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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, 2013

 

 

OR

 

 

 

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

 

 

OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the transition period from_____to_____

 

 

Commission

 

Registrant; State of Incorporation;

 

IRS Employer

File Number

 

Address; and Telephone Number

 

Identification No.

1-9513

 

CMS ENERGY CORPORATION

 

38-2726431 

 

 

(A Michigan Corporation)

 

 

 

 

One Energy Plaza, Jackson, Michigan  49201

 

 

 

 

(517) 788-0550

 

 

 

 

 

 

 

1-5611

 

CONSUMERS ENERGY COMPANY

 

38-0442310 

 

 

(A Michigan Corporation)

 

 

 

 

One Energy Plaza, Jackson, Michigan  49201

 

 

 

 

(517) 788-0550

 

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

CMS Energy Corporation:  Yes T     No o   Consumers Energy Company:  Yes T     No o

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).

CMS Energy Corporation:  Yes T     No o   Consumers Energy Company:  Yes T     No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

CMS Energy Corporation:

Large accelerated filer T   Accelerated filer o   Non-Accelerated filer o   Smaller reporting company o

(Do not check if a smaller reporting company)

Consumers Energy Company:

Large accelerated filer o   Accelerated filer o   Non-Accelerated filer T   Smaller reporting company o

(Do not check if a smaller reporting company)

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

CMS Energy Corporation:  Yes o    No T   Consumers Energy Company:  Yes o    No T

Indicate the number of shares outstanding of each of the issuer’s classes of common stock at July 5, 2013:

CMS Energy Corporation:

CMS Energy Common Stock, $0.01 par value

 

 

(including 1,091,320 shares owned by Consumers Energy Company)

 

266,959,461

Consumers Energy Company:

Consumers 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, 2013

TABLE OF CONTENTS

 

 

 

Page

Glossary

3

Filing Format

8

Forward-Looking Statements and Information

8

 

 

PART I. Financial Information

 

 

 

 

Item 1.

Consolidated Financial Statements (Unaudited)

 

 

CMS Energy Corporation

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

11

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

72

Item 4.

Controls and Procedures

72

 

 

 

PART II. Other Information

 

 

 

 

Item 1.

Legal Proceedings

72

Item 1A.

Risk Factors

73

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

73

Item 3.

Defaults Upon Senior Securities

73

Item 4.

Mine Safety Disclosures

73

Item 5.

Other Information

73

Item 6.

Exhibits

74

Signatures

 

75

 

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GLOSSARY

Certain terms used in the text and financial statements are defined below.

 

2008 Energy Law

 

Comprehensive energy reform package enacted in Michigan in 2008

 

 

 

2012 Form 10-K

 

Each of CMS Energy’s and Consumers’ Annual Report on Form 10-K for the year ended December 31, 2012

 

 

 

ABATE

 

Association of Businesses Advocating Tariff Equity

 

 

 

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

 

 

 

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

 

 

 

CCR

 

Coal combustion residual

 

 

 

CEO

 

Chief Executive Officer

 

 

 

CFO

 

Chief Financial Officer

 

 

 

Clean Air Act

 

Federal Clean Air Act of 1963, as amended

 

 

 

Clean Water Act

 

Federal Water Pollution Control Act of 1972, 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

 

 

 

CMS Field Services

 

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

 

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CMS Gas Transmission

 

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

 

 

 

CMS Land

 

CMS Land Company, a wholly owned subsidiary of CMS Capital

 

 

 

CMS MST

 

CMS Marketing, Services and Trading Company, a wholly owned subsidiary of CMS Enterprises, whose name was changed to CMS ERM in 2004

 

 

 

Consumers

 

Consumers Energy Company, a wholly owned subsidiary of CMS Energy

 

 

 

CSAPR

 

The Cross-State Air Pollution Rule

 

 

 

Customer Choice Act

 

Customer Choice and Electricity Reliability Act, a Michigan statute

 

 

 

DB SERP

 

Defined Benefit Supplemental Executive Retirement Plan

 

 

 

Dodd-Frank Act

 

Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010

 

 

 

DOE

 

U.S. Department of Energy

 

 

 

DOJ

 

U.S. Department of Justice

 

 

 

DTE Electric

 

DTE Electric Company, a non-affiliated company

 

 

 

EBITDA

 

Earnings before interest, taxes, depreciation, and amortization

 

 

 

EGWP

 

Employer Group Waiver Plan

 

 

 

EnerBank

 

EnerBank USA, a wholly owned subsidiary of CMS Capital

 

 

 

Entergy

 

Entergy Corporation, a non-affiliated company

 

 

 

Environmental Mitigation 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

 

 

 

EPA

 

U.S. Environmental Protection Agency

 

 

 

EPS

 

Earnings per share

 

 

 

Exchange Act

 

Securities Exchange Act of 1934, as amended

 

 

 

FDIC

 

Federal Deposit Insurance Corporation

 

 

 

FERC

 

The Federal Energy Regulatory Commission

 

 

 

fine particulate matter

 

Particulate matter that is 2.5 microns or less in diameter

 

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FLI Liquidating Trust

 

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

 

 

 

FMB

 

First mortgage bond

 

 

 

FOV

 

Finding of Violation

 

 

 

FTR

 

Financial transmission right

 

 

 

GAAP

 

U.S. Generally Accepted Accounting Principles

 

 

 

GCR

 

Gas cost recovery

 

 

 

Health Care Acts

 

Comprehensive health care reform enacted in March 2010, comprising the Patient Protection and Affordable Care Act and the related Health Care and Education Reconciliation Act

 

 

 

ISFSI

 

Independent spent fuel storage installation

 

 

 

kWh

 

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

 

 

 

Ludington

 

Ludington pumped-storage plant, jointly owned by Consumers and DTE Electric

 

 

 

MACT

 

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

 

 

 

MATS

 

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

 

 

 

MD&A

 

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

 

 

 

MDEQ

 

Michigan Department of Environmental Quality

 

 

 

MDL

 

A pending multi-district litigation case in Nevada

 

 

 

MGP

 

Manufactured gas plant

 

 

 

Michigan Business Corporation Act

 

Michigan Business Corporation Act of 1972, as amended

 

 

 

Michigan Mercury Rule

 

Michigan Air Pollution Control Rules, Part 15, Emission Limitations and Prohibitions – Mercury, addressing mercury emissions from coal-fueled electric generating units

 

 

 

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 Midcontinent Independent 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

 

 

 

NAV

 

Net asset value

 

 

 

NERC

 

The North American Electric Reliability Corporation, a non-affiliated company responsible for developing and enforcing reliability standards, monitoring the bulk power system, and educating and certifying industry personnel

 

 

 

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

 

Other Post-Employment Benefits

 

 

 

OPEB Plan

 

Defined benefit postretirement health-care and life insurance plans of CMS Energy, Consumers, and Panhandle

 

 

 

Palisades

 

Palisades nuclear power plant, sold by Consumers to Entergy in 2007

 

 

 

Panhandle

 

Panhandle Eastern Pipe Line 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

 

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ReliabilityFirst Corporation

 

ReliabilityFirst Corporation, a non-affiliated company responsible for the preservation and enhancement of bulk power system reliability and security

 

 

 

Renewable Operating Permit

 

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

 

 

 

RMRR

 

Routine maintenance, repair, and replacement

 

 

 

ROA

 

Retail Open Access, which allows electric generation customers to choose alternative electric suppliers pursuant to the Customer Choice Act

 

 

 

SEC

 

U.S. Securities and Exchange Commission

 

 

 

Sherman Act

 

Sherman Antitrust Act of 1890

 

 

 

Smart Energy

 

Consumers’ Smart Energy 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 of 1980

 

 

 

Title V

 

A federal program under the Clean Air Act designed to standardize air quality permits and the permitting process for major sources of emissions across the U.S.

 

 

 

Trunkline

 

Trunkline Gas Company, LLC, a non-affiliated company and wholly owned subsidiary of Panhandle

 

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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 2012 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, MISO, or other governmental authorities;

 

·      the adoption of federal or state laws or regulations or changes in applicable laws, rules, regulations, principles, or practices, or in their interpretation, including those related to energy policy and ROA, the environment, regulation or deregulation, health care reforms (including the Health Care Acts), taxes, accounting matters, and other business issues that could have an impact on CMS Energy’s or Consumers’ businesses or financial results, including 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, EPA, and/or U.S. Army Corps of Engineers, 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 used in calculating the plans’ obligations, and the resulting impact on future funding requirements;

 

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

 

·      changes in the economic and financial viability of CMS Energy’s and Consumers’ suppliers, customers, and other counterparties and the continued ability of these third parties, including third parties in bankruptcy, to meet their obligations to CMS Energy and Consumers;

 

·      population changes in the geographic areas where CMS Energy and Consumers conduct business;

 

·      national, regional, and local economic, competitive, and regulatory policies, conditions, and developments, including municipal bankruptcy filings such as the recent filing by the City of Detroit;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

·      earnings volatility resulting from the application of fair value accounting to certain energy commodity contracts or interest rate 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.

 

All forward-looking statements should be considered in the context of the risk and other factors described above and as detailed from time to time in CMS Energy’s and Consumers’ SEC filings.  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 1, Regulatory Matters and Note 2, Contingencies and Commitments; 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 emphasizes the key elements depicted below:

 

 

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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 2006 to 2012, Consumers achieved a 76 percent reduction in the annual number of recordable safety incidents.

 

CUSTOMER VALUE

 

Consumers is undertaking a number of initiatives that reflect its intensified customer focus.  Consumers’ planned investments in reliability are aimed at improving safety, reducing customer outage frequency, reducing repetitive outages, and increasing customer satisfaction.  Also, in order to minimize increases in customer rates, Consumers has undertaken several initiatives to reduce costs through a voluntary separation plan in 2012, accelerated pension funding, employee and retiree health-care cost sharing, negotiated labor agreements, information system efficiencies, and productivity improvement programs.  These initiatives, together with Consumers’ plans to accelerate further cost reductions, should allow Consumers to avoid increasing electric and gas base rates through 2014.  Consumers’ ability to avoid base rate increases is dependent on MPSC approval of certain applications yet to be filed.  Consumers may also reconsider this expectation should its assumptions change regarding the economy or other matters.

 

UTILITY INVESTMENT

 

Consumers expects to make capital investments of about $7 billion from 2013 through 2017.  Consumers has limited its capital investment program to those investments it believes are needed to provide safe, reliable, and efficient service to its customers.  Consumers’ capital investment program is expected to result in annual rate base growth of five to seven percent while allowing Consumers to maintain sustainable customer base rate increases (excluding PSCR and GCR charges) at or below the rate of inflation.

 

Among the key components of Consumers’ investment program are projects that will enhance customer value.  Consumers’ planned base capital investments of $3.2 billion comprise $2.1 billion of electric utility projects to improve reliability and increase capacity and $1.1 billion of gas utility projects to increase capacity and deliverability and enhance pipeline integrity.  An additional $1.4 billion of planned reliability investments at Consumers are aimed at reducing outages and improving customer satisfaction; these investments comprise $0.7 billion at the electric utility to strengthen circuits and substations, replace poles, and upgrade the Ludington pumped-storage plant, and $0.7 billion at the gas utility to replace mains and enhance transmission and storage systems.  Consumers also expects to spend $1.1 billion on environmental investments needed to comply with state and federal laws and regulations.

 

In December 2012, Consumers announced plans to build a 700-MW gas-fueled electric generating plant at its Thetford complex in Genesee County, Michigan and filed an air permit application with the MDEQ for the proposed plant.  In July 2013, Consumers filed for approval of a certificate of necessity with the MPSC, as allowed under the 2008 Energy Law.  Construction of the plant, at an estimated cost of $750 million, is contingent upon obtaining the certificate of necessity and environmental permits.  Consumers expects the plant to be operational in 2017.

 

Renewable energy projects are another major component of Consumers’ planned capital investments.  Consumers expects to spend $0.3 billion on renewable energy investments, under an MPSC-approved renewable energy plan, from 2013 through 2017.  The 2008 Energy Law requires that at least ten percent of Consumers’ electric sales volume come from renewable energy sources by 2015, and it includes requirements for specific capacity additions.  Consumers has historically included renewable resources as part of its portfolio, with about eight percent of its present power supply coming from such renewable sources as hydropower, landfill gas, biomass, wind, anaerobic digestion, and solar.

 

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

 

REGULATION

 

Regulatory matters are a key aspect of CMS Energy’s and Consumers’ businesses, particularly Consumers’ rate cases and regulatory proceedings before the MPSC.  Michigan Governor Rick Snyder has appointed Sally Talberg to serve on the three-member MPSC for a six-year term starting July 3, 2013 replacing Orjiakor Isiogu.  Talberg has served in various energy-related consulting, management, and public service roles during her career.  She will represent political independents on the Commission.  Her appointment is subject to the advice and consent of the Michigan Senate.  Other important regulatory events and developments are summarized below.

 

·      Electric Rate Cases:  Consumers filed a general electric rate case with the MPSC in September 2012, seeking an annual rate increase of $148 million, based on a 10.5 percent authorized return on equity.  In January 2013, Consumers supplemented its electric rate case application to reflect changes to its environmental compliance and generation outage plans, which reduced its requested annual rate increase to $145 million.

 

In March 2013, Consumers self-implemented an annual rate increase of $110 million out of its requested $145 million, subject to refund with interest.  Consumers’ self-implementation required no order by the MSPC, and no intervenors in Consumers’ electric rate case opposed Consumers’ self-implementation amount.  The MPSC approved a partial settlement agreement in May 2013, authorizing an annual rate increase of $89 million, based on a 10.3 percent authorized rate of return on equity.

 

In July 2013, Consumers filed a reconciliation of total revenues collected during self-implementation to those that would have been collected under final rates.  Consumers’ reconciliation indicated that no refund would be required.

 

·      Gas Rate Case:  In February 2013, Consumers filed an application with the MPSC seeking an annual rate increase of $49 million, based on a 10.5 percent authorized return on equity.  The filing requested authority to recover new investments in customer reliability, deliverability, safety, and system enhancements, and sought approval of several rate adjustment mechanisms.  Subsequent to this filing, Consumers’ projection of non-fuel costs decreased.  As a result, in June 2013, Consumers filed a petition with the MPSC to close the docket or, alternatively, to suspend and extend indefinitely the schedule in this case.  The MPSC approved Consumers’ petition to suspend and indefinitely extend the schedule.

 

·      Gas Revenue Decoupling Mechanism:  The gas revenue decoupling mechanism, authorized by the MPSC in its 2009 order in Consumers’ gas rate case and extended through April 2012, allowed Consumers to adjust future gas rates to the degree that actual average weather-adjusted

 

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sales per customer differed from the rate order.  In December 2012, the MPSC approved Consumers’ first reconciliation of the gas revenue decoupling mechanism, in which Consumers requested recovery of $16 million from customers for the period June 2010 through May 2011.  The MPSC authorized recovery of the full amount over a three-month period that began in February 2013.

 

Consumers filed its final reconciliation of the gas revenue decoupling mechanism in August 2012, requesting recovery of $17 million from customers for the period June 2011 through April 2012.  At June 30, 2013, Consumers had a $17 million regulatory asset recorded for gas revenue decoupling for that period.

 

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, 2013, Consumers’ electric deliveries under the ROA program were at the ten percent limit.  In February 2013, a bill was introduced to the Michigan Senate that, if enacted, would revise the 2008 Energy Law and allow customers on the ROA program waiting list to switch their service to an alternative electric supplier.  Presently, the proportion of Consumers’ electric deliveries under the ROA program and on the ROA waiting list is 25 percent.  The bill also proposes an increase in the cap of six percentage points per year from 2014 through 2016.  Consumers is unable to predict the outcome of this legislative proposal.

 

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 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.  Consumers has received from the MDEQ a one-year extension for MATS and the Michigan Mercury Rule for ten of its coal-fueled units, allowing them to run as presently configured until April 2016.  CMS Energy and Consumers are continuing to assess the impact and cost associated with these standards.

 

In June 2013, President Obama directed the EPA to issue a revised proposal addressing greenhouse gas emissions of new fossil-fuel-fired steam electric generating units by September 20, 2013, and to finalize the rule in a timely fashion.  The EPA was further directed to address existing, modified, and reconstructed fossil-fuel-fired steam electric generating units with proposed standards, regulations, or guidelines to be completed by June 1, 2014, and final standards, regulations, or guidelines to be completed by June 1, 2015.  Subsequent state implementation plans are due by June 30, 2016.  Consumers believes that its balanced energy initiative, its present carbon reduction target, and its emphasis on supply diversity will position it favorably to deal with the impact of carbon regulation, but cannot predict the nature or outcome of these proposals.  Consumers will continue to monitor regulatory activity regarding greenhouse gas emissions standards that may affect electric generating units.

 

FINANCIAL PERFORMANCE

 

For the six months ended June 30, 2013, CMS Energy’s net income available to common stockholders was $224 million, and diluted EPS were $0.83.  This compares with net income available to common stockholders of $167 million and diluted EPS of $0.62 for the six months ended June 30, 2012.  The main factors contributing to CMS Energy’s improved performance in 2013 were increased gas deliveries and the absence, in 2013, of the write-off of Consumers’ electric revenue decoupling mechanism regulatory asset in 2012.

 

Consumers’ utility operations are seasonal.  The consumption of electric energy typically increases in the summer months, due primarily to the use of air conditioners and other cooling equipment, while peak

 

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demand for natural gas occurs in the winter due to colder temperatures and the resulting use of natural gas as heating fuel.  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.  Consumers expects its electric sales to increase annually by about 0.5 to 1.0 percent on average through 2017, driven largely by the continued rise in industrial production.  Excluding the impacts of energy efficiency programs, Consumers expects its electric sales to increase by about 1.0 to 1.5 percent annually through 2017.  Consumers is projecting that its gas sales will remain stable through 2017.  This outlook reflects growth in gas demand offset by energy efficiency and conservation.

 

As Consumers seeks to continue to receive fair and timely regulatory treatment, delivering customer value will remain a key strategic priority.  To keep costs down for its utility customers, Consumers has set goals to achieve further annual productivity improvements.  Additionally, Consumers will strive to give priority to capital investments that increase customer value or lower costs.

 

Consumers expects to continue to have sufficient capacity to fund its investment-based growth plans.  CMS Energy also expects its sources of liquidity to remain sufficient to meet its cash requirements.  CMS Energy and Consumers will continue to monitor developments in the financial and credit markets, as well as government policy responses to those developments, for potential implications for their businesses and their future financial needs.

 

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Table of Contents

 

RESULTS OF OPERATIONS

 

CMS ENERGY CONSOLIDATED RESULTS OF OPERATIONS

 

 

 

 

 

In Millions, Except Per Share Amounts

 

 

 

Three Months Ended

 

Six Months Ended

June 30

 

2013

 

2012

 

Change

 

2013

 

2012

 

Change

 

Net Income Available to Common Stockholders

 

$

80

 

$

100

 

$

(20

)

$

224

 

$

167

 

$

57

 

Basic Earnings Per Share

 

$

0.30

 

$

0.38

 

$

(0.08

)

$

0.85

 

$

0.64

 

$

0.21

 

Diluted Earnings Per Share

 

$

0.29

 

$

0.37

 

$

(0.08

)

$

0.83

 

$

0.62

 

$

0.21

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In Millions

 

 

 

Three Months Ended

 

Six Months Ended

June 30

 

2013

 

2012

 

Change

 

2013

 

2012

 

Change

 

Electric utility

 

$

93

 

$

111

 

$

(18

)

$

159

 

$

132

 

$

27

 

Gas utility

 

5

 

9

 

(4

)

101

 

64

 

37

 

Enterprises

 

1

 

(1

)

2

 

5

 

4

 

1

 

Corporate interest and other

 

(19

)

(19

)

-

 

(41

)

(40

)

(1

)

Discontinued operations

 

-

 

-

 

-

 

-

 

7

 

(7

)

Net Income Available to Common Stockholders

 

$

80

 

$

100

 

$

(20

)

$

224

 

$

167

 

$

57

 

 

Presented in the following table are specific after-tax changes to net income available to common stockholders for 2013 versus 2012:

 

 

 

 

 

 

 

In Millions

 

 

 

June 30, 2013 better/(worse) than 2012

 

Reasons for the change

 

Three Months Ended

 

Six Months Ended

 

Gas sales

 

$

5

 

 

 

$

46

 

 

 

Electric sales

 

(10)

 

 

 

1

 

 

 

Electric and gas rate orders

 

17

 

 

 

30

 

 

 

Depreciation and property tax

 

(10)

 

 

 

(20)

 

 

 

Distribution and restoration cost

 

(20)

 

 

 

(21)

 

 

 

Absence of recovery of development costs related to
canceled coal-fueled plant in 2012

 

(9)

 

 

 

(9)

 

 

 

Subsidiary earnings of enterprises segment

 

1

 

 

 

(1)

 

 

 

Higher corporate fixed charges and other,
offset by higher EnerBank earnings

 

-

 

 

 

(1)

 

 

 

Other

 

(2)

 

$

(28

)

(6)

 

$

19

 

 

 

 

 

 

 

 

 

 

 

Absence of 2012 charge to write off electric decoupling
regulatory asset

 

 

 

-

 

 

 

36

 

Absence of voluntary separation plan cost in 2012

 

 

 

7

 

 

 

7

 

Other, including the absence of the elimination, in 2012, of
a liability associated with a prior asset sale

 

 

 

1

 

 

 

(5

)

Total change

 

 

 

$

(20

)

 

 

$

57

 

 

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Table of Contents

 

CONSUMERS ELECTRIC UTILITY RESULTS OF OPERATIONS

 

 

 

 

 

 

 

 

 

 

 

In Millions

 

 

 

Three Months Ended

 

Six Months Ended

 

June 30

 

2013

 

2012

 

Change

 

2013

 

2012

 

Change

 

Net Income Available to Common Stockholders

 

$

93

 

$

111

 

$

(18

)

$

159

 

$

132

 

$

27

 

Reasons for the change

 

 

 

 

 

 

 

 

 

 

 

 

 

Electric deliveries and rate
increases

 

 

 

 

 

$

(2

)

 

 

 

 

$

78

 

Power supply costs and related
revenue

 

 

 

 

 

(1

)

 

 

 

 

(1

)

Other income, net of expenses

 

 

 

 

 

(1

)

 

 

 

 

(2

)

Maintenance and other
operating expenses

 

 

 

 

 

(17

)

 

 

 

 

(13

)

Depreciation and amortization

 

 

 

 

 

(8

)

 

 

 

 

(19

)

General taxes

 

 

 

 

 

(1

)

 

 

 

 

(2

)

Interest charges

 

 

 

 

 

-

 

 

 

 

 

1

 

Income taxes

 

 

 

 

 

12

 

 

 

 

 

(15

)

Total change

 

 

 

 

 

$

(18

)

 

 

 

 

$

27

 

 

Electric deliveries and rate increases:  For the three months ended June 30, 2013, electric delivery revenues decreased $2 million compared with 2012.  This decrease reflected $19 million of lower deliveries, due partially to milder weather in 2013, and a $2 million decrease in other revenues.  These decreases were offset largely by a $19 million benefit from a May 2013 rate increase that Consumers self-implemented in March 2013.  Deliveries to end-use customers, excluding deliveries to Consumers’ largest customer, which is on an economic development rate, were 8.6 billion kWh in 2013, a decrease of 0.1 billion kWh, or one percent, compared with 2012.

 

For the six months ended June 30, 2013, electric delivery revenues increased $78 million compared with 2012.  This increase reflected the absence, in 2013, of a $59 million charge to write off Consumers’ electric decoupling regulatory asset, and a $23 million benefit from a May 2013 rate increase that Consumers self-implemented in March 2013.  These increases were offset partially by a $4 million decrease in other revenues.  Deliveries to end-use customers, excluding deliveries to Consumers’ largest customer, which is on an economic development rate, were 17.3 billion kWh in 2013, an increase of 0.1 billion kWh, or one percent, compared with 2012.

 

Maintenance and other operating expenses:  For the three months ended June 30, 2013, maintenance and other operating expenses increased $17 million compared with 2012.  This increase reflected the absence, in 2013, of the authorized recovery of $14 million associated with Consumers’ cancelled coal-fueled plant and an $11 million increase in service restoration expenses.  These increases were offset partially by the absence, in 2013, of $8 million of voluntary separation programs expenses.

 

For the six months ended June 30, 2013, maintenance and other operating expenses increased $13 million compared with 2012.  This increase reflected the absence, in 2013, of the authorized recovery of $14 million associated with Consumers’ cancelled coal-fueled plant, and an $8 million increase in service restoration expenses.  These increases were offset partially by the absence, in 2013, of $8 million of voluntary separation program expenses, and a $1 million decrease in other operating expenses.

 

Depreciation and amortization:  For the three months ended June 30, 2013, depreciation and amortization expense increased $8 million compared with 2012, and for the six months ended June 30, 2013, depreciation and amortization expense increased $19 million compared with 2012.  These

 

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increases were due primarily to increased plant in service during 2013 and an increase in depreciation rates that took effect in June 2012.

 

Income taxes:  For the three months ended June 30, 2013, income taxes decreased $12 million compared with 2012, reflecting lower electric utility earnings for the three months ended June 30, 2013.

 

For the six months ended June 30, 2013, income taxes increased $15 million compared with 2012, reflecting higher electric utility earnings for the first six months of 2013.

 

CONSUMERS GAS UTILITY RESULTS OF OPERATIONS

 

 

 

 

 

 

 

 

 

 

 

In Millions

 

 

 

Three Months Ended

 

Six Months Ended

 

June 30

 

2013

 

2012

 

Change

 

2013

 

2012

 

Change

 

Net Income Available to Common Stockholders

 

$

5

 

$

9

 

$

(4

)

$

101

 

$

64

 

$

37

 

Reasons for the change

 

 

 

 

 

 

 

 

 

 

 

 

 

Gas deliveries and rate increases

 

 

 

 

 

$

2

 

 

 

 

 

$

57

 

Maintenance and other operating expenses

 

 

 

 

 

(6

)

 

 

 

 

1

 

Depreciation and amortization

 

 

 

 

 

-

 

 

 

 

 

3

 

General taxes

 

 

 

 

 

-

 

 

 

 

 

(1

)

Interest charges

 

 

 

 

 

(1

)

 

 

 

 

-

 

Income taxes

 

 

 

 

 

1

 

 

 

 

 

(23

)

Total change

 

 

 

 

 

$

(4

)

 

 

 

 

$

37

 

 

Gas deliveries and rate increases:  For the three months ended June 30, 2013, gas delivery revenues increased $2 million compared with 2012.  This increase was due primarily to higher customer deliveries, offset partially by the absence of the gas revenue decoupling mechanism in 2013.  Deliveries to end-use customers were 47 bcf in 2013, an increase of 7 bcf, or 18 percent, compared with 2012.

 

For the six months ended June 30, 2013, gas delivery revenues increased $57 million compared with 2012.  This increase reflected $51 million of higher customer deliveries, due primarily to colder weather in 2013, offset partially by the absence of the gas revenue decoupling mechanism in 2013, and a $6 million benefit from a June 2012 rate increase that Consumers self-implemented in March 2012.  Deliveries to end-use customers were 179 bcf in 2013, an increase of 33 bcf, or 23 percent, compared with 2012.

 

Maintenance and other operating expenses:  For the three months ended June 30, 2013, maintenance and other operating expenses increased $6 million compared with 2012.  This increase was due to a $10 million increase in pipeline integrity and gas distribution operating expenses, offset partially by the absence, in 2013, of $4 million of voluntary separation program expenses.

 

For the six months ended June 30, 2013, maintenance and other operating expenses decreased $1 million compared with 2012.  This decrease was due to the absence, in 2013, of $4 million of voluntary separation program expenses, offset partially by a $3 million increase in gas distribution operating expenses.

 

Depreciation and amortization:  For the six months ended June 30, 2013, depreciation and amortization expense decreased $3 million compared with 2012, due primarily to decreased depreciation rates that took effect in January 2013.

 

Income taxes:  For the six months ended June 30, 2013, income taxes increased $23 million compared with 2012, due to higher gas utility earnings in 2013.

 

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Table of Contents

 

ENTERPRISES RESULTS OF OPERATIONS

 

 

 

 

 

 

 

 

 

 

 

In Millions

 

 

 

Three Months Ended

 

Six Months Ended

June 30

 

2013

 

2012

 

Change

 

2013

 

2012

 

Change

 

Net Income Available to Common Stockholders

 

$

1

 

$

(1

)

$

2

 

$

5

 

$

4

 

$

1

 

 

For the three months ended June 30, 2013, net income of the enterprises segment increased $2 million compared with 2012, due primarily to improved gross margins.

 

For the six months ended June 30, 2013, net income of the enterprises segment increased $1 million compared with 2012, due primarily to lower expenses, offset partially by the absence of a $2 million 2012 Michigan tax benefit.

 

CORPORATE INTEREST AND OTHER RESULTS OF OPERATIONS

 

 

 

 

 

 

 

 

 

 

 

In Millions

 

 

 

Three Months Ended

 

Six Months Ended

June 30

 

2013

 

2012

 

Change

 

2013

 

2012

 

Change

 

Net Income (Reduction) Available to Common Stockholders

 

$

(19

)

$

(19

)

$

-

 

$

(41

)

$

(40

)

$

(1

)

 

For the six months ended June 30, 2013, corporate interest and other net expenses increased $1 million compared with 2012, due primarily to an increase in interest expense, reflecting increased borrowings.

 

DISCONTINUED OPERATIONS

 

For the three months ended June 30, 2013, the net loss from discontinued operations was less than $1 million.

 

For the six months ended June 30, 2013, the net loss from discontinued operations was less than $1 million, compared with income from discontinued operations of $7 million in 2012, reflecting the elimination of a liability related to a prior asset sale.

 

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Table of Contents

 

CASH POSITION, INVESTING, AND FINANCING

 

At June 30, 2013, CMS Energy had $566 million of consolidated cash and cash equivalents, which included $29 million of restricted cash and cash equivalents.  At June 30, 2013, Consumers had $314 million of consolidated cash and cash equivalents, which included $28 million of restricted cash and cash equivalents.

 

OPERATING ACTIVITIES

 

Presented in the following table are specific components of net cash provided by operating activities for the six months ended June 30, 2013 and 2012:

 

 

 

 

 

 

 

In Millions

 

Six Months Ended June 30

 

2013

 

2012

 

Change

 

CMS Energy, including Consumers

 

 

 

 

 

 

 

Net income

 

$

225

 

$

168

 

$

57

 

Non-cash transactions1

 

580

 

533

 

47

 

 

 

805

 

701

 

104

 

Postretirement benefits contributions

 

(88

)

(37

)

(51

)

Proceeds from government grant

 

69

 

-

 

69

 

Changes in core working capital2

 

357

 

291

 

66

 

Changes in other assets and liabilities, net

 

(48

)

(12

)

(36

)

Net cash provided by operating activities

 

$

1,095

 

$

943

 

$

152

 

Consumers

 

 

 

 

 

 

 

Net income

 

$

262

 

$

198

 

$

64

 

Non-cash transactions1

 

527

 

461

 

66

 

 

 

789

 

659

 

130

 

Postretirement benefits contributions

 

(86

)

(34

)

(52

)

Proceeds from government grant

 

69

 

-

 

69

 

Changes in core working capital2

 

357

 

294

 

63

 

Changes in other assets and liabilities, net

 

(44

)

94

 

(138

)

Net cash provided by operating activities

 

$

1,085

 

$

1,013

 

$

72

 

 

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, 2013, net cash provided by operating activities at CMS Energy increased $152 million compared with 2012, and net cash provided by operating activities at Consumers increased $72 million compared with 2012.  The increases were due primarily to higher net income, net of non-cash transactions, the receipt of a $69 million renewable energy grant for Lake Winds® Energy Park, an increase in refunds to customers, and a larger reduction in working capital, reflecting higher usage of gas inventory.  These changes were offset partially by higher pension contributions.  At Consumers, these changes were also offset partially by an increase in tax payments to CMS Energy.

 

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Table of Contents

 

INVESTING ACTIVITIES

 

Presented in the following table are specific components of net cash used in investing activities for the six months ended June 30, 2013 and 2012:

 

 

 

 

 

 

 

In Millions

 

Six Months Ended June 30

 

2013

 

2012

 

Change

 

CMS Energy, including Consumers

 

 

 

 

 

 

 

Capital expenditures

 

$

(580

)

$

(575

)

$

(5

)

Costs to retire property and other

 

(36

)

(35

)

(1

)

Net cash used in investing activities

 

$

(616

)

$

(610

)

$

(6

)

Consumers

 

 

 

 

 

 

 

Capital expenditures

 

$

(579

)

$

(572

)

$

(7

)

Costs to retire property and other

 

(34

)

(29

)

(5

)

Net cash used in investing activities

 

$

(613

)

$

(601

)

$

(12

)

 

For the six months ended June 30, 2013, net cash used in investing activities at CMS Energy increased $6 million compared with 2012, and net cash used in investing activities at Consumers increased $12 million compared with 2012.  The increases were due primarily to a slight increase in capital expenditures under Consumers’ capital investment program.

 

FINANCING ACTIVITIES

 

Presented in the following table are specific components of net cash used in financing activities for the six months ended June 30, 2013 and 2012:

 

 

 

 

 

 

 

In Millions

 

Six Months Ended June 30

 

2013

 

2012

 

Change

 

CMS Energy, including Consumers

 

 

 

 

 

 

 

Issuance of debt

 

$

788

 

$

914

 

$

(126

)

Retirement of debt

 

(586

)

(1,100

)

514

 

Payment of common stock dividends

 

(135

)

(125

)

(10

)

Decrease in notes payable

 

(110

)

-

 

(110

)

Other financing activities

 

8

 

4

 

4

 

Net cash used in financing activities

 

$

(35

)

$

(307

)

$

272

 

Consumers

 

 

 

 

 

 

 

Issuance of debt

 

$

425

 

$

375

 

$

50

 

Retirement of debt

 

(445

)

(694

)

249

 

Payment of common and preferred stock dividends

 

(195

)

(159

)

(36

)

Stockholder contribution from CMS Energy

 

150

 

150

 

-

 

Decrease in notes payable

 

(110

)

-

 

(110

)

Other financing activities

 

(16

)

(15

)

(1

)

Net cash used in financing activities

 

$

(191

)

$

(343

)

$

152

 

 

For the six months ended June 30, 2013, net cash used in financing activities at CMS Energy decreased $272 million compared with 2012 and net cash used in financing activities at Consumers decreased $152 million compared with 2012.  These changes were due primarily to a decrease in net debt retirements, offset partially by repayments by Consumers under its revolving accounts receivable sales program.

 

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Table of Contents

 

RETIREMENT BENEFITS

 

Effective July 1, 2013, CMS Energy and Consumers approved a change to the Medicare drug program provided through their OPEB Plan from an employer-sponsored prescription drug plan with a retiree drug subsidy to an EGWP, to begin on January 1, 2015.  As a result of changes stemming from the Health Care Acts, the EGWP structure can result in reduced costs for employers, without impacting plan participants’ benefit coverage or costs.  Also effective July 1, 2013, CMS Energy and Consumers approved certain benefit changes to the OPEB Plan, to begin on January 1, 2016.  Accordingly, CMS Energy and Consumers performed a remeasurement of the OPEB Plan as of July 1, 2013.  In addition, with the plan remeasurement, the discount rate used to measure the OPEB liability was increased from 4.4 percent at December 31, 2012 to 5.1 percent at July 1, 2013.  Assumptions regarding the expected long-term rate of return on plan assets and the health-care cost trend rate did not change from December 31, 2012 levels.

 

As a result of these changes, CMS Energy’s (including Consumers’) OPEB liability decreased by $613 million and its OPEB regulatory asset decreased by $599 million as of July 1, 2013.  CMS Energy’s accumulated other comprehensive loss decreased by $14 million.  CMS Energy’s (including Consumers’) OPEB cost is expected to decrease by $46 million in 2013.  Consumers’ OPEB liability decreased by $599 million and its OPEB regulatory asset decreased by $599 million as of July 1, 2013.  Consumers’ OPEB cost is expected to decrease by $45 million in 2013.

 

The decrease in CMS Energy’s and Consumers’ OPEB liabilities was due primarily to the change in the discount rate used to measure the liabilities and other changes in actuarial assumptions, the benefit changes, and the change in the OPEB Plan’s Medicare drug program to the EGWP structure.  Presented in the following table are the components of the decrease in CMS Energy’s and Consumers’ OPEB liabilities at July 1, 2013.

 

 

 

In Millions

 

 

 

OPEB Liability

 

CMS Energy, including Consumers

 

 

 

Discount rate and other actuarial assumptions

 

$

250

 

Benefit changes

 

208

 

Medicare drug program structure

 

155

 

Total decrease

 

$

613

 

Consumers

 

 

 

Discount rate and other actuarial assumptions

 

$

245

 

Benefit changes

 

203

 

Medicare drug program structure

 

151

 

Total decrease

 

$

599

 

 

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Presented in the following table are the most recent estimates of CMS Energy’s and Consumers’ pension cost, OPEB cost, and cash contributions through 2015.  These updated estimates incorporate the OPEB Plan changes that became effective July 1, 2013.

 

 

 

 

 

 

 

 

 

In Millions

 

 

 

Pension

 

OPEB

 

Pension

 

OPEB

 

 

 

Cost

 

Cost (Credit

)

Contribution

 

Contribution

  

CMS Energy, including Consumers

 

 

 

 

 

 

 

 

 

2013

 

$

119

 

$

14

 

$

50

 

$

72

 

2014

 

102

 

(24

)

4

 

57

 

2015

 

104

 

(17

)

145

 

25

 

Consumers

 

 

 

 

 

 

 

 

 

2013

 

$

116

 

$

17

 

$

49

 

$

71

 

2014

 

100

 

(20

)

4

 

56

 

2015

 

101

 

(13

)

141

 

25

 

 

Contribution estimates comprise required amounts and discretionary contributions.  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.

 

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 3, Financings and Capitalization – Dividend Restrictions.  For the six months ended June 30, 2013, Consumers paid $194 million in common stock dividends to CMS Energy.

 

CMS Energy has entered into two continuous equity offering programs permitting it to sell, from time to time in “at the market” offerings, common stock having an aggregate sales price of up to $50 million per program.  Under the first program, entered into in 2011, CMS Energy issued common stock and received net proceeds of $20 million in March 2013 and $15 million in each of 2012 and 2011.  In April 2013, CMS Energy entered into the second continuous equity offering program, but has not yet issued any equity under this program.

 

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.

 

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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 diminish or otherwise become 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, 2013:

 

 

 

 

 

 

 

 

 

 

 

In Millions

 

 

 

Amount of

 

Amount

 

Letters of Credit

 

Amount

 

 

 

 

 

Facility

 

Borrowed

 

Outstanding

 

Available

 

Expiration Date

 

CMS Energy

 

 

 

 

 

 

 

 

 

 

 

Revolving credit facility1

 

$

550

 

$

-

 

$

2

 

$

548

 

December 2017

 

Consumers

 

 

 

 

 

 

 

 

 

 

 

Revolving credit facility2

 

$

500

 

$

-

 

$

2

 

$

498

 

December 2017

 

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, 2013, $250 million of accounts receivable were eligible for transfer under this program.

 

Certain of CMS Energy’s and Consumers’ credit agreements, debt indentures, and other facilities contain covenants that require CMS Energy and Consumers to maintain certain financial ratios, as defined therein.  At June 30, 2013, no events of default had occurred with respect to any financial covenants contained in CMS Energy’s and Consumers’ credit agreements, debt indentures, or other facilities.  CMS Energy and Consumers were each in compliance with these covenants as of June 30, 2013, as presented in the following table:

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2013

Credit Agreement, Indenture, or Facility 

 

Description

 

Limit

 

Actual

 

CMS Energy

 

 

 

 

 

 

 

$550 million revolving credit agreement and

 

 

 

 

 

 

 

$180 million term loan credit agreement

 

Debt to EBITDA

 

< 

6.0 to 1.0

 

4.4 to 1.0

 

$180 million term loan credit agreement

 

Interest Coverage

 

2.0 to 1.0

 

4.4 to 1.0

 

Consumers

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

agreements, $35 million and $68 million reimbursement

 

 

 

 

 

 

 

agreements, and $250 million accounts receivable

 

 

 

 

 

 

 

purchase agreement

 

Debt to Capital

 

< 

0.65 to 1.0

 

0.47 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 2013 and beyond.

 

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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 $482 million at June 30, 2013.  While CMS Energy and Consumers believe it is unlikely that they will incur any material losses related to indemnities they have not recorded as liabilities, they cannot predict the impact of these contingent obligations on their liquidity and financial condition.  For additional details on these and other guarantee arrangements, see Note 2, Contingencies and Commitments – Guarantees.

 

OUTLOOK

 

Several business trends and uncertainties may affect CMS 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 2, Contingencies and Commitments; and Part II – Item 1A. Risk Factors.

 

CONSUMERS ELECTRIC UTILITY BUSINESS OUTLOOK AND UNCERTAINTIES

 

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

 

Consumers plans to mothball seven of its smaller coal-fueled units for a period of three years.  In June 2013, MISO approved Consumers’ applications to delay the mothballing of the units by one year, to 2016.  Consumers will continue to evaluate its options for the plants, which include:

 

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

·                 seeking a further extension of compliance deadlines for new environmental standards;

·                 converting the units to natural gas instead of coal;

·                 decommissioning the units; or

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

 

With the potential suspension of these plants’ operations and the potential tightening of the MISO capacity market, Consumers could experience a shortfall in generation capacity of up to 1,500 MW in 2016.  In order to address future capacity requirements and growing electric demand in Michigan, Consumers updated its balanced energy initiative, a comprehensive energy resource plan designed to meet the short-term and long-term electricity needs of its customers through:

 

·                 energy efficiency;

·                 demand management;

·                 expanded use of renewable energy;

·                 development of new power plants;

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

·                 continued operation or upgrade of existing units.

 

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In December 2012, Consumers announced plans to build a 700-MW gas-fueled electric generating plant at its Thetford complex in Genesee County, Michigan and filed an air permit application with the MDEQ for the proposed plant.  In July 2013, Consumers filed for approval of a certificate of necessity with the MPSC, as allowed under the 2008 Energy Law.  Construction of the plant, at an estimated cost of $750 million, is contingent upon obtaining the certificate of necessity and environmental permits.  Consumers expects the plant to be operational in 2017.

 

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 use RECs in an amount equal to at least ten percent of its electric sales volume (estimated to be 3.3 million RECs annually) in 2015 and each year thereafter.  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 new capacity from renewable energy resources by the end of 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.  Through June 2013, Consumers has contracted for the purchase of 302 MW of nameplate capacity from renewable energy suppliers and owns 100 MW of nameplate capacity at its recently constructed Lake Winds® Energy Park.  The combination of the contracted and owned capacity represents 81 percent of the 2015 renewable capacity requirement.  Consumers expects to meet the balance of the requirement through the completion of its Cross Winds® Energy Park, a 105-MW wind park in Tuscola County, Michigan, which is expected to begin operations in late 2014.  In June 2013, Consumers entered into a contract to purchase wind turbine generators for the construction of the Cross Winds® Energy Park.

 

The extension of federal tax credits for wind projects for which construction begins prior to December 31, 2013 could reduce significantly the cost of meeting the renewable requirements of the 2008 Energy Law.  As a result, Consumers has accelerated the construction of Cross Winds® Energy Park and plans to begin construction in late 2013.  Consumers expects to qualify for $100 million to $120 million of federal production tax credits associated with the Cross Winds® Energy Park.  These cost savings, which will be based on the wind project’s production over its first ten years of operation, will be passed on to customers through a reduced renewable energy surcharge or through a reduction in PSCR costs.

 

Energy Optimization Plan:  The 2008 Energy Law requires Consumers to achieve energy savings equivalent to annual sales reduction targets through at least 2015.  The targets increase annually, with the goal of achieving a six percent reduction in customers’ electricity use and a four percent reduction in customers’ natural gas use by December 31, 2015.  Under its energy optimization plan, Consumers provides its customers with incentives to reduce usage by offering energy audits, rebates and discounts on purchases of highly efficient appliances, and other incentives and programs.  Consumers estimates that, through its gas and electric energy optimization programs, its customers realized $184 million in energy savings during 2012.

 

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 in recent years.

 

Consumers expects weather-adjusted electric deliveries to decrease in 2013 by three percent compared with 2012.  Consumers’ outlook for 2013 includes reduced deliveries to its largest customer, which produces energy-related and computer components.  Consumers has a long-term contract with this customer to provide electricity at a discounted rate for economic development purposes.  Excluding this

 

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customer, Consumers expects weather-adjusted electric deliveries in 2013 to remain stable compared with 2012.  This outlook reflects Consumers’ belief that economic conditions in Michigan are improving.

 

Over the next five years, Consumers expects average electric delivery growth of about 0.5 to 1.0 percent annually.  This increase reflects growth in electric demand, offset partially by the predicted effects of energy efficiency programs and appliance efficiency standards.  Actual delivery levels will depend on:

 

·                 energy conservation measures and results of energy efficiency programs;

·                 fluctuations in weather; and

·                 Michigan economic conditions, including utilization, expansion, or contraction of manufacturing facilities, population trends, and housing activity.

 

Electric ROA:  The Customer Choice Act allows 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, 2013, electric deliveries under the ROA program were at the ten percent limit and alternative electric suppliers were providing 789 MW of generation service to ROA customers.  Of Consumers’ 1.8 million electric customers, 308 customers purchased electric generation service under the ROA program.  Consumers expects 2013 electric deliveries under the ROA program to be at a similar level to 2012.

 

In February 2013, a bill was introduced to the Michigan Senate that, if enacted, would revise the 2008 Energy Law and allow customers on the ROA program waiting list to switch their service to an alternative electric supplier.  Presently, the proportion of Consumers’ electric deliveries under the ROA program and on the ROA waiting list is 25 percent.  The bill also proposes an increase in the cap of six percentage points per year from 2014 through 2016.  Consumers is unable to predict the outcome of this legislative proposal.  The Michigan legislature also has conducted hearings on the subject of energy competition.  If a proposal to deregulate electric generation in Michigan were enacted, it could have a material adverse effect on Consumers’ financial results and operations.

 

Electric Transmission:  In 2011, FERC issued an order in a rulemaking proceeding concerning regional electric transmission planning and cost allocations.  Consumers and several other electric utilities filed a joint petition seeking clarification/rehearing of FERC’s order and opposing the allocation methodology.  In 2012, following FERC’s denial of their requests for clarification/rehearing, Consumers and several other electric utilities filed a petition for review of FERC’s order with the U.S. Court of Appeals.  In May 2013, Consumers, along with other electric utilities, filed briefs in this matter.

 

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 2011, Consumers, along with the Michigan Attorney General, ABATE, DTE Electric, and other parties, 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.  In June 2013, the Court of Appeals issued an opinion largely affirming FERC’s orders regarding the cost allocation methodology.  Consumers is reviewing this opinion.  Regardless of the final outcome of these appeals, Consumers expects to continue to recover transmission expenses, including those associated with the MISO tariff revision, through the PSCR process.

 

In 2012, ReliabilityFirst Corporation informed Consumers that Consumers may not be properly registered to meet certain NERC electric reliability standards.  Consumers is assessing its registration status, taking into consideration FERC’s December 2012 order on the definition of a bulk electric system.  In light of

 

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this order, Consumers is reviewing the status of its electric distribution assets under FERC’s modified test and also reviewing prior correspondence from ReliabilityFirst Corporation as to the potential classification of its assets as within a bulk electric system for reliability purposes.  Consumers believes that it would recover any incremental costs that it might incur in connection with the resolution of any issues in this area.

 

Governor’s Energy Initiative:  Michigan’s governor has instituted a process pursuant to which a series of reports are to be completed in December 2013 addressing energy efficiency, renewable energy, the electricity market and customer choice, and other subjects.  The process is designed to help the governor and other lawmakers determine the state’s next steps regarding energy policies.  A series of public hearings took place in 2013 to gather input.  Consumers has participated actively in this process but cannot predict its outcome.

 

Electric Rate Matters:  Rate matters are critical to Consumers’ electric utility business.  For additional details on electric rate matters, see Note 1, Regulatory Matters.

 

Future Electric Rate Case:  Consumers has undertaken several initiatives to reduce costs through a voluntary separation plan in 2012, accelerated pension funding, employee and retiree health-care cost sharing, negotiated labor agreements, information system efficiencies, and productivity improvement programs.  These initiatives, together with Consumers’ plans to accelerate further cost reductions, should allow Consumers to avoid increasing electric base rates through 2014.  Consumers’ ability to avoid a base rate increase is dependent on MPSC approval of certain applications yet to be filed.  Consumers may also reconsider this expectation should its assumptions change regarding the economy or other 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 $1.1 billion from 2013 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 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.  In 2012, the U.S. Court of Appeals for the D.C. Circuit voided CSAPR and held that CAIR would remain in place until the EPA promulgated a new rule.  After a request by the EPA for a rehearing was denied, the EPA and other parties sought an appeal to the U.S. Supreme Court, which was granted in June 2013.  A decision by the Supreme Court is not expected until 2014.

 

In 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.  Existing units, unless granted extensions, must meet the standards by mid-April 2015.  Consumers has received from the MDEQ a one-year extension for MATS and the Michigan Mercury Rule for ten of its coal-fueled units, allowing them to run as presently configured until April 2016.

 

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

 

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

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

 

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·                 changes in how certain plants are used; and

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

 

The MDEQ renewed and issued the Renewable Operating Permit for the B.C. Cobb plant 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.  The Sierra Club or the Natural Resources Defense Council could also file suit in federal district court seeking EPA action on the petition.  Consumers believes these claims are baseless, but is unable to predict the outcome of this petition.

 

Fine Particulate Matter:  In December 2012, the EPA finalized a rule that strengthens the air quality standard for fine particulate matter.  Consumers expects short-term impacts to be limited, but this new standard could give rise to air quality concerns in states downwind of Michigan and put pressure on Michigan and other Midwestern states to reduce emissions further.  Given its present strategy for CAIR and MATS compliance, however, Consumers will already be achieving significant reductions in emissions that contribute to the formation of fine particulate matter.

 

Greenhouse Gases:  In the recent past, there have been numerous legislative and regulatory initiatives at the state, regional, and national levels that involve the regulation of greenhouse gases.  Consumers continues to monitor and comment on these initiatives and to follow 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 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 applied only to new fossil-fuel-fired steam electric generating units.  The standards would have required that carbon dioxide emissions not exceed those of a modern, efficient natural gas-fueled combined-cycle electric generating plant, regardless of fuel type.  In June 2013, President Obama directed the EPA to issue a revised proposal addressing new fossil-fuel-fired steam electric generating units by September 20, 2013, and to finalize the rule in a timely fashion.  The EPA was further directed to address existing, modified, and reconstructed fossil-fuel-fired steam electric generating units with proposed standards, regulations, or guidelines to be completed by June 1, 2014, and final standards, regulations, or guidelines to be completed by June 1, 2015.  Subsequent state implementation plans are due by June 30, 2016.  Consumers believes that its balanced energy initiative, its present carbon reduction target, and its emphasis on supply diversity will position it favorably to deal with the impact of carbon regulation, but cannot predict the nature or outcome of these proposals.  Consumers will continue to monitor regulatory activity regarding greenhouse gas emissions standards that may affect electric generating units.

 

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.

 

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CCRs:  In 2010, the EPA proposed rules regulating CCRs, such as coal ash, under the Resource Conservation and Recovery Act.  Recent communications from the EPA stress the need to coordinate CCR rulemaking guidelines for steam electric generating plants under the Clean Water Act.  A final CCR rule could be issued in 2014.  Michigan already regulates CCRs as low-hazard industrial waste.  The EPA proposed a range of alternatives for regulating CCRs, including regulation as either a non-hazardous waste or a hazardous waste.  If coal ash were regulated as a hazardous waste, Consumers would likely cease the beneficial 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 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’ electric generating plants.  A final rule is expected in November 2013.  The EPA also proposed new regulations in June 2013 that may require physical and/or chemical treatment facilities for wastewater discharges from electric generating plants.  A final rule is expected in 2014.

 

PCBs:  In 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 approach would aim to phase out equipment containing PCBs by 2025.  Another approach would eliminate an exemption for small equipment containing PCBs.  To comply with any such regulatory actions, Consumers could incur substantial costs associated with existing electrical equipment potentially containing PCBs.  A proposed rule is expected in 2013.

 

Other electric environmental matters could have a major impact on Consumers’ outlook.  For additional details on other electric environmental matters, see Note 2, Contingencies and Commitments – Consumers Electric Utility Contingencies – Electric Environmental Matters.

 

CONSUMERS GAS UTILITY BUSINESS OUTLOOK AND UNCERTAINTIES

 

Gas Deliveries:  Consumers expects weather-adjusted gas deliveries in 2013 to grow by about three percent compared with 2012.  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 due to:

 

·                 fluctuations in weather;

·                 use by 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 Transmission:  In May 2013, the MPSC approved Consumers’ application to build a 24-mile, 36-inch natural gas pipeline in St. Joseph and Branch Counties, Michigan.  Consumers expects to spend about $120 million for this project.  Construction of the pipeline is contingent upon obtaining environmental permits.  Consumers expects the pipeline to be operational by the end of 2014.

 

Gas Transportation:  In July 2012, Trunkline filed a proposal with FERC to cease transporting natural gas through one of its two main transmission pipelines serving Michigan.  More than 60 percent of the

 

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natural gas supplied to Consumers’ gas customers is delivered by Trunkline’s two main transmission pipelines.  In August 2012, Consumers filed a motion with FERC to protest against the proposed abandonment on the grounds that it would negatively impact customers and that it could hamper the development of gas-fueled electric generation in Michigan.  Michigan’s governor, the MPSC, and various other parties have also filed protests with FERC.  If Trunkline’s proposal is granted, the abandonment could result in higher gas prices and reduced availability for Michigan gas customers.

 

Gas Rate Matters:  Rate matters are critical to Consumers’ gas utility business.  For additional details on Consumers’ gas rate matters, see Note 1, Regulatory Matters.

 

Pending Gas Rate Case:  In February 2013, Consumers filed an application with the MPSC seeking an annual rate increase of $49 million, based on a 10.5 percent authorized return on equity.  The filing requested authority to recover new investments in customer reliability, deliverability, safety, and system enhancements, and sought approval of several rate adjustment mechanisms.  Subsequent to this filing, Consumers’ projection of non-fuel costs decreased.  As a result, in June 2013, Consumers filed a petition with the MPSC to close the docket or, alternatively, to suspend and extend indefinitely the schedule in this case.  The MPSC approved Consumers’ petition to suspend and indefinitely extend the schedule.  Consumers plans to file a new and amended case containing more recent historical data and an updated projected test year, primarily for rate relief associated with projected capital expenditures.

 

Future Gas Rate Case:  Consumers has undertaken several initiatives to reduce costs through a voluntary separation plan in 2012, accelerated pension funding, employee and retiree health-care cost sharing, negotiated labor agreements, information system efficiencies, and productivity improvement programs.  These initiatives, together with Consumers’ plans to accelerate further cost reductions, should allow Consumers to avoid increasing gas base rates through 2014.  Consumers’ ability to avoid a base rate increase is dependent on MPSC approval of certain applications yet to be filed.  Consumers may also reconsider this expectation should its assumptions change regarding the economy or other matters.

 

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

 

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

·                 an increase in the number of pipeline inspectors;

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

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

·                 prescribed notification and on-site incident response times;

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

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

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

 

Consumers continues to comply with laws and regulations governing natural gas pipeline safety.  These laws and regulations could cause Consumers to incur significant additional costs related to its natural gas pipeline safety programs.  Consumers expects that it would be able to recover the costs in rates, consistent with the recovery of other reasonable costs of complying with laws and regulations.

 

MPSC Investigations:  The MPSC is presently conducting investigations into two natural gas explosions that occurred in Consumers’ gas service territory, in Wayne, Michigan and Royal Oak, Michigan.  Consumers does not expect the outcome of these investigations to have a material adverse impact on its liquidity, financial condition, or results of operations, but cannot predict the financial impact or outcome.

 

Gas Environmental Estimates:  Consumers expects to incur response activity costs at a number of sites, including 23 former MGP sites.  For additional details, see Note 2, Contingencies and Commitments – Consumers Gas Utility Contingencies – Gas Environmental Matters.

 

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CONSUMERS OTHER OUTLOOK AND UNCERTAINTIES

 

Smart Energy:  Consumers’ grid modernization effort continues.  In August 2012, Consumers began installing smart meters in Muskegon County, Michigan.  One of the functions of smart meters is to allow customers to monitor and manage their energy usage, which should help reduce demand during critical peak times, resulting in lower peak capacity requirements.  The installation of smart meters should also provide for both operational and customer benefits.  As of June 30, 2013, Consumers had upgraded over 90,000 electric residential and small business customers in western Michigan to smart meters.  Consumers is able to read these smart meters remotely; further functionality will continue to be added through mid-2015.  Consumers expects to have installed about 400,000 smart meters throughout western Michigan by the end of 2014.  Consumers also plans to install communication modules on gas meters in areas where Consumers provides both electricity and natural gas to customers.

 

ENTERPRISES OUTLOOK AND UNCERTAINTIES

 

The primary focus with respect to CMS Energy’s remaining non-utility businesses is to optimize cash flow and maximize the value of their assets.

 

Trends, uncertainties, and other matters that could have a material impact on CMS Energy’s consolidated income, cash flows, or financial position include:

 

·                 indemnity and environmental remediation obligations at Bay Harbor;

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

·                 the outcome of certain legal proceedings;

·                 impacts of declines in electricity prices on the profitability of the enterprises segment’s generating units;

·                 representations, warranties, and indemnities provided by CMS Energy or its subsidiaries in connection with previous sales of assets;

·                 changes in commodity prices and interest rates on certain derivative contracts that do not qualify for hedge accounting and must be marked to market through earnings;

·                 changes in various environmental laws, regulations, principles, or practices, or in their interpretation; and

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

 

For additional details regarding the enterprises segment’s uncertainties, see Note 2, 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, 2013, and four percent of CMS Energy’s net income available to common stockholders for the six months ended June 30, 2013.  The carrying value of EnerBank’s loan portfolio was $543 million at June 30, 2013.  Its loan portfolio was funded primarily by deposit liabilities of $499 million.  The twelve-month rolling average default rate on loans held by EnerBank has remained stable at 0.7 percent at June 30, 2013.  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.  With its self-funding plan, EnerBank has exceeded these requirements historically and exceeded them as of June 30, 2013.

 

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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 1, Regulatory Matters and Note 2, Contingencies and Commitments.

 

NEW ACCOUNTING STANDARDS

 

There are no new accounting standards issued but not yet effective that are expected to have a material impact on CMS Energy’s or Consumers’ consolidated financial statements.

 

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Table of Contents

 

CMS Energy Corporation

Consolidated Statements of Income

(Unaudited)

 

 

 

 

 

 

 

In Millions

 

 

Three Months Ended

 

Six Months Ended

June 30

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

Operating Revenue

 

   $

1,406

 

   $

1,333

 

   $

3,385

 

   $

3,076

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

Fuel for electric generation

 

147

 

126

 

301

 

256

Purchased and interchange power

 

347

 

334

 

680

 

651

Purchased power – related parties

 

23

 

20

 

46

 

42

Cost of gas sold

 

166

 

133

 

773

 

683

Maintenance and other operating expenses

 

304

 

282

 

586

 

577

Depreciation and amortization

 

137

 

130

 

318

 

302

General taxes

 

50

 

48

 

120

 

117

Total operating expenses

 

1,174

 

1,073

 

2,824

 

2,628

 

 

 

 

 

 

 

 

 

Operating Income

 

232

 

260

 

561

 

448

 

 

 

 

 

 

 

 

 

Other Income (Expense)

 

 

 

 

 

 

 

 

Interest income

 

2

 

1

 

2

 

2

Allowance for equity funds used during construction

 

1

 

2

 

4

 

4

Income from equity method investees

 

3

 

3

 

8

 

8

Other income

 

2

 

3

 

5

 

6

Other expense

 

(3)

 

(3)

 

(6)

 

(5)

Total other income

 

5

 

6

 

13

 

15

 

 

 

 

 

 

 

 

 

Interest Charges

 

 

 

 

 

 

 

 

Interest on long-term debt

 

99

 

94

 

193

 

188

Other interest expense

 

4

 

5

 

9

 

11

Allowance for borrowed funds used during construction

 

(1)

 

(1)

 

(2)

 

(2)

Total interest charges

 

102

 

98

 

200

 

197

 

 

 

 

 

 

 

 

 

Income Before Income Taxes

 

135

 

168

 

374

 

266

Income Tax Expense

 

54

 

67

 

149

 

105

 

 

 

 

 

 

 

 

 

Income From Continuing Operations

 

81

 

101

 

225

 

161

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

 

-

 

-

 

-

 

7

 

 

 

 

 

 

 

 

 

Net Income

 

81

 

101

 

225

 

168

Income Attributable to Noncontrolling Interests

 

1

 

1

 

1

 

1

 

 

 

 

 

 

 

 

 

Net Income Available to Common Stockholders

 

   $

80

 

   $

100

 

   $

224

 

   $

167

 

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Table of Contents

 

 

 

 

 

In Millions, Except Per Share Amounts

 

 

Three Months Ended

 

Six Months Ended

June 30

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

Net Income Attributable to Common Stockholders

 

 

 

 

 

 

 

 

Amounts attributable to continuing operations

 

     $

80

 

     $

100

 

     $

224

 

     $

160

Amounts attributable to discontinued operations

 

-

 

-

 

-

 

7

Net income available to common stockholders

 

     $

80

 

     $

100

 

     $

224

 

     $

167

 

 

 

 

 

 

 

 

 

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

 

     $

0.30

 

     $

0.38

 

     $

0.85

 

     $

0.61

Basic earnings from discontinued operations

 

-

 

-

 

-

 

0.03

Basic earnings attributable to common stock

 

     $

0.30

 

     $

0.38

 

     $

0.85

 

     $

0.64

 

 

 

 

 

 

 

 

 

Diluted Earnings Per Average Common Share

 

 

 

 

 

 

 

 

Diluted earnings from continuing operations

 

     $

0.29

 

     $

0.37

 

     $

0.83

 

     $

0.59

Diluted earnings from discontinued operations

 

-

 

-

 

-

 

0.03

Diluted earnings attributable to common stock

 

     $

0.29

 

     $

0.37

 

     $

0.83

 

     $

0.62

 

 

 

 

 

 

 

 

 

Dividends Declared Per Common Share

 

     $

0.255

 

     $

0.24

 

     $

0.51

 

     $

0.48

 

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

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

Net Income

 

$

81

 

$

101

 

$

225

 

$

168

 

 

 

 

 

 

 

 

 

Retirement Benefits Liability

 

 

 

 

 

 

 

 

Retirement benefits liability adjustments, net
of tax of $1, $-, $1, and $-

 

1

 

1

 

2

 

2

 

 

 

 

 

 

 

 

 

Investments

 

 

 

 

 

 

 

 

Unrealized gain (loss) on investments, net of tax
of $- for all periods

 

(3)

 

1

 

(3)

 

2

 

 

 

 

 

 

 

 

 

Other Comprehensive Income (Loss)

 

(2)

 

2

 

(1)

 

4

 

 

 

 

 

 

 

 

 

Comprehensive Income

 

 

79

 

 

103

 

 

224

 

 

172

 

 

 

 

 

 

 

 

 

Comprehensive Income Attributable to Noncontrolling Interests

 

1

 

1

 

1

 

1

 

 

 

 

 

 

 

 

 

Comprehensive Income Attributable to CMS Energy

 

$

78

 

$

102

 

$

223

 

$

171

 

The accompanying notes are an integral part of these statements.

 

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Table of Contents

 

CMS Energy Corporation

Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

 

 

In Millions

Six Months Ended June 30

 

2013

 

2012

 

 

 

 

 

Cash Flows from Operating Activities

 

 

 

 

Net income

 

$

225

 

$

168

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

 

 

 

 

Depreciation and amortization

 

318

 

302

Deferred income taxes and investment tax credit

 

135

 

102

Postretirement benefits expense

 

95