10-Q 1 d316229d10q.htm FORM 10-Q FORM 10-Q
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

  x   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
    For the quarterly period ended March 31, 2012

OR

 

  ¨    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
     OF THE SECURITIES EXCHANGE ACT OF 1934
     For the transition period from        to        

 

  Commission     Registrant; State of Incorporation;     IRS Employer
  File Number       Address; and Telephone Number       Identification No.
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 ¨  Consumers Energy Company:  Yes x    No ¨

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 ¨  Consumers Energy Company:  Yes x    No ¨

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 ¨  Non-Accelerated filer ¨ Smaller reporting company ¨

(Do not check if a smaller reporting company)

Consumers Energy Company:

Large accelerated filer ¨  Accelerated filer ¨  Non-Accelerated filer x Smaller reporting company ¨

(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 ¨    No x  Consumers Energy Company:  Yes ¨    No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock at April 13, 2012:

CMS Energy Corporation:

CMS Energy Common Stock, $0.01 par value

  

(including 1,296,406 shares owned by Consumers Energy Company)

     261,598,685   

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

March 31, 2012

TABLE OF CONTENTS

 

          Page  

Glossary

     3   

Filing Format

     9   

Forward-Looking Statements and Information

     9   

PART I - FINANCIAL INFORMATION

  

Item 1.

   Consolidated Financial Statements (unaudited)   
   CMS Energy      30   
   Consumers      38   
   Notes to the Unaudited Consolidated Financial Statements      45   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      12   

Item 3.

   Quantitative and Qualitative Disclosures about Market Risk      69   

Item 4.

   Controls and Procedures      69   

PART II - OTHER INFORMATION

  

Item 1.

   Legal Proceedings      70   

Item 1A.

   Risk Factors      70   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      70   

Item 3.

   Defaults Upon Senior Securities      70   

Item 4.

   Mine Safety Disclosures      70   

Item 5.

   Other Information      71   

Item 6.

   Exhibits      71   

Signatures

     72   

 

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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 October 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

 

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CMS ERM    CMS Energy Resource Management Company, formerly CMS MST, a wholly owned subsidiary of CMS Enterprises
CMS Field Services    CMS Field Services, Inc., a former wholly owned subsidiary of CMS Gas Transmission
CMS Gas Transmission    CMS Gas Transmission Company, a wholly owned subsidiary of CMS Enterprises
CMS Land    CMS Land Company, a wholly owned subsidiary of CMS Capital
CMS MST    CMS Marketing, Services and Trading Company, a wholly owned subsidiary of CMS Enterprises, whose name was changed to CMS ERM effective January 2004
Consumers    Consumers Energy Company, a wholly owned subsidiary of CMS Energy
CSAPR    The Cross-State Air Pollution Rule, which would supersede the EPA’s proposed Clean Air Transport Rule and replace CAIR, was finalized in July 2011 and was stayed in December 2011 pending judicial review
Customer Choice Act    Customer Choice and Electricity Reliability Act, a Michigan statute
D.C.    District of Columbia
Detroit Edison    The Detroit Edison Company, a non-affiliated company
Dodd-Frank Act    Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted in July 2010
DOE    U.S. Department of Energy
DOJ    U.S. Department of Justice
EBITDA    Earnings before interest, taxes, depreciation, and amortization
EnerBank    EnerBank USA, a wholly owned subsidiary of CMS Capital
Entergy    Entergy Corporation, a non-affiliated company
EPA    U.S. Environmental Protection Agency
EPS    Earnings per share

 

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Exchange Act    Securities Exchange Act of 1934, as amended
FDIC    Federal Deposit Insurance Corporation
FERC    The Federal Energy Regulatory Commission
FLI Liquidating Trust    Trust formed in Missouri bankruptcy court to accomplish the liquidation of Farmland Industries, Inc., a non-affiliated entity
FMB    First mortgage bond
FOV    Finding of Violation
FTR    Financial transmission right
GAAP    U.S. Generally Accepted Accounting Principles
GCR    Gas cost recovery
Health Care Acts    Comprehensive health care reform enacted in March 2010, comprising the Patient Protection and Affordable Care Act and the related Health Care and Education Reconciliation Act
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; for existing sources, MACT is the average emission limitation achieved by the best performing 12 percent of existing sources or the average limitation achieved by the best performing five sources, depending on the number of sources in the category
MATS    Mercury and Air Toxic Standards, which limit mercury, acid gases, and other toxic pollution from coal-fueled and oil-fueled power plants
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

 

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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
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 Gas Company, LLC, Pan Gas Storage Company, Panhandle Storage Company, and Panhandle Holding Company, a former wholly owned subsidiary of CMS Gas Transmission

 

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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
Smart Grid    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.
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

 

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U.S.    United States
XBRL    eXtensible Business Reporting Language

 

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FILING FORMAT

This combined Form 10-Q is separately filed by CMS Energy and Consumers. Information in this combined Form 10-Q relating to each individual registrant is filed by such registrant on its own behalf. Consumers makes no representation regarding information relating to any other companies affiliated with CMS Energy other than its own subsidiaries. None of CMS Energy, CMS Enterprises, nor any of CMS 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 electric and gas revenue decoupling mechanisms;

 

   

changes in applicable laws, rules, regulations, principles, or practices, or in their interpretation, including those related to energy policy, the environment, regulation, health care reforms (including the Health Care Acts), taxes, accounting matters, and other business issues that could have an impact on CMS Energy’s or Consumers’ businesses or financial results, including 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 of 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 their plan 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 their 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, delivery, usage, and storage;

 

   

the impact of CMS Energy’s and Consumers’ integrated business software system on their operations, 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

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:

 

LOGO

 

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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. Consumers’ productivity and efficiency improvements and capital investments are expected to help keep annual base rate increases (excluding PSCR and GCR charges) at or below the average rate of inflation. 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 $6.6 billion from 2012 through 2016. 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 $1.0 billion of electric utility projects to improve reliability and increase capacity and $0.7 billion of gas utility projects to increase capacity and deliverability and enhance pipeline integrity. Consumers also expects to spend $1.5 billion on environmental investments needed to comply with state and federal laws and regulations. An additional $1.2 billion of planned reliability investments at Consumers are aimed at reducing outages and improving customer satisfaction; these investments comprise $0.8 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 $0.5 billion on renewable energy investments from 2012 through 2016. The 2008 Energy Law requires that at least ten percent of Consumers’ electric sales volume come from renewable energy sources by 2015, and it includes requirements for specific capacity additions. Consumers has historically included renewable resources as part of its portfolio, with about five percent of its present power supply coming from such renewable sources as hydroelectric, landfill gas, biomass, and wind. In October 2011, Consumers filed an application for the biennial review and approval of its renewable energy plan. This filing proposes to reduce the renewable energy surcharge by an annual amount of $3 million, to $20 million, reflecting a reduction in expected costs to comply with renewable energy requirements.

Consumers’ Smart Grid program, with an estimated total project capital cost of $750 million, also represents a major capital investment. The full-scale deployment of advanced metering infrastructure is planned to begin in the second half of 2012 and to continue through 2019. Consumers has spent $140 million through 2011 on its Smart Grid program, and expects to spend an additional $260 million, following a phased approach, from 2012 through 2016.

 

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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 2011, Consumers filed a general electric rate case seeking an annual rate increase of $195 million, based on a 10.7 percent authorized return on equity. Consumers self-implemented an annual rate increase of $118 million in December 2011, subject to refund with interest. In March 2012, the administrative law judge recommended that the MPSC approve an annual rate increase of $43 million, based on a 10.25 percent return on equity.

 

   

Gas Rate Case: In September 2011, Consumers filed a general gas rate case seeking an annual rate increase of $49 million, based on a 10.7 percent authorized return on equity. Consumers self-implemented an annual rate increase of $23 million in March 2012, subject to refund with interest.

 

   

Revenue Decoupling Mechanisms: Consumers has two electric revenue decoupling mechanism reconciliations pending with the MPSC, covering the period December 2009 through November 2011 and requesting, in total, recovery of $59 million.

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. Consumers cannot predict whether this decision will be appealed to the Michigan Supreme Court or the timing or outcome of any such appeal. As a result, Consumers determined that it no longer met the accounting criteria for recognition of a regulatory asset under an alternative revenue program, and wrote off its $59 million electric revenue decoupling mechanism regulatory asset at March 31, 2012. Although the case before the Court of Appeals related specifically to Detroit Edison, Consumers will continue to pursue all of its legal and regulatory avenues to recover its decoupling revenues, including participating in or supporting any appeal of the Detroit Edison decision.

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, authorized under the MPSC’s 2010 gas rate case order, allows 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.

 

   

DOE Settlement: In July 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. In September 2011, Consumers 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 March 31, 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 would revise the 2008 Energy Law and immediately allow customers 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 22 percent. The revision also proposes an increase in the cap of six percentage points per year from 2013 through 2015. Consumers is unable to predict the outcome of the proposed legislation.

 

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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, as well as related litigation.

In July 2011, the EPA finalized CSAPR, which replaces 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.

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 of complying with CSAPR and MATS.

FINANCIAL PERFORMANCE IN 2012 AND BEYOND

For the three months ended March 31, 2012, CMS Energy’s net income available to common stockholders was $67 million, and diluted EPS were $0.25. This compares with net income available to common stockholders of $135 million and diluted EPS of $0.52 for the three months ended March 31, 2011. The two main factors contributing to the decline in earnings in 2012 were milder weather, which resulted in lower gas and electric deliveries to customers, and the write-off of Consumers’ $59 million electric revenue decoupling mechanism regulatory asset, as discussed above.

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. Consumers expects its electric sales to increase by about one percent annually through 2016, driven largely by the continued rise in industrial production. Consumers is projecting that its gas sales will remain stable through 2016. 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 March 31      2012        2011        Change    

 

 

Net Income Available to Common Stockholders

     $ 67         $ 135         $ (68)   

Basic Earnings Per Share

     $ 0.26         $ 0.54         $ (0.28)   

Diluted Earnings Per Share

     $     0.25         $     0.52         $   (0.27)   

 

 

 

In Millions  

 

 

 

     Three Months Ended March 31

       2012           2011           Change     

 

 

Electric utility

     $ 21         $ 65         $ (44)   

Gas utility

       55           88           (33)   

Enterprises

       5           3             

Corporate interest and other

       (21        (23          

Discontinued operations

       7           2             

 

 

Net Income Available to Common Stockholders

     $ 67         $     135         $ (68)   

 

 

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

 

In Millions  

 

       2012 better/(worse) than 2011        

 

Gas sales

                 $  (37)   

Electric sales

         (21)   

Electric and gas rate orders

         30    

Other, including depreciation and property tax

         (13)            $  (41)
        

 

  

Charge to write off electric decoupling regulatory asset

            (36)

Higher subsidiary earnings of enterprises segment

           

Lower corporate fixed charges and other

           

Other, mainly the elimination of a liability related to a previously sold business

           

 

Total change

            $  (68)

 

CONSUMERS ELECTRIC UTILITY RESULTS OF OPERATIONS

 

In Millions    

 

 
     Three Months Ended March 31      2012        2011        Change    

 

 

Net Income Available to Common Stockholders

       $       21           $         65           $       (44)   

 

 

Reasons for the change

              

Electric deliveries and rate increases

                 $       (57)   

Maintenance and other operating expenses

                 (3)   

Depreciation and amortization

                 (6)   

General taxes

                 (1)   

Interest charges

                   

Income taxes

                 22    

 

 

Total change

                 $       (44)   

 

 

 

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Electric deliveries and rate increases: For the three months ended March 31, 2012, electric delivery revenues decreased $57 million compared with 2011. This decrease reflected a $59 million charge to write off Consumers’ electric decoupling mechanism regulatory asset following a Court of Appeals ruling stating that the MPSC lacked statutory authority to adopt a revenue decoupling mechanism for electric utilities. In addition, a $19 million decrease in revenues due to milder weather in 2012 and a $6 million decrease in other miscellaneous revenues were offset largely by a $27 million increase in revenues from a December 2011 self-implemented rate increase. Deliveries to end-use customers were 9.2 billion kWh in 2012 and 9.3 billion kWh in 2011.

Maintenance and other operating expenses: For the three months ended March 31, 2012, maintenance and other operating expenses increased $3 million compared with 2011. This variance consisted of a $4 million increase in energy optimization program costs, the absence, in 2012, of a $3 million insurance refund recorded in 2011, and a $4 million increase in other operating expenses. These increases were offset partially by $8 million in lower plant maintenance costs in 2012.

Depreciation and amortization: For the three months ended March 31, 2012, depreciation and amortization expense increased $6 million compared with 2011, due primarily to higher depreciation expense from increased plant in service.

Income taxes:  For the three months ended March 31, 2012, income taxes decreased $22 million compared with 2011, reflecting lower electric utility earnings in 2012.

CONSUMERS GAS UTILITY RESULTS OF OPERATIONS

 

In Millions    

 

 
     Three Months Ended March 31      2012        2011        Change    

 

 

Net Income Available to Common Stockholders

       $     55           $     88           $     (33)   

 

 

Reasons for the change

              

Gas deliveries and rate increases

                 $     (36)   

Maintenance and other operating expenses

                 (9)   

Depreciation and amortization

                 (4)   

General taxes

                 (1)   

Interest charges

                   

Income taxes

                 16    

 

 

Total change

                 $     (33)   

 

 

Gas deliveries and rate increases: For the three months ended March 31, 2012, gas delivery revenues decreased $36 million compared with 2011. This decrease reflected $59 million of lower customer deliveries, due primarily to milder weather in 2012. The decrease was offset partially by additional revenues of $15 million from a May 2011 rate increase and an $8 million increase in other miscellaneous revenues. Gas deliveries, including transportation to end-use customers, were 106.4 bcf in 2012, a decrease of 27.5 bcf, or 20.5 percent, compared with 2011.

Maintenance and other operating expenses: For the three months ended March 31, 2012, maintenance and other operating expenses increased $9 million compared with 2011, due primarily to higher energy optimization program costs in 2012.

Depreciation and amortization: For the three months ended March 31, 2012, depreciation and amortization expense increased $4 million compared with 2011, due primarily to higher depreciation expense from increased plant in service.

Income taxes: For the three months ended March 31, 2012, income taxes decreased $16 million compared with 2011, reflecting lower gas utility earnings in 2012.

 

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ENTERPRISES RESULTS OF OPERATIONS

 

In Millions    

 

 
     Three Months Ended March 31      2012        2011        Change    

 

 

Net Income Available to Common Stockholders

       $        5           $        3           $        2     

 

 

For the three months ended March 31, 2012, net income of the enterprises segment increased $2 million compared with 2011, due to a Michigan Business Tax benefit.

CORPORATE INTEREST AND OTHER RESULTS OF OPERATIONS

 

In Millions    

 

 
     Three Months Ended March 31      2012        2011        Change    

 

 

Net Loss Available to Common Stockholders

       $     (21        $     (23        $        2     

 

 

For the three months ended March 31, 2012, corporate interest and other net expenses decreased $2 million compared with 2011, due to an after-tax decrease in interest expense, reflecting lower interest rates.

DISCONTINUED OPERATIONS

For the three months ended March 31, 2012, income from discontinued operations was $7 million, reflecting the elimination of a liability related to a prior asset sale, compared with income from discontinued operations of $2 million in 2011 as a result of a favorable legal settlement related to a previously sold business.

 

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CASH POSITION, INVESTING, AND FINANCING

At March 31, 2012, CMS Energy had $387 million of consolidated cash and cash equivalents, which included $29 million of restricted cash and cash equivalents, and Consumers had $201 million of consolidated cash and cash equivalents, which included $28 million of restricted cash and cash equivalents.

OPERATING ACTIVITIES

Presented in the following table are specific components of net cash provided by operating activities for the three months ended March 31, 2012 and 2011:

 

In Millions   

 

 
     Three Months Ended March 31      2012        2011        Change   

 

 

CMS ENERGY, INCLUDING CONSUMERS

              

Net income

             $          67           $        135           $        (68)   

Non-cash transactions1

       280           296           (16)   
    

 

 

 
       $        347           $        431           $        (84)   

Postretirement benefits contributions

       (19        (19          

Decrease in core working capital2

       322           462           (140)   

Other changes in assets and liabilities, net

       (15        (33        18    

 

 

Net cash provided by operating activities

               $        635           $        841           $      (206)   

 

 

CONSUMERS

    

Net income

             $          76           $        153           $        (77)   

Non-cash transactions1

       256           256             
    

 

 

 
       $        332           $        409           $        (77)   

Postretirement benefits contributions

       (18        (19          

Decrease in core working capital2

       328           467           (139)   

Other changes in assets and liabilities, net

       39           10           29    

 

 

Net cash provided by operating activities

       $        681           $        867           $      (186)   

 

 

 

  1 

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

 

  2 

Changes in core working capital comprise changes in accounts receivable and accrued revenues, inventories, and accounts payable.

For the three months ended March 31, 2012, net cash provided by operating activities at CMS Energy decreased $206 million compared with 2011, and net cash provided by operating activities at Consumers decreased $186 million compared with 2011. The decreases were due primarily to lower gas sales and a smaller reduction in core working capital, reflecting lower usage of gas inventory.

 

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INVESTING ACTIVITIES

Presented in the following table are specific components of net cash used in investing activities for the three months ended March 31, 2012 and 2011:

 

In Millions   

 

 
     Three Months Ended March 31      2012        2011        Change   

 

 

CMS ENERGY, INCLUDING CONSUMERS

              

Capital expenditures

       $         (294)           $     (191)           $     (103)   

Costs to retire property and other

       (19)           (37)           18    

 

 

Net cash used in investing activities

       $         (313)           $     (228)           $       (85)   

 

 

CONSUMERS

              

Capital expenditures

       $         (294)           $     (186)           $     (108)   

Costs to retire property and other

       (18)           (42)           24    

 

 

Net cash used in investing activities

       $         (312)           $     (228)           $       (84)   

 

 

For the three months ended March 31, 2012, net cash used in investing activities at CMS Energy increased $85 million compared with 2011, and net cash used in investing activities at Consumers increased $84 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) provided by financing activities for the three months ended March 31, 2012 and 2011:

 

In Millions   

 

 
     Three Months Ended March 31      2012        2011        Change   

 

 

CMS ENERGY, INCLUDING CONSUMERS

              

Issuance of FMBs, senior notes, and other debt

       $           405            $        13            $       392    

Retirement of debt and other debt maturity payments

       (459)           (13)           (446)   

Payments of common stock dividends

       (62)           (53)           (9)   

Other financing activities

       (9)           (8)           (1)   

 

 

Net cash used in financing activities

       $          (125)           $       (61)           $       (64)   

 

 

CONSUMERS

              

Retirement of debt and other debt maturity payments

       $          (310)           $         (9)           $     (301)   

Payments of common stock dividends

       (115)           (104)           (11)   

Stockholder contribution from CMS Energy

       150            125            25    

Other financing activities

       (6)           (9)             

 

 

Net cash (used in) provided by financing activities

       $          (281)           $          3            $     (284)   

 

 

For the three months ended March 31, 2012, net cash used in financing activities at CMS Energy increased $64 million compared with 2011, due primarily to an increase in net debt retirements.

For the three months ended March 31, 2012, net cash used in financing activities at Consumers increased $284 million compared with 2011, due primarily to an increase in net debt retirements, offset partially by an increase in the stockholder contribution from CMS Energy.

 

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CAPITAL RESOURCES AND LIQUIDITY

CMS Energy uses dividends from its subsidiaries and external financing and capital transactions to invest in its utility and non-utility businesses, retire debt, pay dividends, and fund its other obligations. The ability of CMS 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 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 – Dividend Restrictions. For the three months ended March 31, 2012, Consumers paid $115 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 2011, under this program, CMS Energy issued 762,925 shares of common stock at an average price of $19.66 per share, resulting in net proceeds of $15 million. CMS Energy did not issue any common stock under this program during the three months ended March 31, 2012.

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 March 31, 2012:

 

In Millions  

 

       Amount of
Facility
       Amount
Borrowed
       Letters of
Credit
Outstanding
       Amount
Available
       Expiration Date  

 

CMS ENERGY

                        

Revolving credit facility1

           $  550               $        -                   $        3               $  547         March 2016  

 

CONSUMERS

                        

Revolving credit facility2

           $  500               $        -                   $        1               $  499         March 2016  

Revolving credit facility2,3

       150           -           -           150         August 2013  

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.

 

  3 

In April 2012, the expiration date was extended to April 2017.

CMS Energy and Consumers use these credit facilities for general working capital purposes and to issue letters of credit. An additional source of liquidity is Consumers’ revolving accounts receivable sales program, which allows it to transfer up to $250 million of accounts receivable as a secured borrowing. At March 31, 2012, $250 million of accounts receivable were eligible for transfer under this program.

 

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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. CMS Energy’s $550 million revolving credit agreement and its $180 million unsecured term loan credit agreement specify a maximum debt-to-EBITDA ratio, as defined therein. Certain of CMS Energy’s senior notes indenture supplements and its $180 million term loan credit agreement specify a minimum interest coverage ratio, as defined therein. Consumers’ revolving credit agreements and its revolving accounts receivable purchase agreement specify a maximum debt-to-capital ratio, as defined therein. At March 31, 2012, no events of default had occurred with respect to any debt covenants contained in CMS Energy and Consumers’ credit agreements or debt indentures. CMS Energy and Consumers were each in compliance with these limits as of March 31, 2012, as presented in the following table:

 

 

 
    Credit Agreement or Facility      Description      Limit      Ratio at  
March 31, 2012  
 

 

 

CMS ENERGY

              

$550 million revolving credit agreement and $180 million term loan credit agreement

     Debt to EBITDA      £    6.0 to 1.0        5.0 to 1.0     

Senior notes indenture

     Interest Coverage      >    1.6 to 1.0        3.6 to 1.0     

$180 million term loan credit agreement

     Interest Coverage      >    2.0 to 1.0        3.6 to 1.0     

 

 

CONSUMERS

              

$500 million and $30 million revolving credit agreements and $35 million and $68 million reimbursement agreements

     Debt to Capital      £  0.65 to 1.0        0.46 to 1.0     

$150 million revolving credit agreement and $250 million accounts receivable purchase agreement

     Debt to Capital      £  0.70 to 1.0        0.46 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 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 March 31, 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; Part II – Item 1A. Risk Factors; and Note 3: Contingencies and Commitments.

CONSUMERS ELECTRIC UTILITY BUSINESS OUTLOOK AND UNCERTAINTIES

Balanced Energy Initiative: Consumers’ balanced energy initiative is a comprehensive energy resource plan designed to meet the short-term and long-term electricity needs of its customers through:

 

   

energy efficiency;

   

demand management;

   

expanded use of renewable energy;

   

development of new power plants;

 

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power or generating asset purchases to complement existing generating sources;

   

continued operation or upgrade of existing units; and

   

potential retirement or mothballing of older generating units.

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;

   

converting the units to natural gas instead of coal;

   

decommissioning the units; and

   

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

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 secure its renewable energy requirement each year with a combination of newly generated RECs and previously generated RECs carried over from prior years. At March 31, 2012, the combination of these sources represented 100 percent of Consumers’ 2015 REC requirement.

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 March 2012, Consumers has contracted for the purchase of 297 MW of nameplate capacity from renewable energy suppliers, which represents 59 percent of the 2015 renewable capacity requirement.

Consumers has secured more than 83,000 acres of land easements in Michigan’s Huron, Mason, and Tuscola Counties for the potential development of wind generation, and is now collecting wind speed and other meteorological data at those sites. Consumers has entered into construction and supply contracts as well as a contract to purchase wind turbine generators for the construction of Lake Winds Energy Park, a 100-MW wind park in Mason County, which Consumers expects to be operational in late 2012. In July 2011, the Mason County Planning Commission voted in favor of granting a special land use permit for the construction of Lake Winds Energy Park. Although opposed by certain parties, the actions of the Mason County Planning Commission have been upheld by the Mason County Zoning Board of Appeals and the Mason County Circuit Court. Construction of the Lake Winds Energy Park began in November 2011. Consumers will also continue development of Cross Winds Energy Park, its 150-MW wind park in Tuscola County, scheduled for operation by late 2015, as well as seek other opportunities for wind generation development in support of the renewable capacity standards. Upon completion of the Lake Winds and Cross Winds Energy Parks, Consumers will have purchased or constructed 110 percent of the 2015 renewable capacity requirement.

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 two percent compared with 2011.

 

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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 March 31, 2012, electric deliveries under the ROA program were at the ten percent limit and alternative electric suppliers were providing 786 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 would revise the 2008 Energy Law and immediately allow customers 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 22 percent. The revision also proposes an increase in the cap of six percentage points per year from 2013 through 2015. Consumers is unable to predict the outcome of the proposed legislation.

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 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. For additional details on Consumers’ electric rate matters, see Note 4: Regulatory Matters.

Electric Depreciation: In June 2011, the MPSC approved a settlement agreement in Consumers’ electric depreciation case, authorizing a $19 million increase in annual depreciation expense. The new depreciation rates will go into effect with a final order in Consumers’ next electric rate case.

 

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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 allegedly 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. The court heard oral arguments in April 2012, but there is no timeline for a decision or order from the court.

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 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, and MATS involves the installation of state-of-the-art emission control equipment at some facilities and the suspension of operations at others; however, Consumers continues to evaluate CSAPR and MATS in conjunction with other EPA rulemakings, litigation, and congressional action. This evaluation could result in:

 

   

additional or accelerated 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 or all of Consumers’ older, smaller 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.

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 Operating Permit programs. Numerous parties have challenged this rule in the U.S. Court of Appeals for the D.C. Circuit, and Consumers is monitoring this litigation. 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 is analyzing this newly proposed rule. The

 

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EPA is also expected to propose emissions guidelines 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.

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. Michigan already regulates CCBs as low-hazard industrial waste. The EPA proposed a range of alternatives for regulating CCBs, including regulation as either a non-hazardous waste or a hazardous waste. If coal ash were regulated as a hazardous waste, Consumers would likely cease the beneficial re-use of this product, 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 July 2012. Consumers also expects the EPA to propose new regulations in July 2012 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 remain unchanged from 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;

 

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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.

A decoupling mechanism was authorized by the MPSC in Consumers’ 2009 gas rate case, subject to certain conditions. This mechanism, which was extended in the MPSC’s 2010 gas rate case order, allows Consumers to adjust future gas rates to compensate for changes in sales volumes resulting from the difference between the level of average sales per customer adopted in the order and actual average weather-adjusted sales per customer. This mechanism is intended to mitigate the impacts of energy efficiency programs, conservation, and changes in economic conditions on Consumers’ gas utility revenue, but does not provide rate adjustments for changes in sales volumes arising from weather fluctuations.

Gas Rate Matters: Rate matters are critical to Consumers’ gas utility business. For additional details on Consumers’ gas rate matters, see Note 4: Regulatory Matters.

Pending Gas Rate Case: In September 2011, Consumers filed an application with the MPSC seeking an annual rate increase of $49 million based on a 10.7 percent authorized return on equity, in order to recover investments made to enhance safety, system reliability, and operational efficiencies that improve service to customers. In February 2012, the MPSC Staff recommended an annual rate reduction of $22 million, based on a 9.95 percent return on equity. Also in February, Consumers filed testimony and exhibits with the MPSC in support of a self-implemented annual rate increase of $23 million, based on a 10.5 percent return on equity. The MPSC issued an order stating that it did not find good cause to prevent implementation and accordingly, Consumers self-implemented an annual rate increase of $23 million, subject to refund with interest, in March 2012.

Presented in the following table are the components of the rate reduction recommended by the MPSC Staff and Consumers’ self-implemented rate increase:

 

In Millions    

 

 
   Components of the Rate Increase   

Rate Reduction 

Recommended by the 

MPSC Staff 

    

Consumers’ 

Self-Implemented 

Increase 

     Difference    

 

 

   Investment in rate base

     $       17          $     22          $       (5)    

   Uncollectible accounts

             15          (12)    

   Cost of capital

     (11)                 (12)    

   Gross margin

     (18)         (11)         (7)    

   Operating and maintenance costs

     (13)         (4)         (9)    

 

 

   Total

     $     (22)         $     23          $     (45)    

 

 

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;

   

verification of maximum allowable operating pressure of pipelines in populated areas; and

   

pressure testing (or equivalent) of previously untested pipelines.

 

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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 Grid: Consumers’ grid modernization effort continues, with the recent selection of a vendor that will provide smart electric meters and a cellular communications network to allow Consumers to transmit and receive electric usage information from customers’ homes and businesses. Smart meters are designed 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 operational benefits to Consumers. Consumers intends to use a phased implementation approach, beginning deployment in the second half of 2012 and continuing through 2019. 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 March 31, 2012, and seven percent of CMS Energy’s net income available to common stockholders for the three months ended March 31, 2012. The carrying value of EnerBank’s loan portfolio was $477 million at March 31, 2012. Its loan portfolio was funded

 

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primarily by deposit liabilities of $476 million. Twelve-month rolling average default rates on loans held by EnerBank have declined from 1.3 percent at March 31, 2011 to 0.8 percent at March 31, 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.

Employee Separation Program: In April 2012, CMS Energy announced a voluntary separation program for its salaried employees. Under the program, an employee may elect to request separation, and management will decide whether to accept the request and approve the employee’s separation. The target separation date for employees who participate in the program is July 1, 2012. CMS Energy cannot presently predict the level of participation in the program.

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.

NEW ACCOUNTING STANDARDS

For details regarding the implementation of new accounting standards during the three months ended March 31, 2012, see Note 1: New Accounting Standards.

 

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CMS Energy Corporation

Consolidated Statements of Income

(Unaudited)

 

In Millions     

 

 
Three Months Ended March 31    2012        2011    

 

 

Operating Revenue

       $      1,743           $      2,055     

Operating Expenses

     

Fuel for electric generation

     130           152     

Purchased and interchange power

     317           300     

Purchased power – related parties

     22           21     

Cost of gas sold

     550           768     

Maintenance and other operating expenses

     295           279     

Depreciation and amortization

     172           162     

General taxes

     69           67     
  

 

 

 

Total operating expenses

     1,555           1,749     

 

 

Operating Income

     188           306     

Other Income (Expense)

     

Interest income

     1           2     

Allowance for equity funds used during construction

     2           1     

Income from equity method investees

     5           4     

Other income

     3           4     

Other expense

     (2)          (2)    
  

 

 

 

Total other income

     9           9     

 

 

Interest Charges

     

Interest on long-term debt

     94           100     

Other interest expense

     6           6     

Allowance for borrowed funds used during construction

     (1)          (1)    
  

 

 

 

Total interest charges

     99           105     

 

 

Income Before Income Taxes

     98           210     

Income Tax Expense

     38           77     
  

 

 

 

Income From Continuing Operations

     60           133     

Income From Discontinued Operations,

     

Net of Tax Expense of $4 and $1

     7           2     
  

 

 

 

Net Income Available to Common Stockholders

       $           67           $         135     

 

 

 

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In Millions, Except Per Share Amounts    

 

 
Three Months Ended March 31    2012      2011    

 

 

Net Income Attributable to Common Stockholders

     

Amounts attributable to continuing operations

       $           60         $         133     

Amounts attributable to discontinued operations

     7         2     
  

 

 

 

Net income available to common stockholders

       $           67         $         135     
  

 

 

 

Basic Earnings Per Average Common Share

     

Basic earnings from continuing operations

       $        0.23         $        0.53     

Basic earnings from discontinued operations

     0.03         0.01     
  

 

 

 

Basic earnings attributable to common stock

       $        0.26         $        0.54     
  

 

 

 

Diluted Earnings Per Average Common Share

     

Diluted earnings from continuing operations

       $        0.22         $        0.51     

Diluted earnings from discontinued operations

     0.03         0.01     
  

 

 

 

Diluted earnings attributable to common stock

       $        0.25         $        0.52     
  

 

 

 

Dividends Declared Per Common Share

       $        0.24         $        0.21     

 

 

The accompanying notes are an integral part of these statements.

 

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CMS Energy Corporation

Consolidated Statements of Comprehensive Income

(Unaudited)

 

In Millions    

 

 
Three Months Ended March 31    2012      2011    

 

 

Net Income

       $            67         $          135     

Retirement benefits liability

     

Retirement benefits liability adjustments, net of tax of $ - in 2012 and 2011

     1         -     

Investments

     

Unrealized gain on investments, net of tax of $ - in 2012 and 2011

     1         -     
  

 

 

 

Other Comprehensive Income

     2         -     

 

 

Total Comprehensive Income

       $            69         $          135     

 

 

The accompanying notes are an integral part of these statements.

 

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CMS Energy Corporation

Consolidated Statements of Cash Flows

(Unaudited)

 

In Millions    

 

 
Three Months Ended March 31    2012      2011    

 

 

Cash Flows from Operating Activities

     

Net income

       $          67          $        135     

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

     

Depreciation and amortization

     172          162     

Deferred income taxes and investment tax credit

     42          73     

Postretirement benefits expense

     47          40     

Other non-cash operating activities

     19          21     

Postretirement benefits contributions

     (19)         (19)    

Changes in other assets and liabilities:

     

Decrease in accounts receivable, notes receivable, and accrued revenue

     99          9     

Decrease in accrued power supply revenue

             15     

Decrease in inventories

     312          462     

Decrease in accounts payable

     (89)         (9)    

Decrease in accrued expenses

     (109)         (89)    

Decrease in other current and non-current assets

     113          29     

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

     (19)         12     
  

 

 

 

Net cash provided by operating activities

     635          841     

 

 

Cash Flows from Investing Activities

     

Capital expenditures (excludes assets placed under capital lease)

     (294)         (191)    

Cost to retire property

     (7)         (17)    

Other investing activities

     (12)         (20)    
  

 

 

 

Net cash used in investing activities

     (313)         (228)    

 

 

Cash Flows from Financing Activities

     

Proceeds from issuance of long-term debt

     390          -     

Proceeds from EnerBank notes, net

     15          13     

Retirement of long-term debt

     (459)         (13)    

Payment of common stock dividends

     (62)         (53)    

Payment of capital and finance lease obligations

     (6)         (6)    

Other financing costs

     (3)         (2)    
  

 

 

 

Net cash used in financing activities

     (125)         (61)    

 

 

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

     197          552     

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

             2     
  

 

 

 

Net Increase in Cash and Cash Equivalents

     197          554     

Cash and Cash Equivalents, Beginning of Period

     161          247     
  

 

 

 

Cash and Cash Equivalents, End of Period

       $        358          $        801     

 

 

The accompanying notes are an integral part of these statements.

 

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CMS Energy Corporation

Consolidated Balance Sheets

(Unaudited)

ASSETS

In Millions  

 

 
     March 31 
2012  
     December 31 
2011  
 

 

 

Current Assets

     

Cash and cash equivalents

       $             358           $             161     

Restricted cash and cash equivalents

     29           27     

Accounts receivable and accrued revenue, less allowances of $35 in 2012 and 2011

     750           869     

Notes receivable

     25           49     

Accounts receivable – related parties

     10           10     

Inventories at average cost

     

Gas in underground storage

     610           929     

Materials and supplies

     96           92     

Generating plant fuel stock

     182           166     

Deferred income taxes

     3           24     

Deferred property taxes

     155           187     

Regulatory assets

     -           1     

Prepayments and other current assets

     50           50     
  

 

 

 

Total current assets

     2,268           2,565     

 

 

Plant, Property, and Equipment

     

Plant, property, and equipment, gross

     14,864           14,751     

Less accumulated depreciation and amortization

     5,008           4,901     
  

 

 

 

Plant, property, and equipment, net

     9,856           9,850     

Construction work in progress

     899           783     
  

 

 

 

Total plant, property, and equipment

     10,755           10,633     

 

 

Other Non-current Assets

     

Regulatory assets

     2,362           2,466     

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

     454           462     

Investments

     53           50     

Other

     268           276     
  

 

 

 

Total other non-current assets

     3,137           3,254     

 

 

Total Assets

       $        16,160           $        16,452     

 

 

 

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LIABILITIES AND EQUITY

In Millions  

 

 
     March 31
2012  
     December 31 
2011  
 

 

 

Current Liabilities

     

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

     $             837           $          1,057     

Accounts payable

     409           575     

Accounts payable – related parties

     8           9     

Accrued rate refunds

     34           30     

Accrued interest

     66           101     

Accrued taxes

     206           282     

Regulatory liabilities

     120           125     

Other current liabilities

     139           159     
  

 

 

 

Total current liabilities

     1,819           2,338     

 

 

Non-current Liabilities

     

Long-term debt

     6,193           6,040     

Non-current portion of capital and finance lease obligations

     162           167     

Regulatory liabilities

     1,919           1,875     

Postretirement benefits

     1,288           1,289     

Asset retirement obligations

     257           254     

Deferred investment tax credit

     45           46     

Deferred income taxes

     1,056           1,035     

Other non-current liabilities

     328           336     
  

 

 

 

Total non-current liabilities

     11,248           11,042     

 

 

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

     

Equity

     

Common stockholders equity

     

Common stock, authorized 350.0 shares; outstanding 257.4 shares in 2012 and 254.1 shares in 2011

     3           3     

Other paid-in capital

     4,641           4,627     

Accumulated other comprehensive loss

     (47)          (49)    

Accumulated deficit

     (1,548)          (1,553)    
  

 

 

 

Total common stockholders equity

     3,049           3,028     

Noncontrolling interests

     44           44     
  

 

 

 

Total equity

     3,093           3,072     

 

 

Total Liabilities and Equity

     $        16,160           $        16,452     

 

 

The accompanying notes are an integral part of these statements.

 

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CMS Energy Corporation

Consolidated Statements of Changes in Equity

(Unaudited)

 

In Millions    

 

 
Three Months Ended March 31    2012        2011    

 

 

Common Stock

     

At beginning of period

       $             3           $             2     

Common stock issued

     -           1     
  

 

 

 

At end of period

     3           3     

 

 

Other Paid-in Capital

     

At beginning of period

     4,627           4,588     

Common stock issued

     8           6     

Common stock reissued

     6           5     
  

 

 

 

At end of period

     4,641           4,599     

 

 

Accumulated Other Comprehensive Loss

     

Retirement benefits liability

     

At beginning of period

     (48)          (39)    

Retirement benefits liability adjustments

     1           -     
  

 

 

 

At end of period

     (47)          (39)    
  

 

 

 

Investments

     

At beginning of period

     -           -     

Unrealized gain on investments

     1           -     
  

 

 

 

At end of period

     1           -     
  

 

 

 

Derivative instruments

     

At beginning and end of period

     (1)          (1)    
  

 

 

 

At end of period

     (47)          (40)    

 

 

Accumulated Deficit

     

At beginning of period

     (1,553)          (1,757)    

Net income

     67           135     

Common stock dividends declared

     (62)          (53)    
  

 

 

 

At end of period

     (1,548)          (1,675)    

 

 

Noncontrolling Interests

     

At beginning and end of period

     44           44     

 

 

Total Equity

       $      3,093           $      2,931     

 

 

The accompanying notes are an integral part of these statements.

 

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Consumers Energy Company

Consolidated Statements of Income

(Unaudited)

 

In Millions  

 

 
Three Months Ended March 31    2012        2011    

 

 

Operating Revenue

       $      1,675             $      1,988     

Operating Expenses

     

Fuel for electric generation

     106           129     

Purchased and interchange power

     313           293     

Purchased power – related parties

     21           21     

Cost of gas sold

     536           753     

Maintenance and other operating expenses

     277           265     

Depreciation and amortization

     171           161     

General taxes

     68           66     
  

 

 

 

Total operating expenses

     1,492           1,688     

 

 

Operating Income

     183           300     

Other Income (Expense)

     

Interest income

     1           2     

Allowance for equity funds used during construction

     2           1     

Other income

     8           8     

Other expense

     (2)          (2)    
  

 

 

 

Total other income

     9           9     

 

 

Interest Charges

     

Interest on long-term debt

     61           63     

Other interest expense

     4           4     

Allowance for borrowed funds used during construction

     (1)          (1)    
  

 

 

 

Total interest charges

     64           66     

 

 

Income Before Income Taxes

     128           243     

Income Tax Expense

     52           90     
  

 

 

 

Net Income Available to Common Stockholder

       $           76           $         153     

 

 

The accompanying notes are an integral part of these statements.

 

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Consumers Energy Company

Consolidated Statements of Comprehensive Income

(Unaudited)

 

In Millions    

 

 
Three Months Ended March 31    2012        2011    

 

 

Net Income

       $            76           $        153     

Retirement benefits liability

     

Retirement benefits liability adjustments, net of tax of $- in 2012 and 2011

     1           1     

Investments

     

Unrealized loss on investments, net of tax benefit of $(2) in 2012 and $(1) in 2011

     (3)          (1)    
  

 

 

 

Other Comprehensive Loss

     (2)          -     

 

 

Total Comprehensive Income

       $            74           $        153     

 

 

The accompanying notes are an integral part of these statements.

 

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Consumers Energy Company

Consolidated Statements of Cash Flows

(Unaudited)

 

In Millions    

 

 
Three Months Ended March 31    2012        2011    

 

 

Cash Flows from Operating Activities

     

Net income

       $          76           $        153     

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

     

Depreciation and amortization

     171           161     

Deferred income taxes and investment tax credit

     20           39     

Postretirement benefits expense

     46           39     

Other non-cash operating activities

     19           17     

Postretirement benefits contributions

     (18)          (19)    

Changes in other assets and liabilities:

     

Decrease in accounts receivable, notes receivable, and accrued revenue

     100           6     

Decrease in accrued power supply revenue

     -           15     

Decrease in inventories

     302           458     

Increase (decrease) in accounts payable

     (74)          3     

Decrease in accrued expenses

     (69)          (49)    

Decrease in other current and non-current assets

     112           30     

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

     (4)          14     
  

 

 

 

Net cash provided by operating activities

     681           867     

 

 

Cash Flows from Investing Activities

     

Capital expenditures (excludes assets placed under capital lease)

     (294)          (186)    

Cost to retire property

     (7)          (17)    

Other investing activities

     (11)          (25)    
  

 

 

 

Net cash used in investing activities

     (312)          (228)    

 

 

Cash Flows from Financing Activities

     

Retirement of long-term debt

     (310)          (9)    

Payment of common stock dividends

     (115)          (104)    

Stockholder’s contribution

     150           125     

Payment of capital and finance lease obligations

     (6)          (6)    

Other financing costs

     -           (3)    
  

 

 

 

Net cash (used in) provided by financing activities

     (281)          3     

 

 

Net Increase in Cash and Cash Equivalents

     88           642     

Cash and Cash Equivalents, Beginning of Period

     85           71     
  

 

 

 

Cash and Cash Equivalents, End of Period

       $        173           $        713     

 

 

The accompanying notes are an integral part of these statements.

 

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Consumers Energy Company

Consolidated Balance Sheets

(Unaudited)

ASSETS

In Millions  

 

 
     March 31 
2012  
     December 31 
2011  
 

 

 

Current Assets

     

Cash and cash equivalents

       $             173           $               85     

Restricted cash and cash equivalents

     28           26     

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

     737           860     

Notes receivable

     -           23     

Accounts receivable – related parties

     1           1     

Inventories at average cost

     

Gas in underground storage

     607           929     

Materials and supplies

     93           88     

Generating plant fuel stock

     180           164     

Deferred property taxes

     155           187     

Regulatory assets

     -           1     

Prepayments and other current assets

     42           43     
  

 

 

 

Total current assets

     2,016           2,407     

 

 

Plant, Property, and Equipment

     

Plant, property, and equipment, gross

     14,733           14,621     

Less accumulated depreciation and amortization

     4,952           4,846     
  

 

 

 

Plant, property, and equipment, net

     9,781           9,775     

Construction work in progress

     899           782     
  

 

 

 

Total plant, property, and equipment

     10,680           10,557     

 

 

Other Non-current Assets

     

Regulatory assets

     2,362           2,466     

Accounts and notes receivable

     1           1     

Investments

     29           35     

Other

     179           196     
  

 

 

 

Total other non-current assets

     2,571           2,698     

 

 

Total Assets

       $        15,267           $        15,662     

 

 

 

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LIABILITIES AND EQUITY

In Millions    

 

 
     March 31
2012 
     December 31 
2011  
 

 

 

Current Liabilities

     

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

       $               63          $             363     

Accounts payable

     396          561     

Accounts payable – related parties

     11          11     

Accrued rate refunds

     34          30     

Accrued interest

     39          73     

Accrued taxes

     250          287     

Deferred income taxes

     74          73     

Regulatory liabilities

     120          125     

Other current liabilities

     103          119     
  

 

 

 

Total current liabilities

     1,090          1,642     

 

 

Non-current Liabilities

     

Long-term debt

     3,977          3,987     

Non-current portion of capital and finance lease obligations

     162          167     

Regulatory liabilities

     1,919          1,875     

Postretirement benefits

     1,225          1,225     

Asset retirement obligations

     257          253     

Deferred investment tax credit

     45          46     

Deferred income taxes

     1,835          1,817     

Other non-current liabilities

     254          256     
  

 

 

 

Total non-current liabilities

     9,674          9,626     

 

 

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

     

Equity

     

Common stockholder equity

     

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

     841          841     

Other paid-in capital

     3,107          2,957     

Accumulated other comprehensive loss

     (4)         (2)    

Retained earnings

     515          554     
  

 

 

 

Total common stockholder equity

     4,459          4,350     

Preferred stock

     44          44     
  

 

 

 

Total equity

     4,503          4,394     

 

 

Total Liabilities and Equity

       $        15,267          $        15,662     

 

 

The accompanying notes are an integral part of these statements.

 

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Consumers Energy Company

Consolidated Statements of Changes in Equity

(Unaudited)

 

In Millions    

 

 
Three Months Ended March 31    2012       2011    

 

 

Common Stock

     

At beginning and end of period

       $         841            $         841     

 

 

Other Paid-in Capital

     

At beginning of period

     2,957          2,832     

Stockholder contribution

     150          125     
  

 

 

 

At end of period

     3,107          2,957     

 

 

Accumulated Other Comprehensive Loss

     

Retirement benefits liability

     

At beginning of period

     (19)         (16)    

Retirement benefits liability adjustments

             1     
  

 

 

 

At end of period

     (18)         (15)    
  

 

 

 

Investments

     

At beginning of period

     17          16     

Unrealized loss on investments

     (3)         (1)    
  

 

 

 

At end of period

     14          15     
  

 

 

 

At end of period

     (4)         -     

 

 

Retained Earnings

     

At beginning of period

     554          463     

Net income

     76          153     

Common stock dividends declared

     (115)         (104)    
  

 

 

 

At end of period

     515          512     

 

 

Preferred Stock

     

At beginning and end of period

     44          44     

 

 

Total Equity

       $      4,503            $      4,354     

 

 

The accompanying notes are an integral part of these statements.

 

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CMS Energy Corporation

Consumers Energy Company

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

These interim consolidated financial statements have been prepared by CMS Energy and Consumers in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. As a result, CMS Energy and Consumers have condensed or omitted certain information and note disclosures normally included in consolidated financial statements prepared in accordance with GAAP. CMS Energy and Consumers have reclassified certain prior period amounts to conform to the presentation in the current period. In management’s opinion, the unaudited information contained in this report reflects all adjustments of a normal recurring nature necessary to ensure the fair presentation of financial position, results of operations, and cash flows for the periods presented. The notes to the consolidated financial statements and the related consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the 2011 Form 10-K. Due to the seasonal nature of CMS Energy’s and Consumers’ operations, the results presented for this interim period are not necessarily indicative of results to be achieved for the fiscal year.

 

1: NEW ACCOUNTING STANDARDS

IMPLEMENTATION OF NEW ACCOUNTING STANDARDS

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

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

 

2: FAIR VALUE MEASUREMENTS

Accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. When measuring fair value, CMS Energy and Consumers are required to incorporate all assumptions that market participants would use in pricing an asset or liability, including assumptions about risk. A fair value hierarchy prioritizes inputs used to measure fair value according to their observability in the market. The three levels of the fair value hierarchy are as follows:

 

   

Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities.

 

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Level 2 inputs are observable, market-based inputs, other than Level 1 prices. Level 2 inputs may include quoted prices for similar assets or liabilities in active markets, quoted prices in inactive markets, interest rates and yield curves observable at commonly quoted intervals, credit risks, default rates, and inputs derived from or corroborated by observable market data.

 

   

Level 3 inputs are unobservable inputs that reflect CMS Energy’s or Consumers’ own assumptions about how market participants would value their assets and liabilities.

To the extent possible, CMS Energy and Consumers use quoted market prices or other observable market pricing data in valuing assets and liabilities measured at fair value. If this information is unavailable, they use market-corroborated data or reasonable estimates about market participant assumptions. CMS Energy and Consumers classify fair value measurements within the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement in its entirety.

ASSETS AND LIABILITIES MEASURED AT FAIR VALUE ON A RECURRING BASIS

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

 

In Millions   

 

 
   March 31, 2012    Total      Level 1      Level 2      Level 3   

 

 

   CMS ENERGY, INCLUDING CONSUMERS

           

   Assets

           

Cash equivalents

     $     271         $     271         $         -         $         -    

Restricted cash equivalents

     14         14         -           

Nonqualified deferred compensation plan assets

     5         5         -           

SERP

           

Mutual funds

     126         126         -           

Derivative instruments

           

Commodity contracts

     3         1         1           

 

 

   Total

     $     419         $     417         $        1         $        1    

 

 

   Liabilities

           

Nonqualified deferred compensation plan liabilities

     $         5         $         5         $         -         $         -    

Derivative instruments

           

Commodity contracts

     7         -         5           

 

 

   Total

     $       12         $         5         $        5         $        2    

 

 

   CONSUMERS

           

   Assets

           

Cash equivalents

     $     122         $     122         $         -         $         -    

Restricted cash equivalents

     13         13         -           

CMS Energy common stock

     29         29         -           

Nonqualified deferred compensation plan assets

     3         3         -           

SERP

           

Mutual funds

     85         85         -           

Derivative instruments

           

Commodity contracts

     1         -         -           

 

 

   Total

     $     253         $     252         $         -         $        1    

 

 

   Liabilities

           

Nonqualified deferred compensation plan liabilities

     $         3         $         3         $         -         $         -    

 

 

   Total

     $         3         $         3         $         -         $         -    

 

 

 

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In Millions   

 

 
   December 31, 2011    Total      Level 1      Level 2      Level 3   

 

 

   CMS ENERGY, INCLUDING CONSUMERS

           

   Assets

           

Cash equivalents

     $     109         $     109         $         -         $         -    

Restricted cash equivalents

     15         15         -           

Nonqualified deferred compensation plan assets

     4         4         -           

SERP

           

Cash equivalents

     1         1         -           

Mutual funds

     113         113         -           

Derivative instruments

           

Commodity contracts

     3         1         -           

 

 

   Total

     $     245         $     243         $         -         $        2    

 

 

   Liabilities

           

Nonqualified deferred compensation plan liabilities

     $         4         $         4         $         -         $         -    

Derivative instruments

           

Commodity contracts

     7         -         3           

 

 

   Total

     $       11         $         4         $        3         $        4    

 

 

   CONSUMERS

           

   Assets

           

Cash equivalents

     $       56         $       56         $         -         $         -    

Restricted cash equivalents

     14         14         -           

CMS Energy common stock

     35         35         -           

Nonqualified deferred compensation plan assets

     3         3         -           

SERP

           

Cash equivalents

     1         1         -           

Mutual funds

     74         74         -           

Derivative instruments

           

Commodity contracts

     2         -         -           

 

 

   Total

     $     185         $     183         $         -         $        2    

 

 

   Liabilities

           

Nonqualified deferred compensation plan liabilities

     $         3         $         3         $         -         $         -    

 

 

   Total

     $         3         $         3         $         -         $         -    

 

 

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

Nonqualified Deferred Compensation Plan Assets: The nonqualified deferred compensation plan assets consist of various mutual funds that are valued using a market approach. CMS Energy and Consumers value these assets using the daily quoted net asset values that are the basis for transactions to buy or sell shares in each fund. CMS Energy and Consumers report these assets in other non-current assets on their consolidated balance sheets.

SERP Assets: CMS Energy and Consumers value their SERP assets using a market approach, incorporating prices and other relevant information from market transactions. The SERP invests in mutual funds that hold primarily fixed-income instruments of varying maturities. In order to meet their investment objectives, the funds hold investment-grade debt securities, and may invest a portion of their assets in high-yield securities, foreign debt, and derivative instruments. CMS Energy and Consumers value these funds using the daily quoted net asset values that are the basis for transactions to buy or sell shares in each fund. The SERP cash equivalents at December 31, 2011 consisted of a money market fund with daily liquidity. CMS Energy and Consumers report their SERP assets in other non-current assets on their consolidated balance sheets. For additional details about SERP securities, see Note 7: Financial Instruments.

Nonqualified Deferred Compensation Plan Liabilities: CMS Energy and Consumers value their nonqualified deferred compensation plan liabilities based on the fair values of the plan assets, as they reflect what is owed to the plan participants in accordance with their investment elections. CMS Energy and Consumers report these liabilities in other non-current liabilities on their consolidated balance sheets.

 

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Derivative Instruments: CMS Energy and Consumers value their derivative instruments using either a market approach that incorporates information from market transactions, or an income approach that discounts future expected cash flows to a present value amount. CMS Energy has exchange-traded derivative contracts that are valued based on Level 1 quoted prices, as well as derivatives valued using Level 2 inputs, including commodity forward prices, interest rates, credit ratings, default rates, and market-based seasonality factors. CMS Energy and Consumers have classified certain derivatives as Level 3 since the fair value measurements incorporate assumptions that cannot be observed or confirmed through market transactions.

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

There were no significant changes in the fair values of Level 3 assets and liabilities at CMS Energy and Consumers during the three months ended March 31, 2012 and 2011.

 

3: CONTINGENCIES AND COMMITMENTS

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

CMS ENERGY CONTINGENCIES

Gas Index Price Reporting Investigation: In 2002, CMS Energy notified appropriate regulatory and governmental agencies that some employees at CMS MST and CMS Field Services appeared to have provided inaccurate information regarding natural gas trades to various energy industry publications which compile and report index prices. Although CMS Energy has not received any formal notification that the DOJ has completed its investigation, the DOJ’s last request for information occurred in 2003, and CMS Energy completed its response to this request in 2004. CMS Energy is unable to predict the outcome of the DOJ investigation and what effect, if any, the investigation will have on CMS Energy.

Gas Index Price Reporting Litigation: CMS Energy, along with CMS MST, CMS Field Services, Cantera Natural Gas, Inc., and Cantera Gas Company, are named as defendants in various lawsuits arising as a result of alleged inaccurate natural gas price reporting to publications that report trade information. Allegations include manipulation of NYMEX natural gas futures and options prices, price-fixing conspiracies, restraint of trade, and artificial inflation of natural gas retail prices in Colorado, Kansas, Missouri, and Wisconsin. The following provides more detail on these proceedings:

 

   

In 2005, CMS Energy, CMS MST, and CMS Field Services were named as defendants in a putative class action filed in Kansas state court, Learjet, Inc., et al. v. Oneok, Inc., et al. The

 

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complaint alleges that during the putative class period, January 1, 2000 through October 31, 2002, the defendants engaged in a scheme to violate the Kansas Restraint of Trade Act. The plaintiffs are seeking statutory full consideration damages consisting of the full consideration paid by plaintiffs for natural gas allegedly purchased from defendants.

 

   

In 2007, a class action complaint, Heartland Regional Medical Center, et al. v. Oneok, Inc. et al., was filed in Missouri state court alleging violations of Missouri antitrust laws. Defendants, including CMS Energy, CMS Field Services, and CMS MST, are alleged to have violated the Missouri antitrust law in connection with their natural gas reporting activities.

 

   

Breckenridge Brewery of Colorado, LLC and BBD Acquisition Co. v. Oneok, Inc., et al., a class action complaint brought on behalf of retail direct purchasers of natural gas in Colorado, was filed in Colorado state court in 2006. Defendants, including CMS Energy, CMS Field Services, and CMS MST, are alleged to have violated the Colorado Antitrust Act of 1992 in connection with their natural gas reporting activities. Plaintiffs are seeking full refund damages.

 

   

A class action complaint, Arandell Corp., et al. v. XCEL Energy Inc., et al., was filed in 2006 in Wisconsin state court on behalf of Wisconsin commercial entities that purchased natural gas between January 1, 2000 and October 31, 2002. The defendants, including CMS Energy, CMS ERM, and Cantera Gas Company, are alleged to have violated Wisconsin’s antitrust statute. The plaintiffs are seeking full consideration damages, plus exemplary damages and attorneys’ fees. After dismissal on jurisdictional grounds in 2009, plaintiffs filed a new complaint in the U.S. District Court for the Eastern District of Michigan. In 2010, the MDL judge issued an opinion and order granting the CMS Energy defendants’ motion to dismiss the Michigan complaint on statute-of-limitations grounds and all CMS Energy defendants have been dismissed from the Arandell (Michigan) action.

 

   

Another class action complaint, Newpage Wisconsin System v. CMS ERM, et al., was filed in 2009 in circuit court in Wood County, Wisconsin, against CMS Energy, CMS ERM, Cantera Gas Company, and others. The plaintiff is seeking full consideration damages, treble damages, costs, interest, and attorneys’ fees.

 

   

In 2005, J.P. Morgan Trust Company, in its capacity as Trustee of the FLI Liquidating Trust, filed an action in Kansas state court against CMS Energy, CMS MST, CMS Field Services, and others. The complaint alleges various claims under the Kansas Restraint of Trade Act. The plaintiff is seeking statutory full consideration damages for its purchases of natural gas in 2000 and 2001.

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

These cases involve complex facts, a large number of similarly situated defendants with different factual positions, and multiple jurisdictions. Presently, any estimate of liability would be highly speculative; the amount of CMS Energy’s possible loss would be based on widely varying models previously untested in this context. If the outcome after appeals is unfavorable, these cases could have a material adverse impact on CMS Energy’s liquidity, financial condition, and results of operations.

 

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Bay Harbor: As part of the development of Bay Harbor by certain subsidiaries of CMS Energy, and under an agreement with the MDEQ, third parties constructed a golf course and park over several abandoned CKD piles left over from the former cement plant operations on the Bay Harbor site. The third parties also undertook a series of response activities, including constructing a leachate collection system in one area where CKD-impacted groundwater was entering Little Traverse Bay. Leachate is produced when water enters into the CKD piles. In 2002, CMS Energy sold its interest in Bay Harbor, but retained its obligations under environmental indemnities entered into at the start of the project.

In 2005, the EPA, along with CMS Land and CMS Capital, voluntarily executed an Administrative Order on Consent under Superfund, and the EPA approved a Removal Action Work Plan to address contamination issues. Collection systems required under the plan have been installed and effectiveness monitoring of the systems at the shoreline is ongoing. CMS Land, CMS Capital, and the EPA agreed upon augmentation measures to address areas where pH measurements were not satisfactory. Several augmentation measures were implemented and completed in 2009, with the remaining measure completed in 2010.

In May 2011, CMS Energy received approval from the EPA on a revised scope of remedies that CMS Energy had submitted in December 2010. CMS Energy reached a tentative agreement with the MDEQ in December 2011 that identifies the final remedies at the site. The EPA notified the MDEQ in March 2012 that it had no objections, and the parties are now in negotiations to finalize the agreement. In December 2010, the MDEQ issued an NPDES permit that authorizes CMS Land to discharge treated leachate into Little Traverse Bay. This permit requires renewal every five years. Discharge of treated leachate under the permit has commenced. Additionally, CMS Land has committed to investigate the potential for a deep injection well on the Bay Harbor site as an alternative long-term solution to the leachate disposal issue. In 2008, the MDEQ and the EPA granted permits for CMS Land or its wholly owned subsidiary, Beeland Group LLC, to construct and operate an off-site deep injection well in Antrim County, Michigan, to dispose of leachate from Bay Harbor. Certain environmental groups, a local township, and a local county filed lawsuits appealing the permits and seeking an injunction. A temporary restraining order was issued by the trial court. The legal proceeding was stayed in 2009 and can be renewed by either party at any time.

Various claims have been brought against CMS Land or its affiliates, including CMS Energy, alleging environmental damage to property, loss of property value, insufficient disclosure of environmental matters, breach of agreement relating to access, or other matters. In October 2010, CMS Land and other parties received a demand for payment from the EPA in the amount of $7 million, plus interest, whereby the EPA is seeking recovery, as allowed under Superfund, of the EPA’s response costs incurred at the Bay Harbor site. CMS Land communicated to the EPA in November 2010 that it does not believe that this is a valid claim.

CMS Land and CMS Capital, the MDEQ, the EPA, and other parties continue to negotiate the long-term remedy for the Bay Harbor site, including:

 

   

the disposal of leachate;

   

the location and design of collection lines and upstream water diversion systems;

   

application of criteria for various substances such as mercury; and

   

other matters that are likely to affect the scope of response activities that CMS Land and CMS Capital may be obligated to undertake.

CMS Energy has recorded a cumulative charge related to Bay Harbor of $225 million, which includes accretion expense. At March 31, 2012, CMS Energy had a recorded liability of $71 million for its remaining obligations. CMS Energy calculated this liability based on discounted projected costs, using a discount rate of 4.34 percent and an inflation rate of one percent on annual operating and maintenance costs. CMS Energy based the discount rate on the interest rate for 30-year U.S. Treasury securities at December 31, 2010. The undiscounted amount of the remaining obligation is $95 million. CMS Energy

 

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expects to pay $16 million during the remainder of 2012, $8 million in 2013, $4 million in 2014, $4 million in 2015, $5 million in 2016, and the remaining amount thereafter on long-term liquid disposal and operating and maintenance costs.

CMS Energy’s estimate of response activity costs and the timing of expenditures could change if there are additional major changes in circumstances or assumptions, including but not limited to:

 

   

inability to complete the present long-term water disposal strategy at a reasonable cost;

   

requirements to alter the present long-term water disposal strategy upon expiration of the NPDES permit if the MDEQ or EPA identify a more suitable alternative;

   

an increase in the number of contamination areas;

   

different remediation techniques;

   

the nature and extent of contamination;

   

inability to reach agreement with the MDEQ or the EPA over additional response activities;

   

delays in the receipt of requested permits;

   

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

   

additional or new legal or regulatory requirements; or

   

new or different landowner claims.

Depending on the size of any indemnity obligation or liability under environmental laws, an adverse outcome of this matter could have a material adverse effect on CMS Energy’s liquidity and financial condition and could negatively affect CMS Energy’s financial results. Although a liability for its present estimate of remaining response activity costs has been recorded, CMS Energy cannot predict the ultimate financial impact or outcome of this matter.

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

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

CONSUMERS ELECTRIC UTILITY CONTINGENCIES

Electric Environmental Matters: Consumers’ operations are subject to environmental laws and regulations. Historically, Consumers has generally been able to recover, in customer rates, the costs to operate its facilities in compliance with these laws and regulations.

Cleanup and Solid Waste: Consumers expects to incur remediation and other response activity costs at a number of sites under NREPA. Consumers believes that these costs should be recoverable in rates, but cannot guarantee that outcome. Consumers estimates that its liability for NREPA sites will be between $1 million and $4 million. At March 31, 2012, Consumers had a recorded liability of $1 million, the minimum amount in the range of its estimated probable NREPA liability.

Consumers is a potentially responsible party at a number of contaminated sites administered under the Superfund. Superfund liability is joint and several. In addition to Consumers, many other creditworthy parties with substantial assets are potentially responsible with respect to the individual sites. In November 2010, Consumers received official notification from the EPA that identified Consumers as a

 

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potentially responsible party at the Kalamazoo River Superfund site. The notification claimed that the EPA has reason to believe Consumers disposed of PCBs and arranged for the disposal and treatment of PCB-containing materials at portions of the site. Consumers responded to the EPA in December 2010, stating that it has no information showing that it disposed of PCBs or arranged for disposal or treatment of PCB-containing material at portions of the site and requesting further information from the EPA before Consumers would commit to perform or finance cleanup activities at the site. In April 2011, Consumers received a follow-up letter from the EPA requesting that Consumers, as a potentially responsible party at the Kalamazoo River Superfund site, agree to participate in a removal action plan along with several other companies for an area of lower Portage Creek. The letter also indicated that under Sections 106 and 107 of Superfund, Consumers may be liable for reimbursement of the EPA’s costs and potential penalties for noncompliance with any unilateral order that the EPA may issue requiring performance under the removal action plan. All parties, including Consumers, that were asked to participate in the removal action plan declined to accept liability. In August 2011, the EPA announced that it would proceed with the removal action plan and would continue to pursue potentially responsible parties to perform or pay for some or all of the work. The EPA has provided limited information regarding Consumers’ potential responsibility for contamination at the site and has not yet given an indication of the share of any cleanup costs for which Consumers could be held responsible. Consumers continues to investigate the EPA’s claim that it disposed of PCBs or arranged for disposal or treatment of PCB-containing material at portions of the site. Until further information is received from the EPA, Consumers is unable to estimate a range of potential liability for cleanup of the river.

Based on its experience, Consumers estimates that its share of the total liability for other known Superfund sites will be between $2 million and $8 million. Various factors, including the number of potentially responsible parties involved with each site, affect Consumers’ share of the total liability. At March 31, 2012, Consumers had a recorded liability of $2 million for its share of the total liability at these sites, the minimum amount in the range of its estimated probable Superfund liability.

The timing of payments related to Consumers’ remediation and other response activities at its Superfund and NREPA sites is uncertain. Consumers periodically reviews these cost estimates. Any significant change in the underlying assumptions, such as an increase in the number of sites, different remediation techniques, the nature and extent of contamination, and legal and regulatory requirements, could affect its estimates of NREPA and Superfund liability.

Ludington PCB: In 1998, during routine maintenance activities, Consumers identified PCB as a component in certain paint, grout, and sealant materials at Ludington. Consumers removed and replaced part of the PCB material with non-PCB material. Since proposing a plan to take action with respect to the remaining materials, Consumers has had several communications with the EPA. Consumers is not able to predict when the EPA will issue a final ruling and cannot predict the financial impact or outcome of this matter.

Electric Utility Plant Air Permit Issues and Notices of Violation: In 2007, Consumers received an NOV/FOV from the EPA alleging that fourteen utility boilers exceeded the visible emission limits in their associated air permits. Consumers has responded formally to the NOV/FOV denying the allegations. In addition, in 2008, Consumers received an NOV for three of its coal-fueled facilities alleging, among other things, violations of NSR PSD regulations relating to ten projects from 1986 to 1998 allegedly subject to review under the NSR. The EPA has alleged that some utilities have classified incorrectly major plant modifications as RMRR rather than seeking permits from the EPA or state regulatory agencies to modify their plants. Consumers responded to the information requests from the EPA on this subject in the past. Consumers believes that it has properly interpreted the requirements of RMRR.

Consumers is engaged in discussions with the EPA on all of these matters. Depending upon the outcome of these discussions, the EPA could bring legal action against Consumers and/or Consumers could be required to install additional pollution control equipment at some or all of its coal-fueled electric generating plants, surrender emission allowances, engage in Supplemental Environmental Projects, and/or

 

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pay fines. Additionally, Consumers would need to assess the viability of continuing operations at certain plants. The potential costs relating to these matters could be material and the extent of cost recovery cannot be reasonably estimated. Although Consumers cannot predict the financial impact or outcome of these matters, Consumers expects that it would be able to recover some or all of the costs in rates, consistent with the recovery of other reasonable costs of complying with environmental laws and regulations.

Nuclear Matters: The matters discussed in this section relate to Consumers’ previously owned nuclear generating plants.

In 1997, a U.S. Court of Appeals decision confirmed that the DOE was to begin accepting deliveries of spent nuclear fuel for disposal by January 1998. Subsequent U.S. Court of Appeals litigation, in which Consumers and other utilities participated, had not been successful in producing more specific relief for the DOE’s failure to accept the spent nuclear fuel. A number of court decisions have supported the right of utilities to pursue damage claims in the U.S. Court of Claims against the DOE for failure to take delivery of spent nuclear fuel. Consumers filed a complaint in 2002.

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

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

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

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

CONSUMERS GAS UTILITY CONTINGENCIES

Gas Environmental Matters: Consumers expects to incur remediation and other response activity costs at a number of sites under the NREPA. These sites include 23 former MGP facilities. Consumers operated the facilities on these sites for some part of their operating lives. For some of these sites, Consumers has no present ownership interest or may own only a portion of the original site.

At March 31, 2012, Consumers had a recorded liability of $128 million for its remaining obligations for these sites. This amount represents the present value of long-term projected costs, using a discount rate of 2.57 percent and an inflation rate of 2.5 percent. Consumers based the discount rate on the interest rate for 20-year U.S. Treasury securities at December 31, 2011. The undiscounted amount of the remaining obligation is $141 million. Consumers expects to incur remediation and other response activity costs during the remainder of 2012 and in each of the next four years as follows:

 

In Millions    

 

 
     2012      2013      2014      2015      2016    

 

 

CONSUMERS

              

Remediation and other response activity costs

     $    11         $    11         $    11         $    20         $    11     

 

 

 

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Consumers periodically reviews these cost estimates. Any significant change in the underlying assumptions, such as an increase in the number of sites, changes in remediation techniques, or legal and regulatory requirements, could affect Consumers’ estimates of annual response activity costs and the MGP liability.

Pursuant to orders issued by the MPSC, Consumers defers its MGP-related remediation costs and recovers them from its customers. At March 31, 2012, Consumers had a regulatory asset of $155 million related to the MGP sites.

CONSUMERS OTHER CONTINGENCIES

Other Environmental Matters: Consumers is initiating preliminary investigations during 2012 at a number of potentially contaminated sites it presently owns with the intent of determining whether any contamination exists and the extent of any identified contamination. The sites to be investigated include combustion turbine sites, generating sites, compressor stations, and remote storage tanks. As of March 31, 2012, no contamination had been confirmed at any of these sites, but it is reasonably possible that contamination exists. Consumers is unable to estimate a possible loss or range of loss at this stage of the investigations.

GUARANTEES

Presented in the following table are CMS Energy’s and Consumers’ guarantees at March 31, 2012:

 

In Millions    

 

 
   Guarantee Description   

Issue

Date

  

Expiration

Date

   Maximum
Obligation
    Carrying  
Amount  
 

 

 

   CMS ENERGY, INCLUDING CONSUMERS

          

   Indemnity obligations from asset sales and other agreements

   Various    Various through September 2029       $     512 1      $     16     

   Guarantees and put options2

   Various    Various through March 2021      60        1     

 

 

   CONSUMERS

          

   Indemnity obligations and other guarantees

   Various    Various through September 2029       $      30        $       1     

 

 

 

  1 

The majority of this amount arises from stock and asset sale agreements under which CMS Energy or a subsidiary of CMS Energy, other than Consumers, indemnified the purchaser for losses resulting from various matters, including claims related to tax disputes, claims related to power purchase agreements, and defects in title to the assets or stock sold to the purchaser by CMS Energy subsidiaries. Except for items described elsewhere in this Note, CMS Energy believes the likelihood of material loss to be remote for the indemnity obligations not recorded as liabilities.

 

  2 

At March 31, 2012, the carrying amount of CMS Land’s put option agreements with certain Bay Harbor property owners was $1 million. If CMS Land is required to purchase a Bay Harbor property under a put option agreement, it may sell the property to recover the amount paid under the put option agreement.

 

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

 

 

    Guarantee Description    How Guarantee Arose    Events That Would Require Performance  

 

CMS ENERGY, INCLUDING CONSUMERS

     

Indemnity obligations from asset sales and other agreements

   Stock and asset sale agreements   

Findings of misrepresentation,  

breach of warranties, tax claims, and  

other specific events or  

circumstances  

Guarantees

  

Normal operating

activity

  

Nonperformance or non-payment by a  

subsidiary under a related contract  

Put options

  

Bay Harbor

remediation efforts

  

Owners exercising put options requiring  

CMS Land to purchase property  

 

CONSUMERS

     

Guarantees and indemnity obligations

  

Normal operating

activity

  

Nonperformance or claims made by third  

party under a related contract  

 

CMS Energy, Consumers, and certain other subsidiaries of CMS Energy also enter into various agreements containing tax and other indemnity provisions for which they are unable to estimate the maximum potential obligation. These factors include unspecified exposure under certain agreements. CMS Energy and Consumers consider the likelihood that they would be required to perform or incur substantial losses related to these indemnities to be remote.

OTHER CONTINGENCIES

Other: In addition to the matters disclosed in this Note and Note 4: Regulatory Matters, there are certain other lawsuits and administrative proceedings before various courts and governmental agencies arising in the ordinary course of business to which CMS Energy, Consumers, and certain other subsidiaries of CMS Energy are parties. These other lawsuits and proceedings may involve personal injury, property damage, contracts, environmental matters, federal and state taxes, rates, licensing, employment, and other matters. Further, CMS Energy and Consumers occasionally self-report certain regulatory non-compliance matters that may or may not eventually result in administrative proceedings. CMS Energy and Consumers believe that the outcome of any one of these proceedings will not have a material adverse effect on their consolidated results of operations, financial condition, or liquidity.

 

4: REGULATORY MATTERS

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

Electric Rate Case: In June 2011, Consumers filed an application with the MPSC seeking an annual rate increase of $195 million, based on a 10.7 percent authorized return on equity, in order to recover new investment in system reliability, environmental compliance, and technology enhancements.

In November 2011, Consumers filed testimony and exhibits with the MPSC in support of a self-implemented annual rate increase of $147 million. In December 2011, the MPSC issued an order stating that it found good cause to prevent implementation of any amount over $118 million. Accordingly, Consumers self-implemented an annual rate increase of $118 million in December 2011, subject to refund with interest. In March 2012, the administrative law judge recommended that the MPSC approve an annual rate increase of $43 million, based on a 10.25 percent return on equity.

 

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

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

Consumers has an $85 million regulatory asset recorded for $30 million it paid to Entergy to assume ownership responsibility for the Big Rock ISFSI and for $55 million of nuclear fuel storage costs it incurred as a result of the DOE’s failure to accept nuclear fuel. Consumers filed a complaint against the DOE in 2002 for this failure. In July 2011, Consumers entered into an agreement with the DOE to settle its claims for $120 million; Consumers recorded a $120 million regulatory liability related to this settlement. In September 2011, Consumers filed an application with the MPSC requesting authority to utilize $85 million of the settlement amount as recovery of its regulatory asset, and to refund to customers $23 million previously collected through rates for spent nuclear fuel costs. If the MPSC concludes that Consumers may retain any portion of the remaining $12 million of the settlement amount, Consumers will recognize that amount in earnings. For further information, see Note 3: Contingencies and Commitments – Consumers Electric Utility Contingencies – Nuclear Matters.

Electric and Gas Revenue Decoupling Mechanisms: The MPSC’s 2009 electric rate case order authorized Consumers to implement an electric revenue decoupling mechanism, subject to certain conditions. This decoupling mechanism, which was extended through November 2011 in the 2010 electric rate case order, allowed Consumers to adjust future electric rates to compensate for changes in sales volumes resulting from the difference between the level of average sales per customer adopted in the order and actual average sales per customer. Various parties have filed appeals concerning Consumers’ electric revenue decoupling mechanism.

In March 2011, Consumers filed its first reconciliation of the electric revenue decoupling mechanism with the MPSC, requesting recovery of $27 million from customers for the period December 2009 through November 2010. In February 2012, the administrative law judge recommended that the MPSC approve Consumers’ reconciliation of the electric revenue decoupling mechanism for the full amount of its request for the first year of operation of the decoupling mechanism. The matter remains pending before the MPSC. The MPSC Staff and intervenors oppose this recovery.

In March 2012, Consumers filed its second reconciliation of the electric revenue decoupling mechanism, requesting recovery of $32 million from customers for the period December 2010 through November 2011.

In April 2012, the Michigan Court of Appeals ruled in an appeal filed by ABATE that disputed the MPSC’s decision to authorize an electric revenue decoupling mechanism for Detroit Edison. The Court concluded that the MPSC lacks statutory authority to approve or direct the use of a revenue decoupling mechanism for electric providers. Consumers cannot predict whether this decision will be appealed to the Michigan Supreme Court or the timing or outcome of any such appeal. As a result, Consumers determined that it no longer met the accounting criteria for recognition of a regulatory asset under an

 

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alternative revenue program, and wrote off its $59 million electric revenue decoupling mechanism regulatory asset at March 31, 2012. Although the case before the Court of Appeals related specifically to Detroit Edison, Consumers will continue to pursue all of its legal and regulatory avenues to recover its decoupling revenues, including participating in or supporting any appeal of the Detroit Edison decision.

The MPSC’s 2009 gas rate case order authorized Consumers to implement a gas revenue decoupling mechanism, subject to certain conditions. This decoupling mechanism, which was extended in the 2010 gas rate case order, allows 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. In September 2011, Consumers filed its first reconciliation of the gas revenue decoupling mechanism with the MPSC, requesting recovery of $16 million from customers for the period June 2010 through May 2011.

At March 31, 2012, Consumers had a $28 million non-current regulatory asset recorded for gas revenue decoupling. If the MPSC were to reject all or a major portion of Consumers’ requested recovery from its gas revenue decoupling mechanism or if the recovery period were to be substantially delayed, Consumers could be required to write off all or portions of the related regulatory asset. An unfavorable outcome in this reconciliation also could impair Consumers’ ability to continue recording decoupling revenue as volume deficiencies occur, rather than waiting until the recovery period.

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

In October 2011, Consumers filed an application for the biennial review and approval of its renewable energy plan. In March 2012, Consumers filed a settlement agreement with the MPSC, proposing to reduce the renewable energy surcharge by an annual amount of $3 million, to $20 million, reflecting a reduction in expected costs to comply with renewable energy requirements.

Energy Optimization Plan: As one of the conditions to the continuation of the electric and gas revenue decoupling mechanisms, Consumers must exceed the statutory savings targets for 2012 through 2015 specified in the 2008 Energy Law. In August 2011, Consumers filed an amended energy optimization plan with the MPSC, requesting approval of the additional spending necessary to exceed these savings targets. The MPSC approved Consumers’ amended energy optimization plan in April 2012.

For exceeding savings targets under its gas and electric energy optimization plans during 2011, Consumers will request the MPSC’s approval to collect $15 million, the maximum incentive, in the energy optimization reconciliation to be filed in April 2012.

 

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5: FINANCINGS

Presented in the following table is a summary of major long-term debt transactions during the three months ended March 31, 2012:

 

 

 
     Principal
(In Millions)
     Interest Rate      Issue/Retirement
Date
     Maturity Date    

 

 

  Debt Issuances

           

CMS ENERGY

           

Senior notes

       $ 300         5.05%         March 2012         March 2022     

Term loan facility1,3

     30         variable         February 2012         December 2016     

 

 

  Total

       $ 330            

 

 

  Debt Retirements

           

CMS ENERGY

           

Contingently convertible senior notes2

       $ 73         2.875%         January 2012         December 2024     

Trust Preferred Securities4

     29         7.75%         February 2012         July 2027     

CONSUMERS

           

FMB

     300         5.00%         February 2012         February 2012     

 

 

  Total

       $ 402            

 

 

 

  1 

In December 2011, CMS Energy entered into a $180 million term loan credit agreement that provides for delayed draws through July 20, 2012. Outstanding borrowings will bear interest at an annual interest rate of LIBOR plus 2.5 percent.

 

  2 

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

 

  3 

CMS Energy used these proceeds to retire the 7.75 percent Trust Preferred Securities.

 

  4 

In January 2012, CMS Energy called all of its outstanding Trust Preferred Securities.

Revolving Credit Facilities: The following secured revolving credit facilities with banks were available at March 31, 2012:

 

                          In Millions    

 

 
  Expiration Date        Amount of
Facility
     Amount
    Borrowed
     Letters of Credit
Outstanding
     Amount  
          Available  
 

 

 

  CMS ENERGY

           

  March 31, 20161

       $ 550          $ -                   $ 3           $ 547     

 

 

  CONSUMERS

           

  March 31, 20162

       $ 500          $ -                   $ 1           $ 499     

  August 9, 20132,3

     150         -         -         150     

  September 9, 20142

     30         -         30         -     

 

 

 

  1 

Obligations under this facility are secured by Consumers common stock. CMS Energy’s average borrowings during the three months ended March 31, 2012 totaled $20 million, with a weighted-average annual interest rate of 2.28 percent, representing LIBOR plus 2.00 percent.

 

  2 

Obligations under this facility are secured by FMBs of Consumers.

 

  3 

In April 2012, the expiration date was extended to April 2017.

Short-term Borrowings: Under Consumers’ revolving accounts receivable sales program, Consumers may transfer up to $250 million of accounts receivable, subject to certain eligibility requirements. These transactions are accounted for as short-term secured borrowings. At March 31, 2012, $250 million of

 

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accounts receivable were eligible for transfer, and no accounts receivable had been transferred under the program. During the three months ended March 31, 2012, Consumers’ average short-term borrowings totaled $32 million, with a weighted average annual interest rate of 0.9 percent.

Contingently Convertible Securities: Presented in the following table are the significant terms of CMS Energy’s contingently convertible securities at March 31, 2012:

 

 

 
  Security    Maturity      Outstanding
(In Millions)
     Adjusted
Conversion Price
     Adjusted  
Trigger Price  
 

 

 

  2.875% senior notes

     2024            $ 153                 $ 12.40           $ 14.88     

  5.50% senior notes

     2029         172         14.08         18.31     

 

 

During 20 of the last 30 trading days ended March 31, 2012, the adjusted trigger-price contingencies were met for both the contingently convertible senior notes, and as a result, the senior notes are convertible at the option of the note holders for the three months ended June 30, 2012.

Presented in the following table are details about conversions of contingently convertible securities during the three months ended March 31, 2012:

 

 

 
  Series    Conversion
Date
     Principal
Converted
(In Millions)
     Conversion Value
per $1,000 of
principal
     Shares of
Common
Stock Issued
on Settlement
     Cash Paid on  
Settlement  
(In Millions)  
 

 

 

  2.875% senior notes due 2024

     January 2012         73         1,738.99         2,464,138         73     

 

 

In March 2012, CMS Energy called all of its outstanding 2.875 percent contingently convertible senior notes. In April, holders tendered for conversion the remaining outstanding notes with a principal amount of $153 million. Notes settled as of April 25, 2012, with a principal amount of $102 million, had an average conversion value of $1,771.76 per $1,000 principal amount of convertible note. CMS Energy issued 3,584,558 shares of its common stock and paid $102 million cash on settlement of these conversions. The remaining tendered notes with a principal amount of $51 million will be settled in late April 2012.

Dividend Restrictions: Under provisions of CMS Energy’s senior notes indenture, at March 31, 2012, payment of common stock dividends by CMS Energy was limited to $1.2 billion.

Under the provisions of its articles of incorporation, at March 31, 2012, Consumers had $454 million of unrestricted retained earnings available to pay common stock dividends to CMS Energy. Provisions of the Federal Power Act and the Natural Gas Act appear to restrict dividends payable by Consumers to the amount of Consumers’ retained earnings. Several decisions from FERC suggest that under a variety of circumstances common stock dividends from Consumers would not be limited to amounts in Consumers’ retained earnings. Any decision by Consumers to pay common stock dividends in excess of retained earnings would be based on specific facts and circumstances and would result only after a formal regulatory filing process.

For the three months ended March 31, 2012, CMS Energy received $115 million of common stock dividends from Consumers.

 

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6: EARNINGS PER SHARE – CMS ENERGY

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

 

In Millions, Except Per Share Amounts    

 

 
  Three Months Ended March 31        2012          2011    

 

 

  Income Available to Common Stockholders

     

  Income from Continuing Operations Available to Common Stockholders – Basic and Diluted

   $ 60       $ 133     

 

 

  Average Common Shares Outstanding

     

Weighted average shares – basic

     255.6         250.0     

Add dilutive contingently convertible securities

     10.4         10.7     

Add dilutive non-vested stock awards and options

     0.8         0.3     

Add dilutive convertible debentures

     -         0.7     

 

 

  Weighted average shares – diluted

     266.8         261.7     

 

 

  Income from Continuing Operations per Average Common Share Available to Common Stockholders

     

Basic

   $ 0.23       $ 0.53     

Diluted

     0.22         0.51     

 

 

CONTINGENTLY CONVERTIBLE SECURITIES

When CMS Energy has earnings from continuing operations, its contingently convertible securities dilute EPS to the extent that the conversion value of a security, which is based on the average market price of CMS Energy common stock, exceeds the principal value of that security.

NON-VESTED STOCK AWARDS

CMS Energy’s non-vested stock awards are composed of participating and non-participating securities. The participating securities accrue cash dividends when common stockholders receive dividends. Since the recipient is not required to return the dividends to CMS Energy if the recipient forfeits the award, the non-vested stock awards are considered participating securities. As such, the participating non-vested stock awards were included in the computation of basic EPS. The non-participating securities accrue stock dividends that vest concurrently with the stock award. If the recipient forfeits the award, the stock dividends accrued on the non-participating securities are also forfeited. Accordingly, the non-participating awards and stock dividends were included in the computation of diluted EPS, but not basic EPS.

CONVERTIBLE DEBENTURES

For three months ended March 31, 2012, CMS Energy’s 7.75 percent Trust Preferred Securities would have increased diluted EPS had they been included in the calculation. Using the if-converted method, the debentures would have had the following impacts on the calculation of diluted EPS:

 

In Millions    

 

 
  Three Months Ended March 31        2012    

 

 

  Increase to numerator from assumed reduction in interest expense

   $ 1     

  Increase to denominator from assumed conversion of debentures into common shares

     0.5     

 

 

 

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7: FINANCIAL INSTRUMENTS

The carrying amounts of CMS Energy’s and Consumers’ cash, cash equivalents, current accounts and notes receivable, short-term investments, and current liabilities approximate their fair values because of their short-term nature. Presented in the following table are the cost or carrying amounts and fair values, by level within the fair value hierarchy, of CMS Energy’s and Consumers’ long-term financial instruments. For additional details regarding the fair value hierarchy, see Note 2: Fair Value Measurements.

 

In Millions    

 

 
     March 31, 2012      December 31, 2011    

 

 
     Cost or      Fair Value      Cost or         
     Carrying
Amount
     Total      Level 1      Level 2      Level 3      Carrying
Amount
     Fair  
Value  
 

 

 

CMS ENERGY, INCLUDING CONSUMERS

                    

Securities held to maturity

       $ 8       $ 9       $ -       $ 9       $ -       $ 7       $ 7     

Securities available for sale

     126         126         126         -         -         113         113     

Notes receivable1

     477         504         -         -         504         480         504     

Long-term debt2

     7,007         7,972         -         7,972         -         7,073         8,025     

 

 

CONSUMERS

                    

Securities available for sale

       $ 90       $ 114       $ 114       $ -       $ -       $ 81       $ 109     

Long-term debt3

     4,016         4,576         -         4,576         -         4,326         4,882     

 

 

 

  1 

Includes current portion of notes receivable of $24 million at March 31, 2012 and $19 million at December 31, 2011.

 

  2 

Includes current portion of long-term debt of $814 million at March 31, 2012 and $1,033 million at December 31, 2011.

 

  3 

Includes current portion of long-term debt of $39 million at March 31, 2012 and $339 million at December 31, 2011.

Notes receivable consist of EnerBank’s fixed-rate installment loans. EnerBank estimates the fair value of these loans using a discounted cash flows technique that incorporates market interest rates as well as assumptions about the remaining life of the loans and credit risk. Fair values for impaired loans are estimated using discounted cash flows or underlying collateral values.

CMS Energy and Consumers estimate the fair value of their long-term debt using quoted prices from market trades of the debt, if available. In the absence of quoted prices, CMS Energy and Consumers calculate market yields and prices for the debt using a matrix method that incorporates market data for similarly rated debt. Depending on the information available, other valuation techniques may be used that rely on internal assumptions and models. CMS Energy includes the value of the conversion features in estimating the fair value of its convertible debt, and incorporates, as appropriate, information on the market prices of CMS Energy common stock.

The effects of third-party credit enhancements are excluded from the fair value measurements of long-term debt. At March 31, 2012 and December 31, 2011, CMS Energy’s long-term debt included $103 million principal amount that was supported by third-party credit enhancements. This entire principal amount was at Consumers.

 

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Presented in the following table are CMS Energy’s and Consumers’ investment securities:

 

In Millions    

 

 
     March 31, 2012      December 31, 2011  

 

 
     Cost      Unrealized
Gains
     Unrealized
Losses
     Fair
Value
     Cost      Unrealized
Gains
     Unrealized
Losses
     Fair  
Value  
 

 

 

  CMS ENERGY, INCLUDING CONSUMERS

  

        

  Available for sale

                       

SERP

                       

Mutual funds

     $ 126         $      -         $      -         $ 126         $ 113         $      -         $      -         $ 113     

  Held to maturity

                       

Debt securities

     8         1         -         9         7         -         -         7     

 

 

  CONSUMERS

                       

  Available for sale

                       

SERP

                       

Mutual funds

     $   85         $      -         $      -         $   85         $   74         $      -         $      -         $   74     

CMS Energy common stock

     5         24         -         29         7         28         -         35     

 

 

The mutual funds classified as available for sale are fixed-income funds of varying maturities. During the three months ended March 31, 2012, CMS Energy contributed $13 million to the SERP, which included a contribution of $9 million by Consumers. The contributions were used to acquire additional shares in the mutual funds. Debt securities classified as held to maturity consist primarily of mortgage-backed securities held by EnerBank, as well as state and municipal bonds held by EnerBank.

 

8: DERIVATIVE INSTRUMENTS

In order to limit exposure to certain market risks, primarily changes in commodity prices, interest rates, and foreign exchange rates, CMS Energy and Consumers may enter into various risk management contracts, such as forward contracts, futures, options, and swaps. The contracts used to manage market risks may qualify as derivative instruments. Neither CMS Energy nor Consumers enters into any derivatives for trading purposes.

Commodity Price Risk: In order to support ongoing operations, CMS Energy and Consumers enter into contracts for the future purchase and sale of various commodities, such as electricity, natural gas, and coal. These forward contracts are generally long-term in nature and result in physical delivery of the commodity at a contracted price. Most of these contracts are not subject to derivative accounting because:

 

   

they do not have a notional amount (that is, a number of units specified in a derivative instrument, such as MWh of electricity or bcf of natural gas);

   

they qualify for the normal purchases and sales exception; or

   

there is not an active market for the commodity.

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

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

 

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CMS ERM has not designated its contracts to purchase and sell electricity and natural gas as normal purchases and sales and, therefore, CMS Energy accounts for those contracts as derivatives.

The fair value of CMS Energy’s commodity contracts not designated as hedging instruments and recorded in other assets was $3 million at March 31, 2012 and December 31, 2011. The fair value of Consumers’ commodity contracts not designated as hedging instruments and recorded in other assets was $1 million at March 31, 2012 and $2 million at December 31, 2011. The fair value of CMS Energy’s commodity contracts not designated as hedging instruments and recorded in other liabilities was $7 million at March 31, 2012 and December 31, 2011. Consumers did not have any contracts recorded as liabilities at March 31, 2012 and December 31, 2011.

Presented in the following table is the effect on CMS Energy’s consolidated statements of income of its derivatives not designated as hedging instruments:

 

In Millions    

 

 
  Location of Gain (Loss) on Derivatives Recognized in Income    Amount of Gain (Loss) on Derivatives  
Recognized in Income  
 

 

 
  Three Months Ended March 31         2012          2011    

 

 

  CMS ENERGY

          

  Commodity contracts

          

Operating revenue

        $          4           $         1     

Fuel for electric generation

        (2        -     

Purchased and interchange power

        (1        -     

 

 

  Total CMS Energy

        $          1           $         1     

 

 

Consumers’ losses on FTRs deferred as regulatory assets were $2 million for the three months ended March 31, 2012.

CMS Energy’s derivative liabilities subject to credit-risk-related contingent features were $3 million at March 31, 2012 and $4 million at December 31, 2011.

 

9: NOTES RECEIVABLE

EnerBank provides unsecured consumer installment loans for financing home improvements. These loans totaled $477 million, net of an allowance for loan losses of $5 million, at March 31, 2012, and $480 million, net of an allowance for loan losses of $5 million, at December 31, 2011. At March 31, 2012, $24 million of EnerBank’s loans were classified as current notes receivable and $453 million were classified as non-current notes receivable on CMS Energy’s consolidated balance sheets. At December 31, 2011, $19 million of EnerBank’s loans were classified as current notes receivable and $461 million were classified as non-current notes receivable on CMS Energy’s consolidated balance sheets.

The allowance for loan losses is a valuation allowance to reflect estimated credit losses. The allowance is increased by the provision for loan losses and decreased by loan charge-offs net of recoveries. Management estimates the allowance balance required by taking into consideration historical loan loss experience, the nature and volume of the portfolio, economic conditions, and other factors. Loan losses are charged against the allowance when the loss is confirmed, but no later than the point at which a loan becomes 120 days past due.

 

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Presented in the following table are the changes in the allowance for loan losses:

 

In Millions    

 

 
  Three Months Ended March 31         2012              2011    

 

 

  Balance at beginning of period

        $        5                $        5      

  Charge-offs

        (1)               (1)     

  Recoveries

        -                -      

  Provision for loan losses

        1                1      

 

 

  Balance at end of period

        $        5                $        5      

 

 

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

 

In Millions    

 

 
     Past Due
30-59 Days
     Past Due
60-89 Days
     Past Due
Over 90 Days
     Total
Delinquent
     Current      Total  
Outstanding  
 

 

 

  March 31, 2012

     $       1         $       -         $       1         $      2         $   475         $   477     

  December 31, 2011

     1         -         1         2         478         480     

 

 

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

 

10: RETIREMENT BENEFITS

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

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

 

In Millions    

 

 
   

Pension  

 
  Three Months Ended March 31        2012              2011    

 

 

  CMS ENERGY, INCLUDING CONSUMERS

          

  Net periodic pension cost

          

Service cost

       $      12                $      12      

Interest expense

       25                25      

Expected return on plan assets

       (31)               (28)     

Amortization of:

          

Net loss

       19                16      

Prior service cost

       1                1      

 

 

  Net periodic pension cost

       $      26                $      26      

 

 

  CONSUMERS

          

  Net periodic pension cost

          

Service cost

       $      12                $      12      

Interest expense

       24                24      

Expected return on plan assets

       (30)               (27)     

Amortization of:

          

Net loss

       18                15      

Prior service cost

       1                1      

 

 

  Net periodic pension cost

       $      25                $      25      

 

 

CMS Energy’s and Consumers’ expected long-term rate of return on Pension Plan assets is 7.75 percent. For the twelve months ended March 31, 2012, the actual return on Pension Plan assets was 7.4 percent, and for the twelve months ended March 31, 2011, the actual return was 13.1 percent. The expected rate of return is an assumption about long-term asset performance that CMS Energy and Consumers review annually for reasonableness and appropriateness.

 

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In Millions    

 

 
   

OPEB

 
  Three Months Ended March 31        2012           2011    

 

 

  CMS ENERGY, INCLUDING CONSUMERS

          

  Net periodic OPEB cost

          

Service cost

       $          8             $          7      

Interest expense

       21               19      

Expected return on plan assets

       (17)            (17)     

Amortization of:

          

Net loss

       11             8      

Prior service credit

       (5)            (5)     

 

 

  Net periodic OPEB cost

       $        18             $        12      

 

 

  CONSUMERS

          

  Net periodic OPEB cost

          

Service cost

       $          8             $          6      

Interest expense

       20             18      

Expected return on plan assets

       (15)            (15)     

Amortization of:

          

Net loss