10-Q 1 a12-24475_110q.htm 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