CONSUMERS ENERGY CO - Quarter Report: 2011 March (Form 10-Q)
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2011
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number |
Registrant; State of Incorporation; Address; and Telephone Number |
IRS Employer Identification No. |
||
1-9513 | CMS ENERGY CORPORATION (A Michigan Corporation) One Energy Plaza, Jackson, Michigan 49201 (517) 788-0550 |
38-2726431 | ||
1-5611 | CONSUMERS ENERGY COMPANY (A Michigan Corporation) One Energy Plaza, Jackson, Michigan 49201 (517) 788-0550 |
38-0442310 |
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.
CMS Energy Corporation: Yes þ No o Consumers Energy Company: Yes þ No o
CMS Energy Corporation: Yes þ No o Consumers Energy Company: Yes þ No o
Indicate by check mark whether the Registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data file required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the Registrant was required to submit and post such files).
CMS Energy Corporation: Yes þ No o Consumers Energy Company: Yes þ No o
CMS Energy Corporation: Yes þ No o Consumers Energy Company: Yes þ No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
CMS Energy Corporation:
Large accelerated filer þ | Accelerated filer o | Non-Accelerated filer o | Smaller reporting company o |
Consumers Energy Company:
Large accelerated filer o | Accelerated filer o | Non-Accelerated filer þ | Smaller reporting company o |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
CMS Energy Corporation: Yes o No þ Consumers Energy Company: Yes o No þ
CMS Energy Corporation: Yes o No þ Consumers Energy Company: Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock at April 14, 2011: |
||||
CMS Energy Corporation: |
||||
CMS Energy Common Stock, $0.01 par value |
252,352,702 | |||
Consumers Energy Company: |
||||
Consumers Energy Common Stock, $10 par value, privately held by CMS Energy Corporation |
84,108,789 |
CMS Energy Corporation
Consumers Energy Company
Consumers Energy Company
Quarterly Reports on Form 10-Q to the Securities and Exchange Commission for the Period Ended
March 31, 2011
March 31, 2011
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GLOSSARY
Certain terms used in the text and financial statements are defined below.
2008 Energy Law
|
Comprehensive energy reform package enacted in October 2008 with the approval of Michigan Senate Bill 213 and Michigan House Bill 5524 | |
2010 Form 10-K
|
Each of CMS Energys and Consumers Annual Report on Form 10-K for the year ended December 31, 2010 | |
ABATE
|
Association of Businesses Advocating Tariff Equity | |
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 of gas | |
Big Rock
|
Big Rock Point nuclear power plant, formerly owned by Consumers | |
CAIR
|
The Clean Air Interstate Rule | |
Cantera Gas Company
|
Cantera Gas Company LLC, a non-affiliated company | |
Cantera Natural Gas, Inc.
|
Cantera Natural Gas, Inc., a non-affiliated company that purchased CMS Field Services | |
CATR
|
The Clean Air Transport Rule | |
CCB
|
Coal combustion by-product | |
CEO
|
Chief Executive Officer | |
CFO
|
Chief Financial Officer | |
CKD
|
Cement kiln dust | |
Clean Air Act
|
Federal Clean Air Act, as amended | |
Clean Water Act
|
Federal Water Pollution Control Act | |
CMS Capital
|
CMS Capital, L.L.C., a wholly owned subsidiary of CMS Energy | |
CMS Energy
|
CMS Energy Corporation, the parent of Consumers and CMS Enterprises | |
CMS Enterprises
|
CMS Enterprises Company, a wholly owned subsidiary of CMS Energy |
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CMS ERM
|
CMS Energy Resource Management Company, formerly CMS MST, a wholly owned subsidiary of CMS Enterprises | |
CMS Field Services
|
CMS Field Services, Inc., a former wholly owned subsidiary of CMS Gas Transmission | |
CMS Gas Transmission
|
CMS Gas Transmission Company, a wholly owned subsidiary of CMS Enterprises | |
CMS Land
|
CMS Land Company, a wholly owned subsidiary of CMS Capital | |
CMS MST
|
CMS Marketing, Services and Trading Company, a wholly owned subsidiary of CMS Enterprises, whose name was changed to CMS ERM effective January 2004 | |
CMS Oil and Gas
|
CMS Oil and Gas Company, a former wholly owned subsidiary of CMS Enterprises | |
CMS Panhandle Holdings, LLC
|
A former wholly owned subsidiary of CMS Gas Transmission | |
Consumers
|
Consumers Energy Company, a wholly owned subsidiary of CMS Energy | |
Customer Choice Act
|
Customer Choice and Electricity Reliability Act, a Michigan statute | |
D.C.
|
District of Columbia | |
Detroit Edison
|
The Detroit Edison Company, a non-affiliated company | |
Dodd-Frank Act
|
Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted in July 2010 | |
DOE
|
U.S. Department of Energy | |
DOJ
|
U.S. Department of Justice | |
EBITDA
|
Earnings Before Interest, Taxes, Depreciation, and Amortization | |
EnerBank
|
EnerBank USA, a wholly owned subsidiary of CMS Capital | |
Entergy
|
Entergy Corporation, a non-affiliated company | |
EPA
|
U.S. Environmental Protection Agency | |
EPS
|
Earnings per share | |
Exchange Act
|
Securities Exchange Act of 1934, as amended |
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Exeter
|
Exeter Energy Limited Partnership, a limited partnership formerly owned by HYDRA-CO | |
FDIC
|
Federal Deposit Insurance Corporation | |
FERC
|
The Federal Energy Regulatory Commission | |
FLI Liquidating Trust
|
Trust formed in Missouri bankruptcy court to accomplish the liquidation of Farmland Industries, Inc., a non-affiliated entity | |
FMB
|
First mortgage bond | |
FOV
|
Finding of Violation | |
GAAP
|
U.S. Generally Accepted Accounting Principles | |
GCR
|
Gas cost recovery | |
GWh
|
Gigawatt-hour (a unit of energy equal to one million kWh) | |
Health Care Acts
|
Comprehensive health care reform enacted in March 2010, comprising the Patient Protection and Affordable Care Act and the related Health Care and Education Reconciliation Act | |
HYDRA-CO
|
HYDRA-CO Enterprises, Inc., a wholly owned subsidiary of CMS Enterprises | |
IPP
|
Independent power producer or independent power production | |
IRS
|
Internal Revenue Service | |
ISFSI
|
Independent spent fuel storage installation | |
kWh
|
Kilowatt-hour (a unit of energy equal to one thousand watt-hours) | |
Ludington
|
Ludington pumped storage plant, jointly owned by Consumers and Detroit Edison | |
MACT
|
Maximum Achievable Control Technology, which is the emission control that is achieved in practice by the best-controlled similar source; for existing sources, MACT is the average emission limitation achieved by the best performing 12 percent of existing sources or the average limitation achieved by the best performing five sources, depending on the number of sources in the category | |
MD&A
|
Managements Discussion and Analysis |
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MDEQ
|
Michigan Department of Environmental Quality, which, effective March 13, 2011, was re-established after the elimination of the Michigan Department of Natural Resources and Environment | |
MDL
|
A pending multi-district litigation case in Nevada | |
MGP
|
Manufactured gas plant | |
Midwest Energy Market
|
An energy market developed by MISO to provide day-ahead and real-time market information and centralized dispatch for market participants | |
MISO
|
The Midwest Independent Transmission System Operator, Inc. | |
MPSC
|
Michigan Public Service Commission | |
MW
|
Megawatt (a unit of power equal to one million watts) | |
MWh
|
Megawatt-hour (a unit of energy equal to one million watt-hours) | |
NAV
|
Net asset value | |
NOV
|
Notice of Violation | |
NPDES
|
National Pollutant Discharge Elimination System | |
NREPA
|
Part 201 of Michigan Natural Resources and Environmental Protection Act, a statute that covers environmental activities including remediation | |
NSR
|
New Source Review, a construction-permitting program under the Clean Air Act | |
NYMEX
|
New York Mercantile Exchange | |
OPEB
|
Postretirement benefit plans other than pensions | |
Palisades
|
Palisades nuclear power plant, sold by Consumers to Entergy in 2007 | |
Panhandle
|
Panhandle Eastern Pipe Line Company, including its wholly owned subsidiaries Trunkline, Pan Gas Storage Company, Panhandle Storage Company, and Panhandle Holding Company, a former wholly owned subsidiary of CMS Gas Transmission | |
PCB
|
Polychlorinated biphenyl | |
Pension Plan
|
Trusteed, non-contributory, defined benefit pension plan of CMS Energy, Consumers, and Panhandle |
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PPA
|
Power purchase agreement | |
PSCR
|
Power supply cost recovery | |
PSD
|
Prevention of Significant Deterioration | |
REC
|
Renewable energy credit established under the 2008 Energy Law | |
RMRR
|
Routine maintenance, repair, and replacement | |
ROA
|
Retail Open Access, which allows electric generation customers to choose alternative electric suppliers pursuant to the Customer Choice Act | |
SEC
|
U.S. Securities and Exchange Commission | |
SERP
|
Supplemental Executive Retirement Plan | |
Superfund
|
Comprehensive Environmental Response, Compensation and Liability Act | |
Supplemental Environmental Projects
|
Environmentally beneficial projects that a party agrees to undertake as part of the settlement of an enforcement action, but which the party is not otherwise legally required to perform | |
Title V
|
A federal program under the Clean Air Act designed to standardize air quality permits and the permitting process for major sources of emissions across the U.S. | |
Trunkline
|
Trunkline Gas Company, LLC, a former wholly owned subsidiary of CMS Panhandle Holdings, LLC | |
U.S.
|
United States | |
XBRL
|
eXtensible Business Reporting Language |
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FILING FORMAT
This combined Form 10-Q is separately filed by CMS Energy and Consumers. Information in this
combined Form 10-Q relating to each individual registrant is filed by such registrant on its own
behalf. Consumers makes no representation regarding information relating to any other companies
affiliated with CMS Energy other than its own subsidiaries. None of CMS Energy, CMS Enterprises,
nor any of CMS Energys other subsidiaries (other than Consumers) has any obligation in respect of
Consumers debt securities and holders of such debt securities should not consider the financial
resources or results of operations of CMS Energy, CMS Enterprises, nor any of CMS Energys other
subsidiaries (other than Consumers and its own subsidiaries (in relevant circumstances)) in making
a decision with respect to Consumers debt securities. Similarly, none of Consumers nor any other
subsidiary of CMS Energy has any obligation in respect of debt securities of CMS Energy.
This report should be read in its entirety. No one section of this report deals with all aspects
of the subject matter of this report. This report should be read in conjunction with the
consolidated financial statements and related notes and with MD&A included in the 2010 Form 10-K.
FORWARD-LOOKING STATEMENTS AND INFORMATION
This Form 10-Q and other written and oral statements that CMS Energy and Consumers make may contain
forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. The
use of might, may, could, should, anticipates, believes, estimates, expects,
intends, plans, projects, forecasts, predicts, assumes, and other similar words is
intended to identify forward-looking statements that involve risk and uncertainty. This discussion
of potential risks and uncertainties is designed to highlight important factors that may impact CMS
Energys and Consumers businesses and financial outlook. CMS Energy and Consumers 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 CMS Energys and
Consumers actual results to differ materially from the results anticipated in these statements.
These factors include CMS Energys and Consumers inability to predict or control the following,
all of which are potentially significant:
| the price of CMS Energy common stock, capital and financial market conditions, and the effect of these market conditions on CMS Energys and Consumers postretirement benefit plans, interest costs, and access to the capital markets, including availability of financing (including Consumers accounts receivable sales program and CMS Energys and Consumers revolving credit facilities) to CMS Energy, Consumers, or any of their affiliates, and the energy industry; | ||
| the impact of the economy, particularly in Michigan, and potential future volatility in the financial and credit markets on CMS Energys, Consumers, or any of their affiliates: |
| revenues; | ||
| capital expenditure programs and related earnings growth; | ||
| ability to collect accounts receivable from customers; | ||
| cost of capital and availability of capital; and | ||
| Pension Plan and postretirement benefit plans assets and required contributions; |
| changes in the economic and financial viability of CMS Energys and Consumers suppliers, customers, and other counterparties and the continued ability of these third parties, including third parties in bankruptcy, to meet their obligations to CMS Energy and Consumers; | ||
| population changes in the geographic areas where CMS Energy and Consumers conduct business; |
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| national, regional, and local economic, competitive, and regulatory policies, conditions, and developments; | ||
| changes in applicable laws, rules, regulations, principles, or practices, or in their interpretation, including those related to taxes, the environment, and accounting matters, that could have an impact on CMS Energys and Consumers businesses or financial results, including the impact of any future regulations or lawsuits regarding: |
| carbon dioxide and other greenhouse gas emissions, including potential future legislation to establish a cap and trade system; | ||
| criteria pollutants, such as nitrogen oxide, sulfur dioxide, and particulate, and hazardous air pollutants, including impacts of CAIR, MACT, and CATR; | ||
| CCBs; | ||
| PCBs; | ||
| cooling water intake or discharge from power plants or other industrial equipment; | ||
| limitations on the use or construction of coal-fueled electric power plants; | ||
| nuclear-related regulation; | ||
| renewable portfolio standards and energy efficiency mandates; | ||
| energy-related derivatives and hedges under the Dodd-Frank Act; and | ||
| any other potential legislative changes, including changes to the ten-percent ROA limit; |
| potentially adverse regulatory or legal interpretations or decisions, including those related to environmental laws and regulations, and potential environmental remediation costs associated with these interpretations or decisions, including those that may affect Bay Harbor or Consumers RMRR classification under NSR regulations; | ||
| potentially adverse or delayed regulatory treatment or permitting decisions concerning significant matters affecting CMS Energy or Consumers that are or could come before the MDEQ and/or EPA, including Bay Harbor; | ||
| potentially adverse regulatory treatment or failure to receive timely regulatory orders concerning a number of significant matters affecting Consumers that are or could come before the MPSC, including: |
| sufficient and timely recovery of: |
| environmental and safety-related expenditures for coal-fueled plants and other utility properties; | ||
| power supply and natural gas supply costs; | ||
| operating and maintenance expenses; | ||
| additional utility rate-based investments; | ||
| costs associated with the proposed retirement and decommissioning of facilities; | ||
| MISO energy and transmission costs; and | ||
| costs associated with energy efficiency investments and state or federally mandated renewable resource standards; |
| actions of regulators with respect to expenditures subject to tracking mechanisms; | ||
| actions of regulators to prevent or curtail shutoffs for non-paying customers; | ||
| actions of regulators with respect to Consumers pilot electric and gas decoupling mechanisms; | ||
| regulatory orders preventing or curtailing rights to self-implement rate requests; | ||
| regulatory orders potentially requiring a refund of previously self-implemented rates; and | ||
| implementation of new energy legislation or revisions of existing regulations; |
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| potentially adverse regulatory treatment resulting from pressure on regulators to oppose annual rate increases or to lessen rate impacts upon customers, particularly in difficult economic times; | ||
| loss of customer demand for electric generation supply to alternative energy suppliers; | ||
| the ability of Consumers to recover its regulatory assets in full and in a timely manner; | ||
| the effectiveness of Consumers electric and gas decoupling mechanisms in moderating the impact of sales variability on net revenues; | ||
| the ability of Consumers to recover nuclear fuel storage costs incurred as a result of the DOEs failure to accept spent nuclear fuel on schedule or at all, and the outcome of pending litigation with the DOE; | ||
| the impact of enforcement powers and investigation activities at FERC; | ||
| federal regulation of electric sales and transmission of electricity, including periodic re-examination by federal regulators of CMS Energys and Consumers market-based sales authorizations in wholesale power markets without price restrictions; | ||
| effects of weather conditions, such as unseasonably warm weather during the winter, on sales; | ||
| the market perception of the energy industry or of CMS Energy, Consumers, or any of their affiliates; | ||
| the credit ratings of CMS Energy or Consumers; | ||
| the impact of credit markets, economic conditions, and any new banking regulations on EnerBank; | ||
| potential effects of the Dodd-Frank Act and related regulations on CMS Energy and Consumers, including regulation of financial institutions such as EnerBank, and shareholder activity that is permitted or may be permitted under the Act; | ||
| disruptions in the normal commercial insurance and surety bond markets that may increase costs or reduce traditional insurance coverage, particularly terrorism and sabotage insurance, performance bonds, and tax-exempt debt insurance, and stability of insurance providers, and the ability of Consumers to recover the costs of any such insurance from customers; | ||
| energy markets, including availability of capacity and 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, and their impact on CMS Energys and Consumers cash flows and working capital; | ||
| the effectiveness of CMS Energys and Consumers risk management policies, procedures, and strategies, including their strategies to hedge risk related to future prices of electricity, natural gas, and other energy-related commodities; | ||
| changes in construction material prices and the availability of qualified construction personnel to implement Consumers construction program; |
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| factors affecting development of generation projects and distribution infrastructure replacement and expansion projects, including those related to project site identification, construction, permitting, and government approvals; | ||
| costs and availability of personnel, equipment, and materials for operating and maintaining existing facilities; | ||
| factors affecting operations, such as unusual weather conditions, catastrophic weather-related damage, unscheduled generation outages, maintenance or repairs, environmental incidents, or electric transmission and distribution or gas pipeline system constraints; | ||
| potential disruption or interruption of facilities or operations due to accidents, war, or terrorism, and the ability to obtain or maintain insurance coverage for these events; | ||
| the impact of an accident, explosion, or other physical disaster involving Consumers gas pipelines, gas storage fields, overhead or underground electrical lines, or other utility infrastructure; | ||
| CMS Energys and Consumers ability to achieve generation planning goals and the occurrence and duration of scheduled or unscheduled generation or gas compression outages; | ||
| technological developments in energy production, delivery, usage, and storage; | ||
| achievement of capital expenditure and operating expense goals, including the 2011 capital expenditures forecast; | ||
| the impact of CMS Energys and Consumers integrated business software system on their operations, including utility customer billing and collections; | ||
| potential effects of the Health Care Acts on existing or future health care costs; | ||
| adverse outcomes regarding tax positions; | ||
| adverse consequences resulting from any past or future assertion of indemnity or warranty claims associated with assets and businesses previously owned by CMS Energy or Consumers, including claims resulting from attempts by foreign or domestic governments to assess taxes on past operations or transactions; | ||
| the outcome, cost, and other effects of legal or administrative proceedings, settlements, investigations, or claims; | ||
| earnings volatility resulting from the application of fair value accounting to certain energy commodity contracts, such as electricity sales agreements and interest rate and foreign currency contracts; | ||
| changes in financial or regulatory accounting principles or policies; | ||
| a possible future requirement to comply with International Financial Reporting Standards, which differ from GAAP in various ways, including the present lack of special accounting treatment for regulated activities; and | ||
| other business or investment matters that may be disclosed from time to time in CMS Energys and Consumers SEC filings, or in other publicly issued documents. |
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For additional details regarding these and other uncertainties, see the Outlook section included
in MD&A; Note 2, Contingencies and Commitments; Note 3, Regulatory Matters; and Part II, Item 1A.
Risk Factors.
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CMS Energy Corporation
Consumers Energy Company
Consumers Energy Company
MANAGEMENTS DISCUSSION AND ANALYSIS
This MD&A is a combined report of CMS Energy and Consumers.
EXECUTIVE OVERVIEW
CMS Energy is an energy company operating primarily in Michigan. It is the parent holding
company of several subsidiaries, including Consumers, an electric and gas utility, and CMS
Enterprises, primarily a domestic IPP. Consumers electric utility operations include the
generation, purchase, distribution, and sale of electricity, and Consumers gas utility operations
include the purchase, transmission, storage, distribution, and sale of natural gas. Consumers
customer base consists of a mix of residential, commercial, and diversified industrial customers.
CMS Enterprises, through its subsidiaries and equity investments, owns and operates power
generation facilities.
CMS Energy and Consumers manage their businesses by the nature of services each provides. CMS
Energy operates principally in three business segments: electric utility; gas utility; and
enterprises, its non-utility investments and operations. Consumers operates principally in two
business segments: electric utility and gas utility.
CMS Energy and Consumers earn revenue and generate cash from operations by providing electric and
natural gas utility services; electric distribution and generation; gas transmission, storage, and
distribution; and other energy-related services. Their businesses are affected primarily by:
| regulation and regulatory matters; | ||
| economic conditions; | ||
| weather; | ||
| energy commodity prices; | ||
| interest rates; and | ||
| CMS Energys and Consumers securities credit ratings. |
During the past several years, CMS Energys Growing Forward business strategy has emphasized
the following key elements:
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Utility Investment
Consumers expects to make capital investments of more than $6 billion over the next five years,
with a key aspect of its strategy being the balanced energy initiative. The balanced energy
initiative is a comprehensive energy resource plan to meet Consumers projected short-term and
long-term electric power requirements with energy efficiency, demand management, expanded use of
renewable energy, development of new power plants, pursuit of additional PPAs to complement
existing generating sources, potential retirement or mothballing of older generating units, and
continued operation of others.
Renewable energy projects are a major component of Consumers planned capital investments.
Consumers expects to spend $600 million on renewable energy investments through 2015. The 2008
Energy Law requires that at least ten percent of Consumers electric sales volume come from
renewable energy sources by 2015, and it includes requirements for specific capacity additions.
Consumers has historically included renewable resources as part of its portfolio, with about five
percent of its present power supply coming from such renewable sources as hydroelectric, landfill
gas, biomass, and wind. In February 2011, Consumers filed with the MPSC an amended renewable
energy plan, reducing the surcharge billed to customers by an annual amount of $55 million.
Consumers proposed the amendment as a result of lower-than-anticipated costs to comply with the
renewable energy requirements prescribed by the 2008 Energy Law.
In February 2011, Consumers and Detroit Edison together announced an $800 million maintenance and
upgrade project at their jointly owned Ludington pumped-storage plant. The project, scheduled to
begin in 2013 and extend through 2019, will increase the capacity of Ludington from its present
level of 1,872 MW to about 2,172 MW. Consumers expects its share of the project cost to total $400
million.
Consumers smart grid program will also represent a significant capital investment. The initial
substantial deployment, planned for 2012, will include advanced metering infrastructure and follow a phased
approach. Consumers expects to spend $355 million on its smart grid program through 2015.
Regulation
Regulatory matters are a key aspect of CMS Energys and Consumers businesses, particularly
Consumers rate cases and regulatory proceedings before the MPSC. Recent significant regulatory
events and developments are summarized below.
| 2010 Gas Rate Case: In August 2010, Consumers filed an application with the MPSC seeking an annual gas rate increase of $55 million based on an 11 percent authorized return on equity. | ||
In January 2011, Consumers filed support for a self-implemented annual gas rate increase of $48 million. In February 2011, Consumers revised the proposed self-implemented increase to $29 million. The MPSC issued an order in February 2011, delaying Consumers self-implementation in order to give other parties to the proceeding an opportunity to respond to Consumers revised self-implementation filing. In anticipation of a final order, all parties may file briefs supporting their positions. In April 2011, Consumers filed an initial brief supporting an annual gas rate increase of $45 million, and the MPSC Staff submitted a revised recommended annual revenue increase of $16 million. The parties have engaged in discussions in an effort to settle the issues in this case. As of April 28, 2011, a settlement was not yet finalized, but Consumers believes settlement is likely. | |||
| Electric Revenue Decoupling Mechanism: In March 2011, Consumers filed its first reconciliation of the electric revenue decoupling mechanism, requesting recovery of $27 million from customers for the period December 2009 through November 2010. The decoupling mechanism was authorized in Consumers 2009 electric rate case order, subject to certain conditions, and extended in the 2010 electric rate case order. It allows Consumers to adjust future electric rates to compensate for changes in sales volumes resulting from weather fluctuations, energy efficiency, |
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and conservation. Various parties have filed appeals concerning the electric decoupling mechanism. |
Environmental regulation is another area of importance for CMS Energy and Consumers, and they
are monitoring numerous legislative and regulatory initiatives to regulate greenhouse gases, as
well as related litigation. The EPA has taken steps to regulate greenhouse gases under the Clean
Air Act and is on a path to issue final new source performance standards in May 2012 addressing
greenhouse gas emissions from fossil-fueled electric generating units. The EPA is also expected to
propose guidelines for states to regulate greenhouse gas emissions from existing sources.
During 2010, the EPA issued various proposals for regulating PCBs, CCBs, sulfur dioxide, and
nitrogen oxides. Additionally, in March 2011, the EPA proposed a hazardous air pollutant rule that
would establish MACT emission standards for mercury and other hazardous air pollutants. Under the
proposed rule, some coal-fueled electric generating units would require additional controls for
hazardous air pollutants. Also in March 2011, the EPA issued a proposed rule to regulate existing
electric generating plant cooling water intake systems. CMS Energy and Consumers are monitoring
these developments for potential effects on their operations.
Safety
The safety and security of employees, customers, and the general public remain a priority of
CMS Energy and Consumers. Accordingly, CMS Energy and Consumers have worked to integrate a set of
safety principles into their business operations and culture. These principles include complying
with applicable safety, health, and security regulations and implementing programs and processes
aimed at continually improving safety and security conditions.
Financial Performance in 2011 and Beyond
For the three months ended March 31, 2011, CMS Energys net income available to common
stockholders was $135 million, and diluted earnings per share were $0.52. This compares with net
income available to common stockholders of $85 million and
diluted earnings per share of $0.34 for the three months ended March 31, 2010. Among the most
significant factors contributing to CMS Energys improved performance were benefits from electric
and gas rate orders and increased gas deliveries, offset partially by higher distribution and
service restoration costs.
A more detailed discussion of the factors affecting CMS Energys and Consumers performance can be
found in the Results of Operations section that follows this Executive Overview.
CMS Energy believes that economic conditions in Michigan have stabilized. Although Michigans
economy continues to be affected by the recession and its impact on the states automotive
industry, by high unemployment rates, and by a modestly shrinking population, there are indications
that the recession has eased in Michigan. Consumers expects its electric sales to increase by
about 1.5 percent annually through 2016, driven largely by the continued rise in industrial
production. Consumers is projecting that its gas sales will decline by about one percent annually
through 2016, due largely to energy efficiency and conservation.
As Consumers continues to seek fair and timely regulatory treatment, delivering customer value will
remain a key strategic priority. To keep costs down for its utility customers, Consumers has set
aggressive goals for annual productivity improvements. Additionally, Consumers will strive to give
priority to capital investments that increase customer value or lower costs.
Consumers expects to continue to have sufficient capacity to fund its investment-based growth
plans. CMS Energy also expects its sources of liquidity to remain sufficient to meet its cash
requirements. CMS Energy and Consumers will continue to monitor developments in the financial and
credit markets,
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as well as government policy responses to those developments, for potential
implications for their businesses and their future financial needs.
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RESULTS OF OPERATIONS
CMS Energys Consolidated Results of Operations
In Millions (except for per share amounts) | ||||||||||||
Three Months Ended March 31 | 2011 | 2010 | Change | |||||||||
Net Income Available to Common Stockholders |
$ | 135 | $ | 85 | $ | 50 | ||||||
Basic Earnings Per Share |
$ | 0.54 | $ | 0.37 | $ | 0.17 | ||||||
Diluted Earnings Per Share |
$ | 0.52 | $ | 0.34 | $ | 0.18 | ||||||
In Millions | ||||||||||||
Three Months Ended March 31 | 2011 | 2010 | Change | |||||||||
Electric Utility |
$ | 65 | $ | 41 | $ | 24 | ||||||
Gas Utility |
88 | 66 | 22 | |||||||||
Enterprises |
3 | 9 | (6 | ) | ||||||||
Corporate Interest and Other |
(23 | ) | (30 | ) | 7 | |||||||
Discontinued Operations |
2 | (1 | ) | 3 | ||||||||
Net Income Available to Common Stockholders |
$ | 135 | $ | 85 | $ | 50 | ||||||
Presented in the following table are specific after-tax changes to net income available to
common stockholders for the three months ended March 31, 2011 versus 2010:
In Millions | ||||||||||||
Three Months Ended March 31 | 2011 better/(worse) than 2010 | |||||||||||
Electric and gas rate orders |
$ | 25 | ||||||||||
Gas sales: |
||||||||||||
Weather |
$ | 15 | ||||||||||
Deliveries and decoupling benefit |
9 | 24 | ||||||||||
Electric sales and decoupling |
8 | |||||||||||
Distribution and service restoration costs |
(10 | ) | ||||||||||
Other, mainly depreciation and property tax |
(7 | ) | $ | 40 | ||||||||
Voluntary separation plan cost in 2010 and other |
10 | |||||||||||
Total change |
$ | 50 | ||||||||||
Consumers Electric Utility Results of Operations
In Millions | |||||||||||||
Three Months Ended March 31 | 2011 | 2010 | Change | ||||||||||
Net Income Available to Common Stockholders |
$ | 65 | $ | 41 | $ | 24 | |||||||
Reasons for the change: |
|||||||||||||
Electric deliveries and rate increases |
$ | 28 | |||||||||||
Power supply costs and related revenue |
11 | ||||||||||||
Maintenance and other operating expenses |
(14 | ) | |||||||||||
Depreciation and amortization |
13 | ||||||||||||
Interest charges |
1 | ||||||||||||
Income taxes |
(13 | ) | |||||||||||
Other |
(2 | ) | |||||||||||
Total change |
$ | 24 | |||||||||||
Electric deliveries and rate increases: For the three months ended March 31, 2011, electric
delivery revenues increased $28 million compared with 2010. This variance consisted of $26 million
from a
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November 2010 rate increase and $2 million of other miscellaneous revenue increases. Overall,
deliveries to end-use customers were 9.3 billion kWh in 2011, an increase of 0.2 billion kWh, or
2.2 percent, compared with 2010.
Power supply costs and related revenue: For the three months ended March 31, 2011, PSCR revenue
increased $11 million compared with 2010. This increase was due to the absence, in 2011, of a
disallowance in 2010 of certain power supply costs in Consumers 2007 PSCR reconciliation case.
Maintenance and other operating expenses: For the three months ended March 31, 2011, maintenance
and other operating expenses increased $14 million compared with 2010. This increase was due to
$13 million of higher service restoration costs, caused by a series of unusually severe winter
storms, and $7 million of higher plant maintenance and other operating expenses. These increases
were offset partially by a $6 million decrease resulting from the absence, in 2011, of voluntary
separation plan expenses incurred in 2010.
Depreciation and amortization: For the three months ended March 31, 2011, depreciation and
amortization expense decreased $13 million compared with 2010, due primarily to lower amortization
expense on certain regulatory assets.
Income taxes: For the three months ended March 31, 2011, income taxes increased $13 million
compared with 2010, due to higher electric utility earnings in 2011.
Consumers Gas Utility Results of Operations
In Millions | ||||||||||||
Three Months Ended March 31 | 2011 | 2010 | Change | |||||||||
Net Income Available to Common Stockholders |
$ | 88 | $ | 66 | $ | 22 | ||||||
Reasons for the change: |
||||||||||||
Gas deliveries and rate increases |
$ | 32 | ||||||||||
Maintenance and other operating expenses |
12 | |||||||||||
Depreciation and amortization |
(3 | ) | ||||||||||
General taxes |
(1 | ) | ||||||||||
Income taxes |
(16 | ) | ||||||||||
Other |
(2 | ) | ||||||||||
Total change |
$ | 22 | ||||||||||
Gas deliveries and rate increases: For the three months ended March 31, 2011, gas delivery
revenues increased $32 million compared with 2010. This increase consisted of $26 million of
additional revenues from colder weather in 2011 and $6 million from higher customer usage. Gas
deliveries, including miscellaneous transportation to end-use customers, were 133.9 bcf in 2011, an
increase of 14.8 bcf, or 12.4 percent, compared with 2010.
Maintenance and other operating expenses: For the three months ended March 31, 2011, maintenance
and other operating expenses decreased $12 million compared with 2010. This decrease reflected $4
million of voluntary separation plan expenses incurred in 2010, lower uncollectible accounts
expense of $3 million, and a $5 million decrease in other operating expenses.
Income taxes: For the three months ended March 31, 2011, income taxes increased $16 million
compared with 2010, due to higher gas utility earnings in 2011.
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Enterprises Results of Operations
In Millions | ||||||||||||
Three Months Ended March 31 | 2011 | 2010 | Change | |||||||||
Net Income Available to Common Stockholders |
$ | 3 | $ | 9 | $ | (6 | ) | |||||
For the three months ended March 31, 2011, net income of the enterprises segment decreased $6
million compared with 2010, reflecting lower electric capacity revenue of $3 million and lower net
mark-to-market gains of $3 million.
Corporate Interest and Other Results of Operations
In Millions | ||||||||||||
Three Months Ended March 31 | 2011 | 2010 | Change | |||||||||
Net Loss Available to Common Stockholders |
$ | (23 | ) | $ | (30 | ) | $ | 7 | ||||
For the three months ended March 31, 2011, corporate interest and other net expenses decreased
$7 million compared with 2010, due primarily to lower income tax expense in 2011.
Discontinued Operations
For the three months ended March 31, 2011, income of $2 million was recorded from discontinued
operations due to a legal settlement, compared with a loss of $1 million in 2010, reflecting
operating results of Exeter.
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CASH POSITION, INVESTING, AND FINANCING
At March 31, 2011, CMS Energy had $831 million of consolidated cash and cash equivalents,
which included $30 million of restricted cash and cash equivalents. At March 31, 2011, Consumers
had $742 million of consolidated cash and cash equivalents, which included $29 million of
restricted cash and cash equivalents.
Operating Activities
Presented in the following table are specific components of net cash provided by operating
activities for the three months ended March 31, 2011 and 2010:
In Millions | ||||||||||||
Three Months Ended March 31 | 2011 | 2010 | Change | |||||||||
CMS Energy, including Consumers |
||||||||||||
Net income |
$ | 135 | $ | 88 | $ | 47 | ||||||
Non-cash transactions1 |
296 | 284 | 12 | |||||||||
$ | 431 | $ | 372 | $ | 59 | |||||||
Sale of gas purchased in the prior year |
477 | 449 | 28 | |||||||||
Accounts receivable sales, net |
| (50 | ) | 50 | ||||||||
Change in other core working capital2 |
(15 | ) | 53 | (68 | ) | |||||||
Postretirement benefits contributions |
(19 | ) | (135 | ) | 116 | |||||||
Other changes in assets and liabilities, net |
(33 | ) | (32 | ) | (1 | ) | ||||||
Net cash provided by operating activities |
$ | 841 | $ | 657 | $ | 184 | ||||||
Consumers |
||||||||||||
Net income |
$ | 153 | $ | 107 | $ | 46 | ||||||
Non-cash transactions1 |
256 | 219 | 37 | |||||||||
$ | 409 | $ | 326 | $ | 83 | |||||||
Sale of gas purchased in the prior year |
477 | 449 | 28 | |||||||||
Accounts receivable sales, net |
| (50 | ) | 50 | ||||||||
Change in other core working capital2 |
(10 | ) | 42 | (52 | ) | |||||||
Postretirement benefits contributions |
(19 | ) | (125 | ) | 106 | |||||||
Other changes in assets and liabilities, net |
10 | 41 | (31 | ) | ||||||||
Net cash provided by operating activities |
$ | 867 | $ | 683 | $ | 184 | ||||||
1 | Non-cash transactions comprise depreciation and amortization, changes in deferred income taxes, postretirement benefits expense, and other non-cash items. | |
2 | Other core working capital comprises other changes in accounts receivable and accrued revenues, inventories, and accounts payable. |
For the three months ended March 31, 2011, net cash provided by operating activities at CMS Energy
and at Consumers increased $184 million compared with 2010. The increase was due primarily to
higher net income, the absence of Pension Plan contributions in 2011, and increased collection of
accounts receivable.
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Investing Activities
Presented in the following table are specific components of cash used in investing activities
for the three months ended March 31, 2011 and 2010:
In Millions | ||||||||||||
Three Months Ended March 31 | 2011 | 2010 | Change | |||||||||
CMS Energy, including Consumers |
||||||||||||
Capital expenditures |
$ | (191 | ) | $ | (190 | ) | $ | (1 | ) | |||
Cash effect of deconsolidation of partnerships |
| (10 | ) | 10 | ||||||||
Costs to retire property and other |
(37 | ) | (12 | ) | (25 | ) | ||||||
Net cash used in investing activities |
$ | (228 | ) | $ | (212 | ) | $ | (16 | ) | |||
Consumers |
||||||||||||
Capital expenditures |
$ | (186 | ) | $ | (190 | ) | $ | 4 | ||||
Costs to retire property and other |
(42 | ) | (12 | ) | (30 | ) | ||||||
Net cash used in investing activities |
$ | (228 | ) | $ | (202 | ) | $ | (26 | ) | |||
For the three months ended March 31, 2011, net cash used in investing activities increased $16
million at CMS Energy and $26 million at Consumers compared with 2010. These changes were due
primarily to CMS Energys contribution of $27 million to its SERP fund, which included a
contribution of $20 million by Consumers.
Financing Activities
Presented in the following table are specific components of net cash (used in) provided by
financing activities for the three months ended March 31, 2011 and 2010:
In Millions | ||||||||||||
Three Months Ended March 31 | 2011 | 2010 | Change | |||||||||
CMS Energy, including Consumers |
||||||||||||
Issuance of FMBs, convertible senior notes, senior notes,
and other debt |
$ | 13 | $ | 325 | $ | (312 | ) | |||||
Retirement of long-term debt |
(13 | ) | (34 | ) | 21 | |||||||
Payment of common stock dividends |
(53 | ) | (34 | ) | (19 | ) | ||||||
Other financing activities |
(8 | ) | (36 | ) | 28 | |||||||
Net cash (used in) provided by financing activities |
$ | (61 | ) | $ | 221 | $ | (282 | ) | ||||
Consumers |
||||||||||||
Retirement of debt and other debt maturity payments |
$ | (9 | ) | $ | (9 | ) | $ | | ||||
Payments of common stock dividends |
(104 | ) | (114 | ) | 10 | |||||||
Stockholders contribution from CMS Energy |
125 | 200 | (75 | ) | ||||||||
Other financing activities |
(9 | ) | (6 | ) | (3 | ) | ||||||
Net cash provided by financing activities |
$ | 3 | $ | 71 | $ | (68 | ) | |||||
For the three months ended March 31, 2011, net cash used in financing activities at CMS Energy
increased $282 million compared to 2010. The change was due primarily to a decrease in net
proceeds from borrowings by CMS Energy.
For the three months ended March 31, 2011, net cash provided by financing activities at Consumers
decreased $68 million compared with 2010. The change was due primarily to a decrease in
stockholders contribution from CMS Energy, offset partially by a decrease in common stock dividend
payments to CMS Energy.
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CAPITAL RESOURCES AND LIQUIDITY
CMS Energy uses dividends from its subsidiaries and external financing and capital
transactions to invest in its utility and non-utility businesses, retire debt, pay dividends, and
fund its other obligations. The ability of CMS Energys subsidiaries, including Consumers, to pay
dividends to CMS Energy depends upon each subsidiarys revenues, earnings, cash needs, and other
factors. In addition, Consumers ability to pay dividends is restricted by certain terms included
in its articles of incorporation, as well as by FERC requirements. For the three months ended
March 31, 2011, Consumers paid $104 million in common stock dividends to CMS Energy.
Consumers uses cash flows generated from operations and external financing transactions, as well as
stockholders contributions from CMS Energy, to fund capital expenditures, retire debt, pay
dividends, contribute to its employee benefit plans, and fund its other obligations.
CMS Energys and Consumers access to the financial and capital markets depends on their credit
ratings and on market conditions. As evidenced by past financing transactions, CMS Energy and
Consumers have had ready access to these markets and, barring major market dislocations or
disruptions, they expect to continue to have such access. If access to these markets were to
become diminished or otherwise restricted, however, CMS Energy and Consumers would implement
contingency plans to address debt maturities, which could include reduced capital spending. CMS
Energy and Consumers also had the following secured revolving credit facilities available at March
31, 2011:
In Millions | ||||||||||||||||
Amount of | Letters of Credit | Amount | ||||||||||||||
Facility | Outstanding | Available | Expiration Date | |||||||||||||
CMS Energy |
||||||||||||||||
Revolving credit facility1 |
$ | 550 | $ | 3 | $ | 547 | March 2016 | |||||||||
Consumers |
||||||||||||||||
Revolving credit facility2,3 |
500 | 300 | 200 | March 2016 | ||||||||||||
Revolving credit facility3 |
150 | | 150 | August 2013 | ||||||||||||
1 | On March 31, 2011, CMS Energy entered into a $550 million secured revolving credit facility with a consortium of banks. This facility has a five-year term and replaces CMS Energys revolving credit facility that was set to expire in 2012. Obligations under this facility are secured by Consumers common stock. | |
2 | On March 31, 2011, Consumers entered into a $500 million secured revolving credit facility with a consortium of banks. This facility has a five-year term and replaces Consumers revolving credit facility that was set to expire in 2012. | |
3 | Obligations under this facility are secured by FMBs of Consumers. |
CMS Energy and Consumers use these credit facilities for general working capital purposes and to
issue letters of credit. An additional source of liquidity is Consumers revolving accounts
receivable sales program, which allows it to transfer up to $250 million of accounts receivable as
a secured borrowing. At March 31, 2011, $250 million of accounts receivable were eligible for
transfer under this program.
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CMS Energys new $550 million revolving credit agreement specifies a maximum debt-to-EBITDA
ratio, as defined therein. Consumers new $500 million revolving credit agreement specifies a
maximum debt-to-capital ratio, as defined therein. CMS Energy and Consumers were each in
compliance with these limits as of March 31, 2011, as presented in the following table:
Ratio at | ||||||
Revolving Credit Agreement | Description | Maximum Limit | March 31, 2011 | |||
CMS Energys $550 million
revolving credit agreement
|
Debt to EBITDA | 6.0 to 1.0 | 4.54 to 1.0 | |||
Consumers $500 million
revolving credit agreement
|
Debt to Capital | 0.65 to 1.0 | 0.50 to 1.0 | |||
Components of CMS Energys and Consumers cash management plan include controlling operating
expenses and capital expenditures and evaluating market conditions for financing and refinancing
opportunities. CMS Energy and Consumers believe that their present level of cash and their
expected cash flows from operating activities, together with their access to sources of liquidity,
will be sufficient to fund their contractual obligations for 2011 and beyond.
Off-Balance-Sheet Arrangements
CMS Energy, Consumers, and certain of their subsidiaries also enter into various arrangements
in the normal course of business to facilitate commercial transactions with third parties. These
arrangements include indemnities, surety bonds, letters of credit, and financial and performance
guarantees. Indemnities are usually agreements to reimburse a counterparty that may incur losses
due to outside claims or breach of contract terms. The maximum payment that could be required
under a number of these indemnity obligations is not estimable. While CMS Energy and Consumers
believe it is unlikely that they will incur any material losses related to indemnities they have
not recorded as liabilities, they cannot predict the impact of these contingent obligations on
their liquidity and financial condition. For additional details on these and other guarantee
arrangements, see Note 2, Contingencies and Commitments, Guarantees.
OUTLOOK
Several business trends and uncertainties may affect CMS Energys and Consumers financial
condition and results of operations. These trends and uncertainties could have a material impact
on CMS Energys and Consumers consolidated income, cash flows, or financial position. For
additional details regarding these and other uncertainties, see Forward-Looking Statements and
Information; Note 2, Contingencies and Commitments; and Part II, Item 1A. Risk Factors.
Consumers Electric Utility Business Outlook and Uncertainties
Balanced Energy Initiative: Consumers balanced energy initiative is a comprehensive energy
resource plan designed to meet the short-term and long-term energy needs of its customers through:
| energy efficiency; |
| demand management; |
| expanded use of renewable energy; |
| development of new power plants; |
| pursuit of additional PPAs to complement existing generating sources; | ||
| continued operation of existing units; and |
| potential retirement or mothballing of older generating units. |
In May 2010, Consumers announced plans to defer the development of its proposed 830 MW coal-fueled
plant at its Karn/Weadock generating complex. This decision reflects reduced customer demand for
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electricity due to the recession, forecasted lower natural gas prices due to recent developments in
shale gas recovery technology, and projected surplus generating capacity in the MISO market.
Consumers has been monitoring customer demand, fuel and power prices, and other market conditions,
and has not set a timetable for a future decision about the project; however, the likelihood that
the plant will be constructed has diminished significantly. Consumers alternatives to
constructing the proposed coal-fueled plant include constructing new gas-fueled generation, relying
on additional market purchases, and continued operation of several existing generating units.
Renewable Energy Plan: Consumers renewable energy plan details how Consumers will meet REC and
capacity standards prescribed by the 2008 Energy Law. This law requires Consumers to obtain RECs
in an amount equal to at least ten percent of its electric sales volume (estimated to be 3.5
million RECs annually) by 2015. RECs represent proof that the associated electricity was generated
from a renewable energy resource. The law also requires Consumers to obtain 500 MW of capacity
from renewable energy resources by 2015, either through generation resources owned by Consumers or
through agreements to purchase capacity from other parties. Under its renewable energy plan,
Consumers expects to secure its renewable energy requirement each year with a combination of newly
generated RECs and previously generated RECs carried over from prior years. At March 31, 2011, the
combination of these sources represented 77 percent of Consumers 2015 REC requirement.
To meet its renewable capacity requirements, Consumers expects to add more than 500 MW of owned or
contracted renewable capacity by 2015. Through March 2011, Consumers has contracted for the
purchase of 296 MW of nameplate capacity from renewable energy suppliers, which represents 59
percent of the 2015 renewable capacity requirement.
Consumers has secured more than 80,000 acres of land easements in Michigans Huron, Mason, and
Tuscola Counties for the potential development of wind generation, and is now collecting wind speed
and other meteorological data at those sites. Consumers has entered into construction and supply
contracts as well as a contract to purchase wind turbine generators for the construction of a
100-MW wind park in Mason County, the Lake Winds Energy Park, which Consumers expects to be
operational in late 2012. Various parties are opposing a special use permit or have proposed
restrictive zoning conditions before the local planning commission in an effort to stop the Lake
Winds project. Consumers will continue to seek opportunities for wind generation development in
support of the renewable capacity standards.
Electric Customer Deliveries and Revenue: Consumers electric customer deliveries are largely
dependent on Michigans economy, which has suffered from economic and financial instability in the
automotive and real estate sectors. Consumers believes economic conditions have stabilized, and
expects weather-adjusted electric deliveries to increase in 2011 by 2.5 percent compared with 2010.
Consumers outlook for 2011 includes continuing growth in deliveries to its largest customer,
which produces energy-related and electronic device components. Excluding this customers growth,
Consumers expects weather-adjusted electric deliveries in 2011 to increase by 1.5 percent compared
with 2010.
Consumers expects average electric delivery growth of about 1.5 percent annually over the next five
years. This increase reflects growth in electric demand, offset partially by the predicted effects
of energy efficiency programs and appliance efficiency standards. Actual deliveries will depend
on:
| energy conservation measures and results of energy efficiency programs; |
| fluctuations in weather; and |
| changes in economic conditions, including utilization and expansion or contraction of manufacturing facilities, population trends, and housing activity. |
A decoupling mechanism was authorized by the MPSC in Consumers 2009 electric rate case order,
subject to certain conditions, and extended in the 2010 electric rate case order. It allows
Consumers to adjust future electric rates to compensate for changes in sales volumes resulting from
weather
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fluctuations, energy efficiency, and conservation. This mechanism reduces the volatility of
Consumers electric utility revenue.
Electric ROA: The Customer Choice Act allows all of Consumers electric customers to buy electric
generation service from Consumers or from an alternative electric supplier. The 2008 Energy Law
revised the Customer Choice Act by limiting alternative electric supply to ten percent of
Consumers weather-adjusted retail sales of the preceding calendar year. At March 31, 2011,
electric deliveries under the ROA program were at the ten percent limit and alternative electric
suppliers were providing 801 MW of generation service to ROA customers. Based on 2010
weather-adjusted retail sales, Consumers expects 2011 electric deliveries under the ROA program to
be at a similar level to 2010.
Electric
Transmission: In June 2010, FERC issued a Notice of Proposed
Rulemaking to establish a closer link between regional electric
transmission planning and cost allocations to ensure the construction
of required transmission facilities. In a related matter, in July 2010, MISO filed a tariff revision with FERC proposing a cost
allocation methodology for a new category of transmission projects. In December 2010, FERC
approved MISOs cost allocation proposal. Under this tariff revision, the cost of these new
transmission projects will be spread proportionally across the Midwest Energy Market. Consumers
believes that Michigan customers will bear additional costs under MISOs tariff without receiving
comparable benefits from these projects. In January 2011, Consumers, along with the Michigan
Attorney General, ABATE, Detroit Edison, the Michigan Municipal Electric Association, and the
Michigan Public Power Agency, filed a protest and request for rehearing with FERC, opposing the
allocation methodology in the MISO tariff revision. Consumers expects to continue to recover
transmission expenses, including those associated with the MISO tariff revision, through the PSCR
process.
Electric Rate Matters: Rate matters are critical to Consumers electric utility business. For
details on Consumers electric rate case, PSCR, electric revenue decoupling, uncollectible expense
tracking mechanism, electric operation and maintenance expenditures show-cause order, Big Rock
decommissioning, renewable energy plan, energy optimization plan, and electric depreciation,
see Note 3, Regulatory Matters, Consumers Electric Utility.
Electric Environmental Estimates: Consumers operations are subject to various state and federal
environmental laws and regulations. Consumers continues to focus on complying with the Clean Air
Act, Clean Water Act, and numerous state and federal environmental regulations, and
estimates that it will incur expenditures of $1.9 billion from 2011 through 2018 to comply with
these regulations. Consumers expects to recover these costs in customer rates, but cannot
guarantee this result. Consumers primary environmental compliance focus includes, but is not
limited to, the following matters:
Clean
Air Interstate Rule/Clean Air Transport Rule/Federal Hazardous Air Pollutant Regulation: Due to a December 2008 court decision that remanded
CAIR back to the EPA, CAIR remains in effect, pending the EPAs finalization of a new rule. In
July 2010, the EPA released CATR, a proposed rule that would replace CAIR.
In March 2011, the EPA proposed MACT emission standards for electric generating units, based on
Section 112 of the Clean Air Act. Under the proposed rule, some coal-fueled electric generating
units would require additional controls for hazardous air pollutants. Existing sources must meet
the standards generally within three years of issuance of the final rule. The final rule is
expected to be issued in November 2011.
Presently, Consumers strategy to comply with CATR and the MACT standards involves the installation
of state-of-the-art emission control equipment; however, Consumers continues to evaluate these
proposed rules in conjunction with other EPA rulemakings. If adopted in their present form, these
rules could result in additional or accelerated environmental compliance costs related to
Consumers fossil-fueled power plants and the retirement or mothballing of some or all of Consumers
older, smaller generating units.
Greenhouse Gases: There are numerous legislative and regulatory initiatives at the state,
regional, and national levels that involve the regulation of greenhouse gases. Consumers monitors
and comments on these initiatives and also follows litigation involving greenhouse gases.
Consumers believes Congress
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may eventually pass greenhouse gas legislation, but is unable to predict the form and timing of any
final legislation.
In 2009, the U.S. Court of Appeals for the Second Circuit issued a decision that allowed states and
private plaintiffs to bring lawsuits in the federal courts against utilities and others based on
common law nuisance theories that challenged the defendants greenhouse gas emissions. This
decision potentially allowed federal judges to impose caps on such emissions on a case-by-case
basis without reference to any legislatively created standards. A group of utilities filed a
petition with the U.S. Supreme Court, seeking review of the U.S. Court of Appeals decision. In
December 2010, the U.S. Supreme Court granted the petition and will decide the case on its merits.
Consumers will continue to monitor this litigation.
In 2010, the EPA released its Prevention of Significant Deterioration and Title V Greenhouse Gas
Tailoring Rule. The final rule, which numerous parties have challenged in the U.S. Court of
Appeals for the D.C. Circuit, sets limits for greenhouse gas emissions that define when permits are
required for new and existing industrial facilities under NSR PSD and Title V Operating Permit
programs. The EPA issued revised guidance on this rule in March 2011. Consumers does not expect
that the rule will require it to incur significant expenditures for efficiency upgrades for
modified or new facilities.
In December 2010, the EPA entered into a settlement agreement with certain states and environmental
groups that puts it on a path to issue proposed new source performance standards in July 2011.
This proposal will address greenhouse gas emissions for new fossil-fueled electric generating units
and major modifications under Section 111(b) of the Clean Air Act. The EPA will promulgate final
standards by May 2012. On the same schedule, the EPA is expected to propose emissions guidelines
for the states to regulate greenhouse gas emissions from existing sources under Section 111(d) of
the Clean Air Act. Under the expected schedule, states will need to submit plans to the EPA within
nine months of issuance of the final rule and guidelines. Consumers will continue to monitor this
settlement and any proposed new source performance standards regulations.
In March 2011, the EPA issued a final rule that extends to September 30, 2011 the deadline for
reporting 2010 greenhouse gas emissions data under the Greenhouse Gas Reporting Program. The
original deadline was March 31, 2011. Consumers is prepared to comply with the final rule.
Litigation, as well as federal laws, EPA regulations regarding greenhouse gases, or similar
treaties, state laws, or rules, if enacted, could require Consumers to replace equipment, install
additional equipment for emission controls, purchase emission allowances, curtail operations,
arrange for alternative sources of supply, or take other steps to manage or lower the emission of
greenhouse gases. Although associated capital or operating costs relating to greenhouse gas
regulation or legislation could be material and cost recovery cannot be assured, Consumers expects
to recover these costs and capital expenditures in rates consistent with the recovery of other
reasonable costs of complying with environmental laws and regulations.
Coal Combustion By-Products: In June 2010, the EPA proposed rules regulating CCBs, such as coal
ash, under the Resource Conservation and Recovery Act. Michigan already regulates CCBs as
low-hazard industrial waste. The EPA proposed a range of alternatives for regulating CCBs,
including regulation as either a non-hazardous waste or a hazardous waste. If coal ash were
regulated as a hazardous waste, Consumers would likely cease the beneficial re-use of this product,
resulting in significantly more coal ash requiring costly disposal. Additionally, it is possible
that existing coal ash disposal areas could be closed and costly alternative arrangements for coal
ash disposal could be required if the upgrades to hazardous waste landfill standards are
economically prohibitive. Consumers is unable to predict accurately the full impacts from this
wide range of possible outcomes, but significant expenditures are likely.
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Water: In March 2011, the EPA issued a proposed rule to regulate existing electric generating
plant cooling water intake systems. Consumers is evaluating this proposed rule and its potential
impacts on Consumers plants.
Advance Notice of Proposed Rulemaking on PCBs: In April 2010, the EPA issued an Advance Notice of
Proposed Rulemaking, indicating that it is considering a variety of regulatory actions with respect
to PCBs. One proposal aims to phase out equipment containing PCBs by 2025. Another proposal
eliminates an exemption for small equipment containing PCBs. Consumers could incur substantial
costs associated with the regulation of PCBs due to prior installation of electrical equipment
potentially containing PCBs.
Other electric environmental matters could have a major impact on Consumers outlook. For
additional details on other electric environmental matters, see Note 2, Contingencies and
Commitments, Consumers Electric Utility Contingencies Electric Environmental Matters.
Consumers Gas Utility Business Outlook and Uncertainties
Gas Deliveries: Consumers believes economic conditions in Michigan have stabilized, and
expects weather-adjusted gas deliveries to increase in 2011 by one percent compared with 2010.
Over the next five years, Consumers expects average gas deliveries to decline about one percent
annually, reflecting the predicted effects of energy efficiency programs and continued
conservation. Actual delivery levels from year to year may vary from this trend due to:
| fluctuations in weather; |
| use by IPPs; |
| availability and development of renewable energy sources; |
| changes in gas prices; |
| Michigan economic conditions, including population trends and housing activity; |
| the price of competing energy sources or fuels; and |
| energy efficiency and conservation. |
A decoupling mechanism was authorized by the MPSC in Consumers 2009 gas rate case order, subject
to certain conditions. It allows Consumers to adjust future gas rates to compensate for changes in
sales volumes by class arising from the difference between the level of average sales per customer
adopted in the order and actual average weather-adjusted sales per
customer. The mechanism does not provide rate adjustments for changes in sales volumes arising from weather fluctuations. This
mechanism mitigates the impacts of energy efficiency programs, conservation, and changes in
economic conditions on its gas revenue.
Gas Rate Matters: Rate matters are critical to Consumers gas utility business. For details on
Consumers gas rate case and GCR, see Note 3, Regulatory Matters, Consumers Gas Utility.
Gas Pipeline Safety: In response to the natural gas pipeline explosion that occurred in San Bruno,
California in September 2010, the U.S. House of Representatives and the U.S. Senate have proposed
bills stipulating stricter regulation of natural gas pipelines nationwide. These proposed bills
affect primarily transmission pipelines, but distribution pipelines may also be affected. The
proposed bills contain provisions mandating:
| the use of internal inspection devices or comparable methods effective in detecting pipeline deterioration; |
| the installation of automatic shutoff equipment in high-consequence areas; and |
| certain disclosures to homeowners and regulatory agencies. |
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Consumers continues to comply with laws and regulations governing natural gas pipeline safety. If
these proposed laws are put into effect, Consumers could incur significant additional costs related
to its natural gas pipeline safety programs. Consumers expects that it would be able to recover
the costs in rates, consistent with the recovery of other reasonable costs of complying with laws
and regulations.
Gas Environmental Estimates: Consumers expects to incur response activity costs at a number of
sites, including 23 former MGP sites. For additional details, see Note 2, Contingencies and
Commitments, Consumers Gas Utility Contingencies Gas Environmental Matters.
Consumers Other Outlook and Uncertainties
Smart Grid: Consumers grid modernization effort continues to move forward. The foundation
of this effort is the installation of advanced metering and the infrastructure to support it. The
installation will include smart meters that are capable of transmitting and receiving data, a
two-way communications network, and modifications to Consumers existing information technology
systems to manage the data and enable changes to key business processes. Consumers
expects to experience operational benefits upon the installation of
smart meters. Smart meters are also intended to allow customers to monitor and manage their energy usage and help reduce demand during critical peak
times, resulting in lower peak capacity requirements. Due to this systems complexity and the
relative immaturity of the technology, Consumers intends to continue its phased implementation
approach. In 2012, Consumers plans to begin a larger-scale deployment to expand testing
of the operations and systems of the selected advanced metering infrastructure network
communications vendor.
Enterprises Outlook and Uncertainties
The primary focus with respect to CMS Energys remaining non-utility businesses is to optimize
cash flow and maximize the value of their assets.
Trends, uncertainties, and other matters that could have a material impact on CMS Energys
consolidated income, cash flows, or financial position include:
| indemnity and environmental remediation obligations at Bay Harbor; |
| the outcome of certain legal proceedings; |
| impacts of declines in electricity prices on the profitability of the enterprises segments generating units; |
| representations, warranties, and indemnities provided by CMS Energy or its subsidiaries in connection with previous sales of assets; |
| 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 various environmental laws, regulations, principles, practices, or in their interpretation; and |
| economic conditions in Michigan, including population trends and housing activity. |
For additional details regarding the enterprises segments uncertainties, see Note 2, Contingencies
and Commitments.
Other Outlook and Uncertainties
Litigation: CMS Energy, Consumers, and certain of their subsidiaries are named as parties in
various litigation matters, as well as in administrative proceedings before various courts and
governmental agencies, arising in the ordinary course of business. For additional details
regarding these and other legal matters, see Note 2, Contingencies and Commitments and Note 3,
Regulatory Matters.
28
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EnerBank: EnerBank, a wholly owned subsidiary of CMS Capital, is a Utah state-chartered,
FDIC-insured industrial bank providing unsecured home improvement loans. EnerBank represented one
percent of CMS Energys net assets at March 31, 2011, and two percent of CMS Energys Net Income
Available to Common Stockholders for the three months ended March 31, 2011. The carrying value of
EnerBanks loan portfolio was $380 million at March 31, 2011. Its loan portfolio was funded
primarily by deposit liabilities of $377 million. Twelve-month rolling average default rates on
loans held by EnerBank have declined from 1.4 percent at December 31, 2010 to 1.3 percent at March
31, 2011. EnerBank expects the rate of loan defaults to decline further, and to level out at about
1.0 percent. CMS Energy is required to ensure that EnerBank remains well capitalized.
NEW ACCOUNTING STANDARDS
There were
no implementations of new accounting standards that had a material impact on CMS
Energys or Consumers consolidated financial statements. Also, there are no new accounting
standards issued but not yet effective that are expected to have a
material impact on CMS
Energys or Consumers consolidated financial statements.
29
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CMS Energy Corporation
Consolidated Statements of Income
(Unaudited)
(Unaudited)
In Millions | ||||||||
Three Months Ended March 31 | 2011 | 2010 | ||||||
Operating Revenue |
$ | 2,055 | $ | 1,967 | ||||
Operating Expenses |
||||||||
Fuel for electric generation |
152 | 138 | ||||||
Purchased and interchange power |
300 | 278 | ||||||
Purchased power related parties |
21 | 21 | ||||||
Cost of gas sold |
768 | 778 | ||||||
Maintenance and other operating expenses |
279 | 275 | ||||||
Depreciation and amortization |
162 | 172 | ||||||
General taxes |
67 | 66 | ||||||
Total operating expenses |
1,749 | 1,728 | ||||||
Operating Income |
306 | 239 | ||||||
Other Income (Expense) |
||||||||
Interest |
2 | 5 | ||||||
Allowance for equity funds used during construction |
1 | 1 | ||||||
Income from equity method investees |
4 | 3 | ||||||
Other income |
4 | 9 | ||||||
Other expense |
(2 | ) | (2 | ) | ||||
Total other income |
9 | 16 | ||||||
Interest Charges |
||||||||
Interest on long-term debt |
100 | 98 | ||||||
Other interest |
6 | 8 | ||||||
Allowance for borrowed funds used during construction |
(1 | ) | (1 | ) | ||||
Total interest charges |
105 | 105 | ||||||
Income Before Income Taxes |
210 | 150 | ||||||
Income Tax Expense |
77 | 61 | ||||||
Income From Continuing Operations |
133 | 89 | ||||||
Income (Loss) From Discontinued Operations, Net of Tax
Expense (Benefit) of $1 and $(1) |
2 | (1 | ) | |||||
Net Income |
135 | 88 | ||||||
Preferred Stock Dividends |
| 3 | ||||||
Net Income Available to Common Stockholders |
$ | 135 | $ | 85 | ||||
The accompanying notes are an integral part of these statements.
30
Table of Contents
In Millions, Except Per Share Amounts | ||||||||
Three Months Ended March 31 | 2011 | 2010 | ||||||
Net Income Attributable to Common Stockholders |
||||||||
Amounts Attributable to Continuing Operations |
$ | 133 | $ | 86 | ||||
Amounts Attributable to Discontinued Operations |
2 | (1 | ) | |||||
Net Income Available to Common Stockholders |
$ | 135 | $ | 85 | ||||
Basic Earnings Per Average Common Share |
||||||||
Basic Earnings from Continuing Operations |
$ | 0.53 | $ | 0.38 | ||||
Basic Earnings (Loss) from Discontinued Operations |
0.01 | (0.01 | ) | |||||
Basic Earnings Attributable to Common Stock |
$ | 0.54 | $ | 0.37 | ||||
Diluted Earnings Per Average Common Share |
||||||||
Diluted Earnings from Continuing Operations |
$ | 0.51 | $ | 0.35 | ||||
Diluted Earnings (Loss) from Discontinued Operations |
0.01 | (0.01 | ) | |||||
Diluted Earnings Attributable to Common Stock |
$ | 0.52 | $ | 0.34 | ||||
Dividends Declared Per Common Share |
$ | 0.21 | $ | 0.15 | ||||
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32
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CMS Energy Corporation
Consolidated Statements of Cash Flows
(Unaudited)
Consolidated Statements of Cash Flows
(Unaudited)
In Millions | ||||||||
Three Months ended March 31 | 2011 | 2010 | ||||||
Cash Flows from Operating Activities |
||||||||
Net Income |
$ | 135 | $ | 88 | ||||
Adjustments to reconcile net income to net cash provided by operating activities |
||||||||
Depreciation and amortization |
162 | 172 | ||||||
Deferred income taxes and investment tax credit |
73 | 42 | ||||||
Postretirement benefits expense |
40 | 49 | ||||||
Other non-cash operating activities |
21 | 21 | ||||||
Postretirement benefits contributions |
(19 | ) | (135 | ) | ||||
Changes in other assets and liabilities: |
||||||||
Decrease in accounts receivable, notes receivable, and accrued revenue |
9 | 36 | ||||||
Decrease in accrued power supply revenue |
15 | 38 | ||||||
Decrease in inventories |
462 | 460 | ||||||
Decrease in accounts payable |
(9 | ) | (44 | ) | ||||
Decrease in accrued expenses |
(89 | ) | (77 | ) | ||||
Decrease in other current and non-current assets |
29 | 39 | ||||||
Increase (decrease) in other current and non-current liabilities |
12 | (32 | ) | |||||
Net cash provided by operating activities |
841 | 657 | ||||||
Cash Flows from Investing Activities |
||||||||
Capital expenditures (excludes assets placed under capital lease) |
(191 | ) | (190 | ) | ||||
Cost to retire property |
(17 | ) | (11 | ) | ||||
Cash effect of deconsolidation of partnerships |
| (10 | ) | |||||
Other investing activities |
(20 | ) | (1 | ) | ||||
Net cash used in investing activities |
(228 | ) | (212 | ) | ||||
Cash Flows from Financing Activities |
||||||||
Proceeds from issuance of long-term debt |
| 300 | ||||||
Proceeds from EnerBank notes, net |
13 | 25 | ||||||
Retirement of long-term debt |
(13 | ) | (34 | ) | ||||
Payment of common stock dividends |
(53 | ) | (34 | ) | ||||
Payment of capital and finance lease obligations |
(6 | ) | (6 | ) | ||||
Other financing costs |
(2 | ) | (30 | ) | ||||
Net cash (used in) provided by financing activities |
(61 | ) | 221 | |||||
Net Increase in Cash and Cash Equivalents, Including Assets Held for Sale |
552 | 666 | ||||||
Decrease (Increase) in Cash and Cash Equivalents Included in Assets Held for Sale |
2 | (1 | ) | |||||
Net Increase in Cash and Cash Equivalents |
554 | 665 | ||||||
Cash and Cash Equivalents, Beginning of Period |
247 | 90 | ||||||
Cash and Cash Equivalents, End of Period |
$ | 801 | $ | 755 | ||||
The accompanying notes are an integral part of these statements.
33
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CMS Energy Corporation
Consolidated Balance Sheets
(Unaudited)
Consolidated Balance Sheets
(Unaudited)
In Millions | ||||||||
March 31 | December 31 | |||||||
ASSETS | 2011 | 2010 | ||||||
Current Assets |
||||||||
Cash and cash equivalents |
$ | 801 | $ | 247 | ||||
Restricted cash and cash equivalents |
30 | 23 | ||||||
Accounts receivable and accrued revenue,
less allowances of $25 in 2011 and 2010 |
930 | 981 | ||||||
Notes receivable |
55 | 70 | ||||||
Accounts receivable related parties |
11 | 10 | ||||||
Accrued power supply revenue |
| 15 | ||||||
Inventories at average cost |
||||||||
Gas in underground storage |
480 | 946 | ||||||
Materials and supplies |
106 | 104 | ||||||
Generating plant fuel stock |
126 | 125 | ||||||
Deferred property taxes |
149 | 180 | ||||||
Regulatory assets |
14 | 19 | ||||||
Assets held for sale |
| 2 | ||||||
Prepayments and other current assets |
39 | 37 | ||||||
Total current assets |
2,741 | 2,759 | ||||||
Plant, Property & Equipment (at cost) |
||||||||
Plant, property & equipment, gross |
14,242 | 14,145 | ||||||
Less accumulated depreciation, depletion, and amortization |
4,731 | 4,646 | ||||||
Plant, property & equipment, net |
9,511 | 9,499 | ||||||
Construction work in progress |
627 | 570 | ||||||
Total plant, property & equipment |
10,138 | 10,069 | ||||||
Non-current Assets |
||||||||
Regulatory assets |
2,079 | 2,093 | ||||||
Accounts and notes receivable,
less allowances of $5 in 2011 and 2010 |
381 | 397 | ||||||
Investments |
51 | 49 | ||||||
Assets held for sale |
| 4 | ||||||
Other non-current assets |
252 | 245 | ||||||
Total non-current assets |
2,763 | 2,788 | ||||||
Total Assets |
$ | 15,642 | $ | 15,616 | ||||
The accompanying notes are an integral part of these statements.
34
Table of Contents
In Millions | ||||||||
March 31 | December 31 | |||||||
LIABILITIES AND EQUITY | 2011 | 2010 | ||||||
Current Liabilities |
||||||||
Current portion of long-term debt, capital and finance lease obligations |
$ | 1,275 | $ | 750 | ||||
Accounts payable |
413 | 492 | ||||||
Accounts payable related parties |
8 | 9 | ||||||
Accrued rate refunds |
20 | 19 | ||||||
Accrued interest |
75 | 102 | ||||||
Accrued taxes |
239 | 302 | ||||||
Deferred income taxes |
150 | 180 | ||||||
Regulatory liabilities |
1 | 22 | ||||||
Liabilities held for sale |
| 1 | ||||||
Other current liabilities |
109 | 144 | ||||||
Total current liabilities |
2,290 | 2,021 | ||||||
Non-current Liabilities |
||||||||
Long-term debt |
5,926 | 6,448 | ||||||
Non-current portion of capital and finance lease obligations |
182 | 188 | ||||||
Regulatory liabilities |
2,048 | 1,988 | ||||||
Postretirement benefits |
1,135 | 1,135 | ||||||
Asset retirement obligations |
249 | 245 | ||||||
Deferred investment tax credit |
48 | 49 | ||||||
Deferred income taxes |
545 | 438 | ||||||
Other non-current liabilities |
288 | 267 | ||||||
Total non-current liabilities |
10,421 | 10,758 | ||||||
Commitments and Contingencies (Notes 2, 3, 4, 6, and 7) |
||||||||
Equity |
||||||||
Common stockholders equity |
||||||||
Common stock, authorized 350.0 shares; outstanding 250.8 shares in
2011 and 249.6 shares in 2010 |
3 | 2 | ||||||
Other paid-in capital |
4,599 | 4,588 | ||||||
Accumulated other comprehensive loss |
(40 | ) | (40 | ) | ||||
Accumulated deficit |
(1,675 | ) | (1,757 | ) | ||||
Total common stockholders equity |
2,887 | 2,793 | ||||||
Noncontrolling interests |
44 | 44 | ||||||
Total equity |
2,931 | 2,837 | ||||||
Total Liabilities and Equity |
$ | 15,642 | $ | 15,616 | ||||
35
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CMS Energy Corporation
Consolidated Statements of Changes in Equity
(Unaudited)
Consolidated Statements of Changes in Equity
(Unaudited)
In Millions | ||||||||
Three Months Ended March 31 | 2011 | 2010 | ||||||
Common Stock |
||||||||
At beginning of period |
$ | 2 | $ | 2 | ||||
Common stock issued |
1 | | ||||||
At end of period |
3 | 2 | ||||||
Other Paid-in Capital |
||||||||
At beginning of period |
4,588 | 4,560 | ||||||
Common stock issued |
6 | 4 | ||||||
Common stock reissued |
5 | | ||||||
At end of period |
4,599 | 4,564 | ||||||
Accumulated Other Comprehensive Loss |
||||||||
Retirement benefits liability |
||||||||
At beginning of period |
(39 | ) | (32 | ) | ||||
Retirement benefits liability adjustments1 |
| 1 | ||||||
At end of period |
(39 | ) | (31 | ) | ||||
Derivative instruments |
||||||||
At beginning and end of period |
(1 | ) | (1 | ) | ||||
At end of period |
(40 | ) | (32 | ) | ||||
Accumulated Deficit |
||||||||
At beginning of period |
(1,757 | ) | (1,927 | ) | ||||
Net income1 |
135 | 88 | ||||||
Common stock dividends declared |
(53 | ) | (34 | ) | ||||
Preferred stock dividends declared |
| (3 | ) | |||||
At end of period |
(1,675 | ) | (1,876 | ) | ||||
Preferred Stock |
||||||||
At beginning and end of period |
| 239 | ||||||
Noncontrolling Interests |
||||||||
At beginning of period |
44 | 97 | ||||||
Distributions and other changes in noncontrolling interests |
| (53 | ) | |||||
At end of period |
44 | 44 | ||||||
Total Equity |
$ | 2,931 | $ | 2,941 | ||||
36
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CMS Energy Corporation
Consolidated Statements of Changes in Equity
(Unaudited)
Consolidated Statements of Changes in Equity
(Unaudited)
In Millions | ||||||||
Three Months Ended March 31 | 2011 | 2010 | ||||||
1 Disclosure of Comprehensive Income: |
||||||||
Net income |
$ | 135 | $ | 88 | ||||
Retirement benefits liability: |
||||||||
Retirement benefits liability
adjustments, net of tax benefit of $
- in 2011
and $1 in 2010 |
| 1 | ||||||
Total Comprehensive Income |
$ | 135 | $ | 89 | ||||
The accompanying notes are an integral part of these statements.
37
Table of Contents
Consumers Energy Company
Consolidated Statements of Income
(Unaudited)
Consolidated Statements of Income
(Unaudited)
In Millions | ||||||||
Three Months Ended March 31 | 2011 | 2010 | ||||||
Operating Revenue |
$ | 1,988 | $ | 1,890 | ||||
Operating Expenses |
||||||||
Fuel for electric generation |
129 | 125 | ||||||
Purchased and interchange power |
293 | 277 | ||||||
Purchased power related parties |
21 | 21 | ||||||
Cost of gas sold |
753 | 746 | ||||||
Maintenance and other operating expenses |
265 | 262 | ||||||
Depreciation and amortization |
161 | 171 | ||||||
General taxes |
66 | 64 | ||||||
Total operating expenses |
1,688 | 1,666 | ||||||
Operating Income |
300 | 224 | ||||||
Other Income (Expense) |
||||||||
Interest |
2 | 5 | ||||||
Allowance for equity funds used during construction |
1 | 1 | ||||||
Other income |
8 | 9 | ||||||
Other expense |
(2 | ) | (2 | ) | ||||
Total other income |
9 | 13 | ||||||
Interest Charges |
||||||||
Interest on long-term debt |
63 | 63 | ||||||
Other interest |
4 | 6 | ||||||
Allowance for borrowed funds used during construction |
(1 | ) | (1 | ) | ||||
Total interest charges |
66 | 68 | ||||||
Income Before Income Taxes |
243 | 169 | ||||||
Income Tax Expense |
90 | 62 | ||||||
Net Income Available to Common Stockholder |
$ | 153 | $ | 107 | ||||
The accompanying notes are an integral part of these statements.
38
Table of Contents
Consumers Energy Company
Consolidated Statements of Cash Flows
(Unaudited)
(Unaudited)
In Millions | ||||||||
Three Months ended March 31 | 2011 | 2010 | ||||||
Cash Flows from Operating Activities |
||||||||
Net Income |
$ | 153 | $ | 107 | ||||
Adjustments to reconcile net income to net cash provided by operating activities |
||||||||
Depreciation and amortization |
161 | 171 | ||||||
Deferred income taxes and investment tax credit |
39 | (19 | ) | |||||
Postretirement benefits expense |
39 | 48 | ||||||
Other non-cash operating activities |
17 | 19 | ||||||
Postretirement benefits contributions |
(19 | ) | (125 | ) | ||||
Changes in other assets and liabilities: |
||||||||
Decrease in accounts receivable, notes receivable, and accrued revenue |
6 | 31 | ||||||
Decrease in accrued power supply revenue |
15 | 38 | ||||||
Decrease in inventories |
458 | 459 | ||||||
Increase (decrease) in accounts payable |
3 | (49 | ) | |||||
Decrease in accrued expenses |
(49 | ) | (28 | ) | ||||
Decrease in other current and non-current assets |
30 | 44 | ||||||
Increase (decrease) in other current and non-current liabilities |
14 | (13 | ) | |||||
Net cash provided by operating activities |
867 | 683 | ||||||
Cash Flows from Investing Activities |
||||||||
Capital expenditures (excludes assets placed under capital lease) |
(186 | ) | (190 | ) | ||||
Cost to retire property |
(17 | ) | (11 | ) | ||||
Other investing activities |
(25 | ) | (1 | ) | ||||
Net cash used in investing activities |
(228 | ) | (202 | ) | ||||
Cash Flows from Financing Activities |
||||||||
Retirement of long-term debt |
(9 | ) | (9 | ) | ||||
Payment of common stock dividends |
(104 | ) | (114 | ) | ||||
Stockholders contribution |
125 | 200 | ||||||
Payment of capital and finance lease obligations |
(6 | ) | (6 | ) | ||||
Other financing costs |
(3 | ) | | |||||
Net cash provided by financing activities |
3 | 71 | ||||||
Net Increase in Cash and Cash Equivalents |
642 | 552 | ||||||
Cash and Cash Equivalents, Beginning of Period |
71 | 39 | ||||||
Cash and Cash Equivalents, End of Period |
$ | 713 | $ | 591 | ||||
The accompanying notes are an integral part of these statements.
39
Table of Contents
Consumers Energy Company
Consolidated Balance Sheets
(Unaudited)
Consolidated Balance Sheets
(Unaudited)
In Millions | ||||||||
March 31 | December 31 | |||||||
ASSETS | 2011 | 2010 | ||||||
Current Assets |
||||||||
Cash and cash equivalents |
$ | 713 | $ | 71 | ||||
Restricted cash and cash equivalents |
29 | 23 | ||||||
Accounts receivable and accrued revenue,
less allowances of $23 in 2011 and 2010 |
915 | 963 | ||||||
Notes receivable |
41 | 55 | ||||||
Accrued power supply revenue |
| 15 | ||||||
Accounts receivable related parties |
1 | 1 | ||||||
Inventories at average cost |
||||||||
Gas in underground storage |
480 | 941 | ||||||
Materials and supplies |
102 | 100 | ||||||
Generating plant fuel stock |
126 | 124 | ||||||
Deferred property taxes |
149 | 180 | ||||||
Regulatory assets |
14 | 19 | ||||||
Prepayments and other current assets |
30 | 27 | ||||||
Total current assets |
2,600 | 2,519 | ||||||
Plant, Property & Equipment (at cost) |
||||||||
Plant, property & equipment, gross |
14,115 | 14,022 | ||||||
Less accumulated depreciation, depletion, and amortization |
4,678 | 4,593 | ||||||
Plant, property & equipment, net |
9,437 | 9,429 | ||||||
Construction work in progress |
622 | 566 | ||||||
Total plant, property & equipment |
10,059 | 9,995 | ||||||
Non-current Assets |
||||||||
Regulatory assets |
2,079 | 2,093 | ||||||
Accounts and notes receivable |
14 | 22 | ||||||
Investments |
31 | 34 | ||||||
Other non-current assets |
174 | 176 | ||||||
Total non-current assets |
2,298 | 2,325 | ||||||
Total Assets |
$ | 14,957 | $ | 14,839 | ||||
The accompanying notes are an integral part of these statements.
40
Table of Contents
In Millions | ||||||||
March 31 | December 31 | |||||||
LIABILITIES AND EQUITY | 2011 | 2010 | ||||||
Current Liabilities |
||||||||
Current portion of long-term debt, capital and finance
lease obligations |
$ | 361 | $ | 61 | ||||
Accounts payable |
403 | 471 | ||||||
Accounts payable related parties |
11 | 11 | ||||||
Accrued rate refunds |
20 | 19 | ||||||
Accrued interest |
41 | 74 | ||||||
Accrued taxes |
182 | 199 | ||||||
Deferred income taxes |
192 | 209 | ||||||
Regulatory liabilities |
1 | 22 | ||||||
Other current liabilities |
76 | 95 | ||||||
Total current liabilities |
1,287 | 1,161 | ||||||
Non-current Liabilities |
||||||||
Long-term debt |
4,179 | 4,488 | ||||||
Non-current portion of capital and finance lease obligations |
182 | 188 | ||||||
Regulatory liabilities |
2,048 | 1,988 | ||||||
Postretirement benefits |
1,076 | 1,076 | ||||||
Asset retirement obligations |
248 | 244 | ||||||
Deferred investment tax credit |
48 | 49 | ||||||
Deferred income taxes |
1,348 | 1,289 | ||||||
Other non-current liabilities |
187 | 176 | ||||||
Total non-current liabilities |
9,316 | 9,498 | ||||||
Commitments and Contingencies (Notes 2, 3, 4, 6, and 7) |
||||||||
Equity |
||||||||
Common stockholders equity |
||||||||
Common stock, authorized 125.0 shares; outstanding
84.1 shares for both periods |
841 | 841 | ||||||
Other paid-in capital |
2,957 | 2,832 | ||||||
Retained earnings |
512 | 463 | ||||||
Total common stockholders equity |
4,310 | 4,136 | ||||||
Preferred stock |
44 | 44 | ||||||
Total equity |
4,354 | 4,180 | ||||||
Total Liabilities and Equity |
$ | 14,957 | $ | 14,839 | ||||
41
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Consumers Energy Company
Consolidated Statements of Changes in Equity
(Unaudited)
Consolidated Statements of Changes in Equity
(Unaudited)
In Millions | ||||||||
Three Months Ended March 31 | 2011 | 2010 | ||||||
Common Stock |
||||||||
At beginning and end of period |
$ | 841 | $ | 841 | ||||
Other Paid-in Capital |
||||||||
At beginning of period |
2,832 | 2,582 | ||||||
Stockholders contribution |
125 | 200 | ||||||
At end of period |
2,957 | 2,782 | ||||||
Accumulated Other Comprehensive Income |
||||||||
Retirement benefits liability |
||||||||
At beginning of period |
(16 | ) | (11 | ) | ||||
Retirement benefits liability adjustments1 |
1 | | ||||||
At end of period |
(15 | ) | (11 | ) | ||||
Investments |
||||||||
At beginning of period |
16 | 13 | ||||||
Unrealized loss on investments1 |
(1 | ) | (1 | ) | ||||
At end of period |
15 | 12 | ||||||
At end of period |
| 1 | ||||||
Retained Earnings |
||||||||
At beginning of period |
463 | 389 | ||||||
Net income1 |
153 | 107 | ||||||
Common stock dividends declared |
(104 | ) | (114 | ) | ||||
At end of period |
512 | 382 | ||||||
Preferred Stock |
||||||||
At beginning and end of period |
44 | 44 | ||||||
Total Equity |
$ | 4,354 | $ | 4,050 | ||||
The accompanying notes are an integral part of these statements.
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In Millions | ||||||||
Three Months Ended March 31 | 2011 | 2010 | ||||||
1 Disclosure of Comprehensive Income: |
||||||||
Net income |
$ | 153 | $ | 107 | ||||
Retirement benefits liability: |
||||||||
Retirement benefits liability adjustments, net of tax
of $ - in 2011 and $ - in 2010 |
1 | | ||||||
Investments: |
||||||||
Unrealized loss on investments, net of tax
of $(1) in 2011 and $ - in 2010 |
(1 | ) | (1 | ) | ||||
Total Comprehensive Income |
$ | 153 | $ | 106 | ||||
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CMS Energy Corporation
Consumers Energy Company
Consumers Energy Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
These interim Consolidated Financial Statements have been prepared by CMS Energy and Consumers
in accordance with accounting principles generally accepted in the U.S. for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. As a result,
CMS Energy and Consumers have condensed or omitted certain information and Note disclosures
normally included in consolidated financial statements prepared in accordance with accounting
principles generally accepted in the U.S. CMS Energy and Consumers have reclassified certain prior
period amounts to conform to the presentation in the current period. In managements opinion, the
unaudited information contained in this report reflects all adjustments of a normal recurring
nature necessary to ensure the fair presentation of financial position, results of operations, and
cash flows for the periods presented. The Notes to Consolidated Financial Statements and the
related Consolidated Financial Statements should be read in conjunction with the Consolidated
Financial Statements and related Notes contained in the 2010 Form 10-K. Due to the seasonal nature
of CMS Energys and Consumers operations, the results presented for this interim period are not
necessarily indicative of results to be achieved for the fiscal year.
1: FAIR VALUE MEASUREMENTS
Accounting standards define fair value as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market participants. When measuring
fair value, CMS Energy and Consumers are required to incorporate all assumptions that market
participants would use in pricing an asset or liability, including assumptions about risk. A fair
value hierarchy prioritizes inputs used to measure fair value according to their observability in
the market. The three levels of the fair value hierarchy are as follows:
| Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities. |
| Level 2 inputs are observable, market-based inputs, other than Level 1 prices. Level 2 inputs may include quoted prices for similar assets or liabilities in active markets, quoted prices in inactive markets, interest rates and yield curves observable at commonly quoted intervals, credit risks, default rates, and inputs derived from or corroborated by observable market data. |
| Level 3 inputs are unobservable inputs that reflect CMS Energys or Consumers own assumptions about how market participants would value their assets and liabilities. |
To the extent possible, CMS Energy and Consumers use quoted market prices or other observable
market pricing data in valuing assets and liabilities measured at fair value. If this information
is unavailable, they use market-corroborated data or reasonable estimates about market participant
assumptions. CMS Energy and Consumers classify fair value measurements within the fair value
hierarchy based on the lowest level of input that is significant to the fair value measurement in
its entirety.
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Assets and Liabilities Measured at Fair Value on a Recurring Basis
Presented in the following table are CMS Energys and Consumers assets and liabilities, by level
within the fair value hierarchy, reported at fair value on a recurring basis at March 31, 2011:
In Millions | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
CMS Energy, including Consumers |
||||||||||||||||
Assets: |
||||||||||||||||
Cash equivalents |
$ | 656 | $ | 656 | $ | | $ | | ||||||||
Restricted cash equivalents |
14 | 14 | | | ||||||||||||
Nonqualified deferred compensation plan assets |
4 | 4 | | | ||||||||||||
SERP: |
||||||||||||||||
Cash equivalents |
1 | 1 | | | ||||||||||||
Mutual fund |
89 | 89 | | | ||||||||||||
State and municipal bonds |
27 | | 27 | | ||||||||||||
Derivative instruments: |
||||||||||||||||
Commodity contracts1 |
1 | | | 1 | ||||||||||||
Total2 |
$ | 792 | $ | 764 | $ | 27 | $ | 1 | ||||||||
Liabilities: |
||||||||||||||||
Nonqualified deferred compensation plan liabilities |
$ | 4 | $ | 4 | $ | | $ | | ||||||||
Derivative instruments: |
||||||||||||||||
Commodity contracts3 |
3 | | | 3 | ||||||||||||
Total4 |
$ | 7 | $ | 4 | $ | | $ | 3 | ||||||||
Consumers |
||||||||||||||||
Assets: |
||||||||||||||||
Cash equivalents |
$ | 596 | $ | 596 | $ | | $ | | ||||||||
Restricted cash equivalents |
13 | 13 | | | ||||||||||||
CMS Energy common stock |
31 | 31 | | | ||||||||||||
Nonqualified deferred compensation plan assets |
3 | 3 | | | ||||||||||||
SERP: |
||||||||||||||||
Mutual fund |
58 | 58 | | | ||||||||||||
State and municipal bonds |
18 | | 18 | | ||||||||||||
Total |
$ | 719 | $ | 701 | $ | 18 | $ | | ||||||||
Liabilities: |
||||||||||||||||
Nonqualified deferred compensation plan liabilities |
$ | 3 | $ | 3 | $ | | $ | | ||||||||
Total |
$ | 3 | $ | 3 | $ | | $ | | ||||||||
1 | This amount is gross and excludes the impact of offsetting derivative assets and liabilities under master netting arrangements, which was less than $1 million at March 31, 2011. | |
2 | At March 31, 2011, CMS Energys assets classified as Level 3 represented less than one percent of CMS Energys total assets measured at fair value. | |
3 | This amount is gross and excludes the impact of offsetting derivative assets and liabilities under master netting arrangements and offsetting cash margin deposits paid by CMS ERM to other parties, which was less than $1 million at March 31, 2011. | |
4 | At March 31, 2011, CMS Energys liabilities classified as Level 3 represented 43 percent of CMS Energys total liabilities measured at fair value. The Level 3 liabilities consisted primarily of an electricity sales agreement held by CMS ERM. |
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Presented in the following table are CMS Energys and Consumers assets and liabilities, by level
within the fair value hierarchy, reported at fair value on a recurring basis at December 31, 2010:
In Millions | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
CMS Energy, including Consumers |
||||||||||||||||
Assets: |
||||||||||||||||
Cash equivalents |
$ | 183 | $ | 183 | $ | | $ | | ||||||||
Restricted cash equivalents |
6 | 6 | | | ||||||||||||
Nonqualified deferred compensation plan assets |
6 | 6 | | | ||||||||||||
SERP: |
||||||||||||||||
Cash equivalents |
1 | 1 | | | ||||||||||||
Mutual fund |
62 | 62 | | | ||||||||||||
State and municipal bonds |
28 | | 28 | | ||||||||||||
Derivative instruments: |
||||||||||||||||
Commodity contracts1 |
1 | | | 1 | ||||||||||||
Total2 |
$ | 287 | $ | 258 | $ | 28 | $ | 1 | ||||||||
Liabilities: |
||||||||||||||||
Nonqualified deferred compensation plan liabilities |
$ | 6 | $ | 6 | $ | | $ | | ||||||||
Derivative instruments: |
||||||||||||||||
Commodity contracts3 |
4 | | | 4 | ||||||||||||
Total4 |
$ | 10 | $ | 6 | $ | | $ | 4 | ||||||||
Consumers |
||||||||||||||||
Assets: |
||||||||||||||||
Cash equivalents |
$ | 19 | $ | 19 | $ | | $ | | ||||||||
Restricted cash equivalents |
6 | 6 | | | ||||||||||||
CMS Energy common stock |
34 | 34 | | | ||||||||||||
Nonqualified deferred compensation plan assets |
4 | 4 | | | ||||||||||||
SERP: |
||||||||||||||||
Cash equivalents |
1 | 1 | | | ||||||||||||
Mutual fund |
39 | 39 | | | ||||||||||||
State and municipal bonds |
17 | | 17 | | ||||||||||||
Derivative instruments: |
||||||||||||||||
Commodity contracts |
1 | | | 1 | ||||||||||||
Total5 |
$ | 121 | $ | 103 | $ | 17 | $ | 1 | ||||||||
Liabilities: |
||||||||||||||||
Nonqualified deferred compensation plan liabilities |
$ | 4 | $ | 4 | $ | | $ | | ||||||||
Total |
$ | 4 | $ | 4 | $ | | $ | | ||||||||
1 | This amount is gross and excludes the impact of offsetting derivative assets and liabilities under master netting arrangements, which was less than $1 million at December 31, 2010. | |
2 | At December 31, 2010, CMS Energys assets classified as Level 3 represented less than one percent of CMS Energys total assets measured at fair value. | |
3 | This amount is gross and excludes the impact of offsetting derivative assets and liabilities under master netting arrangements and offsetting cash margin deposits paid by CMS ERM to other parties, which was less than $1 million at December 31, 2010. | |
4 | At December 31, 2010, CMS Energys liabilities classified as Level 3 represented 40 percent of CMS Energys total liabilities measured at fair value. The Level 3 liabilities consisted primarily of an electricity sales agreement held by CMS ERM. | |
5 | At December 31, 2010, Consumers assets classified as Level 3 represented one percent of Consumers total assets measured at fair value. |
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Cash Equivalents: Cash equivalents and restricted cash equivalents consist of money market funds
with daily liquidity. The funds invest in U.S. Treasury notes, other government-backed securities,
and repurchase agreements collateralized by U.S. Treasury notes.
Nonqualified Deferred Compensation Plan Assets: CMS Energys and Consumers nonqualified deferred
compensation plan assets are invested in various mutual funds. CMS Energy and Consumers value
these assets using a market approach, using the daily quoted NAVs provided by the fund managers
that are the basis for transactions to buy or sell shares in each fund. CMS Energy and Consumers
report these assets in Other non-current assets on their Consolidated Balance Sheets.
SERP Assets: CMS Energy and Consumers value their SERP assets using a market approach,
incorporating prices and other relevant information from market transactions. The SERP cash
equivalents consist of a money market fund with daily liquidity, which invests in state and
municipal securities.
The SERP invests in a short-term, fixed-income mutual fund that holds a variety of debt securities
with average maturities of one to three years. The fund invests primarily in investment-grade debt
securities but, in order to achieve its investment objective, it may invest a portion of its assets
in high-yield securities, foreign debt, and derivative instruments. The fair value of the fund is
determined using the daily published NAV, which is the basis for transactions to buy or sell shares
in the fund.
The SERP state and municipal bonds are investment grade securities that are valued using a matrix
pricing model that incorporates Level 2 market-based information. The fair value of the bonds is
derived from various observable inputs, including benchmark yields, reported trades, broker/dealer
quotes, bond ratings, and general information on market movements normally considered by market
participants when pricing such debt securities. CMS Energy and Consumers report their SERP assets
in Other non-current assets on their Consolidated Balance Sheets. For additional details about
SERP securities, see Note 6, Financial Instruments.
Nonqualified Deferred Compensation Plan Liabilities: CMS Energy and Consumers value their
non-qualified deferred compensation plan liabilities based on the fair values of the plan assets,
as they reflect what is owed to the plan participants in accordance with their investment
elections. CMS Energy and Consumers report these liabilities in Other non-current liabilities on
their Consolidated Balance Sheets.
Derivative Instruments: CMS Energy and Consumers value their derivative instruments using either a
market approach that incorporates information from market transactions, or an income approach that
discounts future expected cash flows to a present value amount. They use various inputs to value
the derivatives depending on the type of contract and the availability of market data. CMS Energy
has exchange-traded derivative contracts that are valued based on Level 1 quoted prices in actively
traded markets, as well as derivatives that are valued using Level 2 inputs, including commodity
market prices, interest rates, credit ratings, default rates, and market-based seasonality factors.
CMS Energy and Consumers have classified certain derivatives as Level 3 since the fair value
measurements incorporate pricing assumptions that cannot be observed or confirmed through market
transactions.
The most significant derivative classified as Level 3 is an electricity sales agreement held by CMS
ERM. At December 31, 2010 and in prior periods, quoted electricity prices were not available for
the entire term of the agreement, and a proprietary forward pricing model was used to determine
fair value. At March 31, 2011, quoted prices at the nearest active market were available for the
entire term of the agreement. The agreement, however, remains classified as Level 3 since the
pricing differential between the nearest active market in Ohio and the delivery point in Michigan
cannot be confirmed with observable, market transactions.
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For all fair values other than Level 1 prices, CMS Energy and Consumers incorporate adjustments for
the risk of nonperformance. For derivative assets, a credit adjustment is applied against the
asset based on the published default rate for the credit rating that CMS Energy and Consumers
assign to the counterparty based on an internal credit-scoring model. This model considers various
inputs, including the counterpartys financial statements, credit reports, trade press, and other
information that would be available to market participants. To the extent that the internal
ratings are comparable to credit ratings published by independent rating agencies, the resulting
credit adjustment is classified within Level 2. If the internal model results in a rating that is
outside of the range of ratings given by the independent agencies and the credit adjustment is
significant to the overall valuation, the derivative fair value is classified as Level 3. CMS
Energy and Consumers adjust their derivative liabilities downward to reflect the risk of their own
nonperformance, based on their published credit ratings. CMS Energy and Consumers monitor market
conditions and may incorporate other data, such as credit default swap rates, in determining
adjustments for credit risk as warranted. For additional details about derivative contracts, see
Note 7, Derivative Instruments.
Assets and Liabilities Measured at Fair Value on a Recurring Basis using Significant Level 3 Inputs
Presented in the following table is a reconciliation of changes in the fair values of Level 3
assets and liabilities at CMS Energy, which includes Level 3 assets and liabilities at Consumers:
In Millions | ||||||||||||||||
Three Months Ended March 31 | 2011 | 2010 | ||||||||||||||
Balance at January 1 |
$ | (3 | ) | $ | (8 | ) | ||||||||||
Total gains included in earnings1 |
2 | 4 | ||||||||||||||
Settlements |
(1 | ) | 1 | |||||||||||||
Balance at March 31 |
$ | (2 | ) | $ | (3 | ) | ||||||||||
Unrealized gains included in earnings for the three
months ended March 31 relating to assets and
liabilities still held at March 311 |
$ | 1 | $ | 4 | ||||||||||||
1 | CMS Energy records realized and unrealized gains and losses for Level 3 recurring fair values in earnings as a component of Operating Revenue, Other income, or Maintenance and other operating expenses on its Consolidated Statements of Income. |
No further detail is provided on Consumers Level 3 assets, due to the immateriality of the amounts.
2: CONTINGENCIES AND COMMITMENTS
CMS Energy Contingencies
Gas Index Price Reporting Investigation: In 2002, CMS Energy 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 cooperated with an investigation
by the DOJ regarding this matter. Although CMS Energy has not received any formal notification
that the DOJ has completed its investigation, the DOJs last request for information occurred in
2003, and CMS Energy completed its response to this request in 2004. CMS Energy is unable to
predict the outcome of the DOJ investigation and what effect, if any, the investigation will have
on CMS Energy.
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Gas Index Price Reporting Litigation: CMS Energy, along with CMS MST, CMS Field Services, Cantera
Natural Gas, Inc., and Cantera Gas Company, are named as defendants in various class action and
individual lawsuits arising as a result of alleged inaccurate natural gas price reporting to
publications that report trade information. Allegations include manipulation of NYMEX natural gas
futures and options prices, price-fixing conspiracies, restraint of trade, and artificial inflation
of natural gas retail prices in Colorado, Kansas, Missouri, and Wisconsin. The following provides
more detail on these proceedings:
| In 2005, CMS MST was served with a summons and complaint that named CMS Energy, CMS MST, and CMS Field Services as defendants in a putative class action filed in Kansas state court, Learjet, Inc., et al. v. Oneok, Inc., et al. The complaint alleges that during the putative class period, January 1, 2000 through October 31, 2002, the defendants engaged in a scheme to violate the Kansas Restraint of Trade Act. The plaintiffs, who allege they purchased natural gas from the defendants and others for their facilities, are seeking statutory full consideration damages consisting of the full consideration paid by plaintiffs for natural gas. |
| In 2007, a class action complaint, Heartland Regional Medical Center, et al. v. Oneok, Inc. et al., was filed in Missouri state court alleging violations of Missouri antitrust laws. Defendants, including CMS Energy, CMS Field Services, and CMS MST, are alleged to have violated the Missouri antitrust law in connection with their natural gas price reporting activities. |
| Breckenridge Brewery of Colorado, LLC and BBD Acquisition Co. v. Oneok, Inc., et al., a class action complaint brought on behalf of retail direct purchasers of natural gas in Colorado, was filed in Colorado state court in May 2006. Defendants, including CMS Energy, CMS Field Services, and CMS MST, are alleged to have violated the Colorado Antitrust Act of 1992 in connection with their natural gas price reporting activities. Plaintiffs are seeking full refund damages. |
| A class action complaint, Arandell Corp., et al. v. XCEL Energy Inc., et al., was filed in 2006 in Wisconsin state court on behalf of Wisconsin commercial entities that purchased natural gas between January 1, 2000 and October 31, 2002. The defendants, including CMS Energy, CMS ERM, and Cantera Gas Company, are alleged to have violated Wisconsins antitrust statute. The plaintiffs are seeking full consideration damages, plus exemplary damages and attorneys fees. After dismissal on jurisdictional grounds in 2009, plaintiffs filed a new case in the U.S. District Court for the Eastern District of Michigan. In November 2010, the MDL judge issued an opinion and order granting the CMS Energy defendants motion to dismiss the new Michigan case on statute-of-limitations grounds and all CMS Energy defendants have been dismissed from the Arandell Michigan case. |
| Another class action complaint, Newpage Wisconsin System v. CMS ERM, CMS Energy, and Cantera Gas Company, was filed in 2009 in circuit court in Wood County, Wisconsin, against CMS Energy defendants and 19 other non-CMS Energy companies. The plaintiff is seeking full consideration damages, treble damages, costs, interest, and attorneys fees. |
| In 2005, J.P. Morgan Trust Company, in its capacity as Trustee of the FLI Liquidating Trust, filed an action in Kansas state court against a number of energy companies, including CMS Energy, CMS MST, and CMS Field Services. The complaint alleges various claims under the Kansas Restraint of Trade Act. The plaintiff is seeking statutory full consideration damages for its purchases of natural gas between January 1, 2000 and December 31, 2001. This case is not a class action. |
After removal to federal court, the Learjet, Heartland, Breckenridge, both Arandell cases, Newpage,
and J.P. Morgan cases were transferred to the MDL case. CMS Energy was dismissed from the Learjet,
Heartland, and J.P. Morgan cases in 2009, but other CMS Energy defendants remain parties. All
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CMS Energy defendants were dismissed from the Breckenridge case in 2009. It is expected that the
plaintiffs in this case will appeal this decision after all claims against defendants have been
dismissed. At this time, there is no pending appeal. In June 2010, CMS Energy and Cantera Gas
Company were dismissed from the Newpage case; the Arandell (Wisconsin) case was reinstated against
CMS ERM; and the Arandell (Wisconsin) case was consolidated with the Newpage case. These two
consolidated cases remain pending only against CMS ERM. Pending before the court in all of the MDL
cases are the defendants renewed motions for summary judgment based on FERC preemption. In all
but the J.P. Morgan case, there are also pending plaintiffs motions for class certification.
These motions are not yet decided. In October 2010, the MDL court entered an order denying the
plaintiffs motion for leave to amend their complaint to add a federal Sherman Antitrust Act claim.
These cases involve complex facts, a large number of similarly situated defendants with different
factual positions, and multiple jurisdictions. Presently, any estimate of liability would be
highly speculative; the amount of CMS Energys possible loss would be based on widely varying
models previously untested in this context. Defenses are being pursued vigorously, which could
result in the dismissal of the cases completely, but CMS Energy is unable to predict the outcome of
these matters. If the outcome is unfavorable, these cases could have a material adverse impact on
CMS Energys liquidity, financial condition, and results of operations.
Bay Harbor: As part of the development of Bay Harbor by certain subsidiaries of CMS Energy, and
under an agreement with the MDEQ, third parties constructed a golf course and park over several
abandoned CKD piles left over from the former cement plant operations on the Bay Harbor site. The
third parties also undertook a series of response activities, including constructing a leachate
collection system in one area where CKD-impacted groundwater was entering Little Traverse Bay.
Leachate is produced when water enters into the CKD piles. In 2002, CMS Energy sold its interest
in Bay Harbor, but retained its obligations under environmental indemnities entered into at the
start of the project.
In 2005, the EPA, along with CMS Land and CMS Capital, voluntarily executed an Administrative Order
on Consent under Superfund, and the EPA approved a Removal Action Work Plan to address
contamination issues. Collection systems required under the plan have been installed and
effectiveness monitoring of the systems at the shoreline is ongoing. CMS Land, CMS Capital, and
the EPA agreed upon augmentation measures to address areas where pH measurements were not
satisfactory. Several augmentation measures were implemented and completed in 2009, with the
remaining measure completed in 2010.
In December 2010, CMS Energy submitted a revised scope of remedies to the EPA for approval and is
awaiting a response from the EPA regarding its submission. Also in December 2010, the MDEQ issued
an NPDES permit that authorizes CMS Land to discharge treated leachate into Little Traverse Bay.
This permit requires renewal every five years.
Additionally, CMS Land has committed to investigate the potential for a deep injection well on the
Bay Harbor site as an alternative long-term solution to the leachate disposal issue. In 2008, the
MDEQ and the EPA granted permits for CMS Land or its wholly owned subsidiary, Beeland Group LLC, to
construct and operate an off-site deep injection well in Antrim County, Michigan, to dispose of
leachate from Bay Harbor. Certain environmental groups, a local township, and a local county filed
lawsuits appealing the permits. The legal proceeding was stayed in 2009 and can be renewed by
either party at any time.
Various claims have been brought against CMS Land or its affiliates, including CMS Energy, alleging
environmental damage to property, loss of property value, insufficient disclosure of environmental
matters, breach of agreement relating to access, or other matters. In October 2010, CMS Land and
other parties received a demand for payment from the EPA in the amount of $7 million, plus
interest, whereby the EPA is seeking recovery, as allowed under Superfund, of the EPAs response
costs incurred at the Bay Harbor site. CMS Land believes that this is not a valid claim and
intends to dispute it.
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CMS Land and CMS Capital, the MDEQ, the EPA, and other parties continue to negotiate the long-term
remedy for the Bay Harbor site, including:
| the disposal of leachate; |
| the capping and excavation of CKD; |
| the location and design of collection lines and upstream water diversion systems; |
| application of criteria for various substances such as mercury; and |
| other matters that are likely to affect the scope of response activities that CMS Land and CMS Capital may be obligated to undertake. |
CMS Energy has recorded a cumulative charge related to Bay Harbor of $223 million, which includes
accretion expense. At March 31, 2011, CMS Energy had a recorded liability of $94 million for its
remaining obligations. CMS Energy calculated this liability based on discounted projected costs,
using a discount rate of 4.34 percent and an inflation rate of one percent on annual operating and
maintenance costs. CMS Energy based the discount rate on the interest rate for 30-year U.S.
Treasury securities at December 31, 2010. The undiscounted amount of the remaining obligation is
$115 million. CMS Energy expects to pay $23 million during the remainder of 2011, $16 million in
2012, $7 million in 2013, $5 million in 2014, $4 million in 2015, and the remaining amount
thereafter on long-term liquid disposal and operating and maintenance costs.
CMS Energys estimate of response activity costs and the timing of expenditures could change if
there are additional major changes in circumstances or assumptions, including but not limited to:
| inability to complete the present long-term water disposal strategy at a reasonable cost; |
| delays in implementing the present long-term water disposal strategy; |
| requirements to alter the present long-term water disposal strategy upon expiration of the NPDES permit if the MDEQ or EPA identify a more suitable alternative; |
| an increase in the number of contamination areas; |
| different remediation techniques; |
| the nature and extent of contamination; |
| inability to reach agreement with the MDEQ or the EPA over additional response activities; |
| delays in the receipt of requested permits; |
| delays following the receipt of any requested permits due to legal appeals of third parties; |
| additional or new legal or regulatory requirements; or |
| new or different landowner claims. |
Depending on the size of any indemnity obligation or liability under environmental laws, an adverse
outcome of this matter could have a material adverse effect on CMS Energys liquidity and financial
condition and could negatively affect CMS Energys financial results. Although a liability for its
present estimate of remaining response activity costs has been recorded, CMS Energy cannot predict the
ultimate financial impact or outcome of this matter.
Equatorial Guinea Tax Claim: In 2004, CMS Energy received a request for indemnification from the
purchaser of CMS Oil and Gas. The indemnity claim relates to the sale of CMS Energys oil, gas,
and methanol projects in Equatorial Guinea and the claim of the government of Equatorial Guinea
that CMS Energy owes $142 million in taxes in connection with that sale. CMS Energy concluded that
the governments tax claim is without merit and the purchaser of CMS Oil and Gas submitted a
response to the government rejecting the claim. The government of Equatorial Guinea indicated in
2008 that it still intends to pursue its claim. CMS Energy cannot predict the financial impact or
outcome of this matter.
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Consumers Electric Utility Contingencies
Electric Environmental Matters: Consumers operations are subject to environmental laws and
regulations. Generally, Consumers has been able to recover, in customer rates, the costs to
operate its facilities in compliance with these laws and regulations.
Cleanup and Solid Waste: Consumers expects to incur remediation and other response activity costs
at a number of sites under NREPA. Consumers believes that these costs should be recoverable in
rates, but cannot guarantee that outcome. At March 31, 2011, Consumers had a recorded liability of
$1 million, its estimated probable NREPA liability.
Consumers is a potentially responsible party at a number of contaminated sites administered under
the Superfund. Superfund liability is joint and several. In addition to Consumers, many other
creditworthy parties with substantial assets are potentially responsible with respect to the
individual sites. In November 2010, Consumers received official notification from the EPA that
identified Consumers as a potentially responsible party at the Kalamazoo River Superfund site. The
notification claimed that the EPA has reason to believe Consumers disposed of PCBs and arranged for
the disposal and treatment of PCB-containing materials at portions of the site. Consumers
responded to the EPA in December 2010, stating that it has no information showing that it disposed
of PCBs or arranged for disposal or treatment of PCB-containing material at portions of the site
and requesting further information from the EPA before Consumers would commit to perform or finance
cleanup activities at the site.
In April 2011, Consumers received a follow-up letter from the EPA requesting that Consumers, as a potentially responsible
party at the Kalamazoo River Superfund site, agree to participate in a removal action plan along with several other companies.
The letter also indicated that under Sections 106 and 107 of Superfund, Consumers may be liable for reimbursement of the EPAs costs and potential
penalties for noncompliance with any unilateral order that the EPA
may issue requiring performance under the removal action plan. Until further information is received from the EPA, Consumers is
unable to estimate a range of potential liability for cleanup of the river.
Based on its experience, Consumers estimates that its share of the total liability for other known
Superfund sites will be between $2 million and $8 million. Various factors, including the number
of potentially responsible parties involved with each site, affect Consumers share of the total
liability. At March 31, 2011, Consumers had a recorded liability of $2 million, the minimum amount
in the range of its estimated probable Superfund liability.
The timing of payments related to Consumers remediation and other response activities at its
Superfund and NREPA sites is uncertain. Consumers periodically reviews these cost estimates. Any
significant change in the underlying 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 its estimates of NREPA and Superfund liability.
Ludington PCB: In 1998, during routine maintenance activities, Consumers identified PCB as a
component in certain paint, grout, and sealant materials at Ludington. Consumers removed and
replaced part of the PCB material with non-PCB material. Since proposing a plan to take action
with respect to the remaining materials, Consumers has had several communications with the EPA.
Consumers is not able to predict when the EPA will issue a final ruling and cannot predict the
financial impact or outcome of this matter.
Electric Utility Plant Air Permit Issues and Notices of Violation: In 2007, Consumers received an
NOV/FOV from the EPA alleging that fourteen utility boilers exceeded the visible emission limits in
their associated air permits. Consumers has responded formally to the NOV/FOV denying the
allegations. In addition, in 2008, Consumers received an NOV for three of its coal-fueled
facilities alleging, among other things, violations of NSR PSD regulations relating to ten projects
from 1986 to 1998 allegedly subject to NSR review. The EPA has alleged that some utilities have
classified incorrectly major plant modifications as RMRR rather than seeking permits from the EPA
or state regulatory agencies to modify their plants. Consumers responded to the information
requests from the EPA on this subject in the past. Consumers believes that it has properly
interpreted the requirements of RMRR.
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Consumers is engaged in discussions with the EPA on all of these matters. Depending upon the
outcome of these discussions, the EPA could bring legal action against Consumers and/or Consumers
could be required to install additional pollution control equipment at some or all of its
coal-fueled electric generating plants, surrender emission allowances, engage in Supplemental
Environmental Projects, and/or pay fines. Additionally, Consumers would need to assess the
viability of continuing operations at certain plants. The potential costs relating to these
matters could be material and the extent of cost recovery cannot be reasonably estimated. Although
Consumers cannot predict the financial impact or outcome of these matters, Consumers expects that
it would be able to recover some or all of the costs in rates, consistent with the recovery of
other reasonable costs of complying with environmental laws and regulations.
Nuclear Matters: The matters discussed in this section relate to Consumers previously owned
nuclear generating plants.
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 Consumers and other utilities participated, has not been successful in
producing more specific relief for the DOEs failure to accept the spent nuclear fuel.
A number of court decisions support the right of utilities to pursue damage claims in the U.S.
Court of Claims against the DOE for failure to take delivery of spent nuclear fuel. Consumers
filed a complaint in 2002. If Consumers litigation against the DOE is successful, Consumers plans
to use any recoveries as reimbursement for the incurred costs of spent nuclear fuel storage during
Consumers ownership of Palisades and Big Rock. The sale of Palisades and the Big Rock ISFSI did
not transfer the right to any recoveries from the DOE related to costs of spent nuclear fuel
storage incurred during Consumers ownership of Palisades and
Big Rock. Consumers is involved in ongoing discussions with the DOE to settle this lawsuit.
Nuclear Fuel Disposal Cost: Consumers has a recorded liability of $163 million to fund the
disposal of spent nuclear fuel used before 1983. This balance comprises the principal amount of
$44 million collected from customers for spent nuclear fuel disposal fees and $119 million of
interest accrued on those collections. The liability, which is classified in Long-term debt on CMS
Energys and Consumers Consolidated Balance Sheets, is payable to the DOE when it begins to accept
delivery of spent nuclear fuel. In conjunction with the sale of Palisades and the Big Rock ISFSI
in 2007, Consumers retained this obligation and provided a letter of credit to Entergy as security
for this obligation. Consumers is involved in ongoing discussions with the DOE to settle this
liability in conjunction with the settlement of Consumers lawsuit with the DOE. In its November
2010 electric rate order, the MPSC directed Consumers to establish, within six months of the date
of the order, an independent trust fund for the amount payable to the DOE. In December 2010,
Consumers filed a Petition for Rehearing and Clarification, requesting that the MPSC modify its
conclusion that this amount be placed in a trust. In response to Consumers Petition for Rehearing
and Clarification, the MPSC issued an order in March 2011 indicating it did not intend to prejudge
the terms of any potential settlement agreement between Consumers and the DOE. The MPSC granted
Consumers ninety days to finalize a settlement with the
DOE. If a settlement agreement is reached, Consumers will be required to file the agreement with
the MPSC to address how the settlement proceeds will be distributed and to allow interested parties
to comment on the reasonableness and prudence of the agreement. If Consumers enters into a
settlement, Consumers will be permitted to petition the MPSC to relieve it of the obligation to
fund all or any part of the trust. If Consumers does not enter into a
settlement, it will be required to establish the independent trust
fund required by the November 2010 electric rate order.
Consumers Gas Utility Contingencies
Gas Environmental Matters: Consumers expects to incur remediation and other response activity
costs at a number of sites under the NREPA. These sites include 23 former MGP facilities.
Consumers
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operated the facilities on these sites for some part of their operating lives. For some
of these sites, Consumers has no present ownership interest or may own only a portion of the
original site. At March 31, 2011, Consumers estimated its undiscounted remaining remediation and
other response activity costs to be between $31 million and $45 million. Generally, Consumers has
been able to recover most of its costs to date through proceeds from insurance settlements and
customer rates.
At March 31, 2011, Consumers had a recorded liability of $31 million and a regulatory asset of $56
million that included $25 million of deferred MGP expenditures. The timing of payments related to
the remediation and other response activity at Consumers former MGP sites is uncertain. Consumers
expects its remediation and other response activity costs to average $6 million annually over the
next five years. Consumers periodically reviews these cost estimates. Any significant change in
the underlying assumptions, such as an increase in the number of sites, changes in remediation
techniques, or legal and regulatory requirements, could affect Consumers estimates of annual
response activity costs and the MGP liability.
Guarantees
Presented in the following table are CMS Energys guarantees at March 31, 2011:
In Millions | ||||||||||||||||
Issue | Expiration | Maximum | Carrying | |||||||||||||
Guarantee Description | Date | Date | Obligation | Amount | ||||||||||||
Indemnity obligations from asset sales and other agreements |
Various | Various through | $ | 512 | 1 | $ | 21 | |||||||||
June 2022 | ||||||||||||||||
Guarantees and put options2 |
Various | Various through | 36 | 1 | ||||||||||||
December 2011 | ||||||||||||||||
1 | The majority of this amount arises from stock and asset sales agreements under which CMS Energy or a subsidiary of CMS Energy, other than Consumers, indemnified the purchaser for losses resulting from various matters, including claims related to tax disputes, claims related to PPAs, and defects in title to the assets or stock sold to the purchaser by CMS Energy subsidiaries. Except for items described elsewhere in this Note, CMS Energy believes the likelihood of material loss to be remote for the indemnity obligations not recorded as liabilities. | |
2 | At March 31, 2011, the carrying amount of CMS Lands put option agreements with certain Bay Harbor property owners was $1 million. If CMS Land is required to purchase a Bay Harbor property under a put option agreement, it may sell the property to recover the amount paid under the put option agreement. |
At March 31, 2011, the maximum obligation and carrying amounts for Consumers guarantees were less
than $1 million.
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Presented in the following table is additional information regarding CMS Energys guarantees:
Events That Would Require | ||||
Guarantee Description | How Guarantee Arose | Performance | ||
Indemnity obligations from asset
sales and other agreements
|
Stock and asset sales agreements | Findings of misrepresentation, breach of warranties, tax claims, and other specific events or circumstances | ||
Guarantees and put options
|
Normal operating activity | Nonperformance or non-payment by a subsidiary under a related contract |
||
Bay Harbor remediation efforts | Owners exercising put options requiring CMS Land to purchase property | |||
CMS Energy, Consumers, and certain other subsidiaries of CMS Energy also enter into various
agreements containing tax and other indemnity provisions for which they are unable to estimate the
maximum potential obligation. These factors include unspecified exposure under certain agreements.
CMS Energy and Consumers consider the likelihood that they would be required to perform or incur
substantial losses related to these indemnities to be remote.
Other Contingencies
In addition to the matters disclosed in this Note and Note 3, Regulatory Matters, there are
certain other lawsuits and administrative proceedings before various courts and governmental
agencies arising in the ordinary course of business to which CMS Energy, Consumers, and certain
other subsidiaries of CMS Energy are parties. These other lawsuits and proceedings may involve
personal injury, property damage, contracts, environmental matters, federal and state taxes, rates,
licensing, employment, and other matters. Further, CMS Energy and Consumers occasionally
self-report certain regulatory non-compliance matters that may or may not eventually result in
administrative proceedings. CMS Energy and Consumers believe that the outcome of any one of these
proceedings will not have a material adverse effect on their consolidated results of operations,
financial condition, or liquidity.
3: REGULATORY MATTERS
Rate matters are critical to Consumers. Depending upon the specific issues, the outcomes of
rate cases and proceedings could have a material adverse effect on CMS Energys and Consumers
liquidity, financial condition, and results of operations. Consumers cannot predict the outcome of
these proceedings.
Consumers Electric Utility
Electric Rate Case: The MPSC, in its 2010 electric rate case order, authorized Consumers to
increase its rates by $146 million annually, $4 million less than the rate increase
self-implemented by Consumers in July 2010. In February 2011, Consumers filed an application to
reconcile the total revenues collected under its self-implemented rates with those that would have
been collected under the rates authorized by the MPSC. This reconciliation found that no refund to
customers is required.
In its July 2010 order allowing Consumers to self-implement its rate increase, the MPSC expressed
concern about utilities repeatedly self-implementing rate increases over short time periods, and
before the return of previous overcollections of self-implemented rate increases. In August 2010,
the Attorney General filed a claim for appeal with the Michigan Court of Appeals regarding the
MPSCs July 2010 order.
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Power Supply Cost Recovery: The PSCR process is designed to allow Consumers to recover all of
its power supply costs if incurred under reasonable and prudent policies and practices. The MPSC
reviews these costs, policies, and practices in annual plan and reconciliation proceedings.
Consumers adjusts its PSCR billing factor monthly in order to minimize the overrecovery or
underrecovery amount in the annual PSCR reconciliation.
PSCR Plan: In September 2010, Consumers submitted its 2011 PSCR plan to the MPSC. In accordance
with its proposed plan, Consumers self-implemented the 2011 PSCR charge beginning in January 2011.
PSCR Reconciliations: Presented in the following table are the PSCR reconciliation filings pending
with the MPSC:
PSCR Cost of | ||||||||||||
PSCR Year | Date Filed | Net Underrecovery | Power Sold | |||||||||
2009 |
March 2010 | $39 million1 | $1.6 billion | |||||||||
2010 |
March 2011 | $15 million | $1.7 billion | |||||||||
1 | In this reconciliation, intervenors are seeking disallowances ranging from $11 million to $42 million. In March 2011, the administrative law judge recommended that the MPSC allow Consumers to include its 2009 net underrecovery in the 2011 PSCR plan year, with the exception of $2 million of net replacement power costs associated with an outage at Consumers Whiting Plant. |
Electric Revenue Decoupling Mechanism: In March 2011, Consumers filed its first reconciliation of
the electric revenue decoupling mechanism with the MPSC, requesting recovery of $27 million from
customers for the period December 2009 through November 2010. The decoupling mechanism was
authorized by the MPSC in Consumers 2009 electric rate case order, subject to certain conditions,
and extended in the 2010 electric rate case order. It allows Consumers to adjust future electric
rates to compensate for changes in sales volumes resulting from weather fluctuations, energy
efficiency, and conservation. Various parties have filed appeals concerning the electric
decoupling mechanism. At March 31, 2011, Consumers had a $48 million non-current regulatory asset
recorded for electric decoupling, which included the $27 million balance referred to above.
Uncollectible Expense Tracking Mechanism: In March 2011, Consumers filed its reconciliation of the
uncollectible expense tracking mechanism with the MPSC, requesting recovery of $3 million from
customers for November 2009 through November 2010, the entire period of the tracker. The
uncollectible expense tracking mechanism, authorized by the MPSC in its November 2009 electric rate
order, allowed future rates to be adjusted to collect or refund 80 percent of the difference
between the level of electric uncollectible expense included in rates and actual uncollectible
expense. During 2009, various parties filed appeals concerning the uncollectible expense tracking
mechanism. In its November 2010 electric rate order, the MPSC terminated the uncollectible expense
tracking mechanism as of November 2010.
Electric Operation and Maintenance Expenditures Show-Cause Order: In December 2005, the MPSC
authorized Consumers to increase its electric rates. In the same order, the MPSC ordered Consumers
to spend certain amounts on future tree-trimming and line-clearing activities, as well as on the
operation and maintenance of Consumers fossil-fueled power plants. At that time, the MPSC also
ordered Consumers to establish mechanisms to track these expenditures and stated that the rate
increase was subject to refund with interest if the specified amounts were not spent on these
activities.
In October 2009, the MPSC issued a show-cause order alleging that, in 2007, Consumers spent $14
million less on forestry and fossil-fueled plant operation and maintenance activity than the amount
ordered by the MPSC and that Consumers had not refunded this amount to customers. The order
directed Consumers to explain why it should not be found in violation of the MPSCs December 2005
order and
subjected to applicable sanctions, and why the refunds required by that order had not yet occurred.
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Consumers response indicated that the total amount it spent on forestry and fossil-fueled plant
operation and maintenance activity for the years 2006 through 2009 exceeded the total amounts
included in rates for these activities.
In March 2010, the MPSC Staff requested that the MPSC find Consumers in violation of the December
2005 order and that the MPSC order Consumers to refund $27 million for failure to meet annual
spending requirements during 2007 and 2008. Consumers filed a response, stating that it would be
unreasonable and unlawful to order a refund of this amount and that Consumers expenditures were
consistent with the MPSCs orders. In March 2010, the administrative law judges proposal for
decision found Consumers expenditures to be prudent and that Consumers did not violate the
December 2005 order. The administrative law judge recommended that the MPSC find that no violation
of the December 2005 order occurred and that no refunds be made to customers.
Big Rock Decommissioning: The MPSC and FERC regulate the recovery of Consumers costs to
decommission Big Rock. Subsequent to 2000, Consumers stopped funding a Big Rock trust fund because
the collection period for an MPSC-authorized decommissioning surcharge expired. The level of funds
provided by the trust fell short of the amount needed to complete decommissioning and Consumers
provided $44 million of corporate contributions for decommissioning costs.
In an order issued in February 2010, the MPSC concluded that certain revenues collected during a
statutory rate freeze from 2001 through 2003 should have been deposited in a decommissioning trust
fund. The MPSC agreed that Consumers was entitled to recover $44 million of decommissioning costs,
but concluded that Consumers had collected this amount previously through the rates in effect
during the rate freeze. In April 2010, the MPSC ordered Consumers to refund $85 million of revenue
collected in excess of decommissioning costs plus interest. Consumers completed this refund in
January 2011. Consumers filed an appeal with the Michigan Court of Appeals in March 2010 to
dispute the MPSCs conclusion that the collections received during the rate freeze should be
subject to refund.
Consumers paid $30 million to Entergy to assume ownership and responsibility for the Big Rock
ISFSI, and incurred $55 million for nuclear fuel storage costs as a result of the DOEs failure to
accept spent nuclear fuel. Consumers is seeking recovery of these costs from the DOE. At March
31, 2011, Consumers had an $85 million regulatory asset recorded on its Consolidated Balance Sheets
for these costs.
Renewable Energy Plan: In June 2010, Consumers filed with the MPSC its first annual report and
reconciliation for its renewable energy plan, requesting approval of Consumers reconciliation of
renewable energy plan costs for 2009.
In February 2011, Consumers filed an amended renewable energy plan, reducing the surcharge billed
to customers by an annual amount of $55 million. Consumers proposed the amendment as a result of
lower-than-anticipated costs to comply with the renewable energy requirements prescribed by the
2008 Energy Law.
Energy Optimization Plan: In April 2010, Consumers filed with the MPSC its first annual report and
reconciliation for its energy optimization plan, requesting approval of Consumers reconciliation
of energy optimization plan costs for 2009. Consumers also requested approval to collect $6
million from customers as an incentive payment for exceeding savings targets under both its gas and
electric energy optimization plans during 2009. In March 2011, the administrative law judge
recommended that the MPSC approve Consumers reconciliation as filed, with minor exceptions.
For exceeding its 2010 electric and gas savings targets, Consumers will request the MPSCs approval
to collect $8 million, the maximum incentive, in the energy optimization reconciliation to be filed in
April 2011.
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Electric Depreciation: In February 2010, Consumers filed an electric depreciation case related to
its wholly owned electric utility property. As ordered by the MPSC, Consumers prepared a
traditional cost-of-removal study, which supported a $46 million increase in annual depreciation
expense.
Also in February 2010, Consumers filed an electric depreciation case for Ludington, the
pumped-storage plant jointly owned by Consumers and Detroit Edison. This case, filed jointly with
Detroit Edison, requests an increase in annual depreciation expense. Consumers share of this
increase is $9 million annually.
Consumers Gas Utility
Gas Rate Case: In August 2010, Consumers filed an application with the MPSC seeking an annual
increase in revenue of $55 million based on an 11 percent authorized return on equity. The filing
requested recovery for investments made to enhance safety, system reliability, and operational
efficiencies that improve service to customers.
Consumers filed testimony and exhibits with the MPSC in January 2011, supporting a self-implemented
annual gas rate increase of $48 million, subject to refund with interest. In February 2011,
Consumers filed a letter with the MPSC revising the proposed self-implemented increase to $29
million. The MPSC issued an order in February 2011 delaying Consumers self-implementation in
order to give other parties to the proceeding an opportunity to respond to Consumers revised
self-implementation filing.
Parties
have filed briefs supporting their positions. In April 2011, Consumers filed an initial brief supporting an annual gas rate increase of $45
million. Also in April 2011, the MPSC Staff submitted a revised proposed annual revenue increase
of $16 million.
The parties have engaged in discussions in an effort to settle the
issues in this case.
As of April 28, 2011, a settlement was not yet finalized, but
Consumers believes settlement is likely.
Gas Cost Recovery: The GCR process is designed to allow Consumers to recover all of its
purchased natural gas costs if incurred under reasonable and prudent policies and practices. The
MPSC reviews these costs, policies, and practices in annual plan and reconciliation proceedings.
Consumers adjusts its GCR billing factor monthly in order to minimize the overrecovery or
underrecovery amount in the annual GCR reconciliation.
GCR Plan: In December 2010, Consumers submitted its 2011-2012 GCR plan to the MPSC. In accordance
with its proposed plan, Consumers self-implemented the 2011-2012 GCR charge beginning in April
2011.
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GCR Reconciliation: Presented in the following table is the GCR reconciliation filing pending with
the MPSC:
GCR Cost of | ||||||||||||
GCR Year | Date Filed | Net Overrecovery | Gas Sold | |||||||||
2009-2010 |
June 2010 | $1 million | $1.3 billion | |||||||||
4: FINANCINGS
Revolving Credit Facilities: The following secured revolving credit facilities with banks
were available at March 31, 2011:
In Millions | ||||||||||||||||||||
Letters of Credit | ||||||||||||||||||||
Company | Expiration Date | Amount of Facility | Amount Borrowed | Outstanding | Amount Available | |||||||||||||||
CMS Energy1 |
March 31, 2016 | $ | 550 | $ | | $ | 3 | $ | 547 | |||||||||||
Consumers2,3 |
March 31, 2016 | 500 | | 300 | 200 | |||||||||||||||
Consumers3 |
August 9, 2013 | 150 | | | 150 | |||||||||||||||
Consumers4 |
September 21, 2011 | 30 | | 30 | | |||||||||||||||
1 | On March 31, 2011, CMS Energy entered into a $550 million secured revolving credit facility with a consortium of banks. This facility has a five-year term and replaces CMS Energys revolving credit facility that was set to expire in 2012. Obligations under this facility are secured by Consumers common stock. | |
2 | On March 31, 2011, Consumers entered into a $500 million secured revolving credit facility with a consortium of banks. This facility has a five-year term and replaces Consumers revolving credit facility that was set to expire in 2012. | |
3 | Obligations under this facility are secured by FMBs of Consumers. | |
4 | Secured revolving letter of credit facility. |
Short-term Borrowings: Under Consumers revolving accounts receivable sales program, Consumers may
transfer up to $250 million of accounts receivable, subject to certain eligibility requirements.
These transactions are accounted for as short-term secured borrowings. At March 31, 2011, $250
million of accounts receivable were eligible for transfer, and no accounts receivable had been
transferred under the program. During the three months ended March 31, 2011, Consumers had no
borrowings under this program.
Contingently Convertible Securities: Presented in the following table are the significant terms of
CMS Energys contingently convertible securities at March 31, 2011:
Outstanding | Adjusted Conversion | Adjusted Trigger | ||||||||||||||
Security | Maturity | (In Millions) | Price | Price | ||||||||||||
2.875% senior notes |
2024 | $ | 288 | $ | 12.95 | $ | 15.53 | |||||||||
5.50% senior notes |
2029 | 172 | 14.26 | 18.54 | ||||||||||||
During 20 of the last 30 trading days ended March 31, 2011, the adjusted trigger-price
contingencies were met for both series of the contingently convertible senior notes, and as a
result, the senior notes are convertible at the option of the note holders for the three months
ending June 30, 2011.
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Presented in the following table are details about conversions of contingently convertible
securities during the three months ended March 31, 2011:
3.375% contingently | Conversion Value | Cash Paid on | ||||||||||||||||||
convertible senior | Principal Converted | per $1,000 of | Common Stock Issued | Settlement | ||||||||||||||||
notes due 2023 | Conversion Date | (In Millions) | principal | on Settlement | (In Millions) | |||||||||||||||
Voluntary conversion |
January 2011 | $ | 4 | $ | 1,994.21 | 197,472 | $ | 4 | ||||||||||||
Dividend Restrictions: Under provisions of CMS Energys senior notes indenture, at March
31, 2011, payment of common stock dividends by CMS Energy was limited to $1.0 billion.
Under the provisions of its articles of incorporation, at March 31, 2011, Consumers had $453
million of unrestricted retained earnings available to pay common stock dividends to CMS Energy.
Provisions of the Federal Power Act and the Natural Gas Act appear to restrict dividends payable by
Consumers to the amount of Consumers retained earnings. Several decisions from FERC suggest that
under a variety of circumstances common stock dividends from Consumers would not be limited to
amounts in Consumers retained earnings. Any decision by Consumers to pay common stock dividends
in excess of retained earnings would be based on specific facts and circumstances and would result
only after a formal regulatory filing process.
For the three months ended March 31, 2011, CMS Energy received $104 million of common stock
dividends from Consumers.
5: EARNINGS PER SHARE CMS ENERGY
Presented in the following table are CMS Energys basic and diluted EPS computations based on
Income from Continuing Operations:
In Millions, Except Per Share Amounts | ||||||||
Three Months Ended March 31 | 2011 | 2010 | ||||||
Income Available to Common Stockholders |
||||||||
Income from Continuing Operations |
$ | 133 | $ | 89 | ||||
Less Preferred Stock Dividends |
| 3 | ||||||
Income from Continuing Operations Available
to Common Stockholders Basic and Diluted |
$ | 133 | $ | 86 | ||||
Average Common Shares Outstanding |
||||||||
Weighted average shares basic |
250.0 | 228.0 | ||||||
Add dilutive contingently convertible securities |
10.7 | 18.4 | ||||||
Add dilutive non-vested stock awards, options, and warrants |
0.3 | 0.1 | ||||||
Add dilutive convertible debentures |
0.7 | | ||||||
Weighted average shares diluted |
261.7 | 246.5 | ||||||
Income from Continuing Operations per Average
Common Share Available to Common Stockholders |
||||||||
Basic |
$ | 0.53 | $ | 0.38 | ||||
Diluted |
$ | 0.51 | $ | 0.35 | ||||
Contingently Convertible Securities
When CMS Energy has earnings from continuing operations, its contingently convertible
securities dilute EPS to the extent that the conversion value of a security, which is based on the
average market price of CMS Energys common stock, exceeds the principal value of that security.
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Stock Options and Warrants
For the three months ended March 31, 2011, outstanding options to purchase 0.3 million shares
of CMS Energy common stock had no impact on diluted EPS, since the exercise price was greater than
the average market price of CMS Energy common stock. These stock options have the potential to
dilute EPS in the future.
Non-vested Stock Awards
CMS Energys non-vested stock awards are composed of participating and non-participating
securities. The participating securities accrue cash dividends when common stockholders receive
dividends. Since the recipient is not required to return the dividends to CMS Energy if the
recipient forfeits the award, the non-vested stock awards are considered participating securities.
As such, the participating non-vested stock awards were included in the computation of basic EPS.
The non-participating securities accrue stock dividends that vest concurrently with the stock
award. If the recipient forfeits the award, the stock dividends accrued on the non-participating
securities are also forfeited. Accordingly, the non-participating awards and stock dividends were
included in the computation of diluted EPS, but not basic EPS.
Convertible Debentures
For the three months ended March 31, 2010, there was no impact on diluted EPS from CMS
Energys 7.75 percent convertible subordinated debentures. Using the if-converted method, the
debentures would have:
| increased the numerator of diluted EPS by less than $1 million for the three months ended March 31, 2010, from an assumed reduction of interest expense, net of tax; and | ||
| increased the denominator of diluted EPS by 0.7 million shares for the three months ended March 31, 2010. |
CMS Energy can revoke the conversion rights if certain conditions are met.
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6: FINANCIAL INSTRUMENTS
The carrying amounts of CMS Energys and Consumers cash, cash equivalents, current accounts
and notes receivable, short-term investments, and current liabilities approximate their fair values
because of their short-term nature. Presented in the following table are the cost or carrying
amounts and fair values of CMS Energys and Consumers long-term financial instruments:
In Millions | ||||||||||||||||
March 31, 2011 | December 31, 2010 | |||||||||||||||
Cost or Carrying | Cost or Carrying | |||||||||||||||
Amount | Fair Value | Amount | Fair Value | |||||||||||||
CMS Energy, including Consumers |
||||||||||||||||
Securities held to maturity |
$ | 7 | $ | 7 | $ | 5 | $ | 6 | ||||||||
Securities available for sale |
116 | 116 | 90 | 90 | ||||||||||||
Notes receivable1 |
380 | 399 | 386 | 407 | ||||||||||||
Long-term debt2 |
7,177 | 7,936 | 7,174 | 7,861 | ||||||||||||
Consumers |
||||||||||||||||
Securities available for sale |
$ | 83 | $ | 107 | $ | 64 | $ | 90 | ||||||||
Long-term debt3 |
4,516 | 4,895 | 4,525 | 4,891 | ||||||||||||
1 | Includes current portion of notes receivable of $13 million at March 31, 2011 and $11 million at December 31, 2010. | |
2 | Includes current portion of long-term debt of $1,251 million at March 31, 2011 and $726 million at December 31, 2010. | |
3 | Includes current portion of long-term debt of $337 million at March 31, 2011 and $37 million at December 31, 2010. |
Notes receivable consist of EnerBanks fixed-rate installment loans. EnerBank estimates the fair
value of these loans using a discounted cash flows technique that incorporates market interest
rates as well as assumptions about the remaining life of the loans and credit risk. Fair values
for impaired loans are estimated using discounted cash flows or underlying collateral values.
CMS Energy and Consumers estimate the fair value of their long-term debt using quoted prices from
market trades of the debt, if available. In the absence of quoted prices, CMS Energy and Consumers
calculate market yields and prices for the debt using a matrix method that incorporates market data
for similarly rated debt. Depending on the information available, other valuation techniques may
be used that rely on internal assumptions and models. CMS Energy includes the value of the
conversion features in estimating the fair value of its convertible debt, and incorporates, as
appropriate, information on the market prices of CMS Energys common stock.
The effects of third-party credit enhancements are excluded from the fair value measurements of
long-term debt. At March 31, 2011 and December 31, 2010, CMS Energys long-term debt included $103
million principal amount that was supported by third-party credit enhancements. This entire
principal amount was at Consumers.
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Presented in the following table are CMS Energys and Consumers investment securities:
In Millions | ||||||||||||||||||||||||||||||||
March 31, 2011 | December 31, 2010 | |||||||||||||||||||||||||||||||
Cost | Unrealized Gains | Unrealized Losses | Fair Value | Cost | Unrealized Gains | Unrealized Losses | Fair Value | |||||||||||||||||||||||||
CMS Energy, including Consumers | ||||||||||||||||||||||||||||||||
Available for sale: |
||||||||||||||||||||||||||||||||
SERP: |
||||||||||||||||||||||||||||||||
Mutual fund |
$ | 89 | $ | | $ | | $ | 89 | $ | 62 | $ | | $ | | $ | 62 | ||||||||||||||||
State and
municipal bonds |
27 | | | 27 | 28 | | | 28 | ||||||||||||||||||||||||
Held to maturity: |
||||||||||||||||||||||||||||||||
Debt securities |
7 | | | 7 | 5 | 1 | | 6 | ||||||||||||||||||||||||
Consumers |
||||||||||||||||||||||||||||||||
Available for sale: |
||||||||||||||||||||||||||||||||
SERP: |
||||||||||||||||||||||||||||||||
Mutual fund |
$ | 58 | $ | | $ | | $ | 58 | $ | 39 | $ | | $ | | $ | 39 | ||||||||||||||||
State and
municipal bonds |
18 | | | 18 | 17 | | | 17 | ||||||||||||||||||||||||
CMS Energy common
stock |
7 | 24 | | 31 | 8 | 26 | | 34 | ||||||||||||||||||||||||
The mutual fund classified as available for sale is a short-term, fixed-income fund. During
the three months ended March 31, 2011, CMS Energy contributed $27 million to the SERP, which included a
contribution of $20 million by Consumers. The contributions were
used to acquire additional shares in the mutual fund. State and
municipal bonds classified as available for sale consist of investment grade state and municipal
bonds. Debt securities classified as held to maturity consist primarily of mortgage-backed
securities held by EnerBank, as well as state and municipal bonds held by EnerBank.
During each of the three-month periods ended March 31, 2011 and 2010, the proceeds from CMS
Energys sales of investment securities were $1 million, which included proceeds from Consumers
sales of investment securities of less than $1 million. All of the proceeds were related to sales
of state and municipal bonds that were held within the SERP and classified as available for sale.
Gross realized losses on these sales were less than $1 million for CMS Energy and Consumers during
each period.
Presented in the following table are the fair values of the SERP state and municipal bonds by
contractual maturity at March 31, 2011:
In Millions | ||||||||
CMS Energy, | ||||||||
including Consumers | Consumers | |||||||
Due one year or less |
$ | 1 | $ | 1 | ||||
Due after one year through five years |
11 | 7 | ||||||
Due after five years through ten years |
9 | 6 | ||||||
Due after ten years |
6 | 4 | ||||||
Total |
$ | 27 | $ | 18 | ||||
7: DERIVATIVE INSTRUMENTS
In order to limit exposure to certain market risks, primarily changes in commodity prices,
interest rates, and foreign exchange rates, CMS Energy and Consumers may enter into various risk
management contracts, such as forward contracts, futures, options, and swaps. In entering into
these contracts, they follow established policies and procedures under the direction of an
executive oversight committee
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consisting of senior management representatives and a risk committee consisting of business unit
managers. Neither CMS Energy nor Consumers enters into any derivatives for trading purposes.
The contracts used to manage market risks may qualify as derivative instruments. If a contract is
a derivative and does not qualify for the normal purchases and sales exception, the contract is
recorded on the balance sheet at its fair value. Each reporting period, the resulting asset or
liability is adjusted to reflect any change in the fair value of the contract. Since none of CMS
Energys or Consumers derivatives has been designated as an accounting hedge, all changes in fair
value are reported in earnings. For a discussion of how CMS Energy and Consumers determine the
fair value of their derivatives, see Note 1, Fair Value Measurements.
Commodity Price Risk: In order to support ongoing operations, CMS Energy and Consumers enter into
contracts for the future purchase and sale of various commodities, such as electricity, natural
gas, and coal. These forward contracts are generally long-term in nature and result in physical
delivery of the commodity at a contracted price. Most of these contracts are not subject to
derivative accounting because:
| they do not have a notional amount (that is, a number of units specified in a derivative instrument, such as MWh of electricity or bcf of natural gas); | ||
| they qualify for the normal purchases and sales exception; or | ||
| there is not an active market for the commodity. |
CMS Energys and Consumers coal purchase contracts are not derivatives because there is not an
active market for the coal they purchase. If an active market for coal develops in the future,
some of these contracts may qualify as derivatives. For Consumers, which is subject to regulatory
accounting, the resulting fair value gains and losses would be offset by changes in regulatory
assets and liabilities and would not affect net income. No other subsidiaries of CMS Energy enter
into coal purchase contracts.
CMS ERM has not designated its contracts to purchase and sell electricity and natural gas as normal
purchases and sales and, therefore, CMS Energy accounts for those contracts as derivatives. To
manage commodity price risks associated with these forward purchase and sale contracts, CMS ERM
uses various financial instruments, such as futures, options, and swaps. At March 31, 2011, CMS
ERM held the following derivative contracts:
| a forward contract for the physical sale of 642 GWh of electricity through 2015 on behalf of one of CMS Energys non-utility generating plants; | ||
| futures contracts through 2011 as an economic hedge of 24 percent of the generating plants natural gas requirements needed to serve a steam sales contract, for a total of 0.2 bcf of natural gas; | ||
| forward contracts to purchase 3.1 bcf and sell 6.7 bcf of natural gas through 2011 in CMS ERMs role as a marketer of natural gas for third-party producers; and | ||
| an option to sell 458 GWh of electricity, and as an economic hedge, contracts to purchase 0.6 bcf of natural gas through 2011. |
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Presented in the following table are the fair values of CMS Energys and Consumers derivative
instruments:
In Millions | ||||||||||||||||||||||||
Derivative Assets | Derivative Liabilities | |||||||||||||||||||||||
Balance | Fair Value at | Balance | Fair Value at | |||||||||||||||||||||
Sheet | March 31, | December 31, | Sheet | March 31, | December 31, | |||||||||||||||||||
Location | 2011 | 2010 | Location | 2011 | 2010 | |||||||||||||||||||
CMS Energy, including Consumers | ||||||||||||||||||||||||
Derivatives not designated as hedging instruments: | ||||||||||||||||||||||||
Commodity contracts1 |
Other assets | $ | 1 | $ | 1 | Other liabilities2 | $ | 3 | $ | 4 | ||||||||||||||
Consumers | ||||||||||||||||||||||||
Derivatives not designated as hedging instruments: | ||||||||||||||||||||||||
Commodity contracts |
Other assets | $ | | $ | 1 | Other liabilities | $ | | $ | | ||||||||||||||
1 | Assets and liabilities are presented gross and exclude the impact of offsetting derivative assets and liabilities under master netting agreements, which was less than $1 million at March 31, 2011 and December 31, 2010. | |
2 | Liabilities exclude the impact of offsetting cash margin deposits paid by CMS ERM to other parties, which was less than $1 million at March 31, 2011 and December 31, 2010. CMS Energy presents these liabilities net of these impacts on its Consolidated Balance Sheets. |
Presented in the following table is the effect of CMS Energys and Consumers derivative
instruments on their Consolidated Statements of Income:
In Millions | ||||||||||||||||
Location of Gain | Amount of Gain | |||||||||||||||
on Derivatives | on Derivatives | |||||||||||||||
Recognized in Income | Recognized in Income | |||||||||||||||
Three Months Ended March 31 | 2011 | 2010 | ||||||||||||||
CMS Energy, including Consumers | ||||||||||||||||
Derivatives not designated as hedging instruments: | ||||||||||||||||
Commodity contracts |
Operating Revenue | $ | 1 | $ | 5 | |||||||||||
Fuel for electric generation | | 2 | ||||||||||||||
Purchased and interchange power | | 1 | ||||||||||||||
Other income | 1 | | ||||||||||||||
Total CMS Energy |
$ | 2 | $ | 8 | ||||||||||||
Consumers | ||||||||||||||||
Derivatives not designated as hedging instruments: | ||||||||||||||||
Commodity contracts |
Other income | $ | 1 | $ | | |||||||||||
CMS Energys derivative liabilities subject to credit-risk-related contingent features were $1
million at March 31, 2011 and December 31, 2010.
Credit Risk: CMS Energys swaps, options, and forward contracts contain credit risk, which is the
risk that a counterparty will fail to meet its contractual obligations. CMS Energy reduces this
risk through established policies and procedures. CMS Energy assesses credit quality by
considering credit ratings, financial condition, and other available information for
counterparties. A credit limit is established for each counterparty based on the evaluation of its
credit quality. Exposure to potential loss under each contract is monitored and action is taken
when appropriate.
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CMS ERM enters into contracts primarily with companies in the electric and gas industry. This
industry concentration may have a positive or negative impact on CMS Energys exposure to credit
risk based on how similar changes in economic conditions, the weather, or other conditions affect
these counterparties. CMS ERM reduces its credit risk exposure by using industry-standard
agreements that allow for netting positive and negative exposures associated with the same
counterparty. Typically, these agreements also allow each party to demand adequate assurance of
future performance from the other party, when there is reason to do so.
At March 31, 2011, if counterparties within this industry concentration all failed to meet their
contractual obligations, the loss to CMS Energy on contracts accounted for as derivatives would be
less than $1 million.
CMS Energy does not expect a material adverse effect on its Consolidated Balance Sheets and
Consolidated Statements of Income as a result of counterparty nonperformance, given CMS Energys
credit policies, current exposures, and credit reserves.
8: NOTES RECEIVABLE
EnerBank provides unsecured consumer installment loans for financing home improvements. These
loans totaled $380 million, net of an allowance for loan losses of $5 million, at March 31, 2011,
and $385 million, net of an allowance for loan losses of $5 million, at December 31, 2010. At
March 31, 2011, $13 million of EnerBanks loans were classified as current Notes receivable and
$367 million were classified as non-current Notes receivable on CMS Energys Consolidated Balance
Sheets. At December 31, 2010, $10 million of EnerBanks loans were classified as current Notes
receivable and $375 million were classified as non-current Notes receivable on CMS Energys
Consolidated Balance Sheets.
The allowance for loan losses is a valuation allowance to reflect estimated credit losses. The
allowance is increased by the provision for loan losses and decreased by loan charge-offs net of
recoveries. Management estimates the allowance balance required by taking into consideration
historical loan loss experience, the nature and volume of the portfolio, economic conditions, and
other factors. Loans losses are charged against the allowance when the loss is confirmed, but no
later than the point at which a loan becomes 120 days past due.
Presented in the following table are the changes in the allowance for loan losses:
In Millions
Three Months Ended March 31 | 2011 | |||
Allowance for loan losses, at beginning of period |
$ | 5 | ||
Charge-offs |
(1 | ) | ||
Recoveries |
| |||
Provision for loan losses |
1 | |||
Allowance for loan losses, at end of period |
$ | 5 | ||
Loans that are 30 days or more past due are considered delinquent. Presented in the following
table is the delinquency status of EnerBanks consumer loans at March 31, 2011:
In Millions
Past Due | Past Due | Past Due | Total | Total | ||||||
30-59 Days | 60-89 Days | Over 90 Days | Delinquent | Current | Outstanding | |||||
$1 | $1 | $ | $2 | $378 | $380 | |||||
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9: RETIREMENT BENEFITS
CMS Energy and Consumers provide pension, OPEB, and other retirement benefits to employees.
Presented in the following tables are the costs and other changes in plan assets and benefit
obligations incurred in CMS Energys and Consumers retirement benefits plans:
In Millions
Pension | ||||||||
Three Months Ended March 31 | 2011 | 2010 | ||||||
CMS Energy, including Consumers |
||||||||
Net periodic pension cost |
||||||||
Service cost |
$ | 12 | $ | 11 | ||||
Interest expense |
25 | 24 | ||||||
Expected return on plan assets |
(28 | ) | (23 | ) | ||||
Amortization of: |
||||||||
Net loss |
16 | 13 | ||||||
Prior service cost |
1 | 2 | ||||||
Net periodic pension cost |
$ | 26 | $ | 27 | ||||
Regulatory adjustment1 |
| 2 | ||||||
Net periodic pension cost after regulatory adjustment |
$ | 26 | $ | 29 | ||||
Consumers |
||||||||
Net periodic pension cost |
||||||||
Service cost |
$ | 12 | $ | 11 | ||||
Interest expense |
24 | 24 | ||||||
Expected return on plan assets |
(27 | ) | (23 | ) | ||||
Amortization of: |
||||||||
Net loss |
15 | 12 | ||||||
Prior service cost |
1 | 2 | ||||||
Net periodic pension cost |
$ | 25 | $ | 26 | ||||
Regulatory adjustment1 |
| 2 | ||||||
Net periodic pension cost after regulatory adjustment |
$ | 25 | $ | 28 | ||||
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In Millions
OPEB | ||||||||
Three Months Ended March 31 | 2011 | 2010 | ||||||
CMS Energy, including Consumers |
||||||||
Net periodic OPEB cost |
||||||||
Service cost |
$ | 7 | $ | 7 | ||||
Interest expense |
19 | 21 | ||||||
Expected return on plan assets |
(17 | ) | (15 | ) | ||||
Amortization of: |
||||||||
Net loss |
8 | 8 | ||||||
Prior service credit |
(5 | ) | (2 | ) | ||||
Net periodic OPEB cost |
$ | 12 | $ | 19 | ||||
Regulatory adjustment1 |
| 1 | ||||||
Net periodic OPEB cost after regulatory adjustment |
$ | 12 | $ | 20 | ||||
Consumers |
||||||||
Net periodic OPEB cost |
||||||||
Service cost |
$ | 6 | $ | 7 | ||||
Interest expense |
18 | 20 | ||||||
Expected return on plan assets |
(15 | ) | (14 | ) | ||||
Amortization of: |
||||||||
Net loss |
8 | 8 | ||||||
Prior service credit |
(5 | ) | (2 | ) | ||||
Net periodic OPEB cost |
$ | 12 | $ | 19 | ||||
Regulatory adjustment1 |
| 1 | ||||||
Net periodic OPEB cost after regulatory adjustment |
$ | 12 | $ | 20 | ||||
1 | Regulatory adjustments are the differences between amounts included in rates and the periodic benefit cost calculated. These regulatory adjustments were offset by surcharge revenues, which resulted in no impact to net income for the periods presented. |
CMS Energys and Consumers expected long-term rate of return on Pension Plan assets is eight
percent. For the twelve months ended March 31, 2011, the actual return on Pension Plan assets was
13.1 percent, and for the twelve months ended March 31, 2010 the actual return was 31.6 percent.
The expected rate of return is an assumption about long-term asset performance that CMS Energy and
Consumers review annually for reasonableness and appropriateness.
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10: INCOME TAXES
Presented in the following table is the difference between the effective income tax rate from
continuing operations, excluding noncontrolling interests, and the statutory U.S. federal income
tax rate:
In Millions
Three Months Ended March 31 | 2011 | 2010 | ||||||
CMS Energy, including Consumers |
||||||||
U.S. federal income tax rate |
35.0 | % | 35.0 | % | ||||
Increase (decrease) in income taxes from: |
||||||||
State and local income taxes, net of federal benefit |
3.4 | 5.0 | ||||||
Medicare Part D exempt income, net of law change |
(1.2 | ) | 1.0 | |||||
Income tax credit amortization |
(0.6 | ) | (0.7 | ) | ||||
Other, net |
0.1 | 0.4 | ||||||
Effective income tax rate |
36.7 | % | 40.7 | % | ||||
Consumers |
||||||||
U.S. federal income tax rate |
35.0 | % | 35.0 | % | ||||
Increase (decrease) in income taxes from: |
||||||||
State and local income taxes, net of federal benefit |
3.5 | 3.8 | ||||||
Medicare Part D exempt income, net of law change |
(0.9 | ) | (1.1 | ) | ||||
Plant basis differences |
(0.2 | ) | (0.6 | ) | ||||
Income tax credit amortization |
(0.4 | ) | (0.4 | ) | ||||
Other, net |
0.2 | | ||||||
Effective income tax rate |
37.2 | % | 36.7 | % | ||||
For the three months ended March 31, 2010, CMS Energy recognized deferred tax expense of $3
million to reflect the enactment of the Health Care Acts. The law change prospectively repealed
the tax deduction for the portion of the health care costs reimbursed by the Medicare Part D
subsidy for taxable years beginning after December 31, 2012.
11: REPORTABLE SEGMENTS
Reportable segments consist of business units defined by the products and services they offer.
CMS Energy and Consumers evaluate the performance of each segment based on its contribution to net
income available to CMS Energys common stockholders. The reportable segments for CMS Energy and
Consumers are:
CMS Energy:
| electric utility, consisting of regulated activities associated with the generation and distribution of electricity in Michigan; | ||
| gas utility, consisting of regulated activities associated with the transportation, storage, and distribution of natural gas in Michigan; | ||
| enterprises, consisting of various subsidiaries engaging primarily in domestic IPP; and | ||
| other, including EnerBank, corporate interest and other expenses, and discontinued operations. |
Consumers:
| electric utility, consisting of regulated activities associated with the generation and distribution of electricity in Michigan; | ||
| gas utility, consisting of regulated activities associated with the transportation, storage, and distribution of natural gas in Michigan; and | ||
| other, including a consolidated special-purpose entity for the sale of accounts receivable. |
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Presented in the following tables is financial information by reportable segment:
In Millions
Three Months Ended March 31 | 2011 | 2010 | ||||||
Operating Revenue |
||||||||
CMS Energy, including Consumers |
||||||||
Electric utility |
$ | 897 | $ | 838 | ||||
Gas utility |
1,091 | 1,052 | ||||||
Enterprises |
55 | 68 | ||||||
Other |
12 | 9 | ||||||
Total Operating Revenue CMS Energy |
$ | 2,055 | $ | 1,967 | ||||
Consumers |
||||||||
Electric utility |
$ | 897 | $ | 838 | ||||
Gas utility |
1,091 | 1,052 | ||||||
Total Operating Revenue Consumers |
$ | 1,988 | $ | 1,890 | ||||
Net Income Available to Common Stockholders |
||||||||
CMS Energy, including Consumers |
||||||||
Electric utility |
$ | 65 | $ | 41 | ||||
Gas utility |
88 | 66 | ||||||
Enterprises |
3 | 9 | ||||||
Discontinued operations |
2 | (1 | ) | |||||
Other |
(23 | ) | (30 | ) | ||||
Total Net Income Available to Common Stockholders CMS Energy |
$ | 135 | $ | 85 | ||||
Consumers |
||||||||
Electric utility |
$ | 65 | $ | 41 | ||||
Gas utility |
88 | 66 | ||||||
Total Net Income Available to Common Stockholder Consumers |
$ | 153 | $ | 107 | ||||
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In Millions
March 31, 2011 | December 31, 2010 | |||||||
Plant, Property, and Equipment, Gross |
||||||||
CMS Energy, including Consumers |
||||||||
Electric
utility1 |
$ | 10,021 | $ | 9,944 | ||||
Gas utility1 |
4,079 | 4,063 | ||||||
Enterprises |
106 | 102 | ||||||
Other |
36 | 36 | ||||||
Total Plant, Property, and Equipment, Gross CMS Energy |
$ | 14,242 | $ | 14,145 | ||||
Consumers |
||||||||
Electric utility1 |
$ | 10,021 | $ | 9,944 | ||||
Gas utility1 |
4,079 | 4,063 | ||||||
Other |
15 | 15 | ||||||
Total Plant, Property, and Equipment, Gross Consumers |
$ | 14,115 | $ | 14,022 | ||||
Assets |
||||||||
CMS Energy, including Consumers |
||||||||
Electric utility1 |
$ | 9,747 | $ | 9,321 | ||||
Gas utility1 |
4,308 | 4,614 | ||||||
Enterprises |
176 | 191 | ||||||
Other |
1,411 | 1,490 | ||||||
Total Assets CMS Energy |
$ | 15,642 | $ | 15,616 | ||||
Consumers |
||||||||
Electric utility1 |
$ | 9,747 | $ | 9,321 | ||||
Gas utility1 |
4,308 | 4,614 | ||||||
Other |
902 | 904 | ||||||
Total Assets Consumers |
$ | 14,957 | $ | 14,839 | ||||
1 | Amounts include a portion of Consumers other common assets attributable to both the electric and the gas utility businesses. |
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
CMS ENERGY
There have been no material changes to market risk as previously disclosed in Part II, Item 7A.
Quantitative and Qualitative Disclosures About Market Risk, in the 2010 Form 10-K.
CONSUMERS
There have been no material changes to market risk as previously disclosed in Part II, Item 7A.
Quantitative and Qualitative Disclosures About Market Risk, in the 2010 Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
CMS ENERGY
Disclosure Controls and Procedures: CMS Energys 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 Energys 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 Energys
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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
CMS Energy and Consumers are parties to various lawsuits and regulatory matters in the
ordinary course of business. For information regarding material legal proceedings, including
updates to information reported under Item 3 of Part I of the 2010 Form 10-K, see Part I, Item 1,
Note 2, Contingencies and Commitments, and Note 3, Regulatory Matters.
ITEM 1A. RISK FACTORS
There have been no material changes to the Risk Factors as previously disclosed in Part I,
Item 1A. Risk Factors, in the 2010 Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) Unregistered Sales of Equity Securities
On January 6, 2011, CMS Energy issued 197,472 shares of its common stock and paid $4 million in
cash in exchange for $4 million aggregate principal amount of its 3.375 percent Convertible Senior
Notes Due 2023, Series B. These convertible notes were tendered for conversion on December 17,
2010 in accordance with the terms and provisions of the Indenture of CMS Energy dated as of
September 15, 1992, as supplemented by the Sixteenth Supplemental Indenture dated as of December
16, 2004. Such shares of common stock were issued based on the conversion value of $1,994.21 per
$1,000 principal amount of convertible note. The issuance of these shares of common stock was an
exchange of securities with existing shareholders and was exempt from registration pursuant to
Section 3(a)(9) of the Securities Act of 1933, as amended.
(c) Issuer Repurchases of Equity Securities
Presented in the following table are CMS Energys repurchases of equity securities for the three
months ended March 31, 2011:
Total Number of | Maximum Number of | |||||||||||||||
Shares Purchased as | Shares that May Yet Be | |||||||||||||||
Total Number | Average | Part of Publicly | Purchased Under | |||||||||||||
of Shares | Price Paid | Announced Plans or | Publicly Announced | |||||||||||||
Period | Purchased1 | per Share | Programs | Plans or Programs | ||||||||||||
January 1 31, 2011 |
| $ | | | | |||||||||||
February 1 28, 2011 |
| | | | ||||||||||||
March 1 31, 2011 |
355 | 19.12 | | | ||||||||||||
Total |
355 | $ | 19.12 | | | |||||||||||
1 | Common shares were purchased to satisfy CMS Energys minimum statutory income tax withholding obligation for common shares that have vested under the performance incentive stock plan. Shares repurchased have a value based on the market price on the vesting date. |
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. REMOVED AND RESERVED
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
The agreements included as exhibits to this Form 10-Q filing are included solely to provide
information regarding the terms of the agreements and are not intended to provide any other factual
or disclosure information about CMS Energy, Consumers, or other parties to the agreements. The
agreements may contain representations and warranties made by each of the parties to each of the
agreements that were made exclusively for the benefit of the parties involved in each of the
agreements and should not be treated as statements of fact. The representations and warranties
were made as a way to allocate risk if one or more of those statements prove to be incorrect. The
statements were qualified by disclosures to the parties to each of the agreements and may not be
reflected in each of the agreements. The agreements may apply standards of materiality that are
different than standards applied to other investors. Additionally, the statements were made as of
the date of the agreements or as specified in the agreements and have not been updated.
The representations and warranties may not describe the actual state of affairs of the parties to
each agreement. Additional information about CMS Energy and Consumers may be found in this filing,
at www.cmsenergy.com, at www.consumersenergy.com, and through the SECs website at www.sec.gov.
Exhibits | Description | |||
4.1
|
| One Hundred Fourteenth Supplemental Indenture dated as of March 31, 2011 between Consumers Energy Company and The Bank of New York Mellon, Trustee. (Exhibit 4.1 to Form 8-K filed April 6, 2011 and incorporated herein by reference) | ||
10.1
|
| $550 million Revolving Credit Agreement dated as of March 31, 2011 between CMS Energy Corporation, the Banks, as defined therein, and Barclays Bank PLC, as Agent. (Exhibit 10.1 to Form 8-K filed April 6, 2011 and incorporated herein by reference) | ||
10.2
|
| $500 million Revolving Credit Agreement dated as of March 31, 2011 among Consumers Energy Company, the Banks, as defined therein, and JPMorgan Chase Bank, N.A., as Agent. (Exhibit 10.2 to Form 8-K filed April 6, 2011 and incorporated herein by reference) | ||
10.3
|
| Pledge and Security Agreement dated as of March 31, 2011, made by CMS Energy Corporation to Barclays Bank PLC, as Administrative Agent for the Banks, as defined therein. (Exhibit 10.3 to Form 8-K filed April 6, 2011 and incorporated herein by reference) | ||
10.4
|
| CMS Incentive Compensation Plan for CMS Energy and its Subsidiaries, amended and restated effective as of January 1, 2011 | ||
10.5
|
| Defined Contribution Supplemental Executive Retirement Plan effective April 1, 2006 and as amended effective April 1, 2011 | ||
10.6
|
| Supplemental Executive Retirement Plan for Employees of CMS Energy/Consumers Energy Company effective on January 1, 1982 and as amended effective April 1, 2011 | ||
12.1
|
| Statement regarding computation of CMS Energys Ratios of Earnings to Fixed Charges and Combined Fixed Charges and Preferred Dividends | ||
12.2
|
| Statement regarding computation of Consumers Ratios of Earnings to Fixed Charges and Combined Fixed Charges and Preferred Dividends | ||
31.1
|
| CMS Energys certification of the CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
31.2
|
| CMS Energys certification of the CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
31.3
|
| Consumers certification of the CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
31.4
|
| Consumers certification of the CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
32.1
|
| CMS Energys certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||
32.2
|
| Consumers certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||
101.INS1
|
| XBRL Instance Document | ||
101.SCH1
|
| XBRL Taxonomy Extension Schema | ||
101.CAL1
|
| XBRL Taxonomy Extension Calculation Linkbase | ||
101.DEF1
|
| XBRL Taxonomy Extension Definition Linkbase |
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Exhibits | Description | |||
101.LAB1
|
| XBRL Taxonomy Extension Labels Linkbase | ||
101.PRE1
|
| XBRL Taxonomy Extension Presentation Linkbase |
1 | In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 shall be deemed to be furnished and not filed. The financial information contained in the XBRL-related information is unaudited and unreviewed. |
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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: April 28, 2011 | By: | /s/ Thomas J. Webb | ||
Thomas J. Webb | ||||
Executive Vice
President and Chief Financial Officer |
||||
CONSUMERS ENERGY COMPANY (Registrant) |
||||
Dated: April 28, 2011 | By: | /s/ Thomas J. Webb | ||
Thomas J. Webb | ||||
Executive Vice President and Chief Financial Officer |
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CMS
ENERGYS AND CONSUMERS EXHIBIT INDEX
Exhibits | Description | |||
10.4
|
| CMS Incentive Compensation Plan for CMS Energy and its Subsidiaries, amended and restated effective as of January 1, 2011 | ||
10.5
|
| Defined Contribution Supplemental Executive Retirement Plan effective April 1, 2006 and as amended effective April 1, 2011 | ||
10.6
|
| Supplemental Executive Retirement Plan for Employees of CMS Energy/Consumers Energy Company effective on January 1, 1982 and as amended effective April 1, 2011 | ||
12.1
|
| Statement regarding computation of CMS Energys Ratios of Earnings to Fixed Charges and Combined Fixed Charges and Preferred Dividends | ||
12.2
|
| Statement regarding computation of Consumers Ratios of Earnings to Fixed Charges and Combined Fixed Charges and Preferred Dividends | ||
31.1
|
| CMS Energys certification of the CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
31.2
|
| CMS Energys certification of the CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
31.3
|
| Consumers certification of the CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
31.4
|
| Consumers certification of the CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
32.1
|
| CMS Energys certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||
32.2
|
| Consumers certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||
101.INS1
|
| XBRL Instance Document | ||
101.SCH1
|
| XBRL Taxonomy Extension Schema | ||
101.CAL1
|
| XBRL Taxonomy Extension Calculation Linkbase | ||
101.DEF1
|
| XBRL Taxonomy Extension Definition Linkbase | ||
101.LAB1
|
| XBRL Taxonomy Extension Labels Linkbase | ||
101.PRE1
|
| XBRL Taxonomy Extension Presentation Linkbase |
1 | In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 shall be deemed to be furnished and not filed. The financial information contained in the XBRL-related information is unaudited and unreviewed. |