period 1,1321,482 682 --------------------------1,482 682
-------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Minimum Pension Liability
At beginning and end of period (1) - --------------------------(1) -
Minimum pension liability adjustment (b) (1) - (1) -
-------------------------------------------
At end of period (2) - (2) -
-------------------------------------------
Investments
At beginning of period 15 10 12 9
Unrealized gain on investments (b) 3 - 6 1
---------------------------------------------------------------------
At end of period 1518 10 --------------------------18 10
-------------------------------------------
Derivative Instruments
At beginning of period 26 15 20 8
Unrealized gain on derivative instruments (b) 16 9
Realized gain on derivative instruments7 4 23 13
Reclassification adjustments included in net income (b) (10) (2)
--------------------------(1) (3) (11) (5)
-------------------------------------------
At end of period 26 1532 16 32 16
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total Accumulated Other Comprehensive Income 40 2548 26 48 26
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
At beginning of period 647 547 608 521
Net income 157 10433 24 190 128
Cash dividends declared - Common Stock (118) (78)
--------------------------(49) (27) (167) (105)
Cash dividends declared - Preferred Stock (1) (1) (1) (1)
-------------------------------------------
At end of period 647 547630 543 630 543
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKHOLDER'S EQUITY $ 2,6603,001 $ 2,095
===================================================================================================2,092 $ 3,001 $ 2,092
================================================================================================================================
(a) Number of shares of common stock outstanding was 84,108,789 for all periods presented.
(b) Disclosure of Other Comprehensive Income:
Minimum Pension Liability
Minimum pension liability adjustment, net of tax of
$-, $-, $-, and $-, respectively $ (1) $ - $ (1) $ -
Investments
Unrealized gain on investments, net of tax of
$2,$1, $-, $3, and $-, respectively $ 3 $- 6 1
Derivative Instruments
Unrealized gain on derivative instruments, net of tax of
$9,$3, $3, $12, and $4,$7, respectively 16 9
Realized gain on derivative instruments,7 4 23 13
Reclassification adjustments included in net income, net of tax of
$(1), $(2), $(6), and $(1)$(3), respectively (10) (2)(1) (3) (11) (5)
Net income 157 104
--------------------------33 24 190 128
-------------------------------------------
Total Other Comprehensive Income $ 16641 $ 112
==========================25 $ 207 $ 137
===========================================
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
CE-24CE-28
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 inserving 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. IntercompanyWe eliminate intercompany transactions and balances have been eliminated.balances.
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.
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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 31Six Months Ended
- --------------------------------------------------------------------------------------------------------------
June 30 2005 2004 2005 2004
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Other income
Electric restructuring return $ 3 $ 1 $ 24 $ 3
Return on stranded costs 1 - 2 -
Return on security costs 1 1 1 1
Nitrogen oxide allowance sales 1 - 1 -
Gain on stock - - 1 -
All other - - 1 -
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total other income $ 46 $ 2 ================================================================================$ 10 $ 4
==============================================================================================================
In Millions
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31Six Months Ended
- --------------------------------------------------------------------------------------------------------------
June 30 2005 2004 2005 2004
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Other expense
Loss on reacquired debt $ (5)(1) $ - $ (6) $ -
Civic and political expenditures - - (1) (1)
All Other (1) (1) (1) (1)
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total other expense $ (6)(2) $ (1) ================================================================================$ (8) $ (2)
==============================================================================================================
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.trading, which the DOJ commenced in May 2002. 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,
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Consumers Energy Company
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.
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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 and an amended motion
for class certification on June 20, 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.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.
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.
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Consumers Energy Company
Our current capital cost estimates include an escalation rate of 2.6 percent and
an AFUDC capitalization rate of 8.3 percent. As of MarchJune 2005, we have incurred
$543$563 million in capital expenditures to comply with these regulations and
anticipate that the remaining $272$252 million of capital expenditures will be made
between 2005 and 2011. These expenditures include installing selective catalytic
reduction
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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 hashave 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, orand 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 to meet the phase I
reduction requirements of the Clean Air Interstate Rule at a cost near that of
the Selective Catalytic Reduction total cost in order to
meet Phase One emission reduction requirements.Nitrogen Oxide State Implementation Plan.
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 couldare expected to be
significantly less than what 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,June 30, 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
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Consumers Energy Company
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 waterwastewater 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 at this
time, 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, sellingwhich
sell 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. In June 2005, the FERC issued a notice of intent not to act on this
issue. We cannot predict the outcome of these appeals andor the remaining legal
actions.action.
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 AprilJuly 2005, alternative
electric suppliers are providing 893811 MW of generation supply to ROA customers.
This amount represents an increasea decrease of 95 percent compared to AprilJuly 2004, and 1211
percent of our total distribution load.
CE-29CE-33
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 2003.2003, plus the cost of
money through the period of
collection.
Implementation 1999-2004 1997-2003 $91 million (b) The MPSC allowed $68 million Costs for the
Costs years 1997-2001, plus
$20 million for the cost of
money through 2003.
Implementation cost filingsthe period of collection.
The MPSC allowed $6 million for 2002 and 2003 for $8
million, which includesthe
years 2002-2003, plus the cost of money
through 2003,
are pending MPSC approval.the period of collection.
Section 10d(4) 2004 2000-2005 $628 million FiledApplication filed with the MPSC in
October
Regulatory Assets October 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.
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Consumers Energy Company
Of the $628 million, $152 million relates to the cost of money.
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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.costs, which includes the cost of money through the
period of collection. In June 2005, the ALJ issued a Proposal for Decision
recommending that the MPSC approve recovery of the same Section 10d(4) costs
recommended by the MPSC Staff. 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,June 30, 2005, total recorded Section 10d(4) Regulatory Assets
were $160$179 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 load migration to alternative electric suppliers,
increased system maintenance and improvement costs, Clean Air Act-related
expenditures, and employee pension costs. We expectIn April 2005, we filed updated debt
and equity information in this case.
In June 2005, the MPSC staff to fileStaff filed its position in thethis case, recommending a
base rate increase of $98 million. The MPSC Staff also recommended an 11.25
percent return on equity to establish rates and recognized all of our projected
equity investment (infusions and retained earnings) in June 2005.2006. 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 and covering partially the estimated
reserve margin requirements for 2006 through 2007. As a result, we have
recognized an asset of $11$12 million for unexpired capacity and energy contracts
at March 31,June 30, 2005. At AprilAs of July 2005, we expect the total premium cost of electric
capacity and energy contracts for 2005 to be approximately $6$8 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. In June 2005, the MPSC issued an
order that approves our 2005 PSCR plan. 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.
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Consumers Energy Company
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$292 million at March 31,June 30, 2005 and $248$246 million at March 31,June 30, 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 $39$ 56 $ 55 $ 39
================================================================================
Of the 2005 estimate, we expensed $13$29 million for the threesix months ended March
31,June 30,
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 naturalNatural gas prices have
increased substantially in recent years andyears. NYMEX forward natural gas prices
through 2010 recently were approximately $2 per mcf higher than they were at
year-end 2004. Because the price the MCV Partnership can charge us for energy
has not increased to reflect current natural gas prices, the MCV Partnership's
financial performance has been impacted negatively. Even with the approved RCP, ifIf forward gas prices for
2010 and beyond do not decline from present levels,to the $4 to $6 per mcf range currently
anticipated by various government and private natural gas price forecasts, and
remain in that range for the remaining life of the MCV PPA, the economics of
operating the MCV Facility maywould be adverse enough to require usthe MCV
Partnership to recognize an impairment. Therea substantial impairment of its property, plant and
equipment, which are severalincluded in our Consolidated Balance Sheets. However,
forecasting future natural gas prices is extremely difficult and there are
currently differing views among forecasters as to whether such prices will
increase, decrease or remain at current levels over any period of time. At
present, some of the forecasts indicate natural gas prices in excess of the $4
to $6 per mcf range during the years after 2010. At June 30, 2005, the net book
value of the MCV Partnership's property, plant and equipment was $1.396 billion.
Several other factors which could alter significantly ourthe MCV Partnership's 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
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Consumers Energy Company
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. Any such impairment
would be required to be recognized in the period when management's analysis of
the factors described above meets the accounting standards for impairment
recognition. We will continue to monitor the current and long-term trends in
natural gas prices and their effect on the economics of operating the MCV
Facility.
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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Consumers Energy Company 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 fundingDecommissioning-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
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Consumers Energy Company
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: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, in 2007, 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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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. ItsA 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,June 30, 2005, we have recorded a liability
to the DOE of $142$143 million, including interest, which is payable uponprior to 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 theits motion to recover
theseeking
recovery of a one-time fee whichthat 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 further granted our
motion for summary judgment on liability and our motion to dismiss the DOE's
affirmative defense alleging our failure to satisfy a
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condition precedent, butprecedent. We filed a motion for reconsideration of the court denied our motion to dismissportion of the
DOE's counterclaim for recoupment.Court's order dealing with recoupment, which the Court denied. 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 Contractstandard
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 filinghave filed an
amicus brief inopposing holding the related case.standard contract void. 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 energy 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
AndersonPrice-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. This requirement will end December
31, 2007.
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
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Consumers Energy Company
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 expectIn 2003, we estimated 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. We have expended $12 million on these sites since the 2003
estimates were made. At March 31,June 30, 2005, we have recorded a liability of $37$36 million, net
of $45$46 million of expenditures incurred to date, and a regulatory asset of $64$63
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 filingfilings with the MPSC.
Additional details related to the proceedingproceedings 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
=====================================================================================2004-2005 June 2005 Pending $2 million
==================================================================================================================
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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 beare subject to an
annual reconciliation proceeding, which will bewas filed in June 2005. We proposed to
refund to our customers $2 million using a roll-in methodology. The $2 million
reflects an underrecovery of $1 million, offset by interest owed to customers of
$3 million. The roll-in methodology incorporates a GCR over/underrecovery in the
next GCR plan year.
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Consumers Energy Company
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$7.61 per mcf. Actual gas
costs and revenues will be subject to an annual reconciliation proceeding.
The
Attorney GeneralIn June 2005, four of the five parties filed a motion withsettlement agreement; the MPSC asking the MPSC to establishfifth
party filed a temporary factorstatement of $6.98 per mcf and preclude use ofnon-objection. The settlement agreement includes a
GCR ceiling price adjustment contingent mechanism
prior to a final MPSC order. The MPSC denied that request.upon future events.
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 athe 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 theThe MPSC has directed us to file our next gas depreciation case until 150within 90 days
after:after the latter of:
- the removal cost study is filed, andfiling or
- the MPSC issues anissuance of a final order in athe pending case relatingrelated to
ARO accounting.
CE-36
Consumers Energy CompanyThe MPSC order on the pending case related to ARO accounting is expected in the
first quarter of 2006. 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.
2005 GAS RATE CASE: In MarchJuly 2005, we filed an application with the MPSC seeking
a 12 percent authorized return on equity along with a $132 million annual
increase in our gas delivery and transportation rates. The primary reasons for
the request are recovery of new investments, carrying costs on natural gas
inventory related to higher gas prices, system maintenance, employee benefits,
and low-income assistance. If approved, the request would add approximately 5
percent to the typical residential customer's average monthly bill. The increase
would also affect commercial and industrial customers. As part of this filing,
we also requested interim rate relief of $75 million.
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Consumers Energy Company
OTHER CONTINGENCIES
IRS RULING: On August 2, 2005, the MPSC grantedIRS issued Revenue Ruling 2005-53 and
regulations to provide guidance with respect to the use of the "simplified
service cost" method of tax accounting. We use this tax accounting method,
generally allowed by the IRS under Section 263A of the Internal Revenue Code,
with respect to the allocation of certain corporate overheads to the tax basis
of self-constructed utility assets. We are studying the IRS guidance to
determine its effect on us. We cannot predict the impact of this ruling on
future earnings, cash flows, or 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 CONTINGENCIESpresent NOL carryforwards.
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,------------------------------------------------------------------------------------------------------------------
June 30, 2005 December 31, 2004
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
First mortgage bonds $ 2,8503,000 $ 2,300
Senior notes, bank debt and other 1,376938 1,436
Securitization bonds 391384 398
--------------------------- -----------------
Principal amounts outstanding 4,6174,322 4,134
Current amounts (414)(118) (118)
Net unamortized discount (18)(8) (16)
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total Long-term debt $ 4,1854,196 $ 4,000
=====================================================================================================================================================================================================================================================
FINANCINGS: The following is a summary of significant long-term debt issuances
and retirements during the threesix months ended March 31,June 30, 2005:
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Principal Interest Rate
Issue/Retirement
(In millions) (%) Issue/Retirement Date Maturity Date
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
DEBT ISSUANCES
FMB $ 250 5.15 January 2005 February 2017
FMB 300 5.65 March 2005 April 2020
FMB insured quarterly notes 150 5.65 April 2005 April 2035
LORB 35 Variable April 2005 April 2035
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total $ 550
===================================================================================================================================735
==================================================================================================================
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
Senior notes 332 6.25 April and May 2005 September 2006
Senior insured quarterly notes 141 6.50 May 2005 October 2028
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total $ 437
===================================================================================================================================910
==================================================================================================================
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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.company, CMS Energy.
REGULATORY AUTHORIZATION FOR FINANCINGS: OnIn 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
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Consumers Energy Company
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 toto:
- - $1.001 billion of long-term securities for refinancing or refunding purposes,
$1.709- - $1.209 billion of long-term securities for general corporate purposes, and
$2.435- - $1.935 billion of long-term FMBsFMB to be issued solely as collateral for other
long-term securities during the period ending June 30, 2006.securities.
REVOLVING CREDIT FACILITIES: The following secured revolving credit facilities
with banks are available at March 31,June 30, 2005:
In Millions
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Outstanding
Amount of Amount Letters-of- Amount
Company Expiration Date Facility Borrowed Credit Available
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Consumers (a)May 18, 2010 $ 500 $ - $ 1631 $ 484469
MCV Partnership August 27, 2005 50 - 2 48
=======================================================================================3 47
- ---------------------------------------------------------------------------------------------------
(a) ThisWe amended our credit facility expires in August 2005May 2005. The amendment extended the term of
the agreement to 2010 and may be extended annually at
Consumers' option to July 31, 2007.reduced certain fees and interest margins.
CAPITAL AND FINANCE LEASE OBLIGATIONS: Our capital leases are comprised mainly
of leased service vehicles and office furniture. At March 31,June 30, 2005, capital lease
obligations totaled $56$54 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,June 30, 2005,
finance lease obligations totaled $288$290 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. WeThe special purpose entity sold no receivables as of March 31,June 30, 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------------------------------------------------------------------------------------------------------------
Six months ended March 31June 30 2005 2004
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Net cash flow as a result of accounts receivable financing $ (304) $ (297)
Collections from customers $ 1,6052,787 $ 1,549
==================================================================================================================================2,645
============================================================================================================
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Consumers Energy Company
DIVIDEND RESTRICTIONS: Under the provisions of our articles of incorporation, at
March 31,June 30, 2005, we had $496$479 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 threesix
months ended March 31,June 30, 2005, we paid $118$167 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,June 30, 2005:
In Millions
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Issue Expiration Maximum Carrying Recourse
Guarantee Description Date Date Obligation Amount Provision (a)
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Standby letters of credit Various Various $16$ 31 $ - $ -
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 premiums Normal operations of nuclear plants Call by NEIL and Price-Anderson Act
premiums for nuclear incident
======================================================================================================================================================================================================================================
CE-39In the ordinary course of business, we enter into agreements containing
indemnification provisions in connection with a variety of transactions
including financing agreements. While we cannot estimate our maximum exposure
under these indemnities, we consider the probability of liability remote.
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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,---------------------------------------------------------------------------------------------------------------------
June 30, 2005 December 31, 2004
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Cost 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 $4,2324,314 $ 4,476 $ (162) $ 4,118 $ 4,232 $ (114)
Long-term debt - related parties 129 135 (6)134 (5) 506 518 (12)
Available-for-sale securities:
Common stock of CMS Energy 10 30 2034 24 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 118132 246 114 136 262 126
Debt securities 289 295 6284 294 10 291 302 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 incomeOther 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 coal purchase
contracts are not accounted for as derivatives due to the lack of an active
market for the coal that we purchase. Similarly, 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, andderivatives. For our coal purchase contracts, the resulting
mark-to-market impact on earnings could be material to our financial statements.
For our electric capacity and energy contracts, we believe that we will
be able to apply the normal purchases and sales exception, which would not
require us to mark these contracts to market.
The MISO began operating the Midwest Energy Market on April 1, 2005, which2005. The Midwest
Energy Market provides day-ahead and real-time energy market information and
centralized generation 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 adequateas we gain additional
experience with the Midwest Energy Market, we will reevaluatecontinue to evaluate 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 the MISO's market area. WeFTRs are presently
evaluating whether FTRs qualify as derivative instruments. If they are
determined to be
derivative instruments FTRs would beand are required to be recognized on our Consolidated
Balance Sheets as assets or liabilities at their fair value,values, with any
subsequent changes in fair value recognized in earnings. However,As of June 30, 2005, we
believe we may be able to offsetrecorded an asset of $1 million associated with the earnings impact with a regulatory asset or
liability. The Midwest Energy Market was not effective until April 1, 2005.
Therefore,fair value of FTRs had no value at March 31, 2005.
CE-41on our
Consolidated Balance Sheets.
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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,--------------------------------------------------------------------------------------------------------------------
June 30, 2005 December 31, 2004
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Cost Fair Unrealized Cost Fair Unrealized
Derivative Instruments Cost Value Gain Cost Value Gain (Loss)
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
GAS CONTRACTS $- $- $- $2 $-Gas contracts $ - $ - $ - $ 2 $ - $ (2)
FTRs - 1 1 - - -
Derivative contracts associated with the MCV
Partnership:
Gas fuel contracts - 201 201181 181 - 56 56
Gas fuel futures and swaps - 146 146145 145 - 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,June 30, 2005, we had purchased a fixed-priced
gas supply call option and had sold a fixed-priced gas supply put option. 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,June 30, 2005.
The MCV Partnership also held certain long-term gas contracts that did not
qualify as normal purchases at March 31,June 30, 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 as fuel 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, as of January 2005,
any changes in the fair value of these financial hedges will no longer be recognized in Other Comprehensive
Income, but will beare 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 threesix months ended March 31,June 30, 2005, we
recorded a $209$170 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.Income, resulting in a cumulative mark-to-market gain through June 30, 2005
of $226 million. This cumulative amount consists of a $181 million gain related
to gas fuel derivative contracts. The remaining gain of $45 million relates to
the financial hedges associated with these contracts, which is included in the
Gas fuel futures and swaps amount in the Derivative Instruments table above. The
majority of this mark-to-market gain is expected to reverse through earnings
during 2005 and 2006 as the gas is purchased and
CE-47
Consumers Energy Company
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,June 30, 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,June 30, 2005, we have recorded a
cumulative net gain of $27$32 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 AprilJuly 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
threesix months ended March 31,June 30, 2005, we recorded a net gain of $11$22 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,
- a defined company contribution plan for employees hired on or after
September 1, 2005,
- 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 current employees, our
non-utility affiliates, and Panhandle, a former affiliate. The Pension Plan's
assets are not distinguishable by company.
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Consumers Energy Company
On September 1, 2005, we will implement the Defined Company Contribution Plan.
The Defined Company Contribution Plan will provide an employer cash contribution
of 5 percent of base pay to the existing Employees' Savings Plan. No employee
contribution is required to receive the plan's employer contribution. All
employees hired on and after September 1, 2005 will participate in this plan as
part of their retirement benefit program. Cash balance pension plan participants
will also participate in the Defined Company Contribution Plan on September 1,
2005. Additional pay credits under the cash balance pension plan will be
discontinued as of that date.
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 31Six Months Ended
2005 2004 2005 2004
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Service cost $ 14 $ 9 $ 1023 $ 5 $ 519
Interest expense 27 18 18 15 1345 36
Expected return on plan assets (23)(35) (27) (13) (12)
Plan amendments - - - -(58) (54)
Amortization of:
Net loss 7 3 5 34 14 7
Prior service cost 1 1 (2) (2)
-----------------------------2 2 3 3
-----------------------------------------
Net periodic pension and postretirement benefit cost $ 1215 $ 6 $ 27 $ 11
=========================================================================================================
In Millions
- ----------------------------------------------------------------------------------------------------------
OPEB
Three Months Ended Six Months Ended
2005 2004 2005 2004
- ----------------------------------------------------------------------------------------------------------
Service cost $ 5 $ 4 $ 10 $ 7
=======================================================================================9
Interest expense 15 14 30 27
Expected return on plan assets (13) (11) (26) (23)
Amortization of:
Net loss 5 3 10 6
Prior service cost (2) (2) (4) (4)
------------------------------------------
Net periodic pension and postretirement benefit cost $ 10 $ 8 $ 20 $ 15
==========================================================================================================
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 threesix
months ended March 31,June 30, 2005 was less than $1 million.
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Consumers Energy Company
We remeasured our Pension and OPEB obligations as of April 30, 2005 to
incorporate the effects of the collective bargaining agreement reached between
the Utility Workers Union of America and Consumers. The Pension plan
remeasurement increased our accumulated benefit obligation (ABO) by $127
million. Net periodic pension cost increased by $3 million for the six months
ended June 30, 2005, with an expected total increase in net periodic pension
cost of $12 million for 2005.
The Pension plan remeasurement resulted in an unfunded accumulated benefit
obligation of $208 million. The unfunded accumulated benefit obligation is the
amount by which the ABO exceeds the fair value of the plan assets. SFAS No. 87
states that the pension liability shown on the balance sheet must be at least
equal to the unfunded accumulated benefit obligation. As such, we increased our
additional minimum liability by $129 million to $521 million at June 30, 2005.
Consistent with MPSC guidance, we recognized the cost of our minimum pension
liability adjustment as a regulatory asset. This adjustment increased our
regulatory assets by $94 million and intangible assets by $35 million.
The OPEB plan remeasurement increased our accumulated postretirement benefit
obligation by $41 million, with an expected total increase in benefit costs of
$2 million for 2005.
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.
CE-50
Consumers Energy Company
The following tables describe our assets that have legal obligations to be
removed at the end of their useful life:
December 31, 2004June 30, 2005 In Millions
- -----------------------------------------------------------------------------------------------------------
in---------------------------------------------------------------------------------------------------------------------
In Service Trust
AroARO Description Date Long Lived Assets Fund
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Palisades - decommission plant site 1972 Palisades nuclear plant $518$ 529
Big Rock - decommission plant site 1962 Big Rock nuclear plant 4326
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 3/31/6/30/05
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Palisades - decommission $350$ 350 $ - $ - $6$ 12 $ - $356$ 362
Big Rock - decommission 30 - (8) 4(25) 7 - 2612
JHCampbell intake line - - - - - -
Coal ash disposal areas 54 - (1) 12 - 5455
Wells at gas storage fields 1 - - - - 1
Indoor gas services relocations 1 - - - - 1
-----------------------------------------------------------------------------------------------------------------------------------------------------
Total $436$ 436 $ - $(9) $11$ (26) $ 21 $ - $438
=======================================================================================================$ 431
======================================================================================================================
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 duefiled responses 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.
CE-45CE-51
Consumers Energy Company
The following table shows our financial information by reportable segment:
In Millions
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31Six Months Ended
- ----------------------------------------------------------------------------------------------------------------
June 30 2005 2004 2005 2004
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Operating revenue
Electric $ 628649 $ 631612 $ 1,277 $ 1,243
Gas 992 905355 300 1,347 1,205
Other 12 11 24 22
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total Operating Revenue $ 1,6321,016 $ 1,547
================================================================================923 $ 2,648 $ 2,470
================================================================================================================
Net income available to common stockholder
Electric $ 3346 $ 4827 $ 79 $ 75
Gas 58 56(3) 1 55 57
Other 66(11) (5) 55 (5)
- - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total Net Income Available to Common
Stockholder $ 15732 $ 104
================================================================================23 $ 189 $ 127
================================================================================================================
In Millions
- --------------------------------------------------------------------------------
March 31,----------------------------------------------------------------------------------------------------------------
June 30, 2005 December 31, 2004
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Assets
Electric (a) $ 7,4987,646 $ 7,289
Gas (a) 2,8563,209 3,187
Other 2,9262,729 2,335
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 13,28013,584 $ 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 periodperiods presented. These partnerships have third-party
obligations totaling $584$586 million at March 31,June 30, 2005. Property, plant, and
equipment serving as collateral for these obligations has a carrying value of
$1.411$1.396 billion at March 31,June 30, 2005. The creditors of these partnerships do not have
recourse to the general credit of Consumers.
CE-46CE-52
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 deductibletax-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-47CE-53
ItemITEM 3. Quantitative and Qualitative Disclosures About Market RiskQUANTITATIVE 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.
ItemITEM 4. Controls and ProceduresCONTROLS 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
ItemITEM 1. Legal ProceedingsLEGAL 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,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
CO-1
regarding various pending administrative and judicial proceedings involving
rate, operating, regulatory and environmental matters.
CO-1
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 andofficials or relatives of 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 senthas provided responsive documents
to the SEC. CMS Energy is currently
reviewingSEC and will continue to provide such documents as it reviews its
electronic records in further response to the SEC's request. On August 1, 2005,
CMS Energy and several other companies who have conducted business in Equatorial
Guinea received subpoenas from the SEC to provide documents regarding payments
made to officials or relatives of officials of the government of Equatorial
Guinea. CMS Energy will provide responsive documents in connection with the
subpoena.
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 was 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.
On July 7, 2005, CMS Energy filed with the court a Stipulation of Settlement
that was signed by all parties as well as the special litigation committee.
Under the terms of the settlement, CMS Energy will receive $12 million under its
directors and officers liability insurance program, $7 million of which will be
used to pay costs associated with the securities class action lawsuits. CMS
Energy may use the remaining $5 million to pay attorneys' fees and expenses
arising out of the derivative proceeding. The terms of the settlement are
subject to court approval and the hearing for final approval is scheduled for
August 26, 2005.
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.)
CO-2
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. Texas-Ohio has appealed the dismissal to the Ninth Circuit Court of
Appeals.
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.
ThePlaintiffs subsequently filed a consolidated class action complaint alleging
violations of federal and California antitrust laws. Defendants filed a motion
to dismiss, was granted on April 8, 2005, andarguing that 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 tobe dismissed for the
existing complaints.same reasons as the Texas-Ohio case.
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 Benscheidtone 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
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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.complaints and on May 13, 2005, plaintiffs
filed a memorandum of points and authorities in opposition to defendants'
federal preemption demurrer and motion to strike. Pursuant to a ruling dated
June 29, 2005, the demurrer was overruled and the motion to strike was denied.
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.Division,
and they filed a motion on May 20, 2005 to transfer the case to the MDL
proceeding in Nevada. On April 6, 2005, plaintiffs filed a motion to remand the
case back to the Chancery Court in Tennessee. Defendants filed a motion to stay
proceedings pending resolution of the motion to remand and plaintiffs have filed
a response, objecting to defendants' motion. 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 and an amended motion for class certification on June 20, 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
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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.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
DuringAt the first quarter of 2005, neither CMS Energy nor Consumers submitted any
mattersAnnual Meeting of Shareholders held on May 20, 2005, the CMS
Energy shareholders voted upon two proposals, as follows:
- Ratification of the appointment of Ernst & Young LLP as the independent
registered public accounting firm to audit CMS Energy's financial
statements for the year ending December 31, 2005, with a vote of
security holders.170,359,235 shares in favor, 835,976 against and 1,476,040 abstentions;
and
- Election of twelve members to the Board of Directors. The votes for
individual nominees were as follows:
CMS ENERGY
Number of Votes: For Withheld Total
--------------------------------------------------------------------------
Merribel S. Ayres 167,079,391 5,609,800 172,689,191
Richard M. Gabrys 167,147,454 5,541,737 172,689,191
Earl D. Holton 166,459,567 6,229,624 172,689,191
David W. Joos 166,523,599 6,165,592 172,689,191
Philip R. Lochner, Jr. 166,821,472 5,867,719 172,689,191
Michael T. Monahan 167,130,271 5,558,920 172,689,191
Joseph F. Paquette, Jr. 167,011,549 5,677,642 172,689,191
Percy A. Pierre 164,425,375 8,263,816 172,689,191
S. Kinnie Smith, Jr. 166,376,003 6,313,188 172,689,191
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Number of Votes: For Withheld Total
--------------------------------------------------------------------------
Kenneth L. Way 167,016,414 5,672,777 172,689,191
Kenneth Whipple 166,473,648 6,215,543 172,689,191
John B. Yasinsky 164,430,059 8,259,132 172,689,191
CONSUMERS
Consumers did not solicit proxies for the matters submitted to votes at the
contemporaneous May 20, 2005 Consumers' Annual Meeting of Shareholders. All
84,108,789 shares of Consumers Common Stock were voted in favor of electing the
above-named individuals as directors of Consumers and in favor of the remaining
proposals for Consumers. None of the 441,599 shares of Consumers Preferred Stock
were voted at the Annual Meeting.
ITEM 5. OTHER INFORMATION
None.A shareholder who wishes to submit a proposal for consideration at the CMS
Energy 2006 Annual Meeting pursuant to the applicable rules of the SEC must send
the proposal to reach CMS Energy's Corporate Secretary on or before December 19,
2005. In any event if CMS Energy has not received written notice of any matter
to be proposed at that meeting by March 4, 2006, the holders of proxies may use
their discretionary voting authority on such matter. The proposals should be
addressed to: Corporate Secretary, CMS Energy Corporation, One Energy Plaza,
Jackson, MI 49201.
ITEM 6. EXHIBITS
(4)(a) 101st Supplemental Indenture$300 million Sixth Amended and Restated Credit Agreement dated
as of April 1,May 18, 2005 supplementamong CMS Energy Corporation, CMS
Enterprises, and the Administrative Agent and Collateral
Agent, as defined therein (Previously filed as Exhibit (4)(i)
to IndentureForm S-3 filed by CMS Energy on June 6, 2005, and
incorporated by reference herein)
(4)(b) $500 million Third Amended and Restated Credit Agreement
dated as of September 1, 1945, betweenMay 18, 2005 among Consumers Energy Company and
JPMorgan Chase Bank, N.A., a national banking association
(10)(a) Annual Officer Incentive Compensation Plan for CMS Energy
Corporationthe Banks, the Administrative Agent, the Syndication Agent 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, 2005the Co-Documentation Agents, all as defined therein
(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,August 4, 2005 By: /s/ Thomas J.Webb
--------------------------------J. Webb
-----------------------------------
Thomas J. Webb
Executive Vice President and
Chief Financial Officer
CONSUMERS ENERGY COMPANY
(REGISTRANT)(Registrant)
Dated: May 5,August 4, 2005 By: /s/ Thomas J.Webb
--------------------------------J. Webb
-----------------------------------
Thomas J. Webb
Executive Vice President and
Chief Financial Officer
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EXHIBIT INDEXCMS ENERGY AND CONSUMERS EXHIBITS
EX NO.EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
(4)(a) 101st Supplemental Indenture(b) $500 million Third Amended and Restated Credit Agreement dated
as of April 1,May 18, 2005 supplement
to Indenture datedamong Consumers Energy Company and the Banks,
the Administrative Agent, the Syndication Agent and the
Co-Documentation Agents, all 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, 2005defined therein
(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