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CONSUMERS ENERGY CO - Quarter Report: 2012 September (Form 10-Q)

Table of Contents

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

T

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

 

 

OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the quarterly period ended September 30, 2012

 

 

 

 

 

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

 

Registrant; State of Incorporation;

 

IRS Employer

File Number

 

Address; and Telephone Number

 

Identification No.

1-9513

 

CMS ENERGY CORPORATION

 

38-2726431 

 

 

(A Michigan Corporation)

 

 

 

 

One Energy Plaza, Jackson, Michigan  49201

 

 

 

 

(517) 788-0550

 

 

 

 

 

 

 

1-5611

 

CONSUMERS ENERGY COMPANY

 

38-0442310 

 

 

(A Michigan Corporation)

 

 

 

 

One Energy Plaza, Jackson, Michigan  49201

 

 

 

 

(517) 788-0550

 

 

Indicate by check mark whether the 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 x     No o   Consumers Energy Company:  Yes x     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 x     No o   Consumers Energy Company:  Yes x     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 x

 

Accelerated filer o

 

Non-Accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

Consumers Energy Company:

Large accelerated filer o

 

Accelerated filer o

 

Non-Accelerated filer x

 

Smaller reporting company o

(Do not check if a smaller reporting company)

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 x   Consumers Energy Company:  Yes o    No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock at October 12, 2012:

CMS Energy Corporation:

CMS Energy Common Stock, $0.01 par value
(including 1,296,406 shares owned by Consumers Energy Company)

 

265,203,743

 

Consumers Energy Company:

 

 

 

Consumers Energy Common Stock, $10 par value, privately held by CMS Energy Corporation

 

84,108,789

 

 



Table of Contents

 

CMS Energy Corporation

Consumers Energy Company

Quarterly Reports on Form 10-Q to the Securities and Exchange Commission for the Period Ended

September 30, 2012

TABLE OF CONTENTS

 

Page

 

 

Glossary

3

Filing Format

8

Forward-Looking Statements and Information

8

 

 

Part I. Financial Information

 

 

 

Item 1. Consolidated Financial Statements (Unaudited)

 

CMS Energy Corporation

32

Consumers Energy Company

40

Notes to the Unaudited Consolidated Financial Statements

47

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

11

Item 3. Quantitative and Qualitative Disclosures about Market Risk

72

Item 4. Controls and Procedures

72

 

 

Part II. Other Information

 

 

 

Item 1. Legal Proceedings

72

Item 1A. Risk Factors

72

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

73

Item 3. Defaults Upon Senior Securities

73

Item 4. Mine Safety Disclosures

73

Item 5. Other Information

73

Item 6. Exhibits

74

Signatures

75

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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 Michigan in 2008

 

 

 

2011 Form 10-K

 

Each of CMS Energy’s and Consumers’ Annual Report on Form 10-K for the year ended December 31, 2011

 

 

 

ABATE

 

Association of Businesses Advocating Tariff Equity

 

 

 

ASU

 

Financial Accounting Standards Board Accounting Standards Update

 

 

 

Bay Harbor

 

A residential/commercial real estate area located near Petoskey, Michigan, in which CMS Energy sold its interest in 2002

 

 

 

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, formerly known as CMS Field Services

 

 

 

Cantera Natural Gas, Inc.

 

Cantera Natural Gas, Inc., a non-affiliated company that purchased CMS Field Services

 

 

 

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, as amended

 

 

 

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

 

 

 

CMS ERM

 

CMS Energy Resource Management Company, formerly CMS MST, a wholly owned subsidiary of CMS Enterprises

 

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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 in 2004

 

 

 

Consumers

 

Consumers Energy Company, a wholly owned subsidiary of CMS Energy

 

 

 

CSAPR

 

The Cross-State Air Pollution Rule

 

 

 

Customer Choice Act

 

Customer Choice and Electricity Reliability Act, a Michigan statute

 

 

 

Detroit Edison

 

The Detroit Edison Company, a non-affiliated company

 

 

 

Dodd-Frank Act

 

Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted in 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

 

 

 

FDIC

 

Federal Deposit Insurance Corporation

 

 

 

FERC

 

The Federal Energy Regulatory Commission

 

 

 

fine particulate matter

 

Particulate matter that is 2.5 microns or less in diameter

 

 

 

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

 

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FTR

 

Financial transmission right

 

 

 

GAAP

 

U.S. Generally Accepted Accounting Principles

 

 

 

GCR

 

Gas cost recovery

 

 

 

ISFSI

 

Independent spent fuel storage installation

 

 

 

kWh

 

Kilowatt-hour, a unit of energy equal to one thousand watt-hours

 

 

 

LIBOR

 

The London Interbank Offered Rate

 

 

 

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

 

 

 

MATS

 

Mercury and Air Toxic Standards, which limit mercury, acid gases, and other toxic pollution from coal-fueled and oil-fueled power plants

 

 

 

MCIT

 

Michigan Corporate Income Tax

 

 

 

MD&A

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

MDEQ

 

Michigan Department of Environmental Quality

 

 

 

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.

 

 

 

mothball

 

To place a generating unit into a state of extended reserve shutdown in which the unit is inactive and unavailable for service for a specified period, during which the unit can be brought back into service after receiving appropriate notification and completing any necessary maintenance or other work; generation owners in MISO must request approval to mothball a unit, and MISO then evaluates the request for reliability impacts

 

 

 

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

 

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NOV

 

Notice of Violation

 

 

 

NPDES

 

National Pollutant Discharge Elimination System, a permit system for regulating point sources of pollution under the Clean Water Act

 

 

 

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

 

The 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

 

 

 

PSCR

 

Power supply cost recovery

 

 

 

PSD

 

Prevention of Significant Deterioration

 

 

 

REC

 

Renewable energy credit established under the 2008 Energy Law

 

 

 

Renewable Operating Permit

 

Michigan’s Title V permitting program under the Clean Air Act

 

 

 

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

 

 

 

Sherman Act

 

Sherman Antitrust Act, enacted in 1890

 

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Smart Energy

 

Consumers’ grid modernization project, which includes the installation of smart meters that transmit and receive data, a two-way communications network, and modifications to Consumers’ existing information technology system to manage the data and enable changes to key business processes

 

 

 

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 non-affiliated company

 

 

 

Trust Preferred Securities

 

Securities representing an undivided beneficial interest in the assets of statutory business trusts, the interests of which have a preference with respect to certain trust distributions over the interests of either CMS Energy or Consumers, as applicable, as owner of the common beneficial interests of the trusts

 

 

 

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 Energy’s 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 Energy’s 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 2011 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 Energy’s 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 Energy’s and Consumers’ actual results to differ materially from the results anticipated in these statements.  These factors include, but are not limited to, the following, all of which are potentially significant:

 

·                  the impact of regulation by the MPSC or FERC and other applicable governmental proceedings and regulations, including any associated impact on electric or gas rates or rate structures;

 

·                  potentially adverse regulatory treatment or failure to receive timely regulatory orders affecting Consumers that are or could come before the MPSC, FERC, or other governmental authorities, including the treatment of Consumers’ pilot gas revenue decoupling mechanism;

 

·                  the adoption of federal or state laws or regulations or changes in applicable laws, rules, regulations, principles, or practices, or in their interpretation, including those related to energy policy and ROA, the environment, regulation, health care reforms, taxes, accounting matters, and other business issues that could have an impact on CMS Energy’s or Consumers’ businesses or financial results, including laws or regulations regarding climate change and air emissions and potential effects of the Dodd-Frank Act and related regulations on CMS Energy, Consumers, or any of their affiliates;

 

·                  potentially adverse regulatory or legal interpretations or decisions regarding environmental matters, or delayed regulatory treatment or permitting decisions that are or could come before the MDEQ and/or EPA, 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;

 

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·                  changes in energy markets, including availability and price of electric capacity and the timing and extent of changes in commodity prices and availability of coal, natural gas, natural gas liquids, electricity, oil, and certain related products;

 

·                  the price of CMS Energy common stock, the credit ratings of CMS Energy and Consumers, capital and financial market conditions, and the effect of these market conditions on CMS Energy’s and Consumers’ interest costs and access to the capital markets, including availability of financing to CMS Energy, Consumers, or any of their affiliates;

 

·                  the investment performance of the assets of CMS Energy’s and Consumers’ pension and benefit plans and the discount rates applicable to the plans’ obligations, and the resulting impact on future funding requirements;

 

·                  the impact of the economy, particularly in Michigan, and potential future volatility in the financial and credit markets on CMS Energy’s, Consumers’, or any of their affiliates’ revenues, ability to collect accounts receivable from customers, or cost and availability of capital;

 

·                  changes in the economic and financial viability of CMS Energy’s 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;

 

·                  national, regional, and local economic, competitive, and regulatory policies, conditions, and developments;

 

·                  loss of customer demand for electric generation supply to alternative energy suppliers;

 

·                  federal regulation of electric sales and transmission of electricity, including periodic re-examination by federal regulators of CMS Energy’s and Consumers’ market-based sales authorizations in wholesale power markets without price restrictions;

 

·                  the impact of credit markets, economic conditions, and any new banking regulations on EnerBank;

 

·                  the availability, cost, coverage, and terms of insurance, the stability of insurance providers, and the ability of Consumers to recover the costs of any insurance from customers;

 

·                  the effectiveness of CMS Energy’s and Consumers’ risk management policies, procedures, and strategies, including strategies to hedge risk related to future prices of electricity, natural gas, and other energy-related commodities;

 

·                  factors affecting development of generation projects and distribution infrastructure replacement and expansion projects, including those related to project site identification, construction material pricing, availability of qualified construction personnel, permitting, and government approvals;

 

·                  factors affecting operations, such as costs and availability of personnel, equipment, and materials, unusual weather conditions, catastrophic weather-related damage, scheduled or unscheduled equipment outages, maintenance or repairs, environmental incidents, and electric transmission and distribution or gas pipeline system constraints;

 

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·                  potential disruption to, interruption of, or other impacts on facilities, utility infrastructure, or operations due to accidents, explosions, physical disasters, war, or terrorism, and the ability to obtain or maintain insurance coverage for these events;

 

·                  changes or disruption in fuel supply, including but not limited to rail or vessel transport of coal and pipeline transport of natural gas;

 

·                  potential costs, lost revenues, or other consequences resulting from misappropriation of assets or sensitive information, corruption of data, or operational disruption in connection with a cyber attack or other cyber incident;

 

·                  technological developments in energy production, storage, delivery, usage, and metering, including Smart Energy and the success of its implementation;

 

·                  the impact of CMS Energy’s and Consumers’ integrated business software system and its operation on their activities, including utility customer billing and collections;

 

·                  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;

 

·                  restrictions imposed by various financing arrangements and regulatory requirements on the ability of Consumers and other subsidiaries of CMS Energy to transfer funds to CMS Energy in the form of cash dividends, loans, or advances;

 

·                  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, including 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 matters that may be disclosed from time to time in CMS Energy’s and Consumers’ SEC filings, or in other publicly issued documents.

 

For additional details regarding these and other uncertainties, see Part I – Item 1. Consolidated Financial Statements (Unaudited) – Notes to the Unaudited Consolidated Financial Statements – Note 3: Contingencies and Commitments and Note 4: Regulatory Matters; Part I – Item 2. MD&A – Outlook; and Part II – Item 1A. Risk Factors.

 

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CMS Energy Corporation

Consumers Energy Company

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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 independent power producer.  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 Energy’s and Consumers’ securities’ credit ratings.

 

CMS Energy’s business strategy has emphasized the key elements depicted below:

 

GRAPHIC

 

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SAFE, EXCELLENT OPERATIONS

 

The safety of employees, customers, and the general public remains 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.  From 2007 to 2011, Consumers achieved a 73 percent reduction in the annual number of recordable safety incidents.

 

CUSTOMER VALUE

 

Consumers is undertaking a number of initiatives that reflect its intensified customer focus.  Consumers’ planned investments in reliability are aimed at improving safety, reducing customer outage frequency, reducing repetitive outages, and increasing customer satisfaction.  Also, in order to minimize increases in customer rates, Consumers has undertaken several initiatives to reduce costs through a voluntary separation plan, accelerated pension funding, health-care cost sharing, negotiated labor agreements, information system efficiencies, and productivity improvement programs.  Consumers considers these and other aspects of its customer value initiative to be important to its success.

 

UTILITY INVESTMENT

 

Consumers expects to make capital investments of $6.5 billion from 2013 through 2017.  Consumers has limited its capital investment program to those investments it believes are needed to provide safe, reliable, and efficient service to its customers.  Consumers’ capital investment program is expected to result in annual rate base growth of five to seven percent while allowing Consumers to maintain sustainable customer base rate increases (excluding PSCR and GCR charges) at or below the rate of inflation.

 

Among the key components of Consumers’ investment program are projects that will enhance customer value.  Consumers’ planned distribution investments of $1.7 billion comprise $0.9 billion of electric utility projects to improve reliability and increase capacity and $0.8 billion of gas utility projects to increase capacity and deliverability and enhance pipeline integrity.  Consumers also expects to spend $1.2 billion on environmental investments needed to comply with state and federal laws and regulations.  An additional $1.3 billion of planned reliability investments at Consumers are aimed at reducing outages and improving customer satisfaction; these investments comprise $0.9 billion at the electric utility to strengthen circuits and substations, replace poles, and upgrade the Ludington pumped-storage plant, and $0.4 billion at the gas utility to replace mains and enhance transmission and storage systems.

 

Renewable energy projects are another major component of Consumers’ planned capital investments.  Consumers expects to spend $0.4 billion on renewable energy investments, under an MPSC-approved renewable energy plan, from 2013 through 2017.  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.

 

Consumers’ Smart Energy program, with an estimated total project capital cost of $0.8 billion, also represents a major capital investment.  The full-scale deployment of advanced metering infrastructure began in August 2012 and is planned to continue through 2019.  Consumers will have spent $0.2 billion through 2012 on its Smart Energy program, and expects to spend an additional $0.3 billion, following a phased approach, from 2013 through 2017.

 

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REGULATION

 

Regulatory matters are a key aspect of CMS Energy’s and Consumers’ businesses, particularly Consumers’ rate cases and regulatory proceedings before the MPSC.  Important regulatory events and developments are summarized below.

 

·                  Electric Rate Case:  In June 2012, the MPSC authorized an annual rate increase of $118 million, based on a 10.3 percent authorized return on equity.  Consumers filed an application in September 2012 to reconcile the total revenues collected under rates self-implemented in December 2011 to those that would have been collected under final rates.  This reconciliation requests that the MPSC find that no refund is required.

 

Consumers filed a new general electric rate case with the MPSC in September 2012, seeking an annual rate increase of $148 million, based on a 10.5 percent authorized return on equity.  The filing requested authority to recover new investment in system reliability, environmental compliance, and technology enhancements.  Costs associated with these investments represent 85 percent of the total annual rate increase requested.  The filing also seeks approval of several rate adjustment mechanisms, including a mechanism that would reconcile annually Consumers’ actual nonfuel revenues with the revenues approved by the MPSC, and a mechanism that would allow recovery in 2014 of an additional $83 million associated with incremental 2014 investments, subject to reconciliation.

 

·                  Gas Rate Case:  In June 2012, the MPSC authorized an annual rate increase of $16 million, based on a 10.3 percent authorized return on equity.  In September 2012, Consumers filed an application to reconcile the total revenues under rates self-implemented in March 2012 to those that would have been collected under the final rates.  As a result of the reconciliation, which found that a refund was required, Consumers had a $2 million regulatory liability recorded at September 30, 2012.

 

·                  Revenue Decoupling Mechanisms:  In April 2012, the Michigan Court of Appeals ruled in an appeal filed by ABATE that disputed the MPSC’s decision to authorize an electric revenue decoupling mechanism for Detroit Edison.  The Court concluded that the MPSC lacks statutory authority to approve or direct the use of a revenue decoupling mechanism for electric providers.  As a result, Consumers determined that it no longer met the accounting criteria for recognition of a regulatory asset under an alternative revenue program and, at March 31, 2012, wrote off its $59 million electric revenue decoupling mechanism regulatory asset covering the period December 2009 through November 2011.  In August 2012, the MPSC dismissed Consumers’ reconciliation of the electric revenue decoupling mechanism for the period December 2009 through November 2010.  Consumers’ second reconciliation remains pending with the MPSC. Consumers expects the MPSC to dismiss this reconciliation.

 

In September 2011, Consumers filed its first reconciliation of the gas revenue decoupling mechanism, requesting recovery of $16 million from customers for the period June 2010 through May 2011.  This mechanism, which was extended through April 2012 and was not affected by the Court of Appeals decision on electric decoupling, allowed Consumers to adjust future gas rates to compensate for changes in sales volumes resulting from the difference between the level of average sales per customer adopted in the order and actual average weather-adjusted sales per customer, subject to certain conditions.  Certain parties have filed in opposition to the reconciliation.

 

Consumers filed its final reconciliation of the gas revenue decoupling mechanism in August 2012, requesting recovery of $17 million from customers for the period June 2011 through April 2012.  At September 30, 2012, Consumers had a $33 million regulatory asset recorded for gas revenue decoupling.

 

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·                  DOE Settlement:  In 2011, Consumers entered into an agreement with the DOE to settle for $120 million its claims related to the DOE’s failure to accept spent nuclear fuel and filed an application with the MPSC regarding the allocation of the $120 million settlement amount.

 

The 2008 Energy Law limits alternative electric supply to ten percent of Consumers’ weather-adjusted retail sales of the preceding calendar year.  At September 30, 2012, Consumers’ electric deliveries under the ROA program were at the ten percent limit.  In March 2012, a bill was introduced to the Michigan Senate and House of Representatives that, upon enactment, would revise the 2008 Energy Law and allow customers then on the ROA program waiting list to switch their service to an alternative electric supplier.  Presently, the proportion of Consumers’ electric deliveries under the ROA program and on the ROA waiting list is 24 percent.  The revision also proposes an increase in the cap of six percentage points per year from 2013 through 2015.  As a counterpoint to this proposal, another bill was introduced to the Michigan Senate and House of Representatives in June 2012 that, if enacted, would likely phase out electric choice and return the state’s electric industry to full regulation.  Consumers is unable to predict the outcome of these two legislative proposals.

 

A proposal to raise Michigan’s renewable energy requirement will be included on the November 2012 statewide ballot.  The proposal, if passed, would amend the Michigan Constitution to require Michigan utilities to obtain at least 25 percent of their electric energy from clean renewable energy sources such as wind, solar, biomass, and hydropower by 2025.  The proposed amendment would also limit to not more than one percent per year electric utility rate increases charged to customers only to achieve compliance with the renewable energy standard, and would allow annual extensions of the deadline to the 25 percent standard in order to prevent rate increases over the one percent limit.

 

Environmental regulation is another area of importance for CMS Energy and Consumers, and they are monitoring numerous legislative and regulatory initiatives, including initiatives to regulate greenhouse gases, and related litigation.

 

In July 2011, the EPA finalized CSAPR, which was intended to replace CAIR.  In December 2011, due to litigation surrounding CSAPR, the U.S. Court of Appeals for the D.C. Circuit issued a stay of CSAPR, stating that CAIR would remain in place while the court considers the issues.  In August 2012, the Court voided CSAPR and held that CAIR would remain in place until the EPA promulgated a new rule.  In October 2012, the EPA sought a rehearing of this ruling.

 

Additionally, in February 2012, the EPA published its final MACT emission standards for electric generating units, based on Section 112 of the Clean Air Act, calling the final rule MATS.  Although numerous parties, including the State of Michigan, have sought to extend the deadline of MATS, it is expected to take effect in 2015.  CMS Energy and Consumers are continuing to assess the impact and cost associated with these rules and developments.

 

FINANCIAL PERFORMANCE IN 2012 AND BEYOND

 

For the nine months ended September 30, 2012, CMS Energy’s net income available to common stockholders was $315 million, and diluted EPS were $1.17.  This compares with net income available to common stockholders of $374 million and diluted EPS of $1.43 for the nine months ended September 30, 2011.  The main factors contributing to the decline in earnings in 2012 were the write-off of Consumers’ electric revenue decoupling mechanism regulatory asset, as discussed above, and the absence of a tax benefit recognized in 2011 related to the enactment of the MCIT.

 

A more detailed discussion of the factors affecting CMS Energy’s and Consumers’ performance can be found in the Results of Operations section that follows this Executive Overview.

 

CMS Energy and Consumers believe that economic conditions in Michigan are improving.  Although Michigan’s economy continues to be affected by the recession and its impact on the state’s automotive industry and by high unemployment rates, there are indications that the recession has eased in Michigan.

 

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Consumers expects its electric sales to increase by about one percent annually through 2017, driven largely by the continued rise in industrial production.  Consumers is projecting that its gas sales will remain stable through 2017.  This outlook reflects growth in gas demand offset by energy efficiency and conservation.

 

As Consumers seeks to continue to receive 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 goals to achieve further 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, 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 ENERGY CONSOLIDATED RESULTS OF OPERATIONS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In Millions, Except Per Share Amounts

 

 

Three Months Ended

 

Nine Months Ended

 

September 30

 

2012

 

2011

 

Change

 

2012

 

2011

 

Change

Net Income Available to

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stockholders

 

$   148

 

$   139

 

$         9

 

$   315

 

$   374

 

$     (59

)

Basic Earnings Per Share

 

$  0.56

 

$  0.55

 

$    0.01

 

$  1.21

 

$  1.49

 

$  (0.28

)

Diluted Earnings Per Share

 

$  0.55

 

$  0.53

 

$    0.02

 

$  1.17

 

$  1.43

 

$  (0.26

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In Millions

 

 

Three Months Ended

 

Nine Months Ended

 

September 30

 

2012

 

2011

 

Change

 

2012

 

2011

 

Change

Electric utility

 

$   165

 

$   159

 

$    6

 

$  297

 

$  309

 

$  (12

)

Gas utility

 

(3

)

(5

)

2

 

61

 

88

 

(27

)

Enterprises

 

5

 

4

 

1

 

9

 

36

 

(27

)

Corporate interest and other

 

(19

)

(19

)

-

 

(59

)

(61

)

2

 

Discontinued operations

 

-

 

-

 

-

 

7

 

2

 

5

 

Net Income Available to

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stockholders

 

$   148

 

$   139

 

$    9

 

$  315

 

$  374

 

$  (59

)

 

Presented in the following table are specific after-tax changes to net income available to common stockholders for 2012 versus 2011:

 

 

 

In Millions

 

 

September 30, 2012 better/(worse) than 2011

 

Reasons for the change

 

Three Months Ended

 

Nine Months Ended

 

Gas sales

 

$    -

 

 

 

$  (49)

 

 

 

Electric sales

 

7

 

 

 

13

 

 

 

Electric and gas rate orders

 

21

 

 

 

72

 

 

 

Electric and gas decoupling

 

2

 

 

 

(12)

 

 

 

Recovery of development costs related to canceled

 

 

 

 

 

 

 

 

 

coal-fueled plant

 

-

 

 

 

9

 

 

 

Higher depreciation and property tax

 

(12)

 

 

 

(21)

 

 

 

Other

 

(10)

 

$   8

 

(7)

 

$    5

 

 

 

 

 

 

 

 

 

 

 

Subsidiary earnings of enterprises segment

 

 

 

(2)

 

 

 

-

 

Lower corporate fixed charges, higher EnerBank earnings,

 

 

 

 

 

 

 

 

 

and other

 

 

 

-

 

 

 

5

 

Charge to write off electric decoupling regulatory asset

 

 

 

-

 

 

 

(36

)

Absence of tax benefit related to MCIT enactment in 2011

 

 

 

-

 

 

 

(32

)

Other

 

 

 

3

 

 

 

(1

)

Total change

 

 

 

$   9

 

 

 

$  (59

)

 

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CONSUMERS ELECTRIC UTILITY RESULTS OF OPERATIONS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In Millions

September 30

 

2012

 

2011

 

Change

Net Income Available to Common Stockholders

 

 

 

 

 

 

 

Three months ended

 

$  165

 

$    159

 

$   6

 

Nine months ended

 

297

 

309

 

(12

)

 

 

 

In Millions

 

 

September 30, 2012 better/(worse) than 2011

 

Reasons for the change

 

Three Months Ended

 

Nine Months Ended

Electric deliveries and rate increases

 

$   52

 

$    40

 

Power supply costs and related revenue

 

-

 

2

 

Other income, net of expenses

 

(8

)

(10

)

Maintenance and other operating expenses

 

(1

)

3

 

Depreciation and amortization

 

(17

)

(30

)

General taxes

 

(9

)

(7

)

Interest charges

 

5

 

9

 

Income taxes

 

(16

)

(19

)

Total change

 

$   6

 

$  (12

)

Electric deliveries and rate increases:  For the three months ended September 30, 2012, electric delivery revenues increased $52 million compared with 2011.  This variance was due to additional revenues of $30 million resulting from the June 2012 rate order, $13 million from increased surcharge revenues, and a $9 million increase in other revenues.  Deliveries to end-use customers were 10.5 billion kWh in 2012 and 10.4 billion kWh in 2011.

For the nine months ended September 30, 2012, electric delivery revenues increased $40 million compared with 2011.  This variance was due to additional revenues of $81 million resulting from the June 2012 rate order and from Consumers’ self-implemented rate increase in December 2011, $12 million from higher deliveries in 2012, and a $33 million increase in surcharge revenues.  These increases were offset partially by a $59 million charge to write off Consumers’ electric decoupling mechanism regulatory asset, and the absence, in 2012, of $27 million of electric decoupling revenues recognized in 2011.  Deliveries to end-use customers were 29.1 billion kWh in 2012, an increase of 0.4 billion kWh, or 1.4 percent, compared with 2011.

Other income, net of expenses:  For the three months ended September 30, 2012, other income decreased $8 million compared with 2011, and for the nine months ended September 30, 2012, other income decreased $10 million compared with 2011.  These decreases were due primarily to contributions related to a 2012 Michigan ballot proposal.

Maintenance and other operating expenses:  For the nine months ended September 30, 2012, maintenance and other operating expenses decreased $3 million compared with 2011.  This decrease reflected the authorized recovery of $14 million associated with Consumers’ canceled coal-fueled plant, a $9 million reduction in service restoration costs, and a $2 million decrease in other operating expenses.  These decreases were offset partially by $8 million of voluntary separation program expenses and $14 million related to higher energy optimization program costs.

Depreciation and amortization:  For the three months ended September 30, 2012, depreciation and amortization expense increased $17 million compared with 2011, and for the nine months ended September 30, 2012, depreciation and amortization expense increased $30 million compared with 2011.  These variances were due primarily to increased plant in service and an increase in depreciation expense authorized in a June 2012 rate order.

 

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General Taxes:  For the three months ended September 30, 2012, general taxes increased $9 million compared with 2011, and for the nine months ended September 30, 2012, general taxes increased $7 million compared with 2011.  These increases were due primarily to the absence, in 2012, of a favorable Michigan single business tax audit.

Interest Charges:  For the three months ended September 30, 2012, interest charges decreased $5 million compared with 2011, and for the nine months ended September 30, 2012, interest charges decreased $9 million compared with 2011.  These decreases were due primarily to lower average debt levels and lower average interest rates in 2012.

Income taxes:  For the three months ended September 30, 2012, income taxes increased $16 million compared with 2011.  This increase was due primarily to higher electric utility earnings and a change from the Michigan Business Tax to the MCIT in January 2012.

For the nine months ended September 30, 2012, income taxes increased $19 million compared with 2011.  This increase was due primarily to higher electric utility earnings, a change from the Michigan Business Tax to the MCIT in January 2012, and the absence, in 2012, of a benefit related to the Medicare Part D Subsidy.

CONSUMERS GAS UTILITY RESULTS OF OPERATIONS

 

 

 

 

 

 

 

 

 

 

 

 

 

In Millions

September 30

 

2012

 

2011

 

Change

Net Income (Loss) Available to Common Stockholders

 

 

 

 

 

 

 

Three months ended

 

$    (3

)

$    (5

)

$     2

 

Nine months ended

 

61

 

88

 

(27

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In Millions

 

 

September 30, 2012 better/(worse) than 2011

 

Reasons for the change

 

Three Months Ended

 

Nine Months Ended

Gas deliveries and rate increases

 

$   6

 

 

 

$  (26

)

Other income, net of expenses

 

(1

)

 

 

(2

)

Maintenance and other operating expenses

 

2

 

 

 

(6

)

Depreciation and amortization

 

-

 

 

 

(5

)

General taxes

 

(4

)

 

 

(5

)

Interest charges

 

3

 

 

 

6

 

Income taxes

 

(4

)

 

 

11

 

Total change

 

$   2

 

 

 

$  (27

)

Gas deliveries and rate increases:  For the three months ended September 30, 2012, gas delivery revenues increased $6 million compared with 2011, due primarily to an increase in energy optimization surcharge revenues in 2012.  Gas deliveries, including transportation to end-use customers, were 25 bcf in 2012 and 2011.

For the nine months ended September 30, 2012, gas delivery revenues decreased $26 million compared with 2011.  This decrease reflected a $71 million reduction resulting from lower customer deliveries, due primarily to milder weather in early 2012.  The decrease was offset partially by $19 million of additional revenues from March 2012 and May 2011 rate increases, an $11 million increase in surcharge revenues, and a $15 million increase related to lower system losses.  Gas deliveries, including transportation to end-use customers, were 172 bcf in 2012, a decrease of 33 bcf, or 16 percent, compared with 2011.

Maintenance and other operating expenses:  For the nine months ended September 30, 2012, maintenance and other operating expenses increased $6 million compared with 2011.  This increase was

 

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due to $11 million of higher energy optimization program costs and $4 million of voluntary separation program expenses, offset partially by $9 million of lower gas distribution operating expenses.

Depreciation and amortization:  For the nine months ended September 30, 2012, depreciation and amortization expense increased $5 million compared with 2011, due to increased plant in service.

General Taxes:  For the three months ended September 30, 2012, general taxes increased $4 million compared with 2011, and for the nine months ended September 30, 2012, general taxes increased $5 million compared with 2011.  These increases were due primarily to the absence, in 2012, of a favorable Michigan single business tax audit.

Interest Charges:  For the three months ended September 30, 2012, interest charges decreased $3 million compared with 2011, and for the nine months ended September 30, 2012, interest charges decreased $6 million compared with 2011.  These decreases were due primarily to lower average debt levels and lower average interest rates in 2012.

Income taxes:  For the three months ended September 30, 2012, income taxes increased $4 million compared with 2011, due primarily to higher gas utility earnings.

For the nine months ended September 30, 2012, income taxes decreased $11 million compared with 2011, due primarily to lower gas utility earnings.

ENTERPRISES RESULTS OF OPERATIONS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In Millions

September 30

 

2012

 

2011

 

Change

Net Income Available to Common Stockholders

 

 

 

 

 

 

 

Three months ended

 

$    5

 

$    4

 

$     1

 

Nine months ended

 

9

 

36

 

(27

)

For the three months ended September 30, 2012, net income of the enterprises segment increased $1 million compared with 2011, due primarily to an insurance settlement.

For the nine months ended September 30, 2012, net income of the enterprises segment decreased $27 million compared with 2011.  This change was due primarily to the absence, in 2012, of a $28 million income tax benefit resulting from the enactment of the MCIT in May 2011.

CORPORATE INTEREST AND OTHER RESULTS OF OPERATIONS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In Millions

September 30

 

2012

 

2011

 

Change

Net Loss Available to Common Stockholders

 

 

 

 

 

 

 

Three months ended

 

$  (19

)

$  (19

)

$    -

 

Nine months ended

 

(59

)

(61

)

2

 

For the nine months ended September 30, 2012, corporate interest and other net expenses decreased $2 million compared with 2011, due primarily to higher net earnings at EnerBank.

DISCONTINUED OPERATIONS

For the nine months ended September 30, 2012, income from discontinued operations was $7 million, reflecting the elimination of a liability associated with a prior asset sale, compared with income from

 

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discontinued operations of $2 million in 2011, which was due to a favorable legal settlement related to a previously sold business.

CASH POSITION, INVESTING, AND FINANCING

At September 30, 2012, CMS Energy had $159 million of consolidated cash and cash equivalents, which included $31 million of restricted cash and cash equivalents.  Consumers had $87 million of consolidated cash and cash equivalents, which included $30 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 nine months ended September 30, 2012 and 2011:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In Millions

Nine Months Ended September 30

 

2012

 

2011

 

Change

CMS Energy, including Consumers

 

 

 

 

 

 

 

Net income

 

$     317

 

$     376

 

$    (59

)

Non-cash transactions1

 

825

 

742

 

83

 

 

 

1,142

 

1,118

 

24

 

Postretirement benefits contributions

 

(54

)

(56

)

2

 

Decrease in core working capital2

 

-

 

199

 

(199

)

Other changes in assets and liabilities, net

 

(154

)

(66

)

(88

)

Net cash provided by operating activities

 

$     934

 

$  1,195

 

$  (261

)

Consumers

 

 

 

 

 

 

 

Net income

 

$     361

 

$     400

 

$    (39

)

Non-cash transactions1

 

712

 

655

 

57

 

 

 

1,073

 

1,055

 

18

 

Postretirement benefits contributions

 

(51

)

(53

)

2

 

Decrease in core working capital2

 

13

 

201

 

(188

)

Other changes in assets and liabilities, net

 

(10

)

42

 

(52

)

Net cash provided by operating activities

 

$  1,025

 

$  1,245

 

$  (220

)

 

1

Non-cash transactions comprise depreciation and amortization, changes in deferred income taxes, postretirement benefits expense, and other non-cash items.

 

 

2

Core working capital comprises accounts receivable and accrued revenues, inventories, and accounts payable.

For the nine months ended September 30, 2012, net cash provided by operating activities at CMS Energy decreased $261 million compared with 2011, and net cash provided by operating activities at Consumers decreased $220 million compared with 2011.  The decreases were due primarily to lower gas sales and a smaller reduction in core working capital.

INVESTING ACTIVITIES

Presented in the following table are specific components of net cash used in investing activities for the nine months ended September 30, 2012 and 2011:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In Millions

Nine Months Ended September 30

 

2012

 

2011

 

Change

CMS Energy, including Consumers

 

 

 

 

 

 

 

Capital expenditures

 

$  (861

)

$  (624

)

$  (237

)

Costs to retire property and other

 

(77

)

(128

)

51

 

Net cash used in investing activities

 

$  (938

)

$  (752

)

$  (186

)

Consumers

 

 

 

 

 

 

 

Capital expenditures

 

$  (857

)

$  (618

)

$  (239

)

Costs to retire property and other

 

(43

)

(65

)

22

 

Net cash used in investing activities

 

$  (900

)

$  (683

)

$  (217

)

 

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For the nine months ended September 30, 2012, net cash used in investing activities at CMS Energy increased $186 million compared with 2011, and net cash used in investing activities at Consumers increased $217 million compared with 2011.  The increases were due primarily to increases in capital expenditures.

FINANCING ACTIVITIES

Presented in the following table are specific components of net cash used in financing activities for the nine months ended September 30, 2012 and 2011:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In Millions

Nine Months Ended September 30

 

2012

 

2011

 

Change

CMS Energy, including Consumers

 

 

 

 

 

 

 

Issuance of FMBs, senior notes, and other debt

 

$   1,325

 

$     433

 

$  892

 

Retirement of debt and other debt maturity payments

 

(1,166

)

(343

)

(823

)

Common stock issued

 

27

 

26

 

1

 

Payments of common stock dividends

 

(188

)

(159

)

(29

)

Other financing activities

 

(27

)

(26

)

(1

)

Net cash used in financing activities

 

$       (29

)

$    (69

)

$    40

 

Consumers

 

 

 

 

 

 

 

Issuance of FMBs

 

$      725

 

$        -

 

$  725

 

Retirement of debt and other debt maturity payments

 

(703

)

(70

)

(633

)

Payments of common stock dividends

 

(302

)

(292

)

(10

)

Stockholder contribution from CMS Energy

 

150

 

125

 

25

 

Other financing activities

 

(23

)

(23

)

-

 

Net cash used in financing activities

 

$     (153

)

$  (260

)

$  107

 

For the nine months ended September 30, 2012, net cash used in financing activities at CMS Energy decreased $40 million compared with 2011, and net cash used in financing activities at Consumers decreased $107 million compared with 2011.  These decreases were due primarily to an increase in net debt issuances.

RETIREMENT BENEFITS

Presented in the following table are the most recent estimates of CMS Energy’s and Consumers’ pension cost, OPEB cost, and cash contributions through 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In Millions

 

 

Pension Cost

 

OPEB Cost

 

Pension
Contribution

 

OPEB
Contribution

CMS Energy, including Consumers

 

 

 

 

 

 

 

 

 

2012

 

$  103

 

$  74

 

$       -

 

$  65

 

2013

 

122

 

76

 

-

 

74

 

2014

 

118

 

92

 

104

 

76

 

Consumers

 

 

 

 

 

 

 

 

 

2012

 

$  100

 

$  75

 

$       -

 

$  64

 

2013

 

119

 

78

 

-

 

73

 

2014

 

115

 

94

 

101

 

75

 

 

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Contribution estimates comprise amounts required for pension and discretionary contributions for OPEB.  Consumers’ pension and OPEB costs are recoverable through its general ratemaking process.  Actual future costs and contributions will depend on future investment performance, changes in discount rates, and various other factors related to the Pension Plan and OPEB participants.

For additional details on retirement benefits, see Note 10: Retirement Benefits.

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 Energy’s subsidiaries, including Consumers, to pay dividends to CMS Energy depends upon each subsidiary’s revenues, earnings, cash needs, and other factors.  In addition, Consumers’ ability to pay dividends is restricted by certain terms included in its debt covenants and articles of incorporation, and potentially by provisions under the Federal Power Act and the Natural Gas Act and FERC requirements.  For additional details on Consumers’ dividend restrictions, see Note 5: Financings and Capitalization – Dividend Restrictions.  For the nine months ended September 30, 2012, Consumers paid $302 million in common stock dividends to CMS Energy.

In June 2011, CMS Energy entered into a continuous equity offering program under which CMS Energy may sell, from time to time in “at the market” offerings, common stock having an aggregate sales price of up to $50 million.  In June 2012 and June 2011, CMS Energy issued common stock under this program and received net proceeds of $15 million in each period.

Consumers uses cash flows generated from operations and external financing transactions, as well as stockholder contributions from CMS Energy, to fund capital expenditures, retire debt, pay dividends, contribute to its employee benefit plans, and fund its other obligations.

CMS Energy’s 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 had the following secured revolving credit facilities available at September 30, 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In Millions

 

 

Amount of
Facility

 

Amount
Borrowed

 

Letters of Credit
Outstanding

 

Amount
Available

 

Expiration Date

CMS Energy

 

 

 

 

 

 

 

 

 

 

 

Revolving credit facility1

 

$  550

 

$     -

 

$     2

 

$  548

 

March 2016

 

Consumers

 

 

 

 

 

 

 

 

 

 

 

Revolving credit facility2

 

$  500

 

$     -

 

$     2

 

$  498

 

March 2016

 

Revolving credit facility2

 

 150

 

-

 

-

 

150

 

April 2017

 

Revolving credit facility2

 

 30

 

-

 

30

 

-

 

September 2014

 

 

1

Obligations under this facility are secured by Consumers common stock.

 

 

2

Obligations under this facility are secured by FMBs of Consumers.

 

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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 September 30, 2012, $250 million of accounts receivable were eligible for transfer under this program.

Certain of CMS Energy’s and Consumers’ credit agreements and debt indentures contain covenants that require CMS Energy and Consumers to maintain certain financial ratios, as defined therein.  At September 30, 2012, no events of default had occurred with respect to any financial covenants contained in CMS Energy’s and Consumers’ credit agreements or debt indentures.  CMS Energy and Consumers were each in compliance with these limits as of September 30, 2012, as presented in the following table:

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2012

 

Credit Agreement, Indenture, or Facility

 

Description

 

 

Limit

 

Actual

 

CMS Energy

 

 

 

 

 

 

 

 

$550 million revolving credit agreement and

 

 

 

 

 

 

 

 

$180 million term loan credit agreement

 

Debt to EBITDA

 

< 

6.0 to 1.0

 

4.8 to 1.0

 

Senior notes indenture

 

Interest Coverage

 

1.6 to 1.0

 

4.0 to 1.0

 

$180 million term loan credit agreement

 

Interest Coverage

 

2.0 to 1.0

 

4.0 to 1.0

 

Consumers

 

 

 

 

 

 

 

 

$500 million, $150 million, and $30 million revolving credit

 

 

 

 

 

 

 

 

agreements, $375 million term loan credit agreement, and

 

 

 

 

 

 

 

 

$35 million and $68 million reimbursement agreements

 

Debt to Capital

 

< 

0.65 to 1.0

 

0.48 to 1.0

 

$250 million accounts receivable purchase agreement

 

Debt to Capital

 

< 

0.70 to 1.0

 

0.48 to 1.0

 

Components of CMS Energy’s 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 the remainder of 2012 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; the maximum obligation under indemnities for which such amounts were estimable was $512 million at September 30, 2012.  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 3: Contingencies and Commitments – Guarantees.

OUTLOOK

Several business trends and uncertainties may affect CMS Energy’s and Consumers’ financial condition and results of operations.  These trends and uncertainties could have a material impact on CMS Energy’s and Consumers’ consolidated income, cash flows, or financial position.  For additional details regarding these and other uncertainties, see Forward-Looking Statements and Information; Note 3: Contingencies and Commitments; and Part II – Item 1A. Risk Factors.

 

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CONSUMERS ELECTRIC UTILITY BUSINESS OUTLOOK AND UNCERTAINTIES

Balanced Energy Initiative:  Consumers continues to experience increasing demand for electricity due to Michigan’s recovering economy and increased use of air conditioning, consumer electronics, and other electric devices.  In July 2012, customers set a new all-time peak demand record of 9,006 MW.

In December 2011, Consumers formally canceled its plans to build an 830-MW coal-fueled plant at its Karn/Weadock generating complex.  This decision reflects present and anticipated market conditions, new environmental standards, and Consumers’ expectations of the generation sources that will provide the best energy value to customers.  Consumers also plans to mothball seven of its smaller coal-fueled units in 2015.  Consumers will continue to evaluate its options for the plants, which include:

·                  installing more environmental equipment on the units to reduce emissions further in order to meet new environmental standards and continue to operate the units;

·                  seeking an extension of compliance deadlines for new environmental standards;

·                  converting the units to natural gas instead of coal;

·                  decommissioning the units; and

·                  a combination of these options, depending on customer needs and market conditions.

With the potential closure of these plants, Consumers could experience a shortfall in generation capacity of up to 1,500 MW as early as 2015.  In order to address future capacity requirements and growing electric demand in Michigan, Consumers developed a balanced energy initiative, a comprehensive energy resource plan designed to meet the short-term and long-term electricity needs of its customers through:

·                  energy efficiency;

·                  demand management;

·                  expanded use of renewable energy;

·                  development of new power plants;

·                  power or generating asset purchases to complement existing generating sources; and

·                  continued operation or upgrade of existing 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.  Under its renewable energy plan, Consumers expects to meet its renewable energy requirement each year with a combination of newly generated RECs and previously generated RECs carried over from prior years.

The 2008 Energy 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.  To meet its renewable capacity requirements, Consumers expects to add more than 500 MW of owned or contracted renewable capacity by 2015.  Through September 2012, Consumers has contracted for the purchase of 299 MW of nameplate capacity from renewable energy suppliers, which represents 60 percent of the 2015 renewable capacity requirement.

In November 2011, Consumers began construction of Lake Winds® Energy Park, a 100-MW wind park in Mason County, Michigan.  Consumers expects the wind park to be operational in late 2012.  Consumers will continue development of Cross Winds® Energy Park, its 150-MW wind park in Tuscola County, Michigan, scheduled for operation by late 2015, as well as seek other opportunities for wind generation development in support of the renewable capacity standards.  Consumers expects to meet its 2015 renewable capacity requirement with a combination of owned and contracted renewable capacity.

 

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A proposal to raise Michigan’s renewable energy requirement will be included on the November 2012 statewide ballot.  The proposal, if passed, would amend the Michigan Constitution to require Michigan utilities to obtain at least 25 percent of their electric energy from clean renewable energy sources such as wind, solar, biomass, and hydropower by 2025.  The proposed amendment would also limit to not more than one percent per year electric utility rate increases charged to customers only to achieve compliance with the renewable energy standard, and would allow annual extensions of the deadline to the 25 percent standard in order to prevent rate increases over the one percent limit.

Energy Optimization Plan:  The 2008 Energy Law requires Consumers to achieve energy savings equivalent to annual sales reduction targets through at least 2015.  The targets are incremental with the goal of achieving a six percent reduction in customers’ electricity use and a four percent reduction in customers’ natural gas use by December 31, 2015.  Under its energy optimization plan, Consumers provides its customers with incentives to reduce usage by offering energy audits, rebates and discounts on purchases of highly efficient appliances, and other incentives and programs.  In September 2012, the MPSC authorized Consumers to collect $15 million from customers as an incentive payment for exceeding statutory savings targets under both its gas and electric energy optimization plans during 2011.  Consumers estimates that, through its gas and electric energy optimization programs, its customers realized $115 million in energy savings during 2011.

Electric Customer Deliveries and Revenue:  Consumers’ electric customer deliveries are largely dependent on Michigan’s economy, which has suffered from economic and financial instability in the automotive and real estate sectors.  Consumers believes economic conditions in Michigan are improving, and expects weather-adjusted electric deliveries to increase in 2012 by one percent compared with 2011.

Consumers expects average electric delivery growth of about one 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, expansion, or contraction of manufacturing facilities, population trends, and housing activity.

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 September 30, 2012, electric deliveries under the ROA program were at the ten percent limit and alternative electric suppliers were providing 784 MW of generation service to ROA customers.  Based on 2011 weather-adjusted retail sales, Consumers expects 2012 electric deliveries under the ROA program to be at a similar level to 2011.

In March 2012, a bill was introduced to the Michigan Senate and House of Representatives that, upon enactment, would revise the 2008 Energy Law and allow customers then on the ROA program waiting list to switch their service to an alternative electric supplier.  Presently, the proportion of Consumers’ electric deliveries under the ROA program and on the ROA waiting list is 24 percent.  The revision also proposes an increase in the cap of six percentage points per year from 2013 through 2015.  As a counterpoint to this proposal, another bill was introduced to the Michigan Senate and House of Representatives in June 2012 that would likely phase out electric choice and return the state’s electric industry to full regulation.  Consumers is unable to predict the outcome of these two legislative proposals.

Electric Transmission:  In July 2011, FERC issued an order in a rulemaking proceeding concerning regional electric transmission planning and cost allocations.  In August 2011, Consumers and several other electric utilities filed a joint petition seeking clarification/rehearing of FERC’s July order and opposing the allocation methodology.  In May 2012, FERC issued an order denying the utilities’

 

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clarification/rehearing requests on this order.  Following this denial, Consumers and several other electric utilities filed a petition for review of FERC’s order with the U.S. Court of Appeals.

In a related matter, in 2010, MISO filed and FERC approved a tariff revision proposing a cost allocation methodology for a new category of transmission projects.  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 MISO’s tariff without receiving comparable benefits from these projects.  In December 2011, Consumers, along with the Michigan Attorney General, ABATE, Detroit Edison, the Michigan Municipal Electric Association, and the Michigan Public Power Agency, filed a petition for review of FERC’s order with the U.S. Court of Appeals for the Seventh Circuit following FERC’s denial of their request for rehearing opposing the allocation methodology in the MISO tariff revision.  Regardless of the outcome of this appeal, 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.  See Note 4: Regulatory Matters for details on the following electric rate matters:

·                  electric rate case;

·                  Big Rock decommissioning;

·                  electric revenue decoupling mechanism;

·                  renewable energy plan; and

·                  energy optimization plan.

Pending Electric Rate Case:  In September 2012, Consumers filed an application with the MPSC seeking an annual rate increase of $148 million, based on a 10.5 percent authorized return on equity.  The filing requested authority to recover new investment in system reliability, environmental compliance, and technology enhancements.  Costs associated with these investments represent 85 percent of the total annual rate increase requested.  The filing also seeks approval of several rate adjustment mechanisms, including a mechanism that would reconcile annually Consumers’ actual nonfuel revenues with the revenues approved by the MPSC, and a mechanism that would allow recovery in 2014 of an additional $83 million associated with incremental 2014 investments, subject to reconciliation.

Electric Environmental Estimates:  Consumers’ operations are subject to various state and federal environmental laws and regulations.  Consumers estimates that it will incur expenditures of $1.5 billion from 2012 through 2018 to continue to comply with the Clean Air Act, Clean Water Act, and numerous state and federal environmental 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:

Air Quality:  In July 2011, the EPA released CSAPR, a final replacement rule for CAIR, which requires Michigan and 27 other states to improve air quality by reducing power plant emissions that, according to EPA computer models, contribute to ground-level ozone and fine particle pollution in other downwind states.  This rule had mandated emission reductions beginning in 2012, which CMS Energy and Consumers were prepared to meet through fuel blend changes.  In December 2011, due to litigation surrounding CSAPR, the U.S. Court of Appeals for the D.C. Circuit issued a stay of CSAPR, stating that CAIR would remain in place while the court considers the issues.  In August 2012, the Court voided CSAPR and held that CAIR would remain in place until the EPA promulgated a new rule.  In October 2012, the EPA sought a rehearing of this ruling.

In February 2012, the EPA published its final MACT emission standards for electric generating units, based on Section 112 of the Clean Air Act, calling the final rule MATS.  Under MATS, all of Consumers’ existing coal-fueled electric generating units are required to add additional controls for hazardous air

 

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pollutants.  Generally, existing units must meet the standards within three to four years of issuance of the final rule.

Presently, Consumers’ strategy to comply with CAIR, CSAPR or its replacement rule, and MATS involves the installation of emission control equipment at some facilities and the suspension of operations at others; however, Consumers continues to evaluate these rules in conjunction with other EPA rulemakings, litigation, and congressional action.  This evaluation could result in:

·                  changes in environmental compliance costs related to Consumers’ coal-fueled power plants;

·                  a change in the fuel mix at coal-fueled and oil-fueled power plants;

·                  changes in how certain plants are used; and

·                  the retirement, mothballing, or repowering with an alternative fuel of some of Consumers’ generating units.

The MDEQ renewed and issued the B.C. Cobb Renewable Operating Permit in August 2011 after an extensive review and a public comment period.  In October 2011, the Sierra Club and the Natural Resources Defense Council filed a petition with the EPA to object to the MDEQ’s issuance of the state Renewable Operating Permit, alleging that the facility is not in compliance with certain provisions of the Clean Air Act, including NSR and Title V.  Consumers responded to these allegations in December 2011.  The EPA could either deny the petition outright or grant the petition and remand the matter to the MDEQ for further action.  Consumers believes these claims are baseless, but is unable to predict the outcome of this petition.

Fine Particulate Matter:  In June 2012, the EPA proposed revisions that would raise the air quality standard for fine particulate matter.  The revisions are designed to protect human health as well as regulate visibility in urban areas.  The final standard is due to be finalized by December 2012.  While Consumers expects that short-term impacts of the proposed changes would be limited, the longer-term impacts could include further pressure in Michigan for reductions in fine particulate matter.

Greenhouse Gases:  In the recent past, there have been numerous legislative and regulatory initiatives at the state, regional, and national levels that involve the regulation of greenhouse gases.  Consumers continues to monitor and comment on these initiatives and also follows litigation involving greenhouse gases.  Consumers believes Congress may eventually pass greenhouse gas legislation, but is unable to predict the form and timing of any final legislation.

In 2010, the EPA released its Prevention of Significant Deterioration and Title V Greenhouse Gas Tailoring Rule, which sets greenhouse gas emissions limits that define when permits are required for new and existing industrial facilities under NSR PSD and Title V Renewable Operating Permit programs.  Numerous parties challenged this rule in the U.S. Court of Appeals for the D.C. Circuit.  In June 2012, the U.S. Court of Appeals for the D.C. Circuit upheld the Tailoring Rule and dismissed challenges to it and to three other greenhouse gas rules.  Some parties have sought a rehearing, which is pending.  Consumers does not expect to incur significant expenditures to comply with this rule.

In March 2012, the EPA released its proposed “Standards of Performance for Greenhouse Gas Emissions for New Stationary Sources:  Electric Utility Generating Units” pursuant to Section 111 of the Clean Air Act.  This proposed rule applies only to new fossil-fuel-fired steam electric generating units.  The standard would require that carbon dioxide emissions not exceed those of a modern, efficient natural gas combined-cycle plant, regardless of fuel type.  Consumers submitted comments on the proposed rule in June 2012.  The EPA is also expected to propose emissions guidelines within the next year for states to regulate greenhouse gas emissions from existing generating units under Section 111(d) of the Clean Air Act.  Under the expected schedule, states will be required to submit plans to the EPA within nine months of issuance of the final rule and guidelines.  Consumers will continue to monitor activity regarding any proposed regulations involving new source performance standards.

 

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Litigation, as well as federal laws, EPA regulations regarding greenhouse gases, or similar treaties, state laws, or rules, if enacted or ratified, could require Consumers to replace equipment, install additional emission control equipment, 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.

CCBs:  In June 2010, the EPA proposed rules regulating CCBs, such as coal ash, under the Resource Conservation and Recovery Act.  A final rule may be issued in late 2012, but the EPA may first publish additional information for public comment, which could delay the rule well into 2013.  Michigan already regulates CCBs as low-hazard industrial waste.  The EPA proposed a range of alternatives for regulating CCBs, including regulation as either a nonhazardous waste or a hazardous waste.  If coal ash were regulated as a hazardous waste, Consumers would likely cease the beneficial reuse of this product, which would result in a significant increase in the amount of coal ash requiring costly disposal.  Additionally, if the cost of upgrading existing coal ash disposal areas to meet hazardous waste landfill standards were to become economically prohibitive, existing coal ash disposal areas could close, requiring Consumers to find costly alternative arrangements for disposal.  Consumers is unable to predict the impacts from this wide range of possible outcomes, but significant expenditures are likely.

Water:  In March 2011, the EPA issued a proposed rule to regulate existing electric generating plant cooling water intake systems under Section 316(b) of the Clean Water Act aimed at reducing alleged harmful impacts on fish and shellfish.  Consumers continues to evaluate this proposed rule and its potential impacts on Consumers’ plants.  A final rule is expected in mid-2013.  Consumers also expects the EPA to propose new regulations in 2013 for wastewater discharges from electric generating plants that will require physical and/or chemical treatment facilities for all wastewater.  A final rule is expected in 2014.

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.  To comply with this proposed rule, Consumers could incur substantial costs associated with existing electrical equipment potentially containing PCBs.  A proposal is expected in late 2012.

Other electric environmental matters could have a major impact on Consumers’ outlook.  For additional details on other electric environmental matters, see Note 3: Contingencies and Commitments – Consumers Electric Utility Contingencies – Electric Environmental Matters.

CONSUMERS GAS UTILITY BUSINESS OUTLOOK AND UNCERTAINTIES

Gas Deliveries:  Consumers expects weather-adjusted gas deliveries in 2012 to decline by one percent compared with 2011.  Over the next five years, Consumers expects average gas deliveries to remain stable.  This outlook reflects modest growth in gas demand offset by the predicted effects of energy efficiency and conservation.  Actual delivery levels from year to year may vary from this trend due to:

·                  fluctuations in weather;

·                  use by independent power producers;

·                  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 impacts.

 

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Gas Transportation:  In July 2012, Trunkline filed a proposal with FERC to cease transporting natural gas through one of its two main transmission pipelines serving Michigan.  More than 60 percent of the natural gas supplied to Consumers’ gas customers is delivered by Trunkline’s two main transmission pipelines.  In August 2012, Consumers filed a motion with FERC to protest against the proposed abandonment on the grounds that it would negatively impact customers and that it could hamper the development of natural gas-fueled electric generation in Michigan.  The Governor, the MPSC, and various other parties have also filed protests with FERC.  If Trunkline’s proposal is granted, the abandonment could result in higher gas prices and reduced availability for Michigan gas customers.

Gas Rate Matters:  Rate matters are critical to Consumers’ gas utility business.  For details on Consumers’ gas rate case and gas revenue decoupling mechanism, see Note 4: Regulatory Matters.

Gas Depreciation:  In August 2012, the MPSC approved a settlement agreement in Consumers’ gas depreciation case.  The depreciation rates, which will become effective in January 2013, will result in a $5 million decrease in annual gas depreciation expense for Consumers.

Gas Pipeline Safety:  In January 2012, President Obama signed the Pipeline Safety, Regulatory Certainty, and Job Creation Act of 2011.  The law reauthorizes existing federal pipeline safety programs of the Pipeline and Hazardous Materials Safety Administration through 2015 and it contains provisions mandating:

·                  an increase in the maximum fine for safety violations to $2 million;

·                  an increase in the number of pipeline inspectors;

·                  a study regarding application of integrity management requirements outside of “high consequence areas;”

·                  a survey regarding existing plans for safe management and replacement of cast iron pipelines;

·                  prescribed notification and on-site incident response times;

·                  installation of automatic or remotely controlled shut-off valves on new or replaced pipelines where feasible;

·                  historical design and construction documentation to verify maximum allowable operating pressures; and

·                  establishment of new regulations for testing (pressure tests or equivalent methods) of previously untested pipelines in high-consequence areas.

Consumers continues to comply with laws and regulations governing natural gas pipeline safety.  These laws and regulations could cause Consumers to 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 3: Contingencies and Commitments – Consumers Gas Utility Contingencies – Gas Environmental Matters.

CONSUMERS OTHER OUTLOOK AND UNCERTAINTIES

Smart Energy:  Consumers’ grid modernization effort continues.  In August 2012, Consumers began installing smart meters in Muskegon County.  One of the functions of smart meters is to allow customers to monitor and manage their energy usage, which should help reduce demand during critical peak times, resulting in lower peak capacity requirements.  The installation of smart meters should also provide for both operational and customer benefits.  Consumers expects to have 53,000 residential and small business customers in Muskegon County upgraded to smart meters by the end of 2012 and to install 200,000 smart meters throughout western Michigan in each of the years 2013 and 2014.  By mid-2013, Consumers should be able to begin reading meters remotely; further functionality will be added in 2013 and 2014.

 

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Consumers also plans to install communication modules on gas meters in areas where Consumers provides both electricity and natural gas to customers.

ENTERPRISES OUTLOOK AND UNCERTAINTIES

The primary focus with respect to CMS Energy’s 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 Energy’s consolidated income, cash flows, or financial position include:

·                  indemnity and environmental remediation obligations at Bay Harbor;

·                  obligations related to a tax claim from the government of Equatorial Guinea;

·                  the outcome of certain legal proceedings;

·                  impacts of declines in electricity prices on the profitability of the enterprises segment’s 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, or practices, or in their interpretation; and

·                  economic conditions in Michigan, including population trends and housing activity.

For additional details regarding the enterprises segment’s uncertainties, see Note 3: Contingencies and Commitments.

OTHER OUTLOOK AND UNCERTAINTIES

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 two percent of CMS Energy’s net assets at September 30, 2012, and four percent of CMS Energy’s net income available to common stockholders for the nine months ended September 30, 2012.  The carrying value of EnerBank’s loan portfolio was $513 million at September 30, 2012.  Its loan portfolio was funded primarily by deposit liabilities of $488 million.  Twelve-month rolling average default rates on loans held by EnerBank have declined from 1.0 percent at September 30, 2011 to 0.8 percent at September 30, 2012.  CMS Energy is required both by law and by contract to provide financial support, including infusing additional capital, to ensure that EnerBank satisfies mandated capital requirements and has sufficient liquidity to operate.  Presently, EnerBank meets or exceeds all of its capital requirements.

Voluntary Separation Program:  In April 2012, CMS Energy announced a voluntary separation program for its salaried employees.  The separation date for the majority of employees who participated in the program was July 1, 2012.  Management approved 232 employees for early separation and CMS Energy recorded a charge of $12 million related to this program during the three months ended June 30, 2012.

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 3: Contingencies and Commitments and Note 4: Regulatory Matters.

 

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NEW ACCOUNTING STANDARDS

 

For details regarding the implementation of new accounting standards during the nine months ended September 30, 2012, see Note 1: New Accounting Standards.

 

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CMS Energy Corporation

Consolidated Statements of Income

(Unaudited)

 

 

 

 

 

 

 

In Millions

 

 

Three Months Ended

 

Nine Months Ended

 

September 30

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Operating Revenue

 

$  1,507

 

$  1,464

 

$  4,583

 

$  4,883

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

 

Fuel for electric generation

 

190

 

199

 

446

 

504

 

Purchased and interchange power

 

386

 

365

 

1,037

 

968

 

Purchased power – related parties

 

23

 

23

 

65

 

64

 

Cost of gas sold

 

80

 

107

 

763

 

1,095

 

Maintenance and other operating expenses

 

295

 

301

 

872

 

868

 

Depreciation and amortization

 

138

 

120

 

440

 

404

 

General taxes

 

53

 

33

 

170

 

151

 

Gain on asset sales, net

 

(1

)

-

 

(1

)

-

 

Total operating expenses

 

1,164

 

1,148

 

3,792

 

4,054

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

343

 

316

 

791

 

829

 

 

 

 

 

 

 

 

 

 

 

Other Income (Expense)

 

 

 

 

 

 

 

 

 

Interest income

 

1

 

4

 

3

 

8

 

Allowance for equity funds used during construction

 

2

 

1

 

6

 

4

 

Income from equity method investees

 

5

 

4

 

13

 

10

 

Other income

 

3

 

3

 

9

 

12

 

Other expense

 

(11

)

(3

)

(16

)

(8

)

Total other income

 

-

 

9

 

15

 

26

 

 

 

 

 

 

 

 

 

 

 

Interest Charges

 

 

 

 

 

 

 

 

 

Interest on long-term debt

 

92

 

99

 

280

 

298

 

Other interest expense

 

5

 

6

 

16

 

18

 

Allowance for borrowed funds used during construction

 

(1

)

(1

)

(3

)

(3

)

Total interest charges

 

96

 

104

 

293

 

313

 

 

 

 

 

 

 

 

 

 

 

Income Before Income Taxes

 

247

 

221

 

513

 

542

 

Income Tax Expense

 

98

 

81

 

203

 

168

 

 

 

 

 

 

 

 

 

 

 

Income From Continuing Operations

 

149

 

140

 

310

 

374

 

Income From Discontinued Operations, Net of Tax of $-, $-, $4, and $1

 

-

 

-

 

7

 

2

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

149

 

140

 

317

 

376

 

Income Attributable to Noncontrolling Interests

 

1

 

1

 

2

 

2

 

 

 

 

 

 

 

 

 

 

 

Net Income Available to Common Stockholders

 

$     148

 

$     139

 

$     315

 

$     374

 

 

32



Table of Contents

 

 

 

 

 

In Millions, Except Per Share Amounts

 

 

Three Months Ended

 

Nine Months Ended

 

September 30

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Net Income Attributable to Common Stockholders

 

 

 

 

 

 

 

 

 

Amounts attributable to continuing operations

 

$   148

 

$   139

 

$   308

 

$   372

 

Amounts attributable to discontinued operations

 

-

 

-

 

7

 

2

 

Net income available to common stockholders

 

$   148

 

$   139

 

$   315

 

$   374

 

 

 

 

 

 

 

 

 

 

 

Income Attributable to Noncontrolling Interests

 

 

 

 

 

 

 

 

 

Amounts attributable to continuing operations

 

$       1

 

$       1

 

$       2

 

$       2

 

Amounts attributable to discontinued operations

 

-

 

-

 

-

 

-

 

Income attributable to noncontrolling interests

 

$       1

 

$       1

 

$       2

 

$       2

 

 

 

 

 

 

 

 

 

 

 

Basic Earnings Per Average Common Share

 

 

 

 

 

 

 

 

 

Basic earnings from continuing operations

 

$  0.56

 

$  0.55

 

$  1.18

 

$  1.48

 

Basic earnings from discontinued operations

 

-

 

-

 

0.03

 

0.01

 

Basic earnings attributable to common stock

 

$  0.56

 

$  0.55

 

$  1.21

 

$  1.49

 

 

 

 

 

 

 

 

 

 

 

Diluted Earnings Per Average Common Share

 

 

 

 

 

 

 

 

 

Diluted earnings from continuing operations

 

$  0.55

 

$  0.53

 

$  1.14

 

$  1.42

 

Diluted earnings from discontinued operations

 

-

 

-

 

0.03

 

0.01

 

Diluted earnings attributable to common stock

 

$  0.55

 

$  0.53

 

$  1.17

 

$  1.43

 

 

 

 

 

 

 

 

 

 

 

Dividends Declared Per Common Share

 

$  0.24

 

$  0.21

 

$  0.72

 

$  0.63

 

 

The accompanying notes are an integral part of these statements.

 

33



Table of Contents

 

CMS Energy Corporation

Consolidated Statements of Comprehensive Income

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In Millions

 

 

Three Months Ended

 

Nine Months Ended

 

September 30

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Net Income Attributable to CMS Energy

 

 

 

 

 

 

 

 

 

Net income

 

$  149

 

$  140

 

$  317

 

$  376

 

Income attributable to noncontrolling interests

 

1

 

1

 

2

 

2

 

Net income attributable to CMS Energy

 

148

 

139

 

315

 

374

 

 

 

 

 

 

 

 

 

 

 

Retirement Benefits Liability

 

 

 

 

 

 

 

 

 

Retirement benefits liability adjustments, net of tax of

 

 

 

 

 

 

 

 

 

$-, $1, $-, and $1

 

1

 

-

 

3

 

1

 

 

 

 

 

 

 

 

 

 

 

Investments

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on investments, net of tax of

 

 

 

 

 

 

 

 

 

$1, $-, $1, and $-

 

1

 

(2

)

3

 

(1

)

 

 

 

 

 

 

 

 

 

 

Other Comprehensive Income

 

2

 

(2

)

6

 

-

 

 

 

 

 

 

 

 

 

 

 

Total Comprehensive Income

 

$  150

 

$  137

 

$  321

 

$  374

 

 

The accompanying notes are an integral part of these statements.

 

34



Table of Contents

 

CMS Energy Corporation

Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

 

 

In Millions

Nine Months Ended September 30

 

2012

 

2011

 

 

 

 

 

 

 

Cash Flows from Operating Activities

 

 

 

 

 

Net income

 

$   317

 

$   376

 

Adjustments to reconcile net income to net cash provided by operating activities

 

 

 

 

 

Depreciation and amortization

 

440

 

404

 

Deferred income taxes and investment tax credit

 

193

 

149

 

Postretirement benefits expense

 

141

 

124

 

Other non-cash operating activities

 

51

 

65

 

Postretirement benefits contributions

 

(54

)

(56

)

Changes in other assets and liabilities

 

 

 

 

 

Decrease in accounts receivable, notes receivable, and accrued revenue

 

99

 

295

 

Increase in inventories

 

(83

)

(106

)

Decrease in deferred property taxes

 

140

 

133

 

Increase (decrease) in accounts payable

 

(16

)

10

 

Decrease in accrued expenses

 

(251

)

(227

)

Decrease (increase) in other current and non-current assets

 

1

 

(23

)

Increase (decrease) in other current and non-current liabilities

 

(44

)

51

 

Net cash provided by operating activities

 

934

 

1,195

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

Capital expenditures (excludes assets placed under capital lease)

 

(861

)

(624

)

Cost to retire property

 

(32

)

(43

)

Increase in EnerBank loans receivable

 

(32

)

(60

)

Other investing activities

 

(13

)

(25

)

Net cash used in investing activities

 

(938

)

(752

)

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

Proceeds from issuance of long-term debt

 

1,300

 

375

 

Proceeds from EnerBank notes, net

 

25

 

58

 

Issuance of common stock

 

27

 

26

 

Retirement of long-term debt

 

(1,166

)

(300

)

Payment of DOE liability

 

-

 

(43

)

Payment of common stock dividends

 

(188

)

(159

)

Payment of capital and finance lease obligations and other financing costs

 

(27

)

(26

)

Net cash used in financing activities

 

(29

)

(69

)

 

 

 

 

 

 

Net Increase (Decrease) in Cash and Cash Equivalents, Including Assets Held for Sale

 

(33

)

374

 

Decrease in Cash and Cash Equivalents Included in Assets Held for Sale

 

-

 

2

 

 

 

 

 

 

 

Net Increase (Decrease) in Cash and Cash Equivalents

 

(33

)

376

 

Cash and Cash Equivalents, Beginning of Period

 

161

 

247

 

 

 

 

 

 

 

Cash and Cash Equivalents, End of Period

 

$   128

 

$   623

 

 

The accompanying notes are an integral part of these statements.

 

35



Table of Contents

 

CMS Energy Corporation

Consolidated Balance Sheets

(Unaudited)

 

ASSETS

 

 

 

 

 

 

 

 

 

 

In Millions

 

 

September 30

 

December 31

 

 

2012

 

2011

 

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

 

$       128

 

$       161

 

Restricted cash and cash equivalents

 

31

 

27

 

Accounts receivable and accrued revenue, less allowances of $30 in

 

 

 

 

 

2012 and $35 in 2011

 

667

 

869

 

Notes receivable

 

28

 

49

 

Accounts receivable – related parties

 

11

 

10

 

Accrued power supply revenue

 

15

 

-

 

Inventories at average cost

 

 

 

 

 

Gas in underground storage

 

986

 

929

 

Materials and supplies

 

99

 

92

 

Generating plant fuel stock

 

187

 

166

 

Deferred income taxes

 

-

 

24

 

Deferred property taxes

 

119

 

187

 

Regulatory assets

 

27

 

1

 

Prepayments and other current assets

 

62

 

50

 

Total current assets

 

2,360

 

2,565

 

 

 

 

 

 

 

Plant, Property, and Equipment

 

 

 

 

 

Plant, property, and equipment, gross

 

15,103

 

14,751

 

Less accumulated depreciation and amortization

 

5,047

 

4,901

 

Plant, property, and equipment, net

 

10,056

 

9,850

 

Construction work in progress

 

1,134

 

783

 

Total plant, property, and equipment

 

11,190

 

10,633

 

 

 

 

 

 

 

Other Non-current Assets

 

 

 

 

 

Regulatory assets

 

2,273

 

2,466

 

Accounts and notes receivable, less allowances of $5 in 2012 and 2011

 

512

 

462

 

Investments

 

56

 

50

 

Other

 

217

 

276

 

Total other non-current assets

 

3,058

 

3,254

 

 

 

 

 

 

 

Total Assets

 

$  16,608

 

$  16,452

 

 

36



Table of Contents

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

 

 

In Millions

 

 

September 30

 

December 31

 

 

2012

 

2011

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Current portion of long-term debt, capital and finance lease obligations

 

$       510

 

$    1,057

 

Accounts payable

 

491

 

575

 

Accounts payable – related parties

 

9

 

9

 

Accrued rate refunds

 

17

 

30

 

Accrued interest

 

64

 

101

 

Accrued taxes

 

83

 

282

 

Deferred income taxes

 

52

 

-

 

Regulatory liabilities

 

122

 

125

 

Other current liabilities

 

137

 

159

 

Total current liabilities

 

1,485

 

2,338

 

 

 

 

 

 

 

Non-current Liabilities

 

 

 

 

 

Long-term debt

 

6,711

 

6,040

 

Non-current portion of capital and finance lease obligations

 

155

 

167

 

Regulatory liabilities

 

1,939

 

1,875

 

Postretirement benefits

 

1,291

 

1,289

 

Asset retirement obligations

 

264

 

254

 

Deferred investment tax credit

 

44

 

46

 

Deferred income taxes

 

1,156

 

1,035

 

Other non-current liabilities

 

323

 

336

 

Total non-current liabilities

 

11,883

 

11,042

 

 

 

 

 

 

 

Commitments and Contingencies (Notes 3, 4, 5, 7, and 8)

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

Common stockholders equity

 

 

 

 

 

Common stock, authorized 350.0 shares; outstanding 263.9 shares in 2012

 

 

 

 

 

and 254.1 shares in 2011

 

3

 

3

 

Other paid-in capital

 

4,662

 

4,627

 

Accumulated other comprehensive loss

 

(43

)

(49

)

Accumulated deficit

 

(1,426

)

(1,553

)

Total common stockholders equity

 

3,196

 

3,028

 

Noncontrolling interests

 

44

 

44

 

Total equity

 

3,240

 

3,072

 

 

 

 

 

 

 

Total Liabilities and Equity

 

$  16,608

 

$  16,452

 

 

The accompanying notes are an integral part of these statements.

 

37



Table of Contents

 

CMS Energy Corporation

Consolidated Statements of Changes in Equity

(Unaudited)

 

 

 

 

 

 

 

 

 

In Millions

 

 

Three Months Ended

 

 

Nine Months Ended

 

September 30

 

2012

 

2011

 

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

Total Equity at Beginning of Period

 

$     3,155

 

$     3,002

 

 

$     3,072

 

$     2,837

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

At beginning of period

 

3

 

3

 

 

3

 

2

 

Common stock issued

 

-

 

-

 

 

-

 

1

 

At end of period

 

3

 

3

 

 

3

 

3

 

 

 

 

 

 

 

 

 

 

 

 

Other Paid-in Capital

 

 

 

 

 

 

 

 

 

 

At beginning of period

 

4,664

 

4,621

 

 

4,627

 

4,588

 

Common stock issued

 

7

 

7

 

 

38

 

35

 

Common stock reissued

 

-

 

-

 

 

6

 

5

 

Common stock repurchased

 

(9

)

(6

)

 

(9

)

(6

)

At end of period

 

4,662

 

4,622

 

 

4,662

 

4,622

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated Other Comprehensive Loss

 

 

 

 

 

 

 

 

 

 

At beginning of period

 

(45

)

(38

)

 

(49

)

(40

)

Retirement benefits liability

 

 

 

 

 

 

 

 

 

 

At beginning of period

 

(46

)

(38

)

 

(48

)

(39

)

Retirement benefits liability adjustments

 

1

 

-

 

 

3

 

1

 

At end of period

 

(45

)

(38

)

 

(45

)

(38

)

Investments

 

 

 

 

 

 

 

 

 

 

At beginning of period

 

2

 

1

 

 

-

 

-

 

Unrealized gain (loss) on investments

 

1

 

(2

)

 

3

 

(1

)

At end of period

 

3

 

(1

)

 

3

 

(1

)

Derivative instruments

 

 

 

 

 

 

 

 

 

 

At beginning and end of period

 

(1

)

(1

)

 

(1

)

(1

)

At end of period

 

(43

)

(40

)

 

(43

)

(40

)

 

 

 

 

 

 

 

 

 

 

 

Accumulated Deficit

 

 

 

 

 

 

 

 

 

 

At beginning of period

 

(1,511

)

(1,628

)

 

(1,553

)

(1,757

)

Net income attributable to CMS Energy

 

148

 

139

 

 

315

 

374

 

Common stock dividends declared

 

(63

)

(53

)

 

(188

)

(159

)

At end of period

 

(1,426

)

(1,542

)

 

(1,426

)

(1,542

)

 

 

 

 

 

 

 

 

 

 

 

Noncontrolling Interests

 

 

 

 

 

 

 

 

 

 

At beginning of period

 

44

 

44

 

 

44

 

44

 

Income attributable to noncontrolling interests

 

1

 

1

 

 

2

 

2

 

Distributions and other changes in noncontrolling
interests

 

(1

)

(1

)

 

(2

)

(2

)

At end of period

 

44

 

44

 

 

44

 

44

 

 

 

 

 

 

 

 

 

 

 

 

Total Equity at End of Period

 

$     3,240

 

$     3,087

 

 

$     3,240

 

$     3,087

 

The accompanying notes are an integral part of these statements.

38



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39



Table of Contents

 

Consumers Energy Company

Consolidated Statements of Income

(Unaudited)

 

 

 

 

 

 

 

 

 

In Millions

 

 

Three Months Ended

 

 

Nine Months Ended

 

September 30

 

2012

 

2011

 

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

Operating Revenue

 

$    1,448

 

$    1,397

 

 

$    4,405

 

$    4,688

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

Fuel for electric generation

 

166

 

175

 

 

382

 

442

 

Purchased and interchange power

 

379

 

362

 

 

1,019

 

954

 

Purchased power – related parties

 

23

 

24

 

 

65

 

64

 

Cost of gas sold

 

74

 

88

 

 

734

 

1,038

 

Maintenance and other operating expenses

 

284

 

286

 

 

827

 

824

 

Depreciation and amortization

 

137

 

119

 

 

436

 

401

 

General taxes

 

51

 

38

 

 

165

 

153

 

Total operating expenses

 

1,114

 

1,092

 

 

3,628

 

3,876

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

334

 

305

 

 

777

 

812

 

 

 

 

 

 

 

 

 

 

 

 

Other Income (Expense)

 

 

 

 

 

 

 

 

 

 

Interest income

 

-

 

2

 

 

2

 

6

 

Interest and dividend income – related parties

 

1

 

1

 

 

1

 

1

 

Allowance for equity funds used during
construction

 

2

 

1

 

 

6

 

4

 

Other income

 

3

 

3

 

 

14

 

16

 

Other expense

 

(11

)

(3

)

 

(16

)

(8

)

Total other income (expense)

 

(5

)

4

 

 

7

 

19

 

 

 

 

 

 

 

 

 

 

 

 

Interest Charges

 

 

 

 

 

 

 

 

 

 

Interest on long-term debt

 

56

 

62

 

 

175

 

188

 

Other interest expense

 

4

 

5

 

 

12

 

14

 

Allowance for borrowed funds used during
construction

 

(1

)

(1

)

 

(3

)

(3

)

Total interest charges

 

59

 

66

 

 

184

 

199

 

 

 

 

 

 

 

 

 

 

 

 

Income Before Income Taxes

 

270

 

243

 

 

600

 

632

 

Income Tax Expense

 

107

 

88

 

 

239

 

232

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

163

 

155

 

 

361

 

400

 

Preferred Stock Dividends

 

1

 

1

 

 

2

 

2

 

 

 

 

 

 

 

 

 

 

 

 

Net Income Available to Common Stockholder

 

$    162

 

$    154

 

 

$    359

 

$    398

 

The accompanying notes are an integral part of these statements.

40



Table of Contents

 

Consumers Energy Company

Consolidated Statements of Comprehensive Income

(Unaudited)

 

 

 

 

 

 

 

 

In Millions

 

 

Three Months Ended

 

Nine Months Ended

 

September 30

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$   163

 

$   155

 

$   361

 

$   400

 

 

 

 

 

 

 

 

 

 

 

Retirement Benefits Liability

 

 

 

 

 

 

 

 

 

Retirement benefits liability adjustments, net of tax of
$- for all periods presented

 

1

 

-

 

2

 

1

 

 

 

 

 

 

 

 

 

 

 

Investments

 

 

 

 

 

 

 

 

 

Unrealized loss on investments, net of tax (tax benefit) of
$1, $-, $(1), and $(1)

 

-

 

-

 

-

 

(1

)

 

 

 

 

 

 

 

 

 

 

Other Comprehensive Income

 

1

 

-

 

2

 

-

 

 

 

 

 

 

 

 

 

 

 

Total Comprehensive Income

 

$   164

 

$   155

 

$   363

 

$   400

 

The accompanying notes are an integral part of these statements.

41



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42



Table of Contents

 

Consumers Energy Company

Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

 

 

 

 

 

 

In Millions

 

 

 

 

 

 

Nine Months Ended September 30

 

2012

 

2011

 

 

 

 

 

 

 

Cash Flows from Operating Activities

 

 

 

 

 

Net income

 

$     361

 

$      400

 

Adjustments to reconcile net income to net cash provided by operating activities

 

 

 

 

 

Depreciation and amortization

 

436

 

401

 

Deferred income taxes and investment tax credit

 

92

 

85

 

Postretirement benefits expense

 

138

 

117

 

Other non-cash operating activities

 

46

 

52

 

Postretirement benefits contributions

 

(51

)

(53

)

Changes in other assets and liabilities

 

 

 

 

 

Decrease in accounts receivable, notes receivable, and accrued revenue

 

98

 

283

 

Increase in inventories

 

(81

)

(109

)

Decrease in deferred property taxes

 

140

 

133

 

Increase (decrease) in accounts payable

 

(4

)

27

 

Decrease in accrued expenses

 

(143

)

(126

)

Decrease (increase) in other current and non-current assets

 

2

 

(25

)

Increase (decrease) in other current and non-current liabilities

 

(9

)

60

 

Net cash provided by operating activities

 

1,025

 

1,245

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

Capital expenditures (excludes assets placed under capital lease)

 

(857

)

(618

)

Cost to retire property

 

(32

)

(43

)

Other investing activities

 

(11

)

(22

)

Net cash used in investing activities

 

(900

)

(683

)

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

Proceeds from issuance of long-term debt

 

725

 

-

 

Retirement of long-term debt

 

(703

)

(27

)

Payment of DOE liability

 

-

 

(43

)

Payment of common stock dividends

 

(302

)

(292

)

Payment of preferred stock dividends

 

(2

)

(2

)

Stockholder contribution

 

150

 

125

 

Payment of capital and finance lease obligations and other financing costs

 

(21

)

(21

)

Net cash used in financing activities

 

(153

)

(260

)

 

 

 

 

 

 

Net Increase (Decrease) in Cash and Cash Equivalents

 

(28

)

302

 

 

 

 

 

 

 

Cash and Cash Equivalents, Beginning of Period

 

85

 

71

 

 

 

 

 

 

 

Cash and Cash Equivalents, End of Period

 

$       57

 

$      373

 

 

The accompanying notes are an integral part of these statements.

 

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Consumers Energy Company

Consolidated Balance Sheets

(Unaudited)

 

ASSETS

 

 

 

 

 

 

 

 

 

In Millions

 

 

 

 

 

 

 

 

 

September 30

 

December 31

 

 

2012

 

2011

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

Cash and cash equivalents

 

$         57

 

 

$         85

 

Restricted cash and cash equivalents

 

30

 

 

26

 

Accounts receivable and accrued revenue, less allowances of $28 in 2012 and $33 in 2011

 

659

 

 

860

 

Notes receivable

 

-

 

 

23

 

Accounts receivable – related parties

 

1

 

 

1

 

Accrued power supply revenue

 

15

 

 

-

 

Inventories at average cost

 

 

 

 

 

 

Gas in underground storage

 

982

 

 

929

 

Materials and supplies

 

95

 

 

88

 

Generating plant fuel stock

 

186

 

 

164

 

Deferred property taxes

 

119

 

 

187

 

Regulatory assets

 

27

 

 

1

 

Prepayments and other current assets

 

56

 

 

43

 

Total current assets

 

2,227

 

 

2,407

 

 

 

 

 

 

 

 

Plant, Property, and Equipment

 

 

 

 

 

 

Plant, property, and equipment, gross

 

14,968

 

 

14,621

 

Less accumulated depreciation and amortization

 

4,988

 

 

4,846

 

Plant, property, and equipment, net

 

9,980

 

 

9,775

 

Construction work in progress

 

1,133

 

 

782

 

Total plant, property, and equipment

 

11,113

 

 

10,557

 

 

 

 

 

 

 

 

Other Non-current Assets

 

 

 

 

 

 

Regulatory assets

 

2,273

 

 

2,466

 

Accounts and notes receivable

 

26

 

 

1

 

Investments

 

31

 

 

35

 

Other

 

134

 

 

196

 

Total other non-current assets

 

2,464

 

 

2,698

 

 

 

 

 

 

 

 

Total Assets

 

$  15,804

 

 

$  15,662

 

 

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Table of Contents

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

In Millions

 

 

 

 

 

 

 

 

September 30

 

December 31

 

 

2012

 

2011

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

Current portion of long-term debt, capital and finance lease obligations

 

$         62

 

 

$       363

 

Accounts payable

 

480

 

 

561

 

Accounts payable – related parties

 

11

 

 

11

 

Accrued rate refunds

 

17

 

 

30

 

Accrued interest

 

34

 

 

73

 

Accrued taxes

 

198

 

 

287

 

Deferred income taxes

 

101

 

 

73

 

Regulatory liabilities

 

122

 

 

125

 

Other current liabilities

 

105

 

 

119

 

Total current liabilities

 

1,130

 

 

1,642

 

 

 

 

 

 

 

 

Non-current Liabilities

 

 

 

 

 

 

Long-term debt

 

4,308

 

 

3,987

 

Non-current portion of capital and finance lease obligations

 

155

 

 

167

 

Regulatory liabilities

 

1,939

 

 

1,875

 

Postretirement benefits

 

1,229

 

 

1,225

 

Asset retirement obligations

 

263

 

 

253

 

Deferred investment tax credit

 

44

 

 

46

 

Deferred income taxes

 

1,881

 

 

1,817

 

Other non-current liabilities

 

252

 

 

256

 

Total non-current liabilities

 

10,071

 

 

9,626

 

 

 

 

 

 

 

 

Commitments and Contingencies (Notes 3, 4, 5, 7, and 8)

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

Common stockholder equity

 

 

 

 

 

 

Common stock, authorized 125.0 shares; outstanding 84.1 shares for both periods

 

841

 

 

841

 

Other paid-in capital

 

3,107

 

 

2,957

 

Accumulated other comprehensive loss

 

-

 

 

(2

)

Retained earnings

 

611

 

 

554

 

Total common stockholder equity

 

4,559

 

 

4,350

 

Preferred stock

 

44

 

 

44

 

Total equity

 

4,603

 

 

4,394

 

 

 

 

 

 

 

 

Total Liabilities and Equity

 

$  15,804

 

 

$  15,662

 

 

The accompanying notes are an integral part of these statements.

 

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Consumers Energy Company

Consolidated Statements of Changes in Equity

(Unaudited)

 

 

In Millions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30

 

 

2012

 

 

2011

 

 

2012

 

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Equity at Beginning of Period

 

 

$    4,584

 

 

$   4,353

 

 

$    4,394

 

 

$    4,180

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

At beginning and end of period

 

 

841

 

 

841

 

 

841

 

 

841

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Paid-in Capital

 

 

 

 

 

 

 

 

 

 

 

 

 

At beginning of period

 

 

3,107

 

 

2,957

 

 

2,957

 

 

2,832

 

Stockholder contribution

 

 

-

 

 

-

 

 

150

 

 

125

 

At end of period

 

 

3,107

 

 

2,957

 

 

3,107

 

 

2,957

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated Other Comprehensive Loss

 

 

 

 

 

 

 

 

 

 

 

 

 

At beginning of period

 

 

(1

)

 

-

 

 

(2

)

 

-

 

Retirement benefits liability

 

 

 

 

 

 

 

 

 

 

 

 

 

At beginning of period

 

 

(18

)

 

(15)

 

 

(19

)

 

(16

)

Retirement benefits liability adjustments

 

 

1

 

 

-

 

 

2

 

 

1

 

At end of period

 

 

(17

)

 

(15)

 

 

(17

)

 

(15

)

Investments

 

 

 

 

 

 

 

 

 

 

 

 

 

At beginning of period

 

 

17

 

 

15

 

 

17

 

 

16

 

Unrealized loss on investments

 

 

-

 

 

-

 

 

-

 

 

(1

)

At end of period

 

 

17

 

 

15

 

 

17

 

 

15

 

At end of period

 

 

-

 

 

-

 

 

-

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained Earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

At beginning of period

 

 

593

 

 

511

 

 

554

 

 

463

 

Net income

 

 

163

 

 

155

 

 

361

 

 

400

 

Common stock dividends declared

 

 

(144

)

 

(96)

 

 

(302

)

 

(292

)

Preferred stock dividends declared

 

 

(1

)

 

(1)

 

 

(2

)

 

(2

)

At end of period

 

 

611

 

 

569

 

 

611

 

 

569

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

At beginning and end of period

 

 

44

 

 

44

 

 

44

 

 

44

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Equity at End of Period

 

 

$    4,603

 

 

$   4,411

 

 

$    4,603

 

 

$    4,411

 

 

The accompanying notes are an integral part of these statements.

 

46



Table of Contents

 

CMS Energy Corporation

Consumers Energy Company

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

These interim consolidated financial statements have been prepared by CMS Energy and Consumers in accordance with GAAP 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 GAAP.  CMS Energy and Consumers have reclassified certain prior period amounts to conform to the presentation in the current period.  In management’s 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 the 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 2011 Form 10-K.  Due to the seasonal nature of CMS Energy’s and Consumers’ operations, the results presented for this interim period are not necessarily indicative of results to be achieved for the fiscal year.

 

1:    NEW ACCOUNTING STANDARDS

 

IMPLEMENTATION OF NEW ACCOUNTING STANDARDS

 

ASU 2011-05, Presentation of Comprehensive Income:  This standard, which became effective January 1, 2012 for CMS Energy and Consumers, eliminates the option of reporting other comprehensive income and its components on the statement of changes in equity.  Prior to the implementation of this standard, both CMS Energy and Consumers used this option for their consolidated financial statements.  Under the standard, entities are required to present either a single continuous statement of comprehensive income, containing both net income and components of other comprehensive income, or two separate consecutive statements.  CMS Energy and Consumers have chosen to present two separate consecutive statements.  This standard affects only the presentation of comprehensive income on CMS Energy’s and Consumers’ consolidated financial statements.

 

ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs:  This standard, which became effective January 1, 2012 for CMS Energy and Consumers, is the result of a joint project of the Financial Accounting Standards Board and the International Accounting Standards Board.  The primary objective of the standard is to ensure that fair value has the same meaning under GAAP and International Financial Reporting Standards and to establish common fair value measurement guidance in the two sets of standards.  The standard does not change the overall fair value model in GAAP, but it amends various fair value principles and establishes additional disclosure requirements.  This standard did not impact CMS Energy’s or Consumers’ consolidated income, cash flows, or financial position, but did require additional disclosures.

 

2:                 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.

 

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·                 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, forward prices, credit risks, default rates, and inputs derived from or corroborated by observable market data.

 

·                 Level 3 inputs are unobservable inputs that reflect CMS Energy’s 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.

 

ASSETS AND LIABILITIES MEASURED AT FAIR VALUE ON A RECURRING BASIS

 

Presented in the following tables are CMS Energy’s and Consumers’ assets and liabilities, by level within the fair value hierarchy, recorded at fair value on a recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In Millions

September 30, 2012

 

Total

 

Level 1

 

Level 2

 

Level 3

CMS Energy, including Consumers

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Cash equivalents

 

$    60

 

$    60

 

$   -

 

$   -

Restricted cash equivalents

 

14

 

14

 

-

 

-

Nonqualified deferred compensation plan assets

 

5

 

5

 

-

 

-

SERP

 

 

 

 

 

 

 

 

Cash equivalents

 

1

 

1

 

-

 

-

Mutual funds

 

128

 

128

 

-

 

-

Derivative instruments

 

 

 

 

 

 

 

 

Commodity contracts

 

6

 

1

 

1

 

4

Total

 

$  214

 

$  209

 

$   1

 

$   4

Liabilities

 

 

 

 

 

 

 

 

Nonqualified deferred compensation plan liabilities

 

$      5

 

$      5

 

$   -

 

$   -

Derivative instruments

 

 

 

 

 

 

 

 

Commodity contracts

 

6

 

-

 

3

 

3

Total

 

$    11

 

$      5

 

$   3

 

$   3

Consumers

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Cash equivalents

 

$    17

 

$    17

 

$   -

 

$   -

Restricted cash equivalents

 

13

 

13

 

-

 

-

CMS Energy common stock

 

31

 

31

 

-

 

-

Nonqualified deferred compensation plan assets

 

3

 

3

 

-

 

-

SERP

 

 

 

 

 

 

 

 

Cash equivalents

 

1

 

1

 

-

 

-

Mutual funds

 

86

 

86

 

-

 

-

Derivative instruments

 

 

 

 

 

 

 

 

Commodity contracts

 

4

 

-

 

-

 

4

Total

 

$  155

 

$  151

 

$   -

 

$   4

Liabilities

 

 

 

 

 

 

 

 

Nonqualified deferred compensation plan liabilities

 

$      3

 

$      3

 

$   -

 

$   -

Total

 

$      3

 

$      3

 

$   -

 

$   -

 

48



Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In Millions

December 31, 2011

 

Total

 

Level 1

 

Level 2

 

Level 3

CMS Energy, including Consumers

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Cash equivalents

 

$  109

 

$  109

 

$   -

 

$   -

Restricted cash equivalents

 

15

 

15

 

-

 

-

Nonqualified deferred compensation plan assets

 

4

 

4

 

-

 

-

SERP

 

 

 

 

 

 

 

 

Cash equivalents

 

1

 

1

 

-

 

-

Mutual funds

 

113

 

113

 

-

 

-

Derivative instruments

 

 

 

 

 

 

 

 

Commodity contracts

 

3

 

1

 

-

 

2

Total

 

$  245

 

$  243

 

$   -

 

$   2

Liabilities

 

 

 

 

 

 

 

 

Nonqualified deferred compensation plan liabilities

 

$      4

 

$      4

 

$   -

 

$   -

Derivative instruments

 

 

 

 

 

 

 

 

Commodity contracts

 

7

 

-

 

3

 

4

Total

 

$    11

 

$      4

 

$   3

 

$   4

Consumers

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Cash equivalents

 

$    56

 

$    56

 

$   -

 

$   -

Restricted cash equivalents

 

14

 

14

 

-

 

-

CMS Energy common stock

 

35

 

35

 

-

 

-

Nonqualified deferred compensation plan assets

 

3

 

3

 

-

 

-

SERP

 

 

 

 

 

 

 

 

Cash equivalents

 

1

 

1

 

-

 

-

Mutual funds

 

74

 

74

 

-

 

-

Derivative instruments

 

 

 

 

 

 

 

 

Commodity contracts

 

2

 

-

 

-

 

2

Total

 

$  185

 

$  183

 

$   -

 

$   2

Liabilities

 

 

 

 

 

 

 

 

Nonqualified deferred compensation plan liabilities

 

$      3

 

$      3

 

$   -

 

$   -

Total

 

$      3

 

$      3

 

$   -

 

$   -

 

Cash Equivalents:  Cash equivalents and restricted cash equivalents consist of money market funds with daily liquidity.

 

Nonqualified Deferred Compensation Plan Assets:  The nonqualified deferred compensation plan assets consist of various mutual funds that are valued using a market approach.  CMS Energy and Consumers value these assets using the daily quoted net asset values that are publicly available and 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.  The SERP invests in mutual funds that hold primarily fixed-income instruments of varying maturities.  In order to meet their investment objectives, the funds hold investment-grade debt securities, and may invest a portion of their assets in high-yield securities, foreign debt, and derivative instruments.  CMS Energy and Consumers value these funds using the daily quoted net asset values that are publicly available and are the basis for transactions to buy or sell shares in each fund.  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 7: Financial Instruments.

 

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Nonqualified Deferred Compensation Plan Liabilities:  CMS Energy and Consumers value their nonqualified 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.  CMS Energy has exchange-traded derivative contracts that are valued based on Level 1 quoted prices, as well as derivatives valued using Level 2 inputs, including commodity forward 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 assumptions that cannot be observed or confirmed through market transactions.

 

The most significant derivatives classified as Level 3 are a power option sold by CMS ERM and FTRs held by Consumers.  The power option sold by CMS ERM is valued using unobservable assumptions about price volatility and the pricing differential between the delivery point and the nearest active market.  Due to the lack of quoted pricing information, Consumers determines the fair value of its FTRs based on Consumers’ average historical settlements.  Under regulatory accounting, all changes in fair value associated with FTRs are deferred as regulatory assets or liabilities until the instruments are settled.  In valuing their derivative instruments not classified as Level 1, CMS Energy and Consumers may incorporate adjustments for credit risk, or the risk of nonperformance, as deemed appropriate.  CMS Energy and Consumers apply credit risk adjustments, where appropriate, to the net receivable from or payable to each counterparty.  For additional details about derivative contracts, see Note 8: Derivative Instruments.

 

ASSETS AND LIABILITIES MEASURED AT FAIR VALUE ON A RECURRING BASIS USING SIGNIFICANT LEVEL 3 INPUTS

 

Presented in the following tables are reconciliations of changes in the fair values of Level 3 assets and liabilities at CMS Energy and Consumers:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In Millions

 

 

Three Months Ended

 

Nine Months Ended

 

September 30

 

2012

 

2011

 

2012

 

2011

CMS Energy, including Consumers

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$    3

 

$     -

 

$   (2

)

$   (3)

Total gains (losses) included in earnings1

 

(1

)

(1

)

1

 

(1)

Total gains (losses) offset through regulatory accounting

 

1

 

(1

)

8

 

1

Purchases

 

-

 

-

 

-

 

1

Settlements

 

(2

)

1

 

(6

)

1

Balance at end of period

 

$    1

 

$   (1

)

$    1

 

$   (1)

Unrealized gains (losses) included in earnings relating to

 

 

 

 

 

 

 

 

assets and liabilities still held at end of period1

 

$   (1

)

$   (1

)

$    1

 

$     -

Consumers

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$    5

 

$    3

 

$    2

 

$    1

Total gains (losses) offset through regulatory accounting

 

1

 

(1

)

8

 

1

Purchases

 

-

 

-

 

-

 

1

Settlements

 

(2

)

-

 

(6

)

(1)

Balance at end of period

 

$    4

 

$    2

 

$    4

 

$     2

 

1 CMS Energy records realized and unrealized gains and losses for Level 3 recurring fair value measurements in earnings as a component of operating revenue or maintenance and other operating expenses on its consolidated statements of income.

 

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3:               CONTINGENCIES AND COMMITMENTS

 

CMS Energy and Consumers are involved in various matters that give rise to contingent liabilities.  Depending on the specific issues, the resolution of these contingencies could have a material effect on CMS Energy’s and Consumers’ liquidity, financial condition, and results of operations.  In their disclosures of these matters, CMS Energy and Consumers provide an estimate of the possible loss or range of loss when such an estimate can be made.  Disclosures that state that CMS Energy or Consumers cannot predict the outcome of a matter indicate that they are unable to estimate a possible loss or range of loss for the matter.

 

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.  Although CMS Energy has not received any formal notification that the DOJ has completed its investigation, the DOJ’s 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.

 

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 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 Energy, CMS MST, and CMS Field Services were named 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 are seeking statutory full consideration damages consisting of the full consideration paid by plaintiffs for natural gas allegedly purchased from defendants.

 

·                 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 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 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 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 Wisconsin’s antitrust statute. 

 

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The plaintiffs are seeking full consideration damages, plus exemplary damages and attorneys’ fees.  After dismissal on jurisdictional grounds in 2009, plaintiffs filed a new complaint in the U.S. District Court for the Eastern District of Michigan.  In 2010, the MDL judge issued an opinion and order granting the CMS Energy defendants’ motion to dismiss the Michigan complaint on statute-of-limitations grounds and all CMS Energy defendants have been dismissed from the Arandell (Michigan) action.

 

·                 Another class action complaint, Newpage Wisconsin System v. CMS ERM, et al., was filed in 2009 in circuit court in Wood County, Wisconsin, against CMS Energy, CMS ERM, Cantera Gas Company, and others.  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 CMS Energy, CMS MST, CMS Field Services, and others.  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 in 2000 and 2001.

 

After removal to federal court, all of the cases described above were transferred to the MDL.  CMS Energy was dismissed from the Learjet, Heartland, and J.P. Morgan cases in 2009, but other CMS Energy defendants remained parties.  All CMS Energy defendants were dismissed from the Breckenridge case in 2009.  In 2010, CMS Energy and Cantera Gas Company were dismissed from the Newpage case and the Arandell (Wisconsin) case was reinstated against CMS ERM.  In July 2011, all claims against remaining CMS Energy defendants in the MDL cases were dismissed based on FERC preemption.  Plaintiffs have filed appeals in all of the cases.  The issues on appeal are whether the district court erred in dismissing the cases based on FERC preemption and denying the plaintiffs’ motions for leave to amend their complaints to add a federal Sherman Act antitrust claim.  The plaintiffs did not appeal the dismissal of CMS Energy as a defendant in these cases, but other CMS Energy entities remain as defendants.  Oral argument on the appeal was held before the Ninth Circuit Court in San Francisco in October 2012.

 

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 Energy’s possible loss would be based on widely varying models previously untested in this context.  If the outcome after appeals is unfavorable, these cases could have a material adverse impact on CMS Energy’s 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.  A number of remediation measures were subsequently completed.  In June 2012, CMS Energy and the MDEQ finalized an agreement that established the final remedies and the future release criteria at the site.  CMS Energy is in the process of completing all construction necessary to implement the remedies required by the agreement and will continue to maintain and operate a system to discharge treated leachate into Little Traverse Bay under an NPDES permit issued in 2010.  This permit requires renewal every five years.

 

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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 EPA’s response costs incurred at the Bay Harbor site.  CMS Land communicated to the EPA in November 2010 that it does not believe that this is a valid claim.

 

CMS Energy has recorded a cumulative charge related to Bay Harbor of $226 million, which includes accretion expense.  At September 30, 2012, CMS Energy had a recorded liability of $64 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 $85 million.  CMS Energy expects to pay $4 million during the remainder of 2012, $10 million in 2013, $5 million in 2014, $4 million in 2015, $4 million in 2016, and the remaining amount thereafter on long-term liquid disposal and operating and maintenance costs.

 

CMS Energy’s 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:

 

·                 a significant increase in the cost of 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;

·                 the nature and extent of contamination;

·                 delays in the receipt of requested permits;

·                 delays following the receipt of any requested permits due to legal appeals of third parties;

·                  unanticipated difficulties in meeting the technical commitments in the agreement with the MDEQ;

·                 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 Energy’s liquidity and financial condition and could negatively affect CMS Energy’s 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 January 2002, CMS Energy sold its oil, gas, and methanol investments in Equatorial Guinea.  The government of Equatorial Guinea claims that CMS Energy owes $142 million in taxes, plus interest, in connection with the sale.  CMS Energy has concluded that the government’s tax claim is without merit.  The government of Equatorial Guinea indicated through a request for arbitration in October 2011 that it still intends to pursue its claim.  CMS Energy is vigorously contesting the claim, and cannot predict the financial impact or outcome of this matter.

 

Panhandle Tax Indemnification:  CMS Energy recorded a liability in 2003 for an indemnification provided in conjunction with the sale of Panhandle.  As of March 31, 2012 the statute of limitations had expired for this indemnification.  Accordingly, CMS Energy eliminated the liability during the three months ended March 31, 2012 and recognized an after-tax benefit of $7 million in discontinued operations.

 

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CONSUMERS ELECTRIC UTILITY CONTINGENCIES

 

Electric Environmental Matters:  Consumers’ operations are subject to environmental laws and regulations.  Historically, Consumers has generally 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.  Consumers estimates that its liability for NREPA sites will be between $4 million and $7 million.  At September 30, 2012, Consumers had a recorded liability of $4 million, the minimum amount in the range of 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 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 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 for an area of lower Portage Creek.  The letter also indicated that under Sections 106 and 107 of Superfund, Consumers may be liable for reimbursement of the EPA’s costs and potential penalties for noncompliance with any unilateral order that the EPA may issue requiring performance under the removal action plan.  All parties, including Consumers, that were asked to participate in the removal action plan declined to accept liability.  In August 2011, the EPA announced that it would proceed with the removal action plan and would continue to pursue potentially responsible parties to perform or pay for some or all of the work.  The EPA has provided limited information regarding Consumers’ potential responsibility for contamination at the site and has not yet given an indication of the share of any cleanup costs for which Consumers could be held responsible.  Consumers continues to investigate the EPA’s claim that it disposed of PCBs or arranged for disposal or treatment of PCB-containing material at portions of the site.  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 September 30, 2012, Consumers had a recorded liability of $2 million for its share of the total liability at these sites, 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, the 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.  Consumers has had several communications with the

 

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EPA regarding this matter.  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 review under the NSR.  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.

 

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.

 

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, had not been successful in producing more specific relief for the DOE’s failure to accept the spent nuclear fuel.  A number of court decisions have supported 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.

 

In July 2011, Consumers entered into an agreement with the DOE to settle its claims for $120 million.  In September 2011, Consumers filed an application with the MPSC regarding the regulatory treatment of the settlement amount.  For further information, see Note 4: Regulatory Matters.

 

As part of the agreement with the DOE, Consumers settled its liability to the DOE to fund the disposal of spent nuclear fuel used at Palisades and Big Rock before 1983.  This liability, which totaled $163 million, comprised $44 million collected from customers for spent nuclear fuel disposal fees and $119 million of interest accrued on those fees, and was to be paid no later than when the DOE began accepting delivery of spent nuclear fuel.  CMS Energy and Consumers classified the liability as long-term debt on their consolidated balance sheets.

 

Following the settlement, Consumers terminated its letter of credit to Entergy, which Consumers had provided as security for its retained obligation to the DOE in connection with its sale of Palisades and the Big Rock ISFSI to Entergy in 2007.

 

In its November 2010 electric rate case order, the MPSC had directed Consumers to establish an independent trust fund for the amount payable to the DOE.  Following its settlement with the DOE, Consumers petitioned the MPSC to relieve it of the obligation to fund the trust.

 

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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 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 September 30, 2012, Consumers had a recorded liability of $125 million for its remaining obligations for these sites.  This amount represents the present value of long-term projected costs, using a discount rate of 2.57 percent and an inflation rate of 2.5 percent.  Consumers based the discount rate on the interest rate for 20-year U.S. Treasury securities at December 31, 2011.  The undiscounted amount of the remaining obligation is $137 million.  Consumers expects to incur remediation and other response activity costs during the remainder of 2012 and in each of the next four years as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In Millions

 

 

2012

 

2013

 

2014

 

2015

 

2016

 

Consumers

 

 

 

 

 

 

 

 

 

 

 

Remediation and other response activity costs

 

$   7

 

$  11

 

$  11

 

$  20

 

$  11

 

 

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.

 

Pursuant to orders issued by the MPSC, Consumers defers its MGP-related remediation costs and recovers them from its customers over a ten-year period.  At September 30, 2012, Consumers had a regulatory asset of $153 million related to the MGP sites.

 

CONSUMERS OTHER CONTINGENCIES

 

Other Environmental Matters:  Consumers initiated preliminary investigations during 2012 at a number of potentially contaminated sites it presently owns with the intention of determining whether any contamination exists and the extent of any identified contamination.  The sites to be investigated include combustion turbine sites, generating sites, compressor stations, and above-ground storage tanks.  Evidence of contamination led Consumers to plan remedial investigations and certain interim response measures at some of these sites.  The cost of these activities has been incorporated into Consumers’ estimated liability for NREPA sites.  Consumers will continue its preliminary investigations at other potentially contaminated sites through 2013.  Consumers cannot predict an outcome at this stage of the investigations.

 

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GUARANTEES

 

Presented in the following table are CMS Energy’s and Consumers’ guarantees at September 30, 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In Millions

 

Guarantee Description

 

Issue Date

 

Expiration Date

 

Maximum
Obligation

 

Carrying
Amount

 

CMS Energy, including Consumers

 

 

 

 

 

 

 

 

 

Indemnity obligations from asset sales and

 

 

 

Various through

 

 

 

 

 

other agreements

 

Various

 

September 2029

 

$  512

 1

$  15

 

 

 

 

 

Various through

 

 

 

 

 

Guarantees

 

Various

 

March 2021

 

60

 

1

 

Consumers

 

 

 

 

 

 

 

 

 

 

 

 

 

Various through

 

 

 

 

 

Indemnity obligations and other guarantees

 

Various

 

September 2029

 

$    30

 

$    1

 

 

The majority of this amount arises from stock and asset sale 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 power purchase agreements, 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.

 

Presented in the following table is additional information regarding CMS Energy’s and Consumers’ guarantees:

 

 

 

 

 

 

Guarantee Description

 

How Guarantee Arose

 

Events That Would Require Performance

CMS Energy, including Consumers

 

 

 

 

Indemnity obligations from asset

 

Stock and asset sale

 

Findings of misrepresentation, breach of

sales and other agreements

 

agreements

 

warranties, tax claims, and other specific

 

 

 

 

events or circumstances

 

 

 

 

 

Guarantees

 

Normal operating activity

 

Nonperformance or non-payment by a

 

 

 

 

subsidiary under a related contract

Consumers

 

 

 

 

Indemnity obligations and other guarantees

 

Normal operating activity

 

Nonperformance or claims made by third

 

 

 

 

party under a related contract

 

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

 

Other:  In addition to the matters disclosed in this Note and Note 4: 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.

 

4:               REGULATORY MATTERS

 

Rate matters are critical to Consumers.  The Michigan Attorney General, ABATE, the MPSC Staff, and certain other parties typically participate in MPSC proceedings concerning Consumers and have appealed significant MPSC orders.  Depending upon the specific issues, the outcomes of rate cases and proceedings, including judicial proceedings challenging MPSC orders or other actions, could have a material adverse effect on CMS Energy’s and Consumers’ liquidity, financial condition, and results of operations.  Consumers cannot predict the outcome of these proceedings.

 

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There are multiple appeals pending that involve various issues concerning cost allocation among customers, the allocation of refunds among customer groups, and the adequacy of the evidence supporting the recovery of Smart Energy investments.  Consumers is unable to predict the outcome of these appeals.

 

CONSUMERS’ ELECTRIC UTILITY

 

Electric Rate Case:  In June 2011, Consumers filed an application with the MPSC seeking an annual rate increase of $195 million, based on a 10.7 percent authorized return on equity, in order to recover new investment in system reliability, environmental compliance, and technology enhancements.  Consumers self-implemented an annual rate increase of $118 million in December 2011, subject to refund with interest.  In June 2012, the MPSC authorized an annual rate increase of $118 million, based on a 10.3 percent authorized return on equity.  Consumers filed an application in September 2012 to reconcile the total revenues collected during self-implementation to those that would have been collected under final rates.  This reconciliation requests that the MPSC find that no refund is required.

 

The annual rate increase authorized by the MPSC included a $20 million increase in annual depreciation expense resulting from the new depreciation rates that the MPSC approved in June 2011 in Consumers’ electric depreciation case.  These new depreciation rates went into effect with the June 2012 electric rate case order.

 

Also included in the authorized annual rate increase was the recovery of $14 million of development costs associated with Consumers’ proposed 830-MW coal-fueled plant.  The MPSC authorized Consumers to recover these costs over a three-year period.  Consumers canceled its plans to build this plant in December 2011, after having written off its development costs of $22 million in 2010.  At June 30, 2012, Consumers recorded a $14 million regulatory asset for the recovery of these costs with a corresponding benefit recognized in earnings.  In September 2012, a party in Consumers’ electric rate case filed an appeal with the Michigan Court of Appeals to dispute the MPSC’s conclusion that authorized Consumers to recover these costs.

 

Big Rock Nuclear Decommissioning:  The MPSC and FERC regulate the recovery of Consumers’ costs to decommission Big Rock.  Subsequent to 2000, Consumers stopped funding a Big Rock decommissioning trust fund because the collection period for an MPSC-authorized decommissioning surcharge expired.

 

In 2010, the MPSC concluded that certain revenues collected during a statutory rate freeze from 2001 through 2003 should have been deposited in the Big Rock decommissioning trust fund and ordered Consumers to refund $85 million of revenue collected in excess of decommissioning costs plus interest.  Consumers completed this refund in 2011.  Consumers filed an appeal with the Michigan Court of Appeals in 2010 to dispute the MPSC’s conclusion that the collections received during the rate freeze should be subject to refund.  In January 2012, the Michigan Court of Appeals rejected Consumers’ appeal.  In March 2012, Consumers filed an appeal with the Michigan Supreme Court to dispute this decision.  The Michigan Supreme Court denied Consumers’ appeal in June 2012.

 

Consumers has an $85 million regulatory asset recorded for $30 million it paid to Entergy to assume ownership responsibility for the Big Rock ISFSI and for $55 million of nuclear fuel storage costs it incurred as a result of the DOE’s failure to accept nuclear fuel.  Consumers filed a complaint against the DOE in 2002 for this failure.  In July 2011, Consumers entered into an agreement with the DOE to settle its claims for $120 million; Consumers recorded a $120 million regulatory liability related to this settlement.  In September 2011, Consumers filed an application with the MPSC requesting authority to utilize $85 million of the settlement amount as recovery of its regulatory asset, and to refund to customers $23 million previously collected through rates for spent nuclear fuel costs.  Various parties are opposing this request, seeking additional refunds, or seeking other relief.  In September 2012, the administrative

 

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law judge issued a proposal for decision recommending that Consumers refund $44 million of the settlement proceeds to customers and retain the remaining balance of $76 million.  Consumers has filed exceptions to this recommendation.

 

Electric Revenue Decoupling Mechanism:  The MPSC’s 2009 electric rate case order authorized Consumers to implement an electric revenue decoupling mechanism, subject to certain conditions.  This decoupling mechanism, which was extended through November 2011 in the 2010 electric rate case order, allowed Consumers to adjust future electric rates to compensate for changes in sales volumes resulting from the difference between the level of average sales per customer adopted in the order and actual average sales per customer.  Various parties filed appeals concerning Consumers’ 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.  Consumers filed its second reconciliation of the electric revenue decoupling mechanism in March 2012, requesting recovery of $32 million from customers for the period December 2010 through November 2011.

 

In April 2012, the Michigan Court of Appeals ruled in an appeal filed by ABATE that disputed the MPSC’s decision to authorize an electric revenue decoupling mechanism for Detroit Edison.  The Court concluded that the MPSC lacks statutory authority to approve or direct the use of a revenue decoupling mechanism for electric providers.  As a result, Consumers determined that it no longer met the accounting criteria for recognition of a regulatory asset under an alternative revenue program, and wrote off its $59 million electric revenue decoupling mechanism regulatory asset at March 31, 2012.

 

In August 2012, the MPSC dismissed Consumers’ reconciliation of the electric revenue decoupling mechanism for the period December 2009 through November 2010.  Consumers’ second reconciliation remains pending with the MPSC. Consumers expects the MPSC to dismiss this reconciliation.

 

Renewable Energy Plan:  In June 2011, Consumers filed with the MPSC its second annual report and reconciliation for its renewable energy plan, requesting approval of its plan costs for 2010.  In March 2012, the MPSC approved Consumers’ renewable energy plan reconciliation.

 

Consumers filed its third annual report and reconciliation with the MPSC in June 2012, requesting approval of its reconciliation of renewable energy plan costs for 2011.

 

In October 2011, Consumers filed an application for the biennial review and approval of its renewable energy plan.  In May 2012, the MPSC approved Consumers’ settlement agreement in this case, reducing the renewable energy surcharge by an annual amount of $3 million, to $20 million.

 

Energy Optimization Plan:  In August 2011, Consumers filed an amended energy optimization plan with the MPSC, requesting approval of the additional spending necessary to exceed the statutory savings targets for 2012 through 2015 specified in the 2008 Energy Law.  The MPSC approved Consumers’ amended energy optimization plan in April 2012.

 

In May 2012, Consumers filed its third annual report and reconciliation for its energy optimization plan, requesting approval of Consumers’ reconciliation of energy optimization plan costs for 2011.  In September 2012, the MPSC approved Consumers’ settlement agreement and authorized Consumers to collect $15 million from customers as an incentive payment for exceeding statutory savings targets under both its gas and electric energy optimization plans during 2011.  Consumers will collect this incentive over seven months beginning in June 2013.

 

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CONSUMERS’ GAS UTILITY

 

Gas Rate Case:  In September 2011, Consumers filed an application with the MPSC seeking an annual rate increase of $49 million, based on a 10.7 percent authorized return on equity, in order to recover investments made to enhance safety, system reliability, and operational efficiencies that improve service to customers.  Consumers self-implemented an annual rate increase of $23 million in March 2012, subject to refund with interest.

 

In June 2012, the MPSC approved Consumers’ settlement agreement and authorized an annual rate increase of $16 million, based on a 10.3 percent authorized return on equity.  In September 2012, Consumers filed an application to reconcile the total revenues collected during self-implementation to those that would have been collected under the final rates.  As a result of the reconciliation, which found that a refund was required, Consumers had a $2 million regulatory liability recorded at September 30, 2012.

 

Gas Revenue Decoupling Mechanism:  The MPSC’s 2009 gas rate case order authorized Consumers to implement a gas revenue decoupling mechanism, subject to certain conditions.  This decoupling mechanism, which was extended through April 2012, allowed Consumers to adjust future gas rates to compensate for changes in sales volumes resulting from the difference between the level of average sales per customer adopted in the order and actual average weather-adjusted sales per customer.  This mechanism was not affected by the Michigan Court of Appeals decision on electric decoupling.

 

In September 2011, Consumers filed its first reconciliation of the gas revenue decoupling mechanism with the MPSC, requesting recovery of $16 million from customers for the period June 2010 through May 2011.  The matter remains pending before the MPSC.  Certain parties have filed in opposition to this reconciliation.

 

Consumers filed its second reconciliation of the gas revenue decoupling mechanism in August 2012, requesting recovery of $17 million from customers for the period June 2011 through April 2012.

 

At September 30, 2012, Consumers had a $33 million regulatory asset recorded for gas revenue decoupling.  If the MPSC were to reject all or a major portion of Consumers’ requested recovery from its gas revenue decoupling mechanism or if the recovery period were to be substantially delayed, Consumers could be required to write off all or a portion of the related regulatory asset.

 

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5:               FINANCINGS AND CAPITALIZATION

 

Presented in the following table is a summary of major long-term debt transactions during the nine months ended September 30, 2012:

 

 

 

Principal

 

 

 

Issue/Retirement

 

 

 

 

 

(In Millions)

 

Interest Rate

 

Date

 

Maturity Date

 

Debt Issuances

 

 

 

 

 

 

 

 

 

CMS Energy

 

 

 

 

 

 

 

 

 

Senior notes

 

$    300

 

5.05

%

March 2012

 

March 2022

 

Term loan facility1,2

 

180

 

variable

 

February 2012 and July 2012

 

December 2016

 

CMS Energy Total

 

480

 

 

 

 

 

 

 

Consumers

 

 

 

 

 

 

 

 

 

FMB

 

375

 

2.85

%

May 2012

 

May 2022

 

Term loan facility3

 

350

 

variable

 

June 2012

 

March 2013

 

Tax-exempt bonds4

 

68

 

variable

 

August 2012

 

April 2018

 

Tax-exempt bonds4

 

35

 

variable

 

August 2012

 

April 2035

 

Consumers Total

 

828

 

 

 

 

 

 

 

Total

 

$  1,308

 

 

 

 

 

 

 

 

Debt Retirements

 

 

 

 

 

 

 

 

 

CMS Energy

 

 

 

 

 

 

 

 

 

Contingently convertible senior notes5

 

$   226

 

2.88

%

January 2012 and April 2012

 

December 2024

 

Trust Preferred Securities

 

29

 

7.75

%

February 2012

 

July 2027

 

Senior notes

 

150

 

variable

 

July 2012

 

January 2013

 

CMS Energy Total

 

405

 

 

 

 

 

 

 

Consumers

 

 

 

 

 

 

 

 

 

FMB

 

300

 

5.00%

 

February 2012

 

February 2012

 

FMB

 

375

 

5.38%

 

May 2012

 

April 2013

 

Tax-exempt bonds4

 

68

 

variable

 

August 2012

 

April 2018

 

Tax-exempt bonds4

 

35

 

variable

 

August 2012

 

April 2035

 

Consumers Total

 

778

 

 

 

 

 

 

 

Total

 

$ 1,183

 

 

 

 

 

 

 

 

Outstanding borrowings bear interest at an annual interest rate of LIBOR plus 2.5 percent.

 

CMS Energy used these proceeds to retire the 7.75 percent Trust Preferred Securities and floating-rate senior notes due January 2013.

 

In June 2012, Consumers entered into a short-term credit agreement permitting Consumers to borrow up to $375 million.  Outstanding borrowings bear interest at an annual interest rate of LIBOR plus 0.8 percent.

 

In August 2012, Consumers utilized the Michigan Strategic Fund for the issuance of $68 million and $35 million of tax-exempt Michigan Strategic Fund revenue bonds.  The bonds, which are backed by letters of credit and collateralized by Consumers’ FMBs, are subject to optional tender by the holders that would result in remarketing. Consumers used the proceeds to redeem $103 million of tax-exempt bonds in August 2012.

 

CMS Energy’s contingently convertible notes.  See the “Contingently Convertible Securities” section in this Note for further discussion of the conversions.

 

In July 2012, Consumers executed a bond purchase agreement under which it will issue, in a December 2012 private placement, $52 million of 3.19 percent FMBs due 2024, $35 million of 3.39 percent FMBs due 2027, and $263 million of 4.31 percent FMBs due 2042.

 

Revolving Credit Facilities:  The following secured revolving credit facilities with banks were available at September 30, 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In Millions

Expiration Date

 

Amount of Facility

 

Amount Borrowed

 

Letters of Credit
Outstanding

 

Amount Available

CMS Energy

 

 

 

 

 

 

 

 

March 31, 20161

 

$  550

 

$     -

 

$    2

 

$  548

Consumers

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 20162

 

$  500

 

$     -

 

$    2

 

$  498

April 18, 20172

 

 

150

 

 

-

 

 

-

 

 

150

September 9, 20142

 

 

30

 

 

-

 

 

30

 

 

-

 

Obligations under this facility are secured by Consumers common stock.  CMS Energy’s average borrowings during the nine months ended September 30, 2012 were $16 million, with a weighted-average annual interest rate of 2.26 percent, representing LIBOR plus 2.00 percent.

 

Obligations under this facility are secured by FMBs of Consumers.

 

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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 September 30, 2012, $250 million of accounts receivable were eligible for transfer, and no accounts receivable had been transferred under the program.  During the nine months ended September 30, 2012, Consumers’ average short-term borrowings totaled $11 million, with a weighted average annual interest rate of 0.9 percent.

 

Contingently Convertible Securities:  Presented in the following table are the significant terms of CMS Energy’s contingently convertible securities at September 30, 2012:

 

 

 

 

 

 

 

 

 

 

 

Security

 

Maturity

 

Outstanding
(In Millions)

 

Adjusted
Conversion Price

 

Adjusted
Trigger Price

5.50% senior notes

 

2029

 

$  172

 

$    13.94

 

$    18.12

 

During 20 of the last 30 trading days ended September 30, 2012, the adjusted trigger-price contingencies were met for 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 December 31, 2012.

 

Presented in the following table are details about conversions of contingently convertible securities during the nine months ended September 30, 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conversion
Date

 

Principal
Converted
(In Millions)

 

Conversion
Value per
$1,000 of
Principal

 

Shares
of Common
Stock Issued
on Settlement

 

Cash Paid on
Settlement
(In Millions)

2.875% senior notes due 2024

 

January 2012

 

$    73

 

$  1,738.99

 

2,464,138

 

$    73

 

 

April 2012

 

 

153

 

 

1,774.98

 

5,381,349

 

 

153

 

Dividend Restrictions:  Under provisions of CMS Energy’s senior notes indenture, at September 30, 2012, payment of common stock dividends by CMS Energy was limited to $1.4 billion.

 

Under the provisions of its articles of incorporation, at September 30, 2012, Consumers had $550 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 nine months ended September 30, 2012, CMS Energy received $302 million of common stock dividends from Consumers.

 

Issuance of Common Stock:  In June 2011, CMS Energy entered into a continuous equity offering program under which CMS Energy may sell, from time to time in “at the market” offerings, common stock having an aggregate sales price of up to $50 million.  In June 2012, under this program, CMS Energy issued 650,235 shares of common stock at an average price of $23.07 per share, resulting in net proceeds of $15 million.  CMS Energy has issued a total of 1,413,160 shares of common stock under this program, resulting in net proceeds of $30 million.

 

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6:               EARNINGS PER SHARE – CMS ENERGY

Presented in the following table are CMS Energy’s basic and diluted EPS computations based on income from continuing operations:

 

 

In Millions, Except Per Share Amounts

 

Three Months Ended

 

Nine Months Ended

September 30

2012

2011

 

2012

2011

Income Available to Common Stockholders

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$     149

 

$     140

 

 

$     310

 

$     374

Less income attributable to noncontrolling interests

 

 1

 

 1

 

 

 2

 

 2

Income from Continuing Operations Available to

 

 

 

 

 

 

 

 

 

Common Stockholders – Basic and Diluted

 

$     148

 

$     139

 

 

$     308

 

$     372

Average Common Shares Outstanding

 

 

 

 

 

 

 

 

 

Weighted average shares – basic

 

 262.9

 

 251.3

 

 

 259.9

 

 250.5

Add dilutive contingently convertible securities

 

 5.1

 

 11.3

 

 

 7.2

 

 11.4

Add dilutive non-vested stock awards and options

 

 1.0

 

 0.6

 

 

 1.0

 

 0.4

Add dilutive convertible debentures

 

 -

 

 0.7

 

 

 -

 

 -

Weighted average shares – diluted

 

 269.0

 

 263.9

 

 

 268.1

 

 262.3

Income from Continuing Operations per Average

 

 

 

 

 

 

 

 

 

Common Share Available to Common Stockholders

 

 

 

 

 

 

 

 

 

Basic

 

$     0.56

 

$     0.55

 

 

$     1.18

 

$    1.48

Diluted

 

 0.55

 

 0.53

 

 

 1.14

 

 1.42

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 Energy common stock, exceeds the principal value of that security.

NON-VESTED STOCK AWARDS

CMS Energy’s 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.

 

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CONVERTIBLE DEBENTURES

CMS Energy redeemed all of its outstanding 7.75 percent Trust Preferred Securities in February 2012.  For each of the nine-month periods ended September 30, 2012 and September 30, 2011, the Trust Preferred Securities would have increased diluted EPS had they been included in the calculation.  Using the if-converted method, the debentures would have had the following impacts on the calculation of diluted EPS:

 

 

In Millions

 

 

 

Nine Months Ended

September 30

 

 

 

2012

2011

Increase to numerator from assumed reduction in

 

 

 

 

 

 

 

 

 

 

 

interest expense

 

 

 

 

 

 

 

 

$     -

 

$     1

Increase to denominator from assumed conversion of

 

 

 

 

 

 

 

 

 

 

 

debentures into common shares

 

 

 

 

 

 

 

 

 0.2

 

 0.7

7:               FINANCIAL INSTRUMENTS

Presented in the following table are the carrying amounts and fair values, by level within the fair value hierarchy, of CMS Energy’s and Consumers’ financial instruments that are not recorded at fair value.  The table does not include information on cash, cash equivalents, short-term accounts and notes receivable, short-term investments, and current liabilities since the carrying amount of these items approximate their fair values because of their short-term nature.  For information about assets and liabilities recorded at fair value and for additional details regarding the fair value hierarchy, see Note 2: Fair Value Measurements.

 

 

In Millions

 

September 30, 2012

 

December 31, 2011

 

Carrying

 

Fair Value

 

Carrying

 

 

Amount

 

Total

Level 1

Level 2

Level 3

 

Amount

Fair Value

CMS Energy, including Consumers

Securities held to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

maturity

 

$         8

 

 

$         9

 

$   -

 

$         9

 

$     -

 

 

$         7

 

$         7

Notes receivable1

 

 513

 

 

 541

 

 -

 

 -

 

 541

 

 

 480

 

 504

Long-term debt2

 

 7,199

 

 

 8,251

 

 -

 

 8,251

 

 -

 

 

 7,073

 

 8,025

Consumers

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt3

 

$  4,348

 

 

$  4,987

 

$   -

 

$ 4,987

 

$     -

 

 

$ 4,326

 

$ 4,882

Includes current portion of notes receivable of $27 million at September 30, 2012 and $19 million at December 31, 2011.

Includes current portion of long-term debt of $488 million at September 30, 2012 and $1,033 million at December 31, 2011.

Includes current portion of long-term debt of $40 million at September 30, 2012 and $339 million at December 31, 2011.

Notes receivable consist of EnerBank’s 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.

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 Energy common stock.

The effects of third-party credit enhancements are excluded from the fair value measurements of long-term debt.  At September 30, 2012 and December 31, 2011, CMS Energy’s 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 Energy’s and Consumers’ investment securities classified as available for sale or held to maturity:

 

 

In Millions

 

September 30, 2012

 

December 31, 2011

 

 

Unrealized

Unrealized

Fair

 

 

Unrealized

Unrealized

Fair

 

Cost

Gains

Losses

Value

 

Cost

Gains

Losses

Value

CMS Energy, including Consumers

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SERP

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mutual funds

 

$  124

 

$  4

 

$  -

 

$  128

 

 

$  113

 

$    -

 

$  -

 

$  113

Held to maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities

 

 8

 

 1

 

 -

 

 9

 

 

 7

 

 -

 

 -

 

 7

Consumers

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SERP

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mutual funds

 

$   84

 

$  2

 

$  -

 

$   86

 

 

$  74

 

$    -

 

$  -

 

$   74

CMS Energy

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

common stock

 

 6

 

 25

 

 -

 

 31

 

 

 7

 

 28

 

 -

 

 35

The mutual funds classified as available for sale hold primarily fixed-income instruments of varying maturities.  During the nine months ended September 30, 2012, CMS Energy contributed $13 million to the SERP, which included a contribution of $9 million by Consumers.  The contributions were used to acquire additional shares in the mutual funds.  Debt securities classified as held to maturity consist primarily of mortgage-backed securities held by EnerBank.

Sales activity for CMS Energy’s and Consumers’ investment securities was insignificant for each of the three-month and nine-month periods ended September 30, 2012 and 2011.  In January 2012, based on a donation commitment made in 2011, Consumers transferred shares of CMS Energy common stock to a related charitable foundation and recognized a gain of $5 million in income to reflect the excess of fair value over cost of the stock donated.  In January 2011, based on a donation commitment made in 2010, Consumers transferred shares of CMS Energy common stock to a related charitable foundation and recognized a gain of $4 million in income to reflect the excess of fair value over cost of the stock donated.

8:               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.  The contracts used to manage market risks may qualify as derivative instruments.  Neither CMS Energy nor Consumers enters into any derivatives for trading purposes.

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.

 

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Consumers’ coal purchase contracts are not derivatives because there is not an active market for the coal it purchases.  If an active market for coal develops in the future, some of these contracts may qualify as derivatives.  Since Consumers is subject to regulatory accounting, the resulting fair value gains and losses would be deferred as regulatory assets or liabilities and would not affect net income.

Consumers also uses FTRs to manage price risk related to electricity transmission congestion.  An FTR is a financial instrument that entitles its holder to receive compensation or requires its holder to remit payment for congestion-related transmission charges.  FTRs are accounted for as derivatives.  Under regulatory accounting, all changes in fair value associated with these instruments are deferred as regulatory assets or liabilities until the instruments are settled.

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.

The fair value of CMS Energy’s commodity contracts not designated as hedging instruments and recorded in other assets was $6 million at September 30, 2012 and $3 million at December 31, 2011.  The fair value of Consumers’ commodity contracts not designated as hedging instruments and recorded in other assets was $4 million at September 30, 2012 and $2 million at December 31, 2011.  The fair value of CMS Energy’s commodity contracts not designated as hedging instruments and recorded in other liabilities was $6 million at September 30, 2012 and $7 million at December 31, 2011.  Consumers did not have any contracts recorded as liabilities at September 30, 2012 and December 31, 2011.

Presented in the following table are the location and amount of the gains (losses) on derivatives recognized in CMS Energy’s consolidated statements of income for its derivatives not designated as hedging instruments:

 

 

In Millions

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30

 

2012

 

2011

 

2012

 

2011

 

CMS Energy

 

 

 

 

 

 

 

 

 

Commodity contracts

 

 

 

 

 

 

 

 

 

Operating revenue

 

$  (2

)

$  (1

)

$   1

 

$  (1

)

Fuel for electric generation

 

-

 

-

 

(2

)

-

 

Cost of gas sold

 

1

 

-

 

1

 

-

 

Purchased and interchange power

 

-

 

-

 

(1

)

-

 

Total CMS Energy

 

$  (1

)

$  (1

)

$  (1

)

$  (1

)

Consumers’ gains on FTRs deferred as regulatory liabilities were $1 million for the three months ended September 30, 2012 and $8 million for the nine months ended September 30, 2012.  Consumers’ losses on FTRs deferred as regulatory assets were $1 million for the three months ended September 30, 2011 and its gains on FTRs deferred as regulatory liabilities were $1 million for the nine months ended September 30, 2011.

CMS Energy’s derivative liabilities subject to credit-risk-related contingent features were $4 million at September 30, 2012 and $4 million at December 31, 2011.

 

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9:    NOTES RECEIVABLE

Presented in the following table are details of CMS Energy’s and Consumers’ current and non-current notes receivable:

 

 

 

 

 

 

 

 

In Millions

 

September 30, 2012

December 31, 2011

CMS Energy, including Consumers

 

 

 

 

Current

 

 

 

 

EnerBank notes receivable, net of allowance for loan losses

 

$    27

 

$    19

Other

 

 1

 

 30

Non-current

 

 

 

 

EnerBank notes receivable, net of allowance for loan losses

 

 486

 

 461

Other

 

 26

 

 1

Total notes receivable

 

$  540

 

$  511

Consumers

 

 

 

 

Current

 

 

 

 

Other

 

$  -

 

$    23

Non-current

 

 

 

 

Other

 

 26

 

 1

Total notes receivable

 

$    26

 

$    24

EnerBank notes receivable are unsecured consumer installment loans for financing home improvements.

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.  Loan 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

 

Nine Months Ended

 

September 30

 

2012

 

2011

 

2012

 

2011

 

Balance at beginning of period

 

$   5

 

$   5

 

$   5

 

$   5

 

Charge-offs

 

(2

)

(1

)

(4

)

(4

)

Recoveries

 

1

 

-

 

1

 

1

 

Provision for loan losses

 

1

 

1

 

3

 

3

 

Balance at end of period

 

$   5

 

$   5

 

$   5

 

$   5

 

Loans that are 30 days or more past due are considered delinquent.  Presented in the following table is the delinquency status of EnerBank’s consumer loans:

 

 

In Millions

                                                                                                                                               

 

 

Past Due
30-59 Days

 

Past Due
60-89 Days

 

Past Due
Over
90 Days

 

Total
Delinquent

 

Current

 

Total
Outstanding

September 30, 2012

 

$  1

 

$  1

 

$  1

 

$  3

 

$  510

 

$  513

December 31, 2011

 

 

1

 

 

-

 

 

1

 

 

2

 

 

478

 

 

480

At September 30, 2012 and December 31, 2011, $1 million of EnerBank’s loans had been modified as troubled debt restructurings.

 

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10:      RETIREMENT BENEFITS

CMS Energy and Consumers provide pension, OPEB, and other retirement benefits to employees under a number of different plans.

Presented in the following tables are the costs and other changes in plan assets and benefit obligations incurred in CMS Energy’s and Consumers’ retirement benefits plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In Millions

 

 

 

 

 

 

 

 

 

 

 

Pension

 

 

Three Months Ended

 

Nine Months Ended

September 30

 

2012

 

2011

 

2012

 

2011

CMS Energy, including Consumers

 

 

 

 

 

 

 

 

Net periodic pension cost

 

 

 

 

 

 

 

 

Service cost

 

$    12

 

$    12

 

$    36

 

$    36

Interest expense

 

24

 

25

 

74

 

75

Expected return on plan assets

 

(31)

 

(28)

 

(94)

 

(84)

Amortization of:

 

 

 

 

 

 

 

 

Net loss

 

19

 

16

 

57

 

47

Prior service cost

 

1

 

1

 

4

 

4

Net periodic pension cost

 

$    25

 

$    26

 

$    77

 

$    78

Consumers

 

 

 

 

 

 

 

 

Net periodic pension cost

 

 

 

 

 

 

 

 

Service cost

 

$    12

 

$    12

 

$    35

 

$    35

Interest expense

 

24

 

24

 

72

 

73

Expected return on plan assets

 

(30)

 

(27)

 

(91)

 

(82)

Amortization of:

 

 

 

 

 

 

 

 

Net loss

 

18

 

15

 

55

 

46

Prior service cost

 

1

 

1

 

4

 

4

Net periodic pension cost

 

$    25

 

$    25

 

$    75

 

$    76

CMS Energy’s and Consumers’ expected long-term rate of return on Pension Plan assets is 7.75 percent.  For the twelve months ended September 30, 2012, the actual return on Pension Plan assets was 18.6 percent, and for the twelve months ended September 30, 2011, the actual return was 2.0 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.

 

 

 

 

 

 

 

 

 

 

In Millions

 

 

 

 

 

 

 

 

 

 

 

OPEB

 

 

Three Months Ended

 

Nine Months Ended

September 30

 

2012

 

2011

 

2012

 

2011

CMS Energy, including Consumers

 

 

 

 

 

 

 

 

Net periodic OPEB cost

 

 

 

 

 

 

 

 

Service cost

 

$    8

 

$    7

 

$    24

 

$    20

Interest expense

 

21

 

20

 

62

 

58

Expected return on plan assets

 

(17)

 

(17)

 

(50)

 

(50)

Amortization of:

 

 

 

 

 

 

 

 

Net loss

 

12

 

7

 

35

 

23

Prior service credit

 

(5)

 

(5)

 

(15)

 

(15)

Net periodic OPEB cost

 

$    19

 

$    12

 

$    56

 

$    36

Consumers

 

 

 

 

 

 

 

 

Net periodic OPEB cost

 

 

 

 

 

 

 

 

Service cost

 

$    7

 

$    7

 

$    23

 

$    20

Interest expense

 

20

 

19

 

60

 

56

Expected return on plan assets

 

(15)

 

(15)

 

(46)

 

(46)

Amortization of:

 

 

 

 

 

 

 

 

Net loss

 

12

 

7

 

35

 

23

Prior service credit

 

(5)

 

(5)

 

(15)

 

(15)

Net periodic OPEB cost

 

$    19

 

$    13

 

$    57

 

$    38

 

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11:      INCOME TAXES

Presented in the following table is a reconciliation of the statutory U.S. federal income tax rate to the effective income tax rate from continuing operations, excluding noncontrolling interests:

 

 

 

 

 

 

 

Nine Months Ended September 30

 

2012

 

2011

 

CMS Energy, including Consumers

 

 

 

 

 

U.S. federal income tax rate

 

35.0

 %

35.0

 %

Increase (decrease) in income taxes from:

 

 

 

 

 

MCIT law change, net of federal expense

 

-

 

(5.9

)

Other state and local income taxes, net of federal benefit

 

4.7

 

3.4

 

Other, net

 

-

 

(1.4

)

Effective income tax rate

 

39.7

 %

31.1

 %

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

 

5.0

 

3.1

 

Other, net

 

(0.2

)

(1.4

)

Effective income tax rate

 

39.8

 %

36.7

 %

In May 2012, the Internal Revenue Service completed its audit of CMS Energy and its subsidiaries for 2008 and 2009, as well as its audit of research and development tax credit claims for 2001 through 2009.  The audits resulted in a $45 million increase in the net operating loss carryforward.  The impact to net income as a result of the completion of the audits was $1 million.

12:     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 Energy’s 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 independent power production; and

·                 other, including EnerBank, corporate interest and other expenses, and discontinued operations.

 

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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.

Presented in the following tables is financial information by reportable segment:

 

 

 

 

 

 

 

 

 

 

In Millions

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

September 30

 

2012

 

2011

 

2012

 

2011

CMS Energy, including Consumers

 

 

 

 

 

 

 

 

Operating Revenue

 

 

 

 

 

 

 

 

Electric utility

 

$  1,239

 

$  1,180

 

$  3,073

 

$  3,026

Gas utility

 

209

 

217

 

1,332

 

1,662

Enterprises

 

44

 

56

 

136

 

161

Other

 

15

 

11

 

42

 

34

Total Operating Revenue – CMS Energy

 

$  1,507

 

$  1,464

 

$  4,583

 

$  4,883

Consumers

 

 

 

 

 

 

 

 

Operating Revenue

 

 

 

 

 

 

 

 

Electric utility

 

$  1,239

 

$  1,180

 

$  3,073

 

$  3,026

Gas utility

 

209

 

217

 

1,332

 

1,662

Total Operating Revenue – Consumers

 

$  1,448

 

$  1,397

 

$  4,405

 

$  4,688

CMS Energy, including Consumers

 

 

 

 

 

 

 

 

Net Income (Loss) Available to Common Stockholders

 

 

 

 

 

 

 

 

Electric utility

 

$     165

 

$     159

 

$     297

 

$     309

Gas utility

 

(3)

 

(5)

 

61

 

88

Enterprises

 

5

 

4

 

9

 

36

Other

 

(19)

 

(19)

 

(52)

 

(59)

Total Net Income Available to Common Stockholders –

 

 

 

 

 

 

 

 

CMS Energy

 

$     148

 

$     139

 

$     315

 

$     374

Consumers

 

 

 

 

 

 

 

 

Net Income (Loss) Available to Common Stockholder

 

 

 

 

 

 

 

 

Electric utility

 

$     165

 

$     159

 

$     297

 

$     309

Gas utility

 

(3)

 

(5)

 

61

 

88

Other

 

-

 

-

 

1

 

1

Total Net Income Available to Common Stockholder –

 

 

 

 

 

 

 

 

Consumers

 

$     162

 

$     154

 

$     359

 

$     398

 

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Table of Contents

 

 

 

 

 

 

 

 

 

 

 

In Millions

 

 

 

 

 

 

 

September 30, 2012

 

December 31, 2011

CMS Energy, including Consumers

 

 

 

 

 

Plant, Property, and Equipment, Gross

 

 

 

 

 

Electric utility

 

$  10,647

 

$  10,400

 

Gas utility

 

4,306

 

4,206

 

Enterprises

 

112

 

109

 

Other

 

38

 

36

 

Total Plant, Property, and Equipment, Gross – CMS Energy

 

$  15,103

 

$  14,751

 

Consumers

 

 

 

 

 

Plant, Property, and Equipment, Gross

 

 

 

 

 

Electric utility

 

$  10,647

 

$  10,400

 

Gas utility

 

4,306

 

4,206

 

Other

 

15

 

15

 

Total Plant, Property, and Equipment, Gross – Consumers

 

$  14,968

 

$  14,621

 

CMS Energy, including Consumers

 

 

 

 

 

Total Assets

 

 

 

 

 

Electric utility1

 

$  10,135

 

$    9,938

 

Gas utility1

 

5,032

 

4,956

 

Enterprises

 

176

 

242

 

Other

 

1,265

 

1,316

 

Total Assets – CMS Energy

 

$  16,608

 

$   16,452

 

Consumers

 

 

 

 

 

Total Assets

 

 

 

 

 

Electric utility1

 

$  10,135

 

$    9,938

 

Gas utility1

 

5,032

 

4,956

 

Other

 

637

 

768

 

Total Assets – Consumers

 

$  15,804

 

$  15,662

 

Amounts include a portion of Consumers’ other common assets attributable to both the electric and gas utility businesses.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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 2011 Form 10-K.

ITEM 4. CONTROLS AND PROCEDURES

CMS ENERGY

Disclosure Controls and Procedures:  CMS Energy’s management, with the participation of its CEO and CFO, has evaluated the effectiveness of its disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report.  Based on such evaluation, CMS Energy’s CEO and CFO have concluded that, as of the end of such period, its disclosure controls and procedures are effective.

Internal Control Over Financial Reporting:  There have not been any changes in CMS Energy’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

CONSUMERS

Disclosure Controls and Procedures:  Consumers’ management, with the participation of its CEO and CFO, has evaluated the effectiveness of its disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report.  Based on such evaluation, Consumers’ CEO and CFO have concluded that, as of the end of such period, its disclosure controls and procedures are effective.

Internal Control Over Financial Reporting:  There have not been any changes in Consumers’ internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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 Part I – Item 3. Legal Proceedings, in the 2011 Form 10-K, see Part I – Item 1 – Note 3: Contingencies and Commitments, and Note 4: 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 2011 Form 10-K.

 

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Table of Contents

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a)        Unregistered Sales of Equity Securities

None.

(c)        Issuer Repurchases of Equity Securities

Presented in the following table are CMS Energy’s repurchases of equity securities for the three months ended September 30, 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Number of

 

Maximum Number of

 

 

 

 

 

 

Shares Purchased as

 

Shares That May Yet Be

 

 

Total Number of

 

 

 

Part of Publicly

 

Purchased Under Publicly

 

 

Shares

 

Average Price

 

Announced Plans or

 

Announced Plans or

Period

 

Purchased1

 

Paid per Share

 

Programs

 

Programs

July 1, 2012 to July 31, 2012

 

3,132

 

$  23.51

 

-

 

-

August 1, 2012 to

 

 

 

 

 

 

 

 

August 31, 2012

 

356,989

 

23.89

 

-

 

-

September 1, 2012 to

 

 

 

 

 

 

 

 

September 30, 2012

 

-

 

-

 

-

 

-

Total

 

360,121

 

$  23.89

 

-

 

-

1 Common shares were purchased to satisfy the 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.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

 

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Table of Contents

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 of the parties to each of the agreements that 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 SEC’s website at www.sec.gov.

 

Exhibits

 

 

Description

4.1

 

119th Supplemental Indenture dated as of August 3, 2012 between Consumers and The Bank of New York Mellon, as Trustee

12.1

 

Statement regarding computation of CMS Energy’s 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 Energy’s certification of the CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

 

CMS Energy’s 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 Energy’s 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 The financial information contained in the XBRL-related information is “unaudited” and “unreviewed.”

 

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Table of Contents

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:  October 25, 2012

By:

/s/ Thomas J. Webb

 

 

 

 

 

 

 

Thomas J. Webb

 

 

 

Executive Vice President and

 

 

 

Chief Financial Officer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CONSUMERS ENERGY COMPANY

 

 

 

(Registrant)

 

 

 

 

 

 

 

 

 

 

 

 

 

Dated:  October 25, 2012

By:

/s/ Thomas J. Webb

 

 

 

 

 

 

 

Thomas J. Webb

 

 

 

Executive Vice President and

 

 

 

Chief Financial Officer

 

 

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EXHIBITS

 



Table of Contents

CMS ENERGY’S AND CONSUMERS’ EXHIBIT INDEX

 

Exhibits

 

 

 

Description

4.1

 

 

119th Supplemental Indenture dated as of August 3, 2012 between Consumers and The Bank of New York Mellon, as Trustee

12.1

 

 

Statement regarding computation of CMS Energy’s 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 Energy’s certification of the CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

 

 

CMS Energy’s 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 Energy’s 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 The financial information contained in the XBRL-related information is “unaudited” and “unreviewed.”