10-Q 1 k88656e10vq.txt QUARTERLY REPORT FOR PERIOD ENDED 09/30/04 United States Securities and Exchange Commission Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission File Registrant; State of Incorporation; IRS Employer Number Address and Telephone Number Identification No. --------------- ---------------------------------- ------------------ 333-47938 Consumers Funding LLC 38-3575109 A Delaware limited liability company One Energy Plaza Jackson, Michigan 49201 (517) 788-0250 Securities registered pursuant to Section 12 (b) of the Act: None. Securities registered pursuant to Section 12 (g) of the Act: None. Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in rule 12b-2 of the Exchange Act). YES [ ] NO [X] Consumers Funding LLC meets the conditions set forth in General Instruction H(1)(a) and (b) of the Form 10-Q and is, therefore filing this Form 10-Q with the reduced disclosure format. In accordance with Instruction H, Part I, Item 2 has been reduced and Parts III, Items 2, 3 and 4 have been omitted. The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant: None. CONSUMERS FUNDING LLC FORM 10-Q QUARTERLY REPORT TO THE SECURITIES AND EXCHANGE COMMISSION FOR THE QUARTER ENDED SEPTEMBER 30, 2004 TABLE OF CONTENTS
Page ---- PART I: Financial Information 1. Management's Narrative Analysis of Results of Operations.................... 3 2. Financial Statements and Supplementary Data Statements of Income.................................................... 5 Balance Sheets.......................................................... 6 Statements of Cash Flows................................................ 7 Statements of Member's Equity........................................... 8 Notes to Financial Statements........................................... 9 PART II: Other Information 3. Item 1. Legal Proceedings .................................................. 13 Item 5. Other Information .................................................. 13 Item 6. Exhibits, and Reports on Form 8-K................................... 13 Item 7A. Quantitative and Qualitative Disclosures About Market Risk......... 13 Signatures.................................................................. 14 Exhibit Index............................................................... 15
2 CONSUMERS FUNDING LLC MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS This Management's Narrative Analysis (MNA) of the results of operations of Consumers Funding LLC (Consumers Funding) is an abbreviated format pursuant to Instruction H of Form 10-Q. The MNA refers to Consumers Funding's Notes to Financial Statements and should be read in conjunction with such Financial Statements and Notes. This Form 10-Q and other written and oral statements from Consumers Funding contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Consumers Funding's intention with the use of words such as "may," "could," "anticipates," "believes," "estimates," "expects," "intends," "plans," and other similar words is to identify forward-looking statements that involve risk and uncertainty. Consumers Funding designed this discussion of potential risks and uncertainties to highlight important factors that may impact its business and financial outlook. Consumers Funding has no obligation to update or revise forward-looking statements regardless of whether new information, future events or any other factors affect the information contained in the statements. These forward-looking statements are subject to various factors that could cause Consumers Funding's actual results to differ materially from the results anticipated in these statements. Consumers Funding, a Delaware limited liability company, whose sole member is Consumers Energy Company (Consumers), was formed by Consumers on October 11, 2000. Consumers is an electric and gas utility and is a wholly owned subsidiary of CMS Energy Corporation. Consumers Funding was organized for the purposes of purchasing and owning securitization property (see below), issuing securitization bonds, pledging its interest in securitization property and other collateral to the trustee to collateralize the securitization bonds, and performing activities that are necessary, suitable or convenient to accomplish these purposes. On November 8, 2001, Consumers Funding issued $468.6 million of securitization bonds. Consumers Funding used the proceeds from the securitization bond issuance to purchase securitization property from Consumers. As discussed in Note 1 to the Financial Statements, securitization property represents the irrevocable right of Consumers to collect a nonbypassable securitization charge (Securitization Charge) from customers in accordance with a financing order issued by the Michigan Public Service Commission (MPSC). The securitization property, which is classified as a securitization receivable, along with earnings on cash deposited with the trustee, resulted in Consumers Funding recording $5.3 million of interest income for the three months ended September 30,2004 and $5.4 million of interest income for the three months ended September 30, 2003. Interest expense associated with the securitization bonds totaled $5.3 million for the three months ended September 30, 2004 and $5.4 million for the three months ended September 30, 2003. Interest income totaled $16.0 million for the nine months ended September 30, 2004 and $16.6 million for the nine months ended September 30, 2003. Interest expense totaled $16.0 million for the nine months ended September 30, 2004 and $16.6 million for the nine months ended September 30, 2003. Consumers, as servicer, began billing a Securitization Charge to electric customers with its December 2001 billing cycle, totaling $.001427 per kilowatt-hour, per customer, per billing cycle. In the servicing agreement between Consumers Funding and Consumers, Consumers is required to remit its Securitization Charge collections to the trustee each business day. Under the servicing agreement, Consumers is required to request periodic Securitization Charge adjustments from the MPSC. The request for an adjustment must be submitted at least 45 days before the adjustment may take place. Adjustments will be made annually, and then quarterly beginning approximately one year before the expected final payment date of the last maturing class of securitization bonds. Adjustments to the Securitization Charge are based, among other things, on actual Securitization Charge revenue collections and updated assumptions by Consumers as to projected future deliveries of electricity to customers. 3 On October 16, 2003, Consumers submitted a request to the MPSC for its annual adjustment and it was approved on November 25, 2003. The approved adjustment revised the Securitization Charge to $.001299 from $.001328 per kilowatt-hour, per customer, per billing cycle, effective with the December 2003 billing cycle. On October 15, 2004, Consumers submitted a request to the MPSC for its annual adjustment. If approved, the adjustment will revise the Securitization Charge to $.001311 per kilowatt-hour, per customer, per billing cycle, effective December 1, 2004. For the three months ended September 30, 2004, operating revenues totaled $5.6 million, a decrease of approximately $0.1 million compared to 2003. Included in the $5.6 million is $5.3 million of interest income and approximately $0.3 million of other operating revenue. The decrease in total operating revenues for the three-month period primarily reflects lower interest income associated with the reduction in the securitization receivable from Consumers. For the three months ended September 30, 2004, Consumers Funding incurred $5.6 million of operating expenses, a decrease of approximately $0.1 million compared to 2003. Included in the $5.6 million is $5.3 million of interest expense and approximately $0.3 million of servicing, administration and other expenses. The decrease in operating expenses for the three-month period is primarily the result of reduced debt levels. For the nine months ended September 30, 2004, operating revenues totaled $16.9 million, a decrease of approximately $0.6 million compared to 2003. Included in the $16.9 million is $16.0 million of interest income and approximately $0.9 million of other operating revenue. The decrease in total operating revenues for the nine-month period primarily reflects lower interest income associated with the reduction in the securitization receivable from Consumers. For the nine months ended September 30, 2004, Consumers Funding incurred $16.9 million of operating expenses, a decrease of approximately $0.6 million compared to 2003. Included in the $16.9 million is $16.0 million of interest expense and approximately $0.9 million of servicing, administration and other expenses. The decrease in operating expenses for the nine-month period is primarily the result of reduced debt levels. 4 CONSUMERS FUNDING LLC STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 2004 2003 2004 2003 ------------ ------ ------ ------- ------- In Thousands OPERATING REVENUES Interest Income - Consumers $5,262 $5,427 $16,045 $16,593 Other Operating Revenue - Consumers 274 291 833 885 Other Operating Revenue 19 7 22 42 ------ ------ ------- ------- Total Operating Revenues 5,555 5,725 16,900 17,520 ------ ------ ------- ------- OPERATING EXPENSES Interest Expense 5,262 5,427 16,045 16,593 Service Fee - Consumers 254 271 773 825 Administration Fee - Consumers 20 20 60 60 Other 19 7 22 42 ------ ------ ------- ------- Total Operating Expenses 5,555 5,725 16,900 17,520 ------ ------ ------- ------- NET INCOME $ - $ - $ - $ - ====== ====== ======= =======
The accompanying notes are an integral part of these statements. 5 CONSUMERS FUNDING LLC BALANCE SHEETS
SEPT. 30 SEPT. 30 2004 DEC. 31 2003 (UNAUDITED) 2003 (UNAUDITED) ----------- -------- ----------- In Thousands ASSETS CURRENT ASSETS Restricted Cash $ 17,736 $ 17,045 $ 17,837 Securitization Receivable - Consumers 27,230 27,361 26,437 -------- -------- -------- Total Current Assets 44,966 44,406 44,274 NON-CURRENT ASSETS Securitization Receivable - Consumers 367,758 388,459 396,170 -------- -------- -------- Total Non-current Assets 367,758 388,459 396,170 -------- -------- -------- TOTAL ASSETS $412,724 $432,865 $440,444 ======== ======== ======== LIABILITIES AND MEMBER'S EQUITY CURRENT LIABILITIES Securitization Bonds Payable $ 28,412 $ 27,786 $ 27,590 Accounts Payable - Consumers 302 305 286 Accounts Payable - Other 13 32 33 Interest Payable 4,104 4,148 4,229 -------- -------- -------- Total Current Liabilities 32,831 32,271 32,138 NON-CURRENT LIABILITIES Securitization Bonds Payable 377,550 398,251 405,963 -------- -------- -------- Total Non-current Liabilities 377,550 398,251 405,963 -------- -------- -------- MEMBER'S EQUITY Total Member's Equity 2,343 2,343 2,343 -------- -------- -------- TOTAL LIABILITIES AND MEMBER'S EQUITY $412,724 $432,865 $440,444 ======== ======== ========
The accompanying notes are an integral part of these statements. 6 CONSUMERS FUNDING LLC STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30 2004 2003 ------------ -------- -------- In Thousands CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ - $ - Changes in Current Assets and Liabilities: Interest Payable (44) (228) Accounts Payable - Consumers (3) (28) Accounts Payable - Other (19) 31 -------- -------- NET CASH (USED IN) OPERATING ACTIVITIES (66) (225) CASH FLOWS FROM INVESTING ACTIVITIES Restricted Cash (691) (426) Reduction of Securitization Receivable 20,832 20,040 -------- -------- NET CASH PROVIDED BY INVESTING ACTIVITIES 20,141 19,614 CASH FLOWS FROM FINANCING ACTIVITIES Payment of Securitization Bonds Principal (20,075) (19,389) -------- -------- NET CASH (USED IN) FINANCING ACTIVITIES (20,075) (19,389) NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS - - CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD - - -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ - $ - ======== ========
The accompanying notes are an integral part of these statements. 7 CONSUMERS FUNDING LLC STATEMENTS OF MEMBER'S EQUITY (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 2004 2003 2004 2003 ------------ ------ ------ ------ ------ In Thousands BALANCE AT BEGINNING OF PERIOD $2,343 $2,343 $2,343 $2,343 Add: Net Income - - - - ------ ------ ------ ------ BALANCE AT END OF PERIOD $2,343 $2,343 $2,343 $2,343 ====== ====== ====== ======
The accompanying notes are an integral part of these statements. 8 CONSUMERS FUNDING LLC NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND NATURE OF OPERATIONS Consumers Funding, a Delaware limited liability company, whose sole member is Consumers, was formed by Consumers on October 11, 2000. On January 22, 2001, Consumers completed a $1,000 equity contribution to Consumers Funding. Consumers is an electric and gas utility and is a wholly owned subsidiary of CMS Energy Corporation. Consumers Funding was organized for the purposes of purchasing and owning securitization property (see below), issuing securitization bonds, pledging its interest in securitization property and other collateral to the trustee to collateralize the securitization bonds, and performing activities that are necessary, suitable or convenient to accomplish these purposes. Securitization property represents the irrevocable right of Consumers, or its successor or assignee, to collect a nonbypassable Securitization Charge from customers in accordance with an October 24, 2000 MPSC Financing Order (MPSC Financing Order). As modified by rehearing on January 4, 2001, the MPSC Financing Order authorizes the Securitization Charge to be sufficient to recover $468.6 million aggregate principal amount of securitization bonds, plus an amount sufficient to provide for any credit enhancement, to fund any reserves and to pay interest, redemption premiums, if any, servicing fees and other expenses relating to the securitization bonds. For financial reporting purposes, the purchase of the securitization property has been accounted for as a financing arrangement by Consumers Funding in the amount of $468.6 million. Accordingly, Consumers Funding has classified the purchase of securitization property as a securitization receivable from Consumers in the financial statements. Consumers Funding's organizational documents require it to operate in a manner so that it would not be consolidated into the bankruptcy estate of Consumers in the event Consumers becomes subject to a bankruptcy proceeding. Consumers and Consumers Funding have agreed that in the event of Consumers' bankruptcy, the parties will treat the transfer of the securitization property to Consumers Funding as a true sale. The securitization bonds are treated as debt obligations of Consumers Funding. For financial reporting, Federal income tax and State of Michigan and franchise tax purposes, the transfer of securitization property to Consumers Funding is treated as part of a financing arrangement and not as a sale. Furthermore, the results of operations of Consumers Funding are consolidated with Consumers' financial statements for financial and income tax reporting purposes. Consumers Funding is legally separate from Consumers. The assets and income of Consumers Funding, including without limitation, the securitization property, are not available to creditors of Consumers or CMS Energy Corporation. On November 8, 2001, Consumers Funding issued $468.6 million of securitization bonds, Series 2001-1, in six different classes. Consumers Funding used the proceeds to fund the purchase of securitization property from Consumers. The principal amount of the securitization bonds, interest, fees and required overcollateralization for the securitization bonds, will be recovered through Securitization Charges collected from electric retail customers taking delivery of electricity from Consumers or its successor based on MPSC approved rate schedules and as permitted by contracts between Consumers and certain specific customers. Consumers, as servicer, collects Securitization Charges from its customers and deposits collections daily into the General Subaccount held by the trustee, The Bank of New York. The trustee is required to use these funds to make principal and interest payments on the securitization bonds and to pay certain fees and expenses of Consumers Funding. Consumers Funding has no employees. Under the servicing agreement with Consumers, Consumers is required to manage and administer the securitization property and to collect Securitization Charges on Consumers Funding's behalf. Consumers receives a monthly servicing fee of one twelfth times 0.25 percent 9 of the principal amount of securitization bonds outstanding as of the payment date. The servicing agreement also requires Consumers to file annual Securitization Charge adjustment requests with the MPSC. These Securitization Charge adjustment requests are based on actual Securitization Charge revenue collections and Consumers' updated assumptions as to projected future deliveries of electricity to customers, expected delinquencies and write-offs, future payments and expenses relating to securitization property and the securitization bonds, any deficiency in the Capital or Overcollateralization Subaccounts and any amounts on deposit in the Reserve Subaccount. 2. SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amount of revenues, expenses, assets, and liabilities and disclosure of contingencies. Actual results could differ from these estimates. INCOME TAXES Consumers Funding has elected not to be taxed as a corporation for Federal income tax purposes. Consumers Funding is treated as a division of Consumers, and accordingly, will not be treated as a separate taxable entity. RESTRICTED CASH The trustee has established the following subaccounts for the securitization bonds. GENERAL SUBACCOUNT: The General Subaccount is comprised of Securitization Charge collections and interest earned from short-term investments. These amounts accumulate until the trustee pays principal, interest, service and administration fees and other expenses. The General Subaccount totaled $12.8 million at September 30, 2004 and $12.6 million at September 30, 2003. These funds are used by the trustee for the scheduled payments of principal and interest to bondholders and to pay expenses of Consumers Funding. RESERVE SUBACCOUNT: The Reserve Subaccount includes any Securitization Charge collections in excess of the amounts required in the General, Overcollateralization and Capital Subaccounts. The trustee will draw funds from this subaccount if the General Subaccount is insufficient to make scheduled payments. The Reserve Subaccount totaled approximately $2.1 million at September 30, 2004 and $2.6 million at September 30, 2003. OVERCOLLATERALIZATION SUBACCOUNT: On each payment date, the trustee will deposit in the Overcollateralization Subaccount a predetermined, specified amount so that the account balance ultimately reaches the required amount of $2.3 million, which represents 0.5 percent of the initial outstanding principal balance of the securitization bonds. If amounts available in the General Subaccount and the Reserve Subaccount are not sufficient on any payment date to make scheduled payments to the securitization bondholders and to pay the required expenses, fees and charges, the trustee will draw on the amounts in the Overcollateralization Subaccount to make those payments. The Overcollateralization Subaccount totaled approximately $0.5 million at September 30, 2004 and $0.3 million at September 30, 2003. CAPITAL SUBACCOUNT: The Capital Subaccount was established on November 8, 2001. Consumers deposited $2.3 million into the Capital Subaccount, an amount equal to 0.5 percent of the initial principal balance of the securitization bonds. If amounts available in the General Subaccount, the Reserve Subaccount and the Overcollateralization Subaccount are not sufficient on any payment date to make scheduled payments of principal and interest to the securitization bondholders and to pay the expenses, fees and charges of Consumers 10 Funding, the trustee will draw on amounts in the Capital Subaccount to make those payments. At September 30, 2004 and September 30, 2003, the Capital Subaccount contained a balance of $2.3 million. 3. LONG-TERM DEBT On November 8, 2001, Consumers Funding issued $468.6 million of securitization bonds, in six classes at interest rates ranging from 2.59 percent to 5.76 percent. Consumers Funding used the proceeds from the securitization bonds to purchase securitization property from Consumers. As of September 30, 2004, Consumers Funding has retired all of the class A-1 securitization bonds and $36.6 million of the class A-2 securitization bonds in accordance with the bond amortization schedule. Scheduled maturities and interest rates for the remaining securitization bonds at September 30, 2004 are as follows:
Expected Principal Final Final Bond Balance Payment Maturity Class Rate (in thousands) Date Date ----- ---- -------------- ---- ---- A-2 3.80% $ 47,370 April 20, 2006 April 20, 2008 A-3 4.55% 31,000 April 20, 2007 April 20, 2009 A-4 4.98% 95,000 April 20, 2010 April 20, 2012 A-5 5.43% 117,000 April 20, 2013 April 20, 2015 A-6 5.76% 115,592 October 20, 2015 October 20, 2016 -------- Total $405,962 Current Maturities (28,412) -------- Long-Term Debt $377,550 ========
The amortization schedule for the securitization bonds provided for an initial payment to bondholders on July 20, 2002 and then quarterly thereafter. The following table provides the expected principal retirement of the securitization bonds during the remainder of 2004, the next five calendar years, and thereafter (in thousands).
Principal Retirement Year (in thousands) ---- -------------- 2004 $ 7,711 2005 28,646 2006 29,591 2007 30,763 2008 32,130 2009 33,589 Thereafter 243,532 -------- Total Debt $405,962 ========
As scheduled, on October 20, 2004, $7.7 million of securitization bonds were retired. 11 4. FAIR VALUE OF FINANCIAL INSTRUMENTS Restricted cash is on deposit with the trustee and, by definition, is carried at its fair value. Consumers Funding had a financial asset (representing its securitization receivable from Consumers) of approximately $395 million at September 30, 2004 and $423 million at September 30, 2003. Consumers Funding had a financial liability (representing the securitization bonds) with a cost basis of approximately $406 million at September 30, 2004 and $434 million at September 30, 2003. The securitization receivable and securitization bonds are carried at cost, which approximates fair value. Fair value is estimated based on quoted market prices, or, in the absence of specific market prices, on quoted market prices of similar investments or other valuation techniques. 5. SIGNIFICANT AGREEMENTS AND RELATED PARTY TRANSACTIONS Consumers Funding has a securitization receivable with Consumers in the amount of approximately $395 million as of September 30, 2004 and $423 million as of September 30, 2003. Accordingly, Consumers Funding recognized interest income totaling $5.3 million for the three months ended September 30, 2004 and $5.4 million for the three months ended September 30, 2003. In addition, Consumers Funding recognized other operating revenue from Consumers totaling approximately $0.3 million for the three months ended September 30, 2004, and approximately $0.3 million for the three months ended September 30, 2003. Consumers Funding recognized interest income totaling $16.0 million for the nine months ended September 30, 2004 and $16.6 million for the nine months ended September 30, 2003. In addition, Consumers Funding recognized other operating revenue from Consumers totaling approximately $0.8 for the nine months ended September 30, 2004 and approximately $0.9 million for the nine months ended September 30, 2003. Under the servicing and administration agreements, Consumers is required to manage and administer the securitization property of Consumers Funding, and to collect the Securitization Charge on Consumers Funding's behalf. Consumers Funding pays Consumers a servicing fee (see Note 1) and an annual administrative fee. These fees are payable to Consumers on each scheduled quarterly payment date. For the three months ended September 30, 2004 and 2003, Consumers Funding has recorded total expenses related to these fees of approximately $0.3 million. For the nine months ended September 30, 2004, Consumers Funding has recorded total expenses associated with these fees of approximately $0.8 million, and approximately $0.9 million for the nine months ended September 30, 2003. 12 CONSUMERS FUNDING LLC PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. See Exhibit Index that appears following the Signature page to this report. (b) Reports on Form 8-K: None ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK None. 13 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CONSUMERS FUNDING LLC By:/s/ Laura L. Mountcastle Date: November 5, 2004 ------------------------ Laura L. Mountcastle President, Chief Executive Officer, Chief Financial Officer and Treasurer By:/s/ Glenn P. Barba Date: November 5, 2004 ------------------------ Glenn P. Barba Vice President, Controller and Chief Accounting Officer 14 INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION ----------- ----------- 10(a) Monthly Servicer's Certificate dated August 10, 2004 10(b) Monthly Servicer's Certificate dated September 17, 2004 10(c) Monthly Servicer's Certificate dated October 15, 2004 10(d) Quarterly Servicer's Certificate dated October 15, 2004 31 Consumers Funding LLC's certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32 Consumers Funding LLC's certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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