10-Q 1 d363458d10q.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 June 30, 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 July 13, 2012:

CMS Energy Corporation:

    CMS Energy Common Stock, $0.01 par value   
        (including 1,296,406 shares owned by Consumers Energy Company)    264,986,880

Consumers Energy Company:

    Consumers Energy Common Stock, $10 par value, privately held by CMS Energy Corporation    84,108,789

 

 

 


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CMS Energy Corporation

Consumers Energy Company

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

June 30, 2012

TABLE OF CONTENTS

 

     Page  

Glossary

     5   

Filing Format

     10   

Forward-Looking Statements and Information

     10   

Part I. Financial Information

  

Item 1. Consolidated Financial Statements (Unaudited)

  

            CMS Energy Corporation

     34   

            Consumers Energy Company

     42   

             Notes to the Unaudited Consolidated Financial Statements

     49   

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

     13   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     77   

Item 4. Controls and Procedures

     77   

Part II. Other Information

  

Item 1. Legal Proceedings

     77   

Item 1A. Risk Factors

     77   

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

     78   

Item 3. Defaults Upon Senior Securities

     78   

Item 4. Mine Safety Disclosures

     78   

Item 5. Other Information

     78   

Item 6. Exhibits

     79   

Signatures

     80   

 

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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

CMS ERM

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

 

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CMS Field Services

   CMS Field Services, Inc., a former wholly owned subsidiary of CMS Gas Transmission

CMS Gas Transmission

   CMS Gas Transmission Company, a wholly owned subsidiary of CMS Enterprises

CMS Land

   CMS Land Company, a wholly owned subsidiary of CMS Capital

CMS MST

   CMS Marketing, Services and Trading Company, a wholly owned subsidiary of CMS Enterprises, whose name was changed to CMS ERM 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 2010

DOE

   U.S. Department of Energy

DOJ

   U.S. Department of Justice

EBITDA

   Earnings before interest, taxes, depreciation, and amortization

EnerBank

   EnerBank USA, a wholly owned subsidiary of CMS Capital

Entergy

   Entergy Corporation, a non-affiliated company

EPA

   U.S. Environmental Protection Agency

EPS

   Earnings per share

Exchange Act

   Securities Exchange Act of 1934, as amended

FDIC

   Federal Deposit Insurance Corporation

FERC

   The Federal Energy Regulatory Commission

FLI Liquidating Trust

   Trust formed in Missouri bankruptcy court to accomplish the liquidation of Farmland Industries, Inc., a non-affiliated entity

 

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FMB

   First mortgage bond

FOV

   Finding of Violation

FTR

   Financial transmission right

GAAP

   U.S. Generally Accepted Accounting Principles

GCR

   Gas cost recovery

ISFSI

   Independent spent fuel storage installation

kWh

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

LIBOR

   The London Interbank Offered Rate

Ludington

   Ludington pumped-storage plant, jointly owned by Consumers and Detroit Edison

MACT

   Maximum Achievable Control Technology, which is the emission control that is achieved in practice by the best-controlled similar source; 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

MCIT

   Michigan Corporate Income Tax

MD&A

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

MDEQ

   Michigan Department of Environmental Quality

MDL

   A pending multi-district litigation case in Nevada

MGP

   Manufactured gas plant

Midwest Energy Market

   An energy market developed by MISO to provide day-ahead and real-time market information and centralized dispatch for market participants

MISO

   The Midwest Independent Transmission System Operator, Inc.

 

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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

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

 

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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

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 gas revenue decoupling mechanism;

 

   

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

 

   

potentially adverse regulatory or legal interpretations or decisions regarding environmental matters, or delayed regulatory treatment or permitting decisions that are or could come before the MDEQ and/or EPA, and potential environmental remediation costs associated with these interpretations or decisions, including those that may affect Bay Harbor or Consumers’ RMRR classification under NSR regulations;

 

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

 

   

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

 

   

the investment performance of the assets of CMS Energy’s and Consumers’ pension and benefit plans and the discount rates applicable to 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 and its operation on their activities, including utility customer billing and collections;

 

   

adverse consequences resulting from any past or future assertion of indemnity or warranty claims associated with assets and businesses previously owned by CMS Energy or Consumers, including claims resulting from attempts by foreign or domestic governments to assess taxes on past operations or transactions;

 

   

the outcome, cost, and other effects of legal or administrative proceedings, settlements, investigations, or claims;

 

   

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

 

   

earnings volatility resulting from the application of fair value accounting to certain energy commodity contracts, such as electricity sales agreements and interest rate and foreign currency contracts;

 

   

changes in financial or regulatory accounting principles or policies, including a possible future requirement to comply with International Financial Reporting Standards, which differ from GAAP in various ways, including the present lack of special accounting treatment for regulated activities; and

 

   

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

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

 

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CMS Energy Corporation

Consumers Energy Company

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This MD&A is a combined report of CMS Energy and Consumers.

EXECUTIVE OVERVIEW

CMS Energy is an energy company operating primarily in Michigan. It is the parent holding company of several subsidiaries, including Consumers, an electric and gas utility, and CMS Enterprises, primarily a domestic independent power producer. Consumers’ electric utility operations include the generation, purchase, distribution, and sale of electricity, and Consumers’ gas utility operations include the purchase, transmission, storage, distribution, and sale of natural gas. Consumers’ customer base consists of a mix of residential, commercial, and diversified industrial customers. CMS Enterprises, through its subsidiaries and equity investments, owns and operates power generation facilities.

CMS Energy and Consumers manage their businesses by the nature of services each provides. CMS Energy operates principally in three business segments: electric utility; gas utility; and enterprises, its non-utility investments and operations. Consumers operates principally in two business segments: electric utility and gas utility.

CMS Energy and Consumers earn revenue and generate cash from operations by providing electric and natural gas utility services; electric distribution and generation; gas transmission, storage, and distribution; and other energy-related services. Their businesses are affected primarily by:

 

   

regulation and regulatory matters;

   

economic conditions;

   

weather;

   

energy commodity prices;

   

interest rates; and

   

CMS Energy’s and Consumers’ securities’ credit ratings.

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

 

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 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, under an MPSC-approved renewable energy plan, 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.

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 June 2012, the MPSC authorized an annual rate increase of $118 million, based on a 10.3 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. In June 2012, the MPSC approved Consumers’ settlement agreement and authorized an annual rate increase of $16 million, based on a 10.3 percent return on equity.

 

   

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.

As a result of the Court of Appeals decision in the Detroit Edison case, the MPSC requested all interested parties to submit comments regarding the future use of electric revenue decoupling mechanisms in Michigan. In May 2012, Consumers filed its comments with the MPSC. Consumers is unable to predict the outcome of this matter.

In September 2011, Consumers filed its first reconciliation of the gas revenue decoupling mechanism, requesting recovery of $16 million from customers for the period June 2010 through May 2011. This mechanism, which was extended through April 2012 and was not affected by the Court of Appeals decision on electric decoupling, allowed Consumers to adjust future gas rates to compensate for changes in sales volumes resulting from the difference between the level of average sales per customer adopted in the order and actual average weather-adjusted sales per customer, subject to certain conditions. Certain parties have filed in opposition to the reconciliation. At June 30, 2012, Consumers had a $33 million non-current regulatory asset recorded for gas revenue decoupling.

 

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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 June 30, 2012, Consumers’ electric deliveries under the ROA program were at the ten percent limit.

In March 2012, a bill was introduced to the Michigan Senate and House of Representatives that, upon enactment, would revise the 2008 Energy Law and allow customers then on the ROA program waiting list to switch their service to an alternative electric supplier. Presently, the proportion of Consumers’ electric deliveries under the ROA program and on the ROA waiting list is 23 percent. The revision also proposes an increase in the cap of six percentage points per year from 2013 through 2015.

In June 2012, a bill was introduced to the Michigan Senate and House of Representatives that would likely phase out electric choice and return the state’s electric industry to full regulation. This legislation was meant to counterpoint the bill introduced in March 2012. Consumers is unable to predict the outcome of these two legislative proposals.

In January 2012, a ballot initiative was filed proposing to amend the Michigan Constitution to require Michigan utilities to obtain at least 25 percent of their electric energy from clean renewable energy sources such as wind, solar, biomass, and hydropower by 2025. The proposed amendment would also limit how much utilities could charge customers for the cost of complying with this requirement. If this ballot initiative is certified by the State Board of Canvassers, Michigan voters will vote on the proposal in the November 2012 general election.

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

In July 2011, the EPA finalized CSAPR, which 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 six months ended June 30, 2012, CMS Energy’s net income available to common stockholders was $167 million, and diluted EPS were $0.62. This compares with net income available to common stockholders of $235 million and diluted EPS of $0.90 for the six months ended June 30, 2011. The main factors contributing to the decline in earnings in 2012 were the write-off of Consumers’ electric revenue decoupling mechanism regulatory asset, as discussed above, and the absence of a tax benefit recognized in 2011 related to the enactment of the MCIT.

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

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

 

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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     Six Months Ended  
June 30    2012       2011       Change       2012       2011       Change  

Net Income Available to Common Stockholders

             $ 100        $ 100        $ -        $ 167        $ 235        $ (68

Basic Earnings Per Share

             $    0.38        $   0.40        $ (0.02     $    0.64        $    0.94        $ (0.30

Diluted Earnings Per Share

             $ 0.37        $ 0.38        $ (0.01     $ 0.62        $ 0.90        $ (0.28
   
In Millions  
     Three Months Ended     Six Months Ended  
June 30    2012       2011       Change       2012       2011       Change  

Electric utility

             $    111        $ 85        $    26        $    132        $    150        $ (18

Gas utility

     9        5        4        64        93        (29

Enterprises

     (1     29        (30     4        32        (28

Corporate interest and other

     (19     (19     -        (40     (42     2   

Discontinued operations

     -        -        -        7        2        5   

Net Income Available to Common Stockholders

             $ 100        $    100        $ -        $ 167        $ 235        $ (68
   

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

 

In Millions  
     June 30, 2012 better/(worse) than 2011  
Reasons for the change    Three Months Ended     Six Months Ended  

Gas sales

             $ (5                   $ (41  

Electric sales

     7          (13  

Electric and gas rate orders

     23               50     

Recovery of development costs related to canceled coal-fueled plant

     9          9     

Distribution and service restoration cost

     9          9     

Other, including depreciation and property tax

     (7   $ 36        (18   $ (4
  

 

 

     

 

 

   

Subsidiary earnings of enterprises segment

       (2       2   

Lower corporate fixed charges, EnerBank earnings, and other

       5          6   

Charge to write off electric decoupling regulatory asset

       -          (36

Absence of MCIT enactment in 2011

       (32       (32

Other, mainly voluntary separation program cost

       (7       (4
   

Total change

     $ -        $     (68
   

 

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CONSUMERS ELECTRIC UTILITY RESULTS OF OPERATIONS

 

In Millions  
June 30    2012      2011      Change  

Net Income Available to Common Stockholders

        

Three months ended

   $ 111       $ 85       $ 26   

Six months ended

     132         150         (18
   

 

In Millions  
    June 30, 2012 better/(worse) than 2011  
Reasons for the change   Three Months Ended     Six Months Ended  

Electric deliveries and rate increases

    $        45        $        (12

Power supply costs and related revenue

    2        2   

Other income, net of expenses

    (2     (2

Maintenance and other operating expenses

    7        4   

Depreciation and amortization

    (7     (13

General taxes

    3        2   

Interest charges

    3        4   

Income taxes

    (25     (3
   

Total change

    $        26        $        (18
   

Electric deliveries and rate increases: For the three months ended June 30, 2012, electric delivery revenues increased $45 million compared with 2011. This variance was due to additional revenues of $25 million resulting from a December 2011 self-implemented rate increase and $26 million resulting from higher deliveries, reflecting warmer weather and increased usage in 2012. Additionally, other miscellaneous revenue increased $3 million. These increases were offset partially by the absence, in 2012, of $9 million of electric decoupling revenues recognized in 2011. Deliveries to end-use customers were 9.5 billion kWh in 2012, an increase of 0.6 billion kWh, or 6.7 percent, compared with 2011.

For the six months ended June 30, 2012, electric delivery revenues decreased $12 million compared with 2011. This decrease reflected a $59 million charge to write off Consumers’ electric decoupling mechanism regulatory asset, and the absence, in 2012, of $30 million of electric decoupling revenues recognized in 2011. These decreases were offset largely by additional revenues of $51 million resulting from a December 2011 self-implemented rate increase, $11 million resulting from higher deliveries in 2012, and a $15 million increase in surcharges and other miscellaneous revenues. Deliveries to end-use customers were 18.7 billion kWh in 2012, an increase of 0.4 billion kWh, or 2.2 percent, compared with 2011.

Maintenance and other operating expenses: For the three months ended June 30, 2012, maintenance and other operating expenses decreased $7 million compared with 2011. This decrease reflected the $14 million recovery of costs associated with Consumers’ proposed coal-fueled plant and a $7 million reduction in service restoration costs. These decreases were offset partially by $8 million of voluntary separation program expenses, $5 million of higher energy optimization program costs, and a $1 million increase in other operating expenses.

For the six months ended June 30, 2012, maintenance and other operating expenses decreased $4 million compared with 2011. This decrease reflected the $14 million recovery of costs associated with Consumers’ proposed coal-fueled plant and a $9 million reduction in service restoration costs. These decreases were offset partially by $8 million of voluntary separation program expenses, $9 million of higher energy optimization program costs, and a $2 million increase in other operating expenses.

 

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Depreciation and amortization: For the three months ended June 30, 2012, depreciation and amortization expense increased $7 million compared with 2011, and for the six months ended June 30, 2012, depreciation and amortization expense increased $13 million compared with 2011. These increases were due primarily to higher depreciation expense from increased plant in service.

Income taxes: For the three months ended June 30, 2012, income taxes increased $25 million compared with 2011, reflecting higher electric utility earnings in 2012.

CONSUMERS GAS UTILITY RESULTS OF OPERATIONS

 

In Millions  
June 30    2012      2011      Change  

Net Income Available to Common Stockholders

        

Three months ended

   $ 9       $ 5       $ 4   

Six months ended

     64         93         (29
   

 

In Millions  
    June 30, 2012 better/(worse) than 2011  
Reasons for the change     Three Months Ended     Six Months Ended  

Gas deliveries and rate increases

    $        3        $        (32

Other income, net of expenses

    (1     (1

Maintenance and other operating expenses

    1        (8

Depreciation and amortization

    -        (5

General taxes

    -        (1

Interest charges

    2        3   

Income taxes

    (1     15   

Total change

    $        4        $        (29
   

Gas deliveries and rate increases: For the three months ended June 30, 2012, gas delivery revenues increased $3 million compared with 2011. This increase reflected $5 million in additional revenues from March 2012 and May 2011 rate increases and a $5 million increase in surcharges and other miscellaneous revenues. These increases were offset partially by a $7 million reduction resulting from lower customer deliveries, due primarily to warmer weather in 2012. Gas deliveries, including transportation to end-use customers, were 40 bcf in 2012, a decrease of 6 bcf, or 13 percent, compared with 2011.

For the six months ended June 30, 2012, gas delivery revenues decreased $32 million compared with 2011. This decrease reflected a $67 million reduction resulting from lower customer deliveries, due primarily to warmer weather in 2012. The decrease was offset partially by $19 million of additional revenues from March 2012 and May 2011 rate increases, an $8 million increase related to the energy optimization program, and an $8 million increase in other miscellaneous revenues. Gas deliveries, including transportation to end-use customers, were 146 bcf in 2012, a decrease of 33 bcf, or 18 percent, compared with 2011.

Maintenance and other operating expenses: For the six months ended June 30, 2012, maintenance and other operating expenses increased $8 million compared with 2011 due to $8 million of higher energy optimization program costs and $4 million of voluntary separation program expenses, offset partially by $4 million of lower gas distribution operating expenses.

 

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Depreciation and amortization: For the six months ended June 30, 2012, depreciation and amortization expense increased $5 million compared with 2011, due primarily to higher depreciation expense from increased plant in service.

Income taxes: For the six months ended June 30, 2012, income taxes decreased $15 million compared with 2011, reflecting lower gas utility earnings in 2012.

ENTERPRISES RESULTS OF OPERATIONS

 

In Millions  
June 30    2012     2011      Change  

Net Income (Loss) Available to Common Stockholders

       

Three months ended

   $       (1   $       29       $       (30

Six months ended

     4        32         (28
   

For the three months ended June 30, 2012, the enterprises segment recorded a net loss of $1 million, compared with net income of $29 million for the three months ended June 30, 2011, and for the six months ended June 30, 2012, net income of the enterprises segment decreased $28 million compared with 2011. These changes were due primarily to the absence, in 2012, of a $28 million income tax benefit resulting from the enactment of the MCIT in May 2011.

CORPORATE INTEREST AND OTHER RESULTS OF OPERATIONS

 

In Millions  
June 30    2012     2011     Change  

Net Loss Available to Common Stockholders

      

Three months ended

     $      (19     $      (19     $          -   

Six months ended

     (40     (42     2   
   

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

DISCONTINUED OPERATIONS

For each of the three-month periods ended June 30, 2012 and 2011, the net loss recorded from discontinued operations was less than $1 million.

For the six months ended June 30, 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.

CASH POSITION, INVESTING, AND FINANCING

At June 30, 2012, CMS Energy had $215 million of consolidated cash and cash equivalents, which included $28 million of restricted cash and cash equivalents. Consumers had $181 million of consolidated cash and cash equivalents, which included $27 million of restricted cash and cash equivalents.

 

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OPERATING ACTIVITIES

Presented in the following table are specific components of net cash provided by operating activities for the six months ended June 30, 2012 and 2011:

 

In Millions  
Six Months Ended June 30    2012     2011     Change  

CMS Energy, including Consumers

      

Net income

           $ 168      $ 236      $ (68

Non-cash transactions1

     533        480        53   
  

 

 

 
     701        716        (15

Postretirement benefits contributions

     (37     (39     2   

Decrease in core working capital2

     291        453        (162

Other changes in assets and liabilities, net

     (12     86        (98

Net cash provided by operating activities

           $ 943      $ 1,216      $ (273
   

Consumers

      

Net income

           $ 198      $ 245      $ (47

Non-cash transactions1

     461        473        (12
  

 

 

 
     659        718        (59

Postretirement benefits contributions

     (34     (37     3   

Decrease in core working capital2

     294        451        (157

Other changes in assets and liabilities, net

     94        113        (19

Net cash provided by operating activities

           $     1,013      $     1,245      $ (232
   

1 Non-cash transactions comprise depreciation and amortization, changes in deferred income taxes, postretirement benefits

expense, and other non-cash items.

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

For the six months ended June 30, 2012, net cash provided by operating activities at CMS Energy decreased $273 million compared with 2011, and net cash provided by operating activities at Consumers decreased $232 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.

INVESTING ACTIVITIES

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

 

In Millions  
Six Months Ended June 30    2012     2011     Change  

CMS Energy, including Consumers

      

Capital expenditures

   $ (575   $ (399   $ (176

Costs to retire property and other

     (35     (72     37   

Net cash used in investing activities

   $ (610   $ (471   $ (139
   

Consumers

      

Capital expenditures

   $ (572   $ (394   $ (178

Costs to retire property and other

     (29     (51     22   

Net cash used in investing activities

   $     (601   $     (445   $     (156
   

 

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For the six months ended June 30, 2012, net cash used in investing activities at CMS Energy increased $139 million compared with 2011, and net cash used in investing activities at Consumers increased $156 million compared with 2011. The increases were due primarily to increases in capital expenditures.

FINANCING ACTIVITIES

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

 

In Millions  
Six Months Ended June 30    2012     2011     Change  

CMS Energy, including Consumers

      

Issuance of FMBs, senior notes, and other debt

   $ 914      $ 396      $ 518   

Retirement of debt and other debt maturity payments

         (1,100     (292     (808

Common stock issued

     23        22        1   

Payments of common stock dividends

     (125     (106     (19

Other financing activities

     (19     (20     1   

Net cash used in financing activities

   $ (307   $ -      $ (307
   

Consumers

      

Issuance of FMBs

   $ 375      $ -      $ 375   

Retirement of debt and other debt maturity payments

     (694     (18     (676

Payments of common stock dividends

     (158     (196     38   

Stockholder contribution from CMS Energy

     150        125        25   

Other financing activities

     (16     (16     -   

Net cash used in financing activities

   $ (343   $     (105   $ (238
   

For the six months ended June 30, 2012, net cash used in financing activities at CMS Energy increased $307 million compared with 2011, and net cash used in financing activities at Consumers increased $238 million compared with 2011. These increases were due primarily to an increase in net debt retirements.

RETIREMENT BENEFITS

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

 

In Millions  
      Pension Cost      OPEB Cost      Pension
Contribution
     OPEB
Contribution
 

CMS Energy, including Consumers

           

2012

     $        103         $        75         $          -         $        65   

2013

     115         73         -         74   

2014

     112         90         111         73   
   

Consumers

           

2012

     $        100         $        77         $          -         $        64   

2013

     112         75         -         73   

2014

     109         92         108         72   
   

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

 

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

CAPITAL RESOURCES AND LIQUIDITY

CMS Energy uses dividends from its subsidiaries and external financing and capital transactions to invest in its utility and non-utility businesses, retire debt, pay dividends, and fund its other obligations. The ability of CMS Energy’s subsidiaries, including Consumers, to pay dividends to CMS Energy depends upon each subsidiary’s revenues, earnings, cash needs, and other factors. In addition, Consumers’ ability to pay dividends is restricted by certain terms included in its debt covenants and articles of incorporation, and potentially by provisions under the Federal Power Act and the Natural Gas Act and FERC requirements. For additional details on Consumers’ dividend restrictions, see Note 5: Financings and Capitalization – Dividend Restrictions. For the six months ended June 30, 2012, Consumers paid $158 million in dividends on common stock to CMS Energy.

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

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 June 30, 2012:

 

In Millions  

 

 
    

Amount of

Facility

    

Amount

Borrowed

    

Letters of Credit

Outstanding

    

Amount

Available

    

Expiration

Date

 

 

 

CMS Energy

              

Revolving credit facility1

     $    550         $      25         $        2         $     523         March 2016   

 

 

Consumers

              

Revolving credit facility2

     $    500         $        -         $        3         $     497         March 2016   

Revolving credit facility2

     150         -         -         150         April 2017   

Revolving credit facility2

     30         -         30         -         September 2014   

 

 

1 Obligations under this facility are secured by Consumers common stock.

2 Obligations under this facility are secured by FMBs of Consumers.

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

 

 

 
Credit Agreement, Indenture, or Facility    Description      Limit      Ratio at
June 30, 2012
 

 

 

CMS Energy

          

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

     Debt to EBITDA         <        6.0 to 1.0         4.7 to 1.0   

Senior notes indenture

     Interest Coverage         >        1.6 to 1.0         3.8 to 1.0   

$180 million term loan credit agreement

     Interest Coverage         >        2.0 to 1.0         3.8 to 1.0   

 

 

Consumers

          

$500 million, $150 million, and $30 million revolving credit agreements, $375 million term loan credit agreement, and $35 million and $68 million reimbursement agreements

     Debt to Capital         <        0.65 to 1.0         0.46 to 1.0   

$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 June 30, 2012. While CMS Energy and Consumers believe it is unlikely that they will incur any material losses related to indemnities they have not recorded as liabilities, they cannot predict the impact of these contingent obligations on their liquidity and financial condition. For additional details on these and other guarantee arrangements, see Note 3: Contingencies and Commitments – Guarantees.

OUTLOOK

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

 

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CONSUMERS ELECTRIC UTILITY BUSINESS OUTLOOK AND UNCERTAINTIES

Balanced Energy Initiative: Consumers’ 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;

   

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 meet its renewable energy requirement each year with a combination of newly generated RECs and previously generated RECs carried over from prior years.

The 2008 Energy Law also requires Consumers to obtain 500 MW of capacity from renewable energy resources by 2015, either through generation resources owned by Consumers or through agreements to purchase capacity from other parties. To meet its renewable capacity requirements, Consumers expects to add more than 500 MW of owned or contracted renewable capacity by 2015. Through June 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.

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

 

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In January 2012, a ballot initiative was filed proposing to amend the Michigan Constitution to require Michigan utilities to obtain at least 25 percent of their electric energy from clean renewable energy sources such as wind, solar, biomass, and hydropower by 2025. The proposed amendment would also limit how much utilities could charge customers for the cost of complying with this requirement. If this ballot initiative is certified by the State Board of Canvassers, Michigan voters will vote on the proposal in the November 2012 general election.

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.

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 June 30, 2012, electric deliveries under the ROA program were at the ten percent limit and alternative electric suppliers were providing 787 MW of generation service to ROA customers. Based on 2011 weather-adjusted retail sales, Consumers expects 2012 electric deliveries under the ROA program to be at a similar level to 2011.

In March 2012, a bill was introduced to the Michigan Senate and House of Representatives that, upon enactment, would revise the 2008 Energy Law and allow customers then on the ROA program waiting list to switch their service to an alternative electric supplier. Presently, the proportion of Consumers’ electric deliveries under the ROA program and on the ROA waiting list is 23 percent. The revision also proposes an increase in the cap of six percentage points per year from 2013 through 2015.

In June 2012, a bill was introduced to the Michigan Senate and House of Representatives that would likely phase out electric choice and return the state’s electric industry to full regulation. This legislation was meant to counterpoint the bill introduced in March 2012. Consumers is unable to predict the outcome of these two legislative proposals.

Electric Transmission: In July 2011, FERC issued an order in a rulemaking proceeding concerning regional electric transmission planning and cost allocations. In August 2011, Consumers and several other electric utilities filed a joint petition seeking clarification/rehearing of FERC’s July order and opposing the allocation methodology. In May 2012, FERC issued an order denying the utilities’ clarification/rehearing requests on this order. Following this denial, Consumers and several other electric utilities filed a petition for review of FERC’s order with the U. S. Court of Appeals.

In a related matter, in 2010, MISO filed and FERC approved a tariff revision proposing a cost allocation methodology for a new category of transmission projects. Under this tariff revision, the cost of these new transmission projects will be spread proportionally across the Midwest Energy Market. Consumers believes that Michigan customers will bear additional costs under MISO’s tariff without receiving comparable benefits from these projects. In December 2011, Consumers, along with the Michigan Attorney General, ABATE, Detroit Edison, the Michigan Municipal Electric Association, and the Michigan Public Power Agency, filed a petition for review of FERC’s order with the U.S. Court of Appeals for the Seventh Circuit following FERC’s denial of their request for rehearing opposing the allocation methodology in the MISO tariff revision. Regardless of the outcome of this appeal, Consumers expects to continue to recover transmission expenses, including those associated with the MISO tariff revision, through the PSCR process.

 

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

Electric Environmental Estimates: Consumers’ operations are subject to various state and federal environmental laws and regulations. Consumers estimates that it will incur expenditures of $1.5 billion from 2012 through 2018 to continue to comply with the Clean Air Act, Clean Water Act, and numerous state and federal environmental regulations. Consumers expects to recover these costs in customer rates, but cannot guarantee this result. Consumers’ primary environmental compliance focus includes, but is not limited to, the following matters:

Air Quality: In July 2011, the EPA released CSAPR, a final replacement rule for CAIR, which requires Michigan and 27 other states to improve air quality by reducing power plant emissions that, according to EPA computer models, contribute to ground-level ozone and fine particle pollution in other downwind states. This rule had mandated emission reductions beginning in 2012, which CMS Energy and Consumers were prepared to meet through fuel blend changes. In December 2011, due to litigation surrounding CSAPR, the U.S. Court of Appeals for the D.C. Circuit issued a stay of CSAPR, stating that CAIR would remain in place while the court considers the issues. 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 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 Renewable Operating Permit programs. Numerous parties have challenged this rule in the U.S. Court of Appeals for the D.C. Circuit. In June 2012, the U.S. Court of Appeals for the D.C. Circuit upheld the Tailoring Rule and dismissed challenges to it and to three other greenhouse gas rules. Consumers does not expect to incur significant expenditures to comply with this rule.

 

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

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 nonhazardous waste or a hazardous waste. If coal ash were regulated as a hazardous waste, Consumers would likely cease the beneficial reuse of this product, which would result in a significant increase in the amount of coal ash requiring costly disposal. Additionally, if the cost of upgrading existing coal ash disposal areas to meet hazardous waste landfill standards were to become economically prohibitive, existing coal ash disposal areas could close, requiring Consumers to find costly alternative arrangements for disposal. Consumers is unable to predict the impacts from this wide range of possible outcomes, but significant expenditures are likely.

Water: In March 2011, the EPA issued a proposed rule to regulate existing electric generating plant cooling water intake systems under Section 316(b) of the Clean Water Act aimed at reducing alleged harmful impacts on fish and shellfish. Consumers continues to evaluate this proposed rule and its potential impacts on Consumers’ plants. A final rule is expected in late 2012. Consumers also expects the EPA to propose new regulations in November 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.

 

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CONSUMERS GAS UTILITY BUSINESS OUTLOOK AND UNCERTAINTIES

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

 

   

fluctuations in weather;

   

use by independent power producers;

   

availability and development of renewable energy sources;

   

changes in gas prices;

   

Michigan economic conditions, including population trends and housing activity;

   

the price of competing energy sources or fuels; and

   

energy efficiency and conservation impacts.

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

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.

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 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.

 

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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 June 30, 2012, and five percent of CMS Energy’s net income available to common stockholders for the six months ended June 30, 2012. The carrying value of EnerBank’s loan portfolio was $486 million at June 30, 2012. Its loan portfolio was funded primarily by deposit liabilities of $458 million. Twelve-month rolling average default rates on loans held by EnerBank have declined from 1.1 percent at June 30, 2011 to 0.8 percent at June 30, 2012. CMS Energy is required both by law and by contract to provide financial support, including infusing additional capital, to ensure that EnerBank satisfies mandated capital requirements and has sufficient liquidity to operate. Presently, EnerBank meets or exceeds all of its capital requirements.

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

Litigation: CMS Energy, Consumers, and certain of their subsidiaries are named as parties in various litigation matters, as well as in administrative proceedings before various courts and governmental agencies, arising in the ordinary course of business. For additional details regarding these and other legal matters, see Note 3: Contingencies and Commitments and Note 4: Regulatory Matters.

 

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NEW ACCOUNTING STANDARDS

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

 

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CMS Energy Corporation

Consolidated Statements of Income

(Unaudited)

 

                                        In Millions  
       Three Months Ended                 Six Months Ended      
June 30      2012      2011              2012      2011  

Operating Revenue

       $    1,333         $    1,364              $    3,076         $    3,419   

Operating Expenses

                  

Fuel for electric generation

       126         153              256         305   

Purchased and interchange power

       334         303              651         603   

Purchased power – related parties

       20         20              42         41   

Cost of gas sold

       133         220              683         988   

Maintenance and other operating expenses

       282         288              577         567   

Depreciation and amortization

       130         122              302         284   

General taxes

       48         51                117         118   

Total operating expenses

       1,073         1,157                2,628         2,906   

Operating Income

       260         207              448         513   

Other Income (Expense)

                  

Interest income

       1         2              2         4   

Allowance for equity funds used during construction

       2         2              4         3   

Income from equity method investees

       3         2              8         6   

Other income

       3         5              6         9   

Other expense

       (3      (3             (5      (5

Total other income

       6         8                15         17   

Interest Charges

                  

Interest on long-term debt

       94         99              188         199   

Other interest expense

       5         6              11         12   

Allowance for borrowed funds used during construction

       (1      (1             (2      (2

Total interest charges

       98         104                197         209   

Income Before Income Taxes

       168         111              266         321   

Income Tax Expense

       67         10                105         87   

Income From Continuing Operations

       101         101              161         234   

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

       -         -                7         2   

Net Income

       101         101              168         236   

Income Attributable to Noncontrolling Interests

       1         1                1         1   

Net Income Available to Common Stockholders

       $       100         $       100              $       167         $       235   
   

 

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     In Millions, Except Per Share Amounts    

 

 
             Three Months Ended                       Six Months Ended           
June 30    2012      2011        2012      2011    

 

 

Net Income Attributable to Common Stockholders

           

Amounts attributable to continuing operations

             $       100         $       100           $       160         $       233     

Amounts attributable to discontinued operations

     -         -           7         2     
  

 

 

 

Net income available to common stockholders

             $       100         $       100           $       167         $       235     
  

 

 

 

Income Attributable to Noncontrolling Interests

           

Amounts attributable to continuing operations

             $           1         $           1           $           1         $           1     

Amounts attributable to discontinued operations

     -         -           -         -     
  

 

 

 

Income attributable to noncontrolling interests

             $           1         $           1           $           1         $           1     
  

 

 

 

Basic Earnings Per Average Common Share

           

Basic earnings from continuing operations

             $      0.38         $      0.40           $      0.61         $      0.93     

Basic earnings from discontinued operations

     -         -           0.03         0.01     
  

 

 

 

Basic earnings attributable to common stock

             $      0.38         $      0.40           $      0.64         $      0.94     
  

 

 

 

Diluted Earnings Per Average Common Share

           

Diluted earnings from continuing operations

             $      0.37         $      0.38           $      0.59         $      0.89     

Diluted earnings from discontinued operations

     -         -           0.03         0.01     
  

 

 

 

Diluted earnings attributable to common stock

             $      0.37         $      0.38           $      0.62         $      0.90     
  

 

 

 

Dividends Declared Per Common Share

             $      0.24         $      0.21           $      0.48         $      0.42     

 

 

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             Six Months Ended    
June 30          2012      2011            2012      2011  

Net Income Attributable to CMS Energy

                 

Net income

        $    101         $    101            $    168         $    236   

Income attributable to noncontrolling interests

        1         1              1         1   

Net income attributable to CMS Energy

        100         100            167         235   

Retirement Benefits Liability

                 

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

        1         1            2         1   

Investments

                 

Unrealized gain on investments, net of tax of $- for all periods presented

        1         1              2         1   

Other Comprehensive Income

          2         2              4         2   

Total Comprehensive Income

        $    102         $    102            $    171         $    237   
                   

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  
Six Months Ended June 30    2012                 2011  

Cash Flows from Operating Activities

    

Net income

           $ 168      $ 236   

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

    

Depreciation and amortization

     302        284   

Deferred income taxes and investment tax credit

     102        74   

Postretirement benefits expense

     94        83   

Other non-cash operating activities

     35        39   

Postretirement benefits contributions

     (37     (39

Changes in other assets and liabilities

    

Decrease in accounts receivable, notes receivable, and accrued revenue

     146        215   

Decrease in accrued power supply revenue

     -        15   

Decrease in inventories

     135        204   

Increase in accounts payable

     10        34   

Decrease in accrued expenses

     (82     (36

Decrease in other current and non-current assets

     100        71   

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

     (30     36   

Net cash provided by operating activities

     943        1,216   

Cash Flows from Investing Activities

    

Capital expenditures (excludes assets placed under capital lease)

     (575     (399

Cost to retire property

     (20     (28

Other investing activities

     (15     (44

Net cash used in investing activities

     (610     (471

Cash Flows from Financing Activities

    

Proceeds from issuance of long-term debt

     790        375   

Proceeds from (retirements of) EnerBank notes, net

     (4     21   

Issuance of common stock

     23        22   

Retirement of long-term debt

     (972     (292

Payment of common stock dividends

     (125     (106

Payment of capital and finance lease obligations

     (12     (12

Other financing costs

     (7     (8

Net cash used in financing activities

     (307     -   

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

     26        745   

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

     -        2   

Net Increase in Cash and Cash Equivalents

     26        747   

Cash and Cash Equivalents, Beginning of Period

     161        247   

Cash and Cash Equivalents, End of Period

           $ 187      $ 994   
   

The accompanying notes are an integral part of these statements.

 

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CMS Energy Corporation

Consolidated Balance Sheets

(Unaudited)

 

                 

ASSETS

    
             In Millions  
     June 30     December 31  
      2012     2011  

Current Assets

    

Cash and cash equivalents

       $   187          $ 161   

Restricted cash and cash equivalents

     28        27   

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

     670        869   

Notes receivable

     40        49   

Accounts receivable – related parties

     10        10   

Inventories at average cost

    

Gas in underground storage

     760        929   

Materials and supplies

     96        92   

Generating plant fuel stock

     196        166   

Deferred income taxes

     -        24   

Deferred property taxes

     136        187   

Regulatory assets

     13        1   

Prepayments and other current assets

     70        50   

Total current assets

     2,206        2,565   

Plant, Property, and Equipment

    

Plant, property, and equipment, gross

     14,959        14,751   

Less accumulated depreciation and amortization

     4,973        4,901   

Plant, property, and equipment, net

     9,986        9,850   

Construction work in progress

     1,011        783   

Total plant, property, and equipment

     10,997        10,633   

Other Non-current Assets

    

Regulatory assets

     2,335        2,466   

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

     461        462   

Investments

     54        50   

Other

     240        276   

Total other non-current assets

     3,090        3,254   

Total Assets

   $ 16,293          $ 16,452   
   

 

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LIABILITIES AND EQUITY

    
             In Millions  
     June 30     December 31  
      2012     2011  

Current Liabilities

    

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

       $ 653          $ 1,057   

Accounts payable

     527        575   

Accounts payable – related parties

     9        9   

Accrued rate refunds

     37        30   

Accrued interest

     96        101   

Accrued taxes

     199        282   

Deferred income taxes

     28        -   

Regulatory liabilities

     122        125   

Other current liabilities

     136        159   

Total current liabilities

     1,807        2,338   

Non-current Liabilities

    

Long-term debt

     6,221        6,040   

Non-current portion of capital and finance lease obligations

     157        167   

Regulatory liabilities

     1,933        1,875   

Postretirement benefits

     1,289        1,289   

Asset retirement obligations

     261        254   

Deferred investment tax credit

     44        46   

Deferred income taxes

     1,090        1,035   

Other non-current liabilities

     336        336   

Total non-current liabilities

     11,331        11,042   

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

    

Equity

    

Common stockholders equity

    

Common stock, authorized 350.0 shares; outstanding 263.7 shares in 2012 and 254.1 shares in 2011

     3        3   

Other paid-in capital

     4,664        4,627   

Accumulated other comprehensive loss

     (45     (49

Accumulated deficit

     (1,511     (1,553

Total common stockholders equity

     3,111        3,028   

Noncontrolling interests

     44        44   

Total equity

     3,155        3,072   

Total Liabilities and Equity

   $ 16,293          $ 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          Six Months Ended  
June 30          2012     2011           2012     2011  

Common Stock

              

At beginning of period

      $ 3      $ 3         $ 3      $ 2   

Common stock issued

          -        -             -        1   

At end of period

          3        3             3        3   

Other Paid-in Capital

              

At beginning of period

        4,641        4,599           4,627        4,588   

Common stock issued

        23        22           31        28   

Common stock reissued

          -        -             6        5   

At end of period

          4,664        4,621             4,664        4,621   

Accumulated Other Comprehensive Loss

              

Retirement benefits liability

              

At beginning of period

        (47     (39        (48     (39

Retirement benefits liability adjustments

          1        1             2        1   

At end of period

          (46     (38          (46     (38

Investments

              

At beginning of period

        1        -           -        -   

Unrealized gain on investments

          1        1             2        1   

At end of period

          2        1             2        1   

Derivative instruments

              

At beginning and end of period

          (1     (1          (1     (1

At end of period

          (45     (38          (45     (38

Accumulated Deficit

              

At beginning of period

        (1,548     (1,675        (1,553     (1,757

Net income attributable to CMS Energy

        100        100           167        235   

Common stock dividends declared

          (63     (53          (125     (106

At end of period

          (1,511     (1,628          (1,511     (1,628

Noncontrolling Interests

              

At beginning of period

        44        44           44        44   

Income attributable to noncontrolling interests

        1        1           1        1   

Distributions and other changes in noncontrolling interests

          (1     (1          (1     (1

At end of period

          44        44             44        44   

Total Equity

      $     3,155      $     3,002         $     3,155      $     3,002   
   

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          Six Months Ended  
June 30    2012     2011           2012     2011  

Operating Revenue

   $     1,282      $     1,303         $     2,957      $     3,291   

Operating Expenses

           

Fuel for electric generation

     110        138           216        267   

Purchased and interchange power

     327        299           640        592   

Purchased power – related parties

     21        19           42        40   

Cost of gas sold

     124        197           660        950   

Maintenance and other operating expenses

     266        273           543        538   

Depreciation and amortization

     128        121           299        282   

General taxes

     46        49             114        115   

Total operating expenses

     1,022        1,096             2,514        2,784   

Operating Income

     260        207           443        507   

Other Income (Expense)

           

Interest income

     1        2           2        4   

Allowance for equity funds used during construction

     2        2           4        3   

Other income

     3        5           11        13   

Other expense

     (3     (3          (5     (5

Total other income

     3        6             12        15   

Interest Charges

           

Interest on long-term debt

     58        63           119        126   

Other interest expense

     4        5           8        9   

Allowance for borrowed funds used during construction

     (1     (1          (2     (2

Total interest charges

     61        67             125        133   

Income Before Income Taxes

     202        146           330        389   

Income Tax Expense

     80        54             132        144   

Net Income

     122        92           198        245   

Preferred Stock Dividends

     1        1             1        1   

Net Income Available to Common Stockholder

   $ 121      $ 91         $ 197      $ 244   
   

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              Six Months Ended        
June 30    2012      2011           2012      2011  

Net Income

     $    122         $    92           $    198         $    245   

Retirement Benefits Liability

             

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

     -         -           1         1   

Investments

             

Unrealized gain (loss) on investments, net of tax benefit of $-, $-, $(2), and $(1)

     3         -             -         (1

Other Comprehensive Income

     3         -             1         -   

Total Comprehensive Income

     $    125         $    92           $    199         $    245   
   

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  
Six Months Ended June 30    2012     2011  

Cash Flows from Operating Activities

    

Net income

   $      198      $      245   

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

    

Depreciation and amortization

     299        282   

Deferred income taxes and investment tax credit

     39        82   

Postretirement benefits expense

     92        78   

Other non-cash operating activities

     31        31   

Postretirement benefits contributions

     (34     (37

Changes in other assets and liabilities

    

Decrease in accounts receivable, notes receivable, and accrued revenue

     146        207   

Decrease in accrued power supply revenue

     -        15   

Decrease in inventories

     137        202   

Increase in accounts payable

     11        42   

Decrease in accrued expenses

     (19     (12

Decrease in other current and non-current assets

     103        68   

Increase in other current and non-current liabilities

     10        42   

Net cash provided by operating activities

     1,013        1,245   

Cash Flows from Investing Activities

    

Capital expenditures (excludes assets placed under capital lease)

     (572     (394

Cost to retire property

     (20     (28

Other investing activities

     (9     (23

Net cash used in investing activities

     (601     (445

Cash Flows from Financing Activities

    

Proceeds from issuance of long-term debt

     375        -   

Retirement of long-term debt

     (694     (18

Payment of common stock dividends

     (158     (196

Payment of preferred stock dividends

     (1     (1

Stockholder contribution

     150        125   

Payment of capital and finance lease obligations

     (12     (12

Other financing costs

     (3     (3

Net cash used in financing activities

     (343     (105

Net Increase in Cash and Cash Equivalents

     69        695   

Cash and Cash Equivalents, Beginning of Period

     85        71   

Cash and Cash Equivalents, End of Period

   $ 154      $ 766   
   
    

The accompanying notes are an integral part of these statements.

 

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Consumers Energy Company

Consolidated Balance Sheets

(Unaudited)

ASSETS

      In Millions  
             June 30      December 31  
      2012      2011  

Current Assets

     

Cash and cash equivalents

       $ 154           $ 85   

Restricted cash and cash equivalents

     27         26   

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

     659         860   

Notes receivable

     13         23   

Accounts receivable – related parties

     1         1   

Inventories at average cost

     

Gas in underground storage

     756         929   

Materials and supplies

     92         88   

Generating plant fuel stock

     196         164   

Deferred property taxes

     136         187   

Regulatory assets

     13         1   

Prepayments and other current assets

     63         43   

Total current assets

     2,110         2,407   

Plant, Property, and Equipment

     

Plant, property, and equipment, gross

     14,825         14,621   

Less accumulated depreciation and amortization

     4,915         4,846   

Plant, property, and equipment, net

     9,910         9,775   

Construction work in progress

     1,010         782   

Total plant, property, and equipment

     10,920         10,557   

Other Non-current Assets

     

Regulatory assets

     2,335         2,466   

Accounts and notes receivable

     1         1   

Investments

     31         35   

Other

     157         196   

Total other non-current assets

     2,524         2,698   

Total Assets

       $ 15,554           $ 15,662   
                   

 

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LIABILITIES AND EQUITY

    
In Millions  
             June 30     December 31  
      2012     2011  

Current Liabilities

    

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

   $ 62      $ 363   

Accounts payable

     512        561   

Accounts payable – related parties

     12        11   

Accrued rate refunds

     37        30   

Accrued interest

     65        73   

Accrued taxes

     271        287   

Deferred income taxes

     85        73   

Regulatory liabilities

     122        125   

Other current liabilities

     108        119   

Total current liabilities

     1,274        1,642   

Non-current Liabilities

    

Long-term debt

     3,967        3,987   

Non-current portion of capital and finance lease obligations

     157        167   

Regulatory liabilities

     1,933        1,875   

Postretirement benefits

     1,227        1,225   

Asset retirement obligations

     260        253   

Deferred investment tax credit

     44        46   

Deferred income taxes

     1,846        1,817   

Other non-current liabilities

     262        256   

Total non-current liabilities

     9,696        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

     (1     (2

Retained earnings

     593        554   

Total common stockholder equity

     4,540        4,350   

Preferred stock

     44        44   

Total equity

     4,584        4,394   

Total Liabilities and Equity

   $ 15,554      $ 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                Six Months Ended      
June 30      2012      2011             2012      2011  

Common Stock

                 

At beginning and end of period

     $ 841       $ 841             $ 841       $ 841   

Other Paid-in Capital

                 

At beginning of period

       3,107         2,957             2,957         2,832   

Stockholder contribution

       -         -               150         125   

At end of period

       3,107         2,957               3,107         2,957   

Accumulated Other Comprehensive Loss

                 

Retirement benefits liability

                 

At beginning of period

       (18      (15          (19      (16

Retirement benefits liability adjustments

       -         -               1         1   

At end of period

       (18      (15            (18      (15

Investments

                 

At beginning of period

       14         15             17         16   

Unrealized gain (loss) on investments

       3         -               -         (1

At end of period

       17         15               17         15   

At end of period

       (1      -               (1      -   

Retained Earnings

                 

At beginning of period

       515         512             554         463   

Net income

       122         92             198         245   

Common stock dividends declared

       (43      (92          (158      (196

Preferred stock dividends declared

       (1      (1            (1      (1

At end of period

       593         511               593         511   

Preferred Stock

                 

At beginning and end of period

       44         44               44         44   

Total Equity

     $ 4,584       $ 4,353           $ 4,584       $ 4,353   
            

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

 

   

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

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

ASSETS AND LIABILITIES MEASURED AT FAIR VALUE ON A RECURRING BASIS

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

 

In Millions  
June 30, 2012    Total      Level 1      Level 2      Level 3  

CMS Energy, including Consumers

           

Assets

           

Cash equivalents

     $    141         $    141         $        -         $        -   

Restricted cash equivalents

     14         14         -         -   

Nonqualified deferred compensation plan assets

     5         5         -         -   

SERP

           

Mutual funds

     127         127         -         -   

Derivative instruments

           

Commodity contracts

     7         1         1         5   

Total

     $    294         $    288         $        1         $        5   
   

Liabilities

           

Nonqualified deferred compensation plan liabilities

     $        5         $        5         $        -         $        -   

Derivative instruments

           

Commodity contracts

     6         -         4         2   

Total

     $      11         $        5         $       4         $        2   
   

Consumers

           

Assets

           

Cash equivalents

     $    122         $    122         $        -         $        -   

Restricted cash equivalents

     14         14         -         -   

CMS Energy common stock

     30         30         -         -   

Nonqualified deferred compensation plan assets

     3         3         -         -   

SERP

           

Mutual funds

     86         86         -         -   

Derivative instruments

           

Commodity contracts

     5         -         -         5   

Total

     $    260         $    255         $        -         $        5   
   

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         -         2   

Total

   $       245       $       243       $ -       $       2   
   

Liabilities

           

Nonqualified deferred compensation plan liabilities

   $ 4       $ 4       $ -       $ -   

Derivative instruments

           

Commodity contracts

     7         -         3         4   

Total

   $ 11       $ 4       $       3       $ 4   
   

Consumers

           

Assets

           

Cash equivalents

   $ 56       $ 56       $ -       $ -   

Restricted cash equivalents

     14         14         -         -   

CMS Energy common stock

     35         35         -         -   

Nonqualified deferred compensation plan assets

     3         3         -         -   

SERP

           

Cash equivalents

     1         1         -         -   

Mutual funds

     74         74         -         -   

Derivative instruments

           

Commodity contracts

     2         -         -         2   

Total

   $ 185       $ 183       $ -       $ 2   
   

Liabilities

           

Nonqualified deferred compensation plan liabilities

   $ 3       $ 3       $ -       $ -   

Total

   $ 3       $ 3       $ -       $ -   
   

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

Nonqualified Deferred Compensation Plan Assets: The nonqualified deferred compensation plan assets consist of various mutual funds that are valued using a market approach. CMS Energy and Consumers value these assets using the daily quoted net asset values that are 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.

 

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

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

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

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

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

 

In Millions  
       Three Months Ended     Six Months Ended  
June 30    2012     2011     2012     2011  

CMS Energy, including Consumers

        

Balance at beginning of period

     $       (1     $       (2     $       (2     $       (3

Total gains included in earnings1

     -        -        2        -   

Total gains offset through regulatory accounting

     9        2        7        2   

Purchases

     -        -        -        1   

Settlements

     (5     -        (4     -   

Balance at end of period

     $        3        $         -        $        3        $         -   
   

Unrealized gains included in earnings relating to assets and liabilities still held at end of period1

     $         -        $         -        $        2        $        1   
   

Consumers

        

Balance at beginning of period

     $        1        $         -        $        2        $        1   

Total gains offset through regulatory accounting

     9        2        7        2   

Purchases

     -        1        -        1   

Settlements

     (5     -        (4     (1

Balance at end of period

     $        5        $        3        $        5        $        3   
   

1 CMS Energy records realized and unrealized gains and losses for Level 3 recurring fair value measurements in earnings as a

component of operating revenue or maintenance and other operating expenses on its consolidated statements of income.

 

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3:     CONTINGENCIES AND COMMITMENTS

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

CMS ENERGY CONTINGENCIES

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

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

 

   

In 2005, CMS Energy, CMS MST, and CMS Field Services were named as defendants in a putative class action filed in Kansas state court, Learjet, Inc., et al. v. Oneok, Inc., et al. The complaint alleges that during the putative class period, January 1, 2000 through October 31, 2002, the defendants engaged in a scheme to violate the Kansas Restraint of Trade Act. The plaintiffs are seeking statutory full consideration damages consisting of the full consideration paid by plaintiffs for natural gas allegedly purchased from defendants.

 

   

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

 

   

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

 

   

A class action complaint, Arandell Corp., et al. v. XCEL Energy Inc., et al., was filed in 2006 in Wisconsin state court on behalf of Wisconsin commercial entities that purchased natural gas between January 1, 2000 and October 31, 2002. The defendants, including CMS Energy, CMS ERM, and Cantera Gas Company, are alleged to have violated Wisconsin’s antitrust statute.

 

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

 

   

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

 

   

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

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

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

Bay Harbor: As part of the development of Bay Harbor by certain subsidiaries of CMS Energy, and under an agr