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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 September 30, 2014

 

 

OR

 

 

 

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

 

 

OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the transition period from_____to_____

 

 

Commission

 

Registrant; State of Incorporation;

 

IRS Employer

File Number

 

Address; and Telephone Number

 

Identification No.

1-9513

 

CMS ENERGY CORPORATION

 

38-2726431

 

 

(A Michigan Corporation)

 

 

 

 

One Energy Plaza, Jackson, Michigan  49201

 

 

 

 

(517) 788-0550

 

 

 

 

 

 

 

1-5611

 

CONSUMERS ENERGY COMPANY

 

38-0442310

 

 

(A Michigan Corporation)

 

 

 

 

One Energy Plaza, Jackson, Michigan  49201

 

 

 

 

(517) 788-0550

 

 

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

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

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

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

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

CMS Energy Corporation:

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

(Do not check if a smaller reporting company)

Consumers Energy Company:

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

(Do not check if a smaller reporting company)

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock at October 7, 2014:

CMS Energy Corporation:

CMS Energy Common Stock, $0.01 par value

 

 

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

 

276,148,945

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

September 30, 2014

 

TABLE OF CONTENTS

 

 

Page

Glossary

3

Filing Format

8

Forward-Looking Statements and Information

8

 

 

PART I. Financial Information

 

 

 

 

Item 1.

Consolidated Financial Statements (Unaudited)

 

 

CMS Energy Corporation

32

 

Consumers Energy Company

40

 

Notes to the Unaudited Consolidated Financial Statements

47

Item 2.

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

11

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

67

Item 4.

Controls and Procedures

67

 

 

 

PART II. Other Information

 

 

 

 

Item 1.

Legal Proceedings

67

Item 1A.

Risk Factors

67

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

68

Item 3.

Defaults Upon Senior Securities

68

Item 4.

Mine Safety Disclosures

68

Item 5.

Other Information

68

Item 6.

Exhibits

68

Signatures

69

 

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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

 

 

 

2013 Form 10-K

 

Each of CMS Energy’s and Consumers’ Annual Report on Form 10-K for the year ended December 31, 2013

 

 

 

ABATE

 

Association of Businesses Advocating Tariff Equity

 

 

 

ASU

 

Financial Accounting Standards Board Accounting Standards Update

 

 

 

Bay Harbor

 

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

 

 

 

bcf

 

Billion cubic feet

 

 

 

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

 

 

 

CERCLA

 

Comprehensive Environmental Response, Compensation, and Liability Act of 1980

 

 

 

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 known as CMS MST, a wholly owned subsidiary of CMS Enterprises

 

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CMS Field Services

 

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

 

 

 

CMS Gas Transmission

 

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

 

 

 

CMS Land

 

CMS Land Company, a wholly owned subsidiary of CMS Capital

 

 

 

CMS MST

 

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

 

 

 

Consumers

 

Consumers Energy Company, a wholly owned subsidiary of CMS Energy

 

 

 

Consumers 2014 Securitization Funding

 

Consumers 2014 Securitization Funding LLC, a wholly owned consolidated bankruptcy-remote subsidiary of Consumers and special-purpose entity organized for the sole purpose of purchasing and owning Securitization property, issuing Securitization bonds, and pledging its interest in Securitization property to a trustee to collateralize the Securitization bonds

 

 

 

CSAPR

 

The Cross-State Air Pollution Rule

 

 

 

DB SERP

 

Defined Benefit Supplemental Executive Retirement Plan

 

 

 

Dodd-Frank Act

 

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

 

 

 

EBITDA

 

Earnings before interest, taxes, depreciation, and amortization

 

 

 

EnerBank

 

EnerBank USA, a wholly owned subsidiary of CMS Capital

 

 

 

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

 

 

 

FMB

 

First mortgage bond

 

 

 

FOV

 

Finding of Violation

 

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FTR

 

Financial transmission right

 

 

 

GAAP

 

U.S. Generally Accepted Accounting Principles

 

 

 

GCR

 

Gas cost recovery

 

 

 

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

 

 

 

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 Company, a non-affiliated company

 

 

 

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

 

 

 

MGP

 

Manufactured gas plant

 

 

 

MISO

 

Midcontinent Independent System Operator, Inc.

 

 

 

mothball

 

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

 

 

 

MPSC

 

Michigan Public Service Commission

 

 

 

MW

 

Megawatt, a unit of power equal to one million watts

 

 

 

NAAQS

 

National Ambient Air Quality Standards

 

 

 

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

 

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NPDES

 

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

 

 

 

NREPA

 

Part 201 of the 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

 

Postretirement health care and life insurance plans of CMS Energy and Consumers, including certain present and former affiliates and subsidiaries

 

 

 

PCB

 

Polychlorinated biphenyl

 

 

 

Pension Plan

 

Defined benefit pension plan of CMS Energy and Consumers, including certain present and former affiliates and subsidiaries

 

 

 

PSCR

 

Power supply cost recovery

 

 

 

PSD

 

Prevention of Significant Deterioration

 

 

 

REC

 

Renewable energy credit established under the 2008 Energy Law

 

 

 

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

 

 

 

Resource Conservation and Recovery Act

 

Federal Resource Conservation and Recovery Act of 1976

 

 

 

RMRR

 

Routine maintenance, repair, and replacement

 

 

 

ROA

 

Retail Open Access, which allows electric generation customers to choose alternative electric suppliers pursuant to a Michigan statute enacted in 2000

 

 

 

SEC

 

U.S. Securities and Exchange Commission

 

 

 

Securitization

 

A financing method authorized by statute and approved by the MPSC which allows a utility to sell its right to receive a portion of the rate payments received from its customers for the repayment of securitization bonds issued by a special-purpose entity affiliated with such utility

 

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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

 

 

 

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.

 

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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, neither 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 2013 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 new regulation by the MPSC or FERC and other applicable governmental proceedings and regulations, including any associated impact on electric or gas rates or rate structures;

 

·                 potentially adverse regulatory treatment or failure to receive timely regulatory orders affecting Consumers that are or could come before the MPSC, FERC, or other governmental authorities;

 

·                 changes in the performance of or regulations applicable to MISO, Michigan Electric Transmission Company, pipelines, railroads, vessels, or other service providers that CMS Energy, Consumers, or any of their affiliates rely on to serve their customers;

 

·                 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, gas pipeline safety, 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;

 

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·                 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;

 

·                 changes in energy markets, including availability and price of electric capacity and the timing and extent of changes in commodity prices and availability and deliverability 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;

 

·                 loss of customer demand for electric generation supply to alternative energy suppliers or to increased use of distributed generation;

 

·                 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 gas and electric distribution infrastructure replacement and expansion projects, including those related to project site identification, construction material pricing, schedule delays, availability of qualified construction personnel, permitting, and government approvals;

 

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·                 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, equipment failures, and electric transmission and distribution or gas pipeline system constraints;

 

·                 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 any legal or administrative proceedings, settlements, investigations, or claims;

 

·                 the impact of operational incidents, violations of corporate compliance policies, regulatory violations, and other events on CMS Energy’s and Consumers’ reputations;

 

·                 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 2, Regulatory Matters and Note 3, 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 operations and investments.  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 and Consumers’ business strategy emphasizes the key elements depicted below:

 

 

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Accountability is part of CMS Energy’s and Consumers’ corporate culture.  CMS Energy and Consumers are committed to making the right choices to serve their customers safely and affordably and to acting responsibly as corporate citizens.  CMS Energy and Consumers hold themselves accountable to the highest standards of safety, operational performance, and ethical behavior, and work diligently to comply with all laws, rules, and regulations that govern the electric and gas industry.  Consumers’ 2014 accountability report, which is available to the public, provides an overview of Consumers’ efforts to continue meeting Michigan’s energy needs safely and efficiently, and highlights Consumers’ commitment to Michigan businesses, its corporate citizenship, and its role in reducing the state’s air emissions.

 

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 through 2013, Consumers achieved a 72 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 base rates, Consumers has undertaken several additional initiatives to reduce costs through voluntary separation plans, accelerated pension funding, employee and retiree health-care cost sharing, negotiated labor agreements, information system efficiencies, and productivity improvements.  Consumers has also issued Securitization bonds and is accelerating the recognition of certain tax benefits, both of which will result in cost savings for customers.  These initiatives have allowed Consumers to avoid increasing electric and gas base rates in 2014.

 

UTILITY INVESTMENT

 

Consumers expects to make capital investments of about $7 billion from 2014 through 2018.  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 $3.9 billion represent projects to maintain Consumers’ system and comprise $2.4 billion at the electric utility to preserve reliability and capacity and $1.5 billion at the gas utility to sustain deliverability and enhance pipeline integrity.  An additional $1.6 billion of planned reliability investments at Consumers are aimed at reducing outages and improving customer satisfaction; these investments comprise $0.9 billion at the electric utility to strengthen circuits and substations, replace poles, and upgrade the Ludington pumped-storage plant and $0.7 billion at the gas utility to replace mains and enhance transmission and storage systems.  Consumers also expects to spend $0.9 billion on environmental investments needed to comply with state and federal laws and regulations.

 

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 2012 and is planned to continue through 2017.  Consumers has spent $0.3 billion through 2013

 

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on its Smart Energy program, and expects to spend an additional $0.5 billion, following a phased approach, from 2014 through 2017.

 

Renewable energy projects are another major component of Consumers’ planned capital investments.  Consumers expects to spend $0.2 billion on renewable energy investments, under an MPSC-approved renewable energy plan, from 2014 through 2018.  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.

 

In December 2013, Consumers signed an agreement to purchase a 540-MW gas-fueled electric generating plant located in Jackson, Michigan for $155 million.  In January 2014, as a result of this planned purchase, Consumers announced plans to defer the development of its proposed 700-MW gas-fueled electric generating plant at its Thetford complex in Genesee County, Michigan.

 

REGULATION

 

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

 

·                 Gas Rate Case:  In July 2014, Consumers filed an application with the MPSC seeking an annual rate increase of $88 million, based on a 10.7 percent authorized return on equity.  The filing requested authority to recover new investments that will allow Consumers to improve system reliability, comply with regulations, and enhance technology.  Costs associated with these investments represent an annual rate increase of $144 million; this amount is offset partially by reductions in the revenue requirement associated with working capital and other cost reductions.  If approved, this rate increase would take effect in 2015 and would be Consumers’ first gas base rate increase since 2012.

 

The filing also seeks approval of two rate adjustment mechanisms:  a mechanism that would reconcile annually Consumers’ actual nonfuel revenues with the revenues approved by the MPSC, and a mechanism that would allow recovery of an additional $92 million associated with investments that Consumers plans to make in 2016 and 2017, subject to reconciliation.

 

·                 Securitization Financing Order:  In July 2014, Consumers, through its subsidiary Consumers 2014 Securitization Funding, issued $378 million of Securitization bonds to finance the recovery of the remaining book value of seven smaller coal-fueled electric generating units and three smaller gas-fueled electric generating units that it plans to retire by April 2016.  The MPSC approved the issuance of these bonds in its December 2013 Securitization financing order, and authorized Consumers to collect from its retail electric customers, with some exceptions, Securitization charges to cover the principal and interest on the bonds as well as certain other qualified costs.

 

The 2008 Energy Law limits alternative electric supply to ten percent of Consumers’ weather-adjusted retail sales of the preceding calendar year.  At September 30, 2014, Consumers’ electric deliveries under the ROA program were at the ten-percent limit.  Bills have been introduced to the Michigan House of Representatives and the Michigan Senate to raise or remove the ROA limit.  The House bill also proposes to deregulate electric generation service in Michigan within two years.  Consumers is unable to predict the outcome of these legislative proposals.  In addition, the Michigan legislature has conducted hearings on the subject of energy competition.  If the ROA limit were increased or if electric generation service in

 

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Michigan were deregulated, it could have a material adverse effect on Consumers’ financial results and operations.

 

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.  CMS Energy and Consumers believe that environmental laws and regulations related to their operations will continue to become more stringent and require them to make additional significant capital expenditures for emissions control equipment, CCR disposal, cooling water intake equipment, effluent treatment, and PCB remediation.  Present and reasonably anticipated state and federal environmental statutes and regulations, including but not limited to the Clean Air Act, including the Clean Power Plan, as well as the Clean Water Act, the Resource Conservation and Recovery Act, and CERCLA, will continue to have a material effect on CMS Energy and Consumers.

 

FINANCIAL PERFORMANCE

 

For the nine months ended September 30, 2014, CMS Energy’s net income available to common stockholders was $381 million, and diluted EPS were $1.39.  This compares with net income available to common stockholders of $350 million and diluted EPS of $1.29 for the nine months ended September 30, 2013.  Among the factors contributing to CMS Energy’s improved performance in 2014 were increased gas sales due to colder winter weather.

 

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 demand for natural gas occurs in the winter due to colder temperatures and the resulting use of natural gas as heating fuel.  In addition, Consumers’ electric rates, which follow a seasonal rate design, are higher in the summer months than in the remaining months of the year.  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 deliveries to increase annually by about 0.5 to 1.0 percent on average through 2018, driven largely by the continued rise in industrial production.  Excluding the impacts of energy efficiency programs, Consumers expects its electric deliveries to increase by about 1.0 to 1.5 percent annually through 2018.  Consumers is projecting that its gas deliveries will remain relatively stable through 2018.  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.  In order to minimize increases in customer base rates, 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 borrowing capacity to fund its investment-based growth plans.  CMS Energy also expects its sources of liquidity to remain sufficient to meet its cash requirements.  CMS Energy and Consumers will continue to monitor developments in the financial and credit markets, as well as government policy responses to those developments, for potential implications for their businesses and their future financial needs.

 

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RESULTS OF OPERATIONS

 

CMS ENERGY CONSOLIDATED RESULTS OF OPERATIONS

 

 

 

In Millions, Except Per Share Amounts

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30

 

2014

 

2013

 

Change

 

2014

 

2013

 

Change

 

Net Income Available to Common Stockholders

 

$

94

 

$

126

 

$

(32

)

$

381

 

$

350

 

$

31

 

Basic Earnings Per Share

 

$

0.34

 

$

0.48

 

$

(0.14

)

$

1.41

 

$

1.32

 

$

0.09

 

Diluted Earnings Per Share

 

$

0.34

 

$

0.46

 

$

(0.12

)

$

1.39

 

$

1.29

 

$

0.10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In Millions

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30

 

2014

 

2013

 

Change

 

2014

 

2013

 

Change

 

Electric utility

 

$

128

 

$

156

 

$

(28

)

$

326

 

$

315

 

$

11

 

Gas utility

 

(9

)

(4

)

(5

)

121

 

97

 

24

 

Enterprises

 

(7

)

(4

)

(3

)

(3

)

1

 

(4

)

Corporate interest and other

 

(18

)

(22

)

4

 

(63

)

(63

)

-

 

Net Income Available to Common Stockholders

 

$

94

 

$

126

 

$

(32

)

$

381

 

$

350

 

$

31

 

 

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

 

 

In Millions

 

 

 

September 30, 2014 better/(worse) than 2013

 

Reasons for the change

 

Three Months Ended

 

Nine Months Ended

 

Consumers electric utility and gas utility:

 

 

 

 

 

 

 

 

 

Gas sales

 

$

1

 

 

 

$

32

 

 

 

Electric sales

 

(24

)

 

 

(12

)

 

 

Tax benefit associated with MPSC accounting order

 

9

 

 

 

30

 

 

 

Electric rate increase

 

(1

)

 

 

20

 

 

 

Operating and maintenance costs, including employee benefits

 

(11

)

 

 

3

 

 

 

Depreciation and property taxes

 

(7

)

 

 

(32

)

 

 

Other

 

-

 

$

(33

)

(6

)

$

35

 

 

 

 

 

 

 

 

 

 

 

Enterprises:

 

 

 

 

 

 

 

 

 

Subsidiary earnings of enterprises segment

 

6

 

 

 

5

 

 

 

Increase in Bay Harbor environmental liability

 

(9

)

(3

)

(9

)

(4

)

 

 

 

 

 

 

 

 

 

 

Corporate interest and other:

 

 

 

 

 

 

 

 

 

Higher EnerBank earnings and other

 

 

 

2

 

 

 

3

 

Early extinguishment of debt

 

 

 

2

 

 

 

(6

)

Other

 

 

 

-

 

 

 

3

 

Total change

 

 

 

$

(32

)

 

 

$

31

 

 

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CONSUMERS ELECTRIC UTILITY RESULTS OF OPERATIONS

 

 

 

In Millions

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30

 

2014

 

2013

 

Change

 

2014

 

2013

 

Change

 

Net Income Available to Common Stockholders

 

$

128

 

$

156

 

$

(28

)

$

326

 

$

315

 

$

11

 

Reasons for the change

 

 

 

 

 

 

 

 

 

 

 

 

 

Electric deliveries and rate increases

 

 

 

 

 

$

(32

)

 

 

 

 

$

35

 

Power supply costs and related revenue

 

 

 

 

 

-

 

 

 

 

 

(2

)

Other income, net of expenses

 

 

 

 

 

(1

)

 

 

 

 

(6

)

Maintenance and other operating expenses

 

 

 

 

 

(21

)

 

 

 

 

(15

)

Depreciation and amortization

 

 

 

 

 

(5

)

 

 

 

 

(26

)

General taxes

 

 

 

 

 

(2

)

 

 

 

 

(9

)

Interest charges

 

 

 

 

 

(3

)

 

 

 

 

-

 

Income taxes

 

 

 

 

 

36

 

 

 

 

 

34

 

Total change

 

 

 

 

 

$

(28

)

 

 

 

 

$

11

 

 

Following is a discussion of significant changes to net income available to common stockholders.

 

Electric deliveries and rate increases:  For the three months ended September 30, 2014, electric delivery revenues decreased $32 million compared with 2013.  This change reflected a $41 million reduction due primarily to a decrease in sales to Consumers’ higher-margin customers, offset partially by a $9 million increase in other revenues related primarily to the renewable energy program.  Deliveries to end-use customers were 9.6 billion kWh in 2014 and 9.8 billion kWh in 2013.

 

For the nine months ended September 30, 2014, electric delivery revenues increased $35 million compared with 2013.  This change reflected a $33 million benefit from a May 2013 rate increase that Consumers self-implemented in March 2013, $14 million from a low-income assistance surcharge, and an $11 million increase in other revenues related primarily to the renewable energy program.  These increases were offset partially by a $23 million reduction due primarily to a decrease in sales to Consumers’ higher-margin customers.  Deliveries to end-use customers were 28.3 billion kWh in 2014 and 27.8 billion kWh in 2013.

 

Other income, net of expenses:  For the nine months ended September 30, 2014, other income, net of expenses, decreased $6 million compared with 2013.  This decrease was due primarily to a contribution to oppose certain Michigan legislative proposals related to ROA, and to the absence, in 2014, of a gain related to a donation of CMS Energy stock by Consumers.

 

Maintenance and other operating expenses:  For the three months ended September 30, 2014, maintenance and other operating expenses increased $21 million compared with 2013.  This increase was due to $28 million of increased forestry, service restoration, and other operating and maintenance expenses, offset partially by a $7 million reduction in postretirement benefit costs.

 

For the nine months ended September 30, 2014, maintenance and other operating expenses increased $15 million compared with 2013.  This increase was due to $40 million of higher forestry and other operating and maintenance expenses, and $14 million of increased expenses related to a low-income assistance program.  These increases were offset largely by a $39 million reduction in postretirement benefit costs.

 

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Depreciation and amortization:  For the three months ended September 30, 2014, depreciation and amortization expense increased $5 million compared with 2013, due primarily to higher amortization of certain regulatory assets.

 

For the nine months ended September 30, 2014, depreciation and amortization expense increased $26 million compared with 2013, due primarily to increased plant in service in 2014 and higher amortization of certain regulatory assets.

 

General taxes:  For the nine months ended September 30, 2014, general taxes increased $9 million compared with 2013, due to increased property taxes, reflecting higher capital spending.

 

Income taxes:  For the three months ended September 30, 2014, income taxes decreased $36 million compared with 2013.  This change was due to a $9 million benefit associated with the accelerated flow-through of income tax benefits under an MPSC accounting order that Consumers implemented in January 2014, $26 million attributed to lower electric utility earnings, and $1 million for other tax related items.

 

For the nine months ended September 30, 2014, income taxes decreased $34 million compared with 2013.  This change was due to a $22 million benefit associated with the accelerated flow-through of income tax benefits under an MPSC accounting order that Consumers implemented in January 2014, $9 million attributed to lower electric utility earnings, and $3 million for other tax related items.

 

CONSUMERS GAS UTILITY RESULTS OF OPERATIONS

 

 

 

In Millions

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30

 

2014

 

2013

 

Change

 

2014

 

2013

 

Change

 

Net Income (Loss) Available to Common Stockholders

 

$

(9

)

$

(4

)

$

(5

)

$

121

 

$

97

 

$

24

 

Reasons for the change

 

 

 

 

 

 

 

 

 

 

 

 

 

Gas deliveries and rate increases

 

 

 

 

 

$

1

 

 

 

 

 

$

39

 

Other income, net of expenses

 

 

 

 

 

1

 

 

 

 

 

(2

)

Maintenance and other operating expenses

 

 

 

 

 

(4

)

 

 

 

 

7

 

Depreciation and amortization

 

 

 

 

 

(2

)

 

 

 

 

(12

)

General taxes

 

 

 

 

 

(1

)

 

 

 

 

(4

)

Interest charges

 

 

 

 

 

(1

)

 

 

 

 

(1

)

Income taxes

 

 

 

 

 

1

 

 

 

 

 

(3

)

Total change

 

 

 

 

 

$

(5

)

 

 

 

 

$

24

 

 

Following is a discussion of significant changes to net income (loss) available to common stockholders.

 

Gas deliveries and rate increases:  For the nine months ended September 30, 2014, gas delivery revenues increased $39 million compared with 2013.  This change reflected $47 million of higher sales, due primarily to colder weather in 2014.  This increase was offset partially by an $8 million decrease associated with the energy efficiency program.  Deliveries to end-use customers were 234 bcf in 2014 and 206 bcf in 2013.

 

Maintenance and other operating expenses:  For the three months ended September 30, 2014, maintenance and other operating expenses increased $4 million compared with 2013.  This change was

 

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due primarily to increased expenses related to Consumers’ appliance service program, and an increase in uncollectible accounts expense.

 

For the nine months ended September 30, 2014, maintenance and other operating expenses decreased $7 million compared with 2013.  This decrease was due to a $24 million reduction in postretirement benefit costs, and an $8 million decrease in expenses related to the energy efficiency program.  These decreases were offset largely by a $25 million increase related to pipeline integrity and other gas operating and maintenance expenses.

 

Depreciation and amortization:  For the nine months ended September 30, 2014, depreciation and amortization expense increased $12 million compared with 2013, due to increased plant in service in 2014.

 

General taxes:  For the nine months ended September 30, 2014, general taxes increased $4 million compared with 2013, due to increased property taxes, reflecting higher capital spending.

 

Income taxes:  For the nine months ended September 30, 2014, income taxes increased $3 million compared with 2013.  This change reflected a $10 million increase attributed primarily to higher gas utility earnings, and a $1 million increase in other tax related items.  These increases were offset largely by an $8 million benefit associated with the accelerated flow-through of income tax benefits under an MPSC accounting order that Consumers implemented in January 2014.

 

ENTERPRISES RESULTS OF OPERATIONS

 

 

 

In Millions

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30

 

2014

 

2013

 

Change

 

2014

 

2013

 

Change

 

Net Income (Loss) Available to Common Stockholders

 

$

(7

)

$

(4

)

$

(3

)

$

(3

)

$

1

 

$

(4

)

 

For the three months ended September 30, 2014, net loss increased $3 million compared with 2013, due to a $9 million after-tax increase in the environmental remediation liability associated with Bay Harbor, offset partially by the absence in 2014 of $4 million in additional tax expense related to OPEB Plan changes adopted in July 2013.  Also offsetting the change was a decrease in maintenance expense at certain plants.

 

For the nine months ended September 30, 2014, the enterprises segment recorded a net loss of $3 million, compared with net income of $1 million in the same period of the prior year.  The $4 million change was due primarily to a $9 million after-tax increase in the environmental remediation liability associated with Bay Harbor, offset partially by the absence in 2014 of $4 million in additional tax expense related to OPEB Plan changes adopted in July 2013.

 

CORPORATE INTEREST AND OTHER RESULTS OF OPERATIONS

 

 

 

In Millions

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30

 

2014

 

2013

 

Change

 

2014

 

2013

 

Change

 

Net Income (Loss) Available to Common Stockholders

 

$

(18

)

$

(22

)

$

4

 

$

(63

)

$

(63

)

$

-

 

 

For the three months ended September 30, 2014 corporate interest and other net expenses decreased $4 million compared with 2013, due primarily to lower fixed charges and the absence in 2014 of $2 million in early debt retirement costs.

 

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For the nine months ended September 30, 2014, corporate interest and other net expenses were unchanged from 2013.  An $8 million loss on early extinguishment of debt was offset by a $3 million reduction in miscellaneous corporate costs, the absence in 2014 of $2 million in early debt retirement costs, and higher earnings at EnerBank.

 

CASH POSITION, INVESTING, AND FINANCING

 

At September 30, 2014, CMS Energy had $530 million of consolidated cash and cash equivalents, which included $37 million of restricted cash and cash equivalents.  At September 30, 2014, Consumers had $237 million of consolidated cash and cash equivalents, which included $37 million of restricted cash and cash equivalents.

 

OPERATING ACTIVITIES

 

Presented in the following table are specific components of net cash provided by operating activities for the nine months ended September 30, 2014 and 2013:

 

 

 

In Millions

 

Nine Months Ended September 30

 

2014

 

2013

 

Change

 

CMS Energy, including Consumers

 

 

 

 

 

 

 

Net income

 

$

382

 

$

352

 

$

30

 

Non-cash transactions1

 

762

 

855

 

(93

)

 

 

1,144

 

1,207

 

(63

)

Postretirement benefits contributions

 

(5

)

(109

)

104

 

Proceeds from government grant

 

-

 

69

 

(69

)

Changes in core working capital2

 

(64

)

96

 

(160

)

Changes in other assets and liabilities, net

 

(113

)

(145

)

32

 

Net cash provided by operating activities

 

$

962

 

$

1,118

 

$

(156

)

Consumers

 

 

 

 

 

 

 

Net income

 

$

449

 

$

415

 

$

34

 

Non-cash transactions1

 

634

 

769

 

(135

)

 

 

1,083

 

1,184

 

(101

)

Postretirement benefits contributions

 

(3

)

(106

)

103

 

Proceeds from government grant

 

-

 

69

 

(69

)

Changes in core working capital2

 

(49

)

108

 

(157

)

Changes in other assets and liabilities, net

 

(83

)

(121

)

38

 

Net cash provided by operating activities

 

$

948

 

$

1,134

 

$

(186

)

 

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 and notes receivable and accrued revenues (including accrued power supply and gas revenues), inventories, accounts payable, and accrued rate refunds.

 

For the nine months ended September 30, 2014, net cash provided by operating activities at CMS Energy decreased $156 million compared with 2013, and net cash provided by operating activities at Consumers decreased $186 million compared with 2013.  The decreases were due primarily to an increase in gas and power supply underrecoveries as a result of severe winter weather and to lower initial gas inventory levels.  These changes were offset partially by higher cash collections of accounts receivable from customers.  The decrease in postretirement benefits contributions was approximately equal to the decrease in postretirement benefits expense, which is reflected above as a non-cash transaction added to net income.

 

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INVESTING ACTIVITIES

 

Presented in the following table are specific components of net cash used in investing activities for the nine months ended September 30, 2014 and 2013:

 

 

In Millions

 

Nine Months Ended September 30

 

2014

 

2013

 

Change

 

CMS Energy, including Consumers

 

 

 

 

 

 

 

Capital expenditures

 

$

(1,125

)

$

(900

)

$

(225

)

Change in EnerBank notes receivable

 

(164

)

(53

)

(111

)

Costs to retire property and other

 

(58

)

(51

)

(7

)

Net cash used in investing activities

 

$

(1,347

)

$

(1,004

)

$

(343

)

Consumers

 

 

 

 

 

 

 

Capital expenditures

 

$

(1,123

)

$

(895

)

$

(228

)

Costs to retire property and other

 

(59

)

(50

)

(9

)

Net cash used in investing activities

 

$

(1,182

)

$

(945

)

$

(237

)

 

For the nine months ended September 30, 2014, net cash used in investing activities at CMS Energy increased $343 million compared with 2013, and net cash used in investing activities at Consumers increased $237 million compared with 2013.  The changes were due primarily to an increase in capital expenditures under Consumers’ capital investment program.  At CMS Energy, the change was also due to an increase in EnerBank consumer lending.

 

FINANCING ACTIVITIES

 

Presented in the following table are specific components of net cash provided by financing activities for the nine months ended September 30, 2014 and 2013:

 

 

 

In Millions

 

Nine Months Ended September 30

 

2014

 

2013

 

Change

 

CMS Energy, including Consumers

 

 

 

 

 

 

 

Issuance of debt

 

$

1,812

 

$

1,294

 

$

518

 

Retirement of debt

 

(725

)

(926

)

201

 

Payment of common and preferred stock dividends

 

(220

)

(205

)

(15

)

Decrease in notes payable

 

(170

)

(110

)

(60

)

Other financing activities

 

9

 

-

 

9

 

Net cash provided by financing activities

 

$

706

 

$

53

 

$

653

 

Consumers

 

 

 

 

 

 

 

Issuance of debt

 

$

878

 

$

750

 

$

128

 

Retirement of debt

 

(208

)

(455

)

247

 

Payment of common and preferred stock dividends

 

(376

)

(302

)

(74

)

Stockholder contribution from CMS Energy

 

317

 

150

 

167

 

Decrease in notes payable

 

(170

)

(110

)

(60

)

Other financing activities

 

(25

)

(28

)

3

 

Net cash provided by financing activities

 

$

416

 

$

5

 

$

411

 

 

For the nine months ended September 30, 2014, net cash provided by financing activities at CMS Energy increased $653 million compared with 2013 and net cash provided by financing activities at Consumers increased $411 million compared with 2013.  The changes were due primarily to an increase in debt issuances, offset partially by higher repayments under Consumers’ accounts receivable sales program.  At Consumers, the change was also due to an increase in cash contributions by CMS Energy, offset partially by increases in dividend payments by Consumers to CMS Energy on its common stock.

 

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RETIREMENT BENEFITS

 

Following amendments to the OPEB Plan in July 2013, Consumers’ OPEB costs decreased substantially and, as a result, the OPEB Plan was fully funded at December 31, 2013.  In May 2014, Consumers filed an application with the MPSC requesting approval to suspend contributions to Consumers’ OPEB Plan during 2014 and 2015 if the OPEB Plan continues to be fully funded.  Consumers’ electric and gas rates still reflect the higher OPEB costs, and previous MPSC orders required Consumers to contribute to the OPEB Plan the associated amount collected in rates annually.

 

In September 2014, the MPSC approved a settlement agreement addressing Consumers’ OPEB Plan funding application.  Under the settlement agreement, Consumers will contribute $25 million to the plan in 2014 and $29 million in February 2015.  Consumers will then suspend further contributions until the MPSC determines funding requirements in future general rate cases.

 

Presented in the following table are the most recent estimates of CMS Energy’s and Consumers’ pension cost, OPEB cost, and cash contributions through 2016.

 

 

 

 

 

 

 

 

 

In Millions

 

 

 

Pension

 

OPEB

 

Pension

 

OPEB

 

 

 

Cost

 

Cost (Credit)

 

Contribution

 

Contribution

 

CMS Energy, including Consumers

 

 

 

 

 

 

 

 

 

2014

 

$   63

 

$   (51

)

$   -

 

$   25

 

2015

 

108

 

(26

)

-

 

29

 

2016

 

97

 

(28

)

-

 

-

 

Consumers

 

 

 

 

 

 

 

 

 

2014

 

$   62

 

$   (46

)

$   -

 

$   25

 

2015

 

106

 

(22

)

-

 

29

 

2016

 

95

 

(24

)

-

 

-

 

 

Projected retirement benefit costs have increased for 2015 and 2016 due to a change in assumptions from December 31, 2013.  At September 30, 2014, the discount rate for pension was lowered from 4.9 percent to 4.0 percent, and for OPEB from 5.1 percent to 4.2 percent.  The projection was also updated to use the draft RP-2014 mortality table.

 

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, discount rates, and various 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 4, Financings and Capitalization — Dividend Restrictions.  For the nine months ended September 30, 2014, Consumers paid $375 million in dividends on its common stock to CMS Energy.

 

In April 2013, CMS Energy entered into a continuous equity offering program permitting it to sell, from time to time through “at the market” offerings, common stock having an aggregate sales price of up to

 

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$50 million.  In March 2014, CMS Energy issued common stock under this program and received net proceeds of $30 million.

 

Consumers uses cash flows generated from operations and external financing transactions, as well as stockholder contributions from CMS Energy, to fund capital expenditures, retire debt, pay dividends, contribute to its employee benefit plans, and fund its other obligations.  As a result of accelerated pension funding in recent years and several initiatives to reduce costs, Consumers anticipates continued strong cash flows from operating activities in 2014.

 

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.  In August 2014, Consumers issued $250 million of 50-year FMBs.  Barring major market dislocations or disruptions, CMS Energy and Consumers expect to continue to have ready access to the financial and capital markets.  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 September 30, 2014:

 

 

 

 

 

 

 

 

 

 

 

In Millions

 

 

 

Amount of

 

Amount

 

Letters of Credit

 

Amount

 

 

 

 

 

Facility

 

Borrowed

 

Outstanding

 

Available

 

Expiration Date

 

CMS Energy

 

 

 

 

 

 

 

 

 

 

 

Revolving credit facility1

 

$

550

 

$

-

 

$

2

 

$

548

 

December 2018

 

Consumers

 

 

 

 

 

 

 

 

 

 

 

Revolving credit facility2

 

$

650

 

$

-

 

$

-

 

$

650

 

December 2018

 

Revolving credit facility2

 

30

 

-

 

30

 

-

 

May 2018

 

 

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 eligible accounts receivable as a secured borrowing.  At September 30, 2014, $250 million of accounts receivable were eligible for transfer under this program.

 

In September 2014, Consumers entered into a commercial paper program.  Under the program, Consumers may issue, in one or more placements, commercial paper notes with maturities up to 365 days and that bear interest at fixed or floating rates.  These issuances are backed by Consumers’ $650 million revolving credit facility and may have an aggregate principal amount outstanding of up to $500 million.  At September 30, 2014, there were no notes outstanding under this program.

 

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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 September 30, 2014, no 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 September 30, 2014, as presented in the following table:

 

 

 

 

 

September 30, 2014

 

Credit Agreement, Indenture, or Facility

 

Description

 

Limit

 

Actual

 

CMS Energy

 

 

 

 

 

 

 

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

 

Debt to EBITDA

 

< 

6.0 to 1.0

 

4.8 to 1.0

 

$180 million term loan credit agreement

 

Interest Coverage

 

2.0 to 1.0

 

4.5 to 1.0

 

Consumers

 

 

 

 

 

 

 

 

$650 million and $30 million revolving credit agreements,
$35 million and $68 million reimbursement agreements, and
$250 million revolving accounts receivable sales agreement

 

Debt to Capital

 

< 

0.65 to 1.0

 

0.48 to 1.0

 

 

Components of CMS Energy’s and Consumers’ cash management plan include controlling operating expenses and capital expenditures and evaluating market conditions for financing and refinancing opportunities.  CMS Energy and Consumers believe that their present level of cash and their expected cash flows from operating activities, together with their access to sources of liquidity, will be sufficient to fund their contractual obligations for 2014 and beyond.

 

OFF-BALANCE-SHEET ARRANGEMENTS

 

CMS Energy, Consumers, and certain of their subsidiaries also enter into various arrangements in the normal course of business to facilitate commercial transactions with third parties.  These arrangements include indemnities, surety bonds, letters of credit, and financial and performance guarantees.  Indemnities are usually agreements to reimburse a counterparty that may incur losses due to outside claims or breach of contract terms.  The maximum payment that could be required under a number of these indemnity obligations is not estimable; the maximum obligation under indemnities for which such amounts were estimable was $450 million at September 30, 2014.  While CMS Energy and Consumers believe it is unlikely that they will incur any material losses related to indemnities they have not recorded as liabilities, they cannot predict the impact of these contingent obligations on their liquidity and financial condition.  For additional details on these and other guarantee arrangements, see Note 3, Contingencies and Commitments — Guarantees.

 

OUTLOOK

 

Several business trends and uncertainties may affect CMS Energy’s and Consumers’ financial condition and results of operations.  These trends and uncertainties could have a material impact on CMS Energy’s and Consumers’ consolidated income, cash flows, or financial position.  For additional details regarding these and other uncertainties, see Forward-Looking Statements and Information; Note 2, Regulatory Matters; Note 3, Contingencies and Commitments; and Part II — Item 1A. Risk Factors.

 

CONSUMERS ELECTRIC UTILITY AND GAS UTILITY BUSINESS OUTLOOK AND UNCERTAINTIES

 

Energy Optimization Plan:  The 2008 Energy Law requires Consumers to achieve energy savings equivalent to annual usage reduction targets through at least 2015.  The targets increase annually, with the goal of achieving cumulative reductions of 5.6 percent in customers’ electricity use and 3.9 percent in customers’ natural gas use by December 31, 2015.  Under its energy optimization plan, Consumers

 

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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.  At September 30, 2014, Consumers had achieved cumulative reductions of 5.7 percent in customers’ electricity use and 3.9 percent in customers’ natural gas use; the savings results will be certified at the end of the plan year by a third party.

 

Smart Energy:  Consumers’ grid modernization effort continues.  In 2012, Consumers began installing smart meters for electric residential and small business customers in western Michigan.  One of the functions of smart meters is to allow customers to monitor and manage their energy usage, which Consumers expects will help reduce demand during critical peak times, resulting in lower peak electric capacity requirements.  The installation of smart meters should also provide for both operational and customer benefits.  As of September 30, 2014, Consumers had upgraded 300,000 electric customers in western Michigan to smart meters.  Of the customers scheduled for the upgrade, 0.5 percent have chosen not to participate in the smart meter program.

 

Consumers is able to disconnect and reconnect service, read, and bill from smart meters remotely; further functionality will continue to be added through 2015.  Consumers expects to have installed 388,000 smart meters throughout western Michigan by the end of 2014 and to have completed the installation of smart meters throughout its service territory by the end of 2017.  Consumers also plans to install communication modules on gas meters in areas where Consumers provides both electricity and natural gas to customers.

 

CONSUMERS ELECTRIC UTILITY BUSINESS OUTLOOK AND UNCERTAINTIES

 

Clean Energy Plan:  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.  With the planned retirement of seven smaller coal-fueled electric generating units and the potential tightening of the MISO capacity market, Consumers could experience a shortfall in generation capacity in 2016.  In order to address future capacity requirements and growing electric demand in Michigan, Consumers has a comprehensive clean energy 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;

·                 construction or purchase of electric generating units; and

·                 continued operation or upgrade of existing units.

 

In December 2013, Consumers signed an agreement to purchase a 540-MW gas-fueled electric generating plant located in Jackson, Michigan for $155 million from AlphaGen Power LLC and DPC Juniper, LLC, affiliates of JPMorgan Chase & Co.  Consumers expects to close the purchase, which is subject to MPSC, FERC, and other approvals, in late 2015.  In September 2014, Consumers received approval from FERC for the purchase.

 

Also, in September 2014, Consumers completed an auction to purchase generation capacity for 2015 and 2016.  The contracts entered into as a result of the auction are subject to MPSC approval.

 

Renewable Energy Plan:  Consumers’ renewable energy plan details how Consumers expects to meet REC and capacity standards prescribed by the 2008 Energy Law.  This law requires Consumers to use RECs, which represent proof that the associated electricity was generated from a renewable energy resource, to achieve certain renewable energy targets.  The targets increase annually, with a goal of using RECs in an amount equal to at least ten percent of Consumers’ electric sales volume (estimated to be 3.3 million RECs annually) in 2015 and each year thereafter.  Under its renewable energy plan,

 

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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.  Through September 30, 2014, Consumers has contracted for the purchase of 298 MW of nameplate capacity from renewable energy suppliers and owns 100 MW of nameplate capacity at its Lake Winds® Energy Park.

 

Consumers expects to meet the balance of the renewable capacity requirement one year earlier than required, through the completion of its Cross Winds® Energy Park, a 111-MW wind park in Tuscola County, Michigan.  Consumers began construction of Cross Winds® Energy Park in October 2013 and expects to begin operations by the end of 2014.  Cross Winds® Energy Park will qualify for certain federal production tax credits that should reduce significantly the cost of meeting the renewable requirements of the 2008 Energy Law.  Consumers expects to qualify for $100 million to $120 million of federal production tax credits, which will be based on the wind project’s production over its first ten years of operation.  These cost savings will be passed on to customers.

 

Electric Customer Deliveries and Revenue:  Consumers’ electric customer deliveries are largely dependent on Michigan’s economy.  Consumers expects weather-adjusted electric deliveries to increase in 2014 by 2.0 to 3.0 percent compared with 2013.

 

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:  A Michigan statute enacted in 2000 allows Consumers’ electric customers to buy electric generation service from Consumers or from alternative electric suppliers.  The 2008 Energy Law revised the statute by limiting alternative electric supply to ten percent of Consumers’ weather-adjusted retail sales of the preceding calendar year.  At September 30, 2014, electric deliveries under the ROA program were at the ten-percent limit and alternative electric suppliers were providing 782 MW of generation service to ROA customers.  Of Consumers’ 1.8 million electric customers, 309 customers, or 0.02 percent, purchased electric generation service under the ROA program.

 

In December 2013, a bill was introduced to the Michigan House of Representatives that, if enacted, would revise the 2008 Energy Law by removing the ten-percent limit and allowing all of Consumers’ electric customers to take service from an alternative electric supplier.  Presently, the proportion of Consumers’ electric deliveries under the ROA program and on the ROA waiting list is 26 percent.  The bill also proposes to deregulate electric generation service in Michigan within two years.  No definitive action has been taken on this bill or on a similar bill introduced to the Michigan Senate in February 2013.  The Senate bill, if enacted, would revise the 2008 Energy Law and allow customers on the ROA program waiting list to take service from alternative electric suppliers.  The Senate 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 these legislative proposals.  In addition, the Michigan legislature has conducted hearings on the subject of energy competition.  If the ROA limit were increased or if electric generation service in Michigan were deregulated, it could have a material adverse effect on Consumers’ financial results and operations.

 

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Electric Rate Design:  In June 2014, Michigan’s governor signed legislation requiring the MPSC to explore alternative cost allocation and rate design methods that would promote affordable and competitive rates for all electric customers.  In conjunction with this legislation, in October 2014 Consumers submitted to the MPSC a proposal for a new electric rate design.  This proposed new design is aimed at making rates for energy-intensive industrial customers more competitive, while keeping residential bills affordable.  If the MPSC approves Consumers’ proposal, Consumers will incorporate the new rate design into its next electric rate case.

 

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 for the D.C. Circuit.  In August 2014, the U.S. Court of Appeals upheld FERC’s order.  Consumers expects to continue to recover transmission expenses 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 has assessed its registration status, taking into consideration FERC’s December 2012 order on the definition of a bulk electric system, and in August 2013 notified ReliabilityFirst Corporation that it is preparing to register as a transmission owner, transmission planner, and transmission operator.  In light of this order, Consumers reviewed the classification of certain electric distribution assets and, in April 2014, filed an application for reclassification with the MPSC.  In October 2014, the MPSC approved a settlement agreement that will allow Consumers to reclassify $34 million of plant assets from distribution to transmission, subject to FERC approval.  Consumers will next file an application for reclassification with FERC.

 

Depreciation Rate Case:  In June 2014, Consumers filed a depreciation case related to its electric and common utility property, requesting to increase depreciation expense, and its recovery of that expense, by $28 million annually.

 

Electric Environmental Outlook:  Consumers’ operations are subject to various state and federal environmental laws and regulations.  Consumers estimates that it will incur expenditures of $0.9 billion from 2014 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.  This matter was appealed to the U.S. Supreme Court, which upheld and remanded the decision back to the D.C. Circuit for additional action in April 2014.  The D.C. Circuit has not yet made a decision, and other CSAPR-related litigation is being held in abeyance.  The EPA and environmental groups are seeking to make CSAPR effective in 2015.

 

In 2012, the EPA published 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.  Compliance is required by April 2015, unless a one-year extension is granted by the MDEQ.  Consumers has received the extension for ten of its coal-fueled units and expects to meet the extended deadline for three units it intends to continue operating.  Consumers expects to retire the remaining seven units by the extended deadline.  Consumers expects to meet the April 2015 deadline for its two other coal-fueled units.  MATS

 

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is presently being litigated and the U.S. Court of Appeals for the D.C. Circuit recently denied the petitions challenging the final rule.  This matter has been appealed to the U.S. Supreme Court.

 

The NAAQS for ozone continue to be litigated and new proposed rules are expected in the near future.  Industry groups challenged the 2008 NAAQS for ozone in the D.C. Circuit and lost.  That matter was appealed to the U.S. Supreme Court, which recently declined to hear the case.

 

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

 

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

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

·                 changes in how certain plants are used; and

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

 

The MDEQ renewed and issued the Renewable Operating Permit for the B.C. Cobb plant in August 2011 and for the J.H. Campbell plant in July 2013 after an extensive review and a public comment period.  The Sierra Club and the Natural Resources Defense Council filed separate petitions with the EPA to object to the MDEQ’s issuance of the state Renewable Operating Permit for both of these facilities, alleging that the facilities are not in compliance with certain provisions of the Clean Air Act, including NSR and Title V.  Consumers has responded to these allegations.  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 is unable to predict the outcome of these actions.

 

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 January 2014, the EPA published proposed rules pursuant to Section 111(b) of the Clean Air Act to limit carbon dioxide emissions from new electric generating units.  New coal-fueled units would not be able to meet this limit without installing carbon dioxide control equipment using such methods as carbon capture and sequestration.  The proposed rules for new sources are expected to be finalized by the end of 2014.

 

In June 2014, the EPA published proposed rules pursuant to Section 111(d) of the Clean Air Act to limit carbon dioxide emissions from existing electric generating units, calling the rules the “Clean Power Plan.”  The proposed rules would require a 30 percent nationwide reduction in carbon emissions from existing power plants by 2030 (based on 2005 levels).  Each state would have a tailored target based on its circumstances, and Michigan specifically would be required to achieve approximately a 31 percent reduction from 2012 levels.  The rules for existing sources are expected to be finalized by June 2015.  Subsequent state implementation plans are due by June 30, 2016, but extensions are available.  In addition, the Clean Power Plan is presently being litigated.

 

Consumers believes that its clean energy plan, 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

 

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the final outcome of either of these EPA proposals or of Michigan’s implementation plan.  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.

 

CCRs:  In 2010, the EPA proposed rules regulating CCRs, such as coal ash, under the Resource Conservation and Recovery Act.  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 is expected in late 2014 or early 2015.  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:  The EPA’s rule to regulate existing electric generating plant cooling water intake systems under Section 316(b) of the Clean Water Act became effective in October 2014.  The rule is aimed at reducing alleged harmful impacts on fish and shellfish.  Consumers does not expect any changes to its environmental strategy as a result of the final rule.  Consumers also expects the EPA to issue final effluent limitation guidelines in 2015 that may require physical and/or chemical treatment of wastewater discharges from electric generating plants.  Consumers will evaluate these rules and their potential impacts on Consumers’ electric generating plants once they are final.

 

Many of Consumers’ facilities maintain NPDES permits, which are valid for five years and vital to the facilities’ operations.  Failure of the MDEQ to renew any NPDES permit, a successful appeal against a permit, or onerous terms contained in a permit could have a significant detrimental effect on the operations of a facility.

 

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 2015.

 

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

 

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CONSUMERS GAS UTILITY BUSINESS OUTLOOK AND UNCERTAINTIES

 

Gas Deliveries:  Consumers expects weather-adjusted gas deliveries in 2014 to increase by 1.0 to 2.0 percent compared with 2013 due to the addition of gas-fired electric generation in its service territory.  Over the next five years, Consumers expects weather-adjusted gas deliveries to remain relatively stable.  This outlook reflects modest growth in gas demand offset by the predicted effects of energy efficiency and conservation.  Actual delivery levels from year to year may vary from this expectation 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 Rate Case:  In July 2014, Consumers filed an application with the MPSC seeking an annual rate increase of $88 million, based on a 10.7 percent authorized return on equity.  The filing requested authority to recover new investments that will allow Consumers to improve system reliability, comply with regulations, and enhance technology.  If approved, this rate increase would take effect in 2015 and, as a result of several initiatives undertaken by Consumers to reduce costs, would be Consumers’ first gas base rate increase since 2012.

 

Presented in the following table are the components of the requested rate increase:

 

 

 

In Millions

 

Components of the rate increase

 

 

 

Investment in rate base

 

$

144

 

Operating and maintenance costs

 

8

 

Cost of capital

 

2

 

Working capital and other cost reductions

 

(51

)

Gross margin

 

(15

)

Total

 

$

88

 

 

The filing also seeks approval of two rate adjustment mechanisms:  a mechanism that would reconcile annually Consumers’ actual nonfuel revenues with the revenues approved by the MPSC, and a mechanism that would allow recovery of an additional $92 million associated with investments that Consumers plans to make in 2016 and 2017, subject to reconciliation.

 

Gas Transmission:  In September 2014, Consumers began operating a 24-mile, 36-inch natural gas pipeline.  The $88 million pipeline runs through St. Joseph and Branch Counties, Michigan.

 

Gas Environmental Outlook:  Consumers expects to incur response activity costs at a number of sites, including 23 former MGP sites.  For additional details, see Note 3, Contingencies and Commitments — Consumers Gas Utility Contingencies, “Gas Environmental Matters.”

 

ENTERPRISES OUTLOOK AND UNCERTAINTIES

 

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

 

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

 

·                 indemnity and environmental remediation obligations at Bay Harbor;

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

·                 the outcome of certain legal proceedings;

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

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

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

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

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

 

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

 

OTHER OUTLOOK AND UNCERTAINTIES

 

EnerBank:  EnerBank is a Utah state-chartered, FDIC-insured industrial bank providing unsecured consumer installment loans for financing home improvements.  EnerBank represented three percent of CMS Energy’s net assets at September 30, 2014, and four percent of CMS Energy’s net income available to common stockholders for the nine months ended September 30, 2014.  The carrying value of EnerBank’s loan portfolio was $847 million at September 30, 2014.  Its loan portfolio was funded primarily by deposit liabilities of $799 million.  The twelve-month rolling average default rate on loans held by EnerBank has remained stable at 0.6 percent at September 30, 2014.  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 September 30, 2014.

 

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 2, Regulatory Matters and Note 3, Contingencies and Commitments.

 

NEW ACCOUNTING STANDARDS

 

For details regarding new accounting standards issued but not yet effective, see Note 1, New Accounting Standards.

 

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CMS Energy Corporation

Consolidated Statements of Income

(Unaudited)

 

In Millions, Except Per Share Amounts

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

September 30

 

2014

 

2013

 

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

Operating Revenue

 

$

1,430

 

$

1,445

 

$

5,421

 

$

4,830

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

 

Fuel for electric generation

 

161

 

165

 

534

 

466

 

Purchased and interchange power

 

387

 

383

 

1,244

 

1,063

 

Purchased power – related parties

 

21

 

21

 

67

 

67

 

Cost of gas sold

 

86

 

76

 

1,107

 

849

 

Maintenance and other operating expenses

 

329

 

284

 

899

 

870

 

Depreciation and amortization

 

153

 

145

 

503

 

463

 

General taxes

 

57

 

54

 

188

 

174

 

Total operating expenses

 

1,194

 

1,128

 

4,542

 

3,952

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

236

 

317

 

879

 

878

 

 

 

 

 

 

 

 

 

 

 

Other Income (Expense)

 

 

 

 

 

 

 

 

 

Interest income

 

1

 

1

 

2

 

3

 

Allowance for equity funds used during construction

 

2

 

1

 

6

 

5

 

Income from equity method investees

 

4

 

3

 

11

 

11

 

Other income

 

2

 

2

 

8

 

7

 

Other expense

 

(3

)

(7

)

(26

)

(13

)

Total other income

 

6

 

-

 

1

 

13

 

 

 

 

 

 

 

 

 

 

 

Interest Charges

 

 

 

 

 

 

 

 

 

Interest on long-term debt

 

98

 

96

 

294

 

289

 

Other interest expense

 

4

 

3

 

12

 

12

 

Allowance for borrowed funds used during construction

 

(1

)

-

 

(3

)

(2

)

Total interest charges

 

101

 

99

 

303

 

299

 

 

 

 

 

 

 

 

 

 

 

Income Before Income Taxes

 

141

 

218

 

577

 

592

 

Income Tax Expense

 

47

 

91

 

195

 

240

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

94

 

127

 

382

 

352

 

Income Attributable to Noncontrolling Interests

 

-

 

1

 

1

 

2

 

 

 

 

 

 

 

 

 

 

 

Net Income Available to Common Stockholders

 

$

94

 

$

126

 

$

381

 

$

350

 

 

 

 

 

 

 

 

 

 

 

Basic Earnings Per Average Common Share

 

$

0.34

 

$

0.48

 

$

1.41

 

$

1.32

 

Diluted Earnings Per Average Common Share

 

$

0.34

 

$

0.46

 

$

1.39

 

$

1.29

 

 

 

 

 

 

 

 

 

 

 

Dividends Declared Per Common Share

 

$

0.27

 

$

0.255

 

$

0.81

 

$

0.765

 

 

The accompanying notes are an integral part of these statements.

 

32



Table of Contents

 

CMS Energy Corporation

Consolidated Statements of Comprehensive Income

(Unaudited)

 

In Millions

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

September 30

 

2014

 

2013

 

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

94

 

$

127

 

$

382

 

$

352

 

 

 

 

 

 

 

 

 

 

 

Retirement Benefits Liability

 

 

 

 

 

 

 

 

 

Net gain arising during the period, net of tax of $-, $6, $-, and $6

 

-

 

10

 

-

 

10

 

Prior service credit adjustment, net of tax of $-, $3, $-, and $3

 

-

 

5

 

-

 

5

 

Amortization of net actuarial loss, net of tax of $-, $1, $1, and $2

 

1

 

1

 

2

 

3

 

Amortization of prior service credit, net of tax of $-, $(1), $-, and $(1)

 

(1

)

-

 

(1

)

-

 

 

 

 

 

 

 

 

 

 

 

Investments

 

 

 

 

 

 

 

 

 

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

 

-

 

1

 

-

 

(2

)

 

 

 

 

 

 

 

 

 

 

Derivative Instruments

 

 

 

 

 

 

 

 

 

Reclassification adjustments included in net income, net of tax of $- for all periods

 

-

 

-

 

1

 

-

 

 

 

 

 

 

 

 

 

 

 

Other Comprehensive Income

 

-

 

17

 

2

 

16

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Income

 

94

 

144

 

384

 

368

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Income Attributable to Noncontrolling Interests

 

-

 

1

 

1

 

2

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Income Attributable to CMS Energy

 

$

94

 

$

143

 

$

383

 

$

366

 

 

The accompanying notes are an integral part of these statements.

 

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34



Table of Contents

 

CMS Energy Corporation

Consolidated Statements of Cash Flows

(Unaudited)

 

In Millions

 

Nine Months Ended September 30

 

2014

 

2013

 

 

 

 

 

 

 

Cash Flows from Operating Activities

 

 

 

 

 

Net income

 

$

382

 

$

352

 

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

 

 

 

 

 

Depreciation and amortization

 

503

 

463

 

Deferred income taxes and investment tax credit

 

178

 

213

 

Postretirement benefits expense

 

17

 

120

 

Other non-cash operating activities

 

64

 

59

 

Postretirement benefits contributions

 

(5

)

(109

)

Proceeds from government grant

 

-

 

69

 

Cash provided by (used in) changes in assets and liabilities

 

 

 

 

 

Accounts receivable, notes receivable, and accrued revenue

 

111

 

134

 

Inventories

 

(161

)

(6

)

Accounts payable and accrued refunds

 

(14

)

(32

)

Other current and non-current assets and liabilities

 

(113

)

(145

)

Net cash provided by operating activities

 

962

 

1,118

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

Capital expenditures (excludes assets placed under capital lease)

 

(1,125

)

(900

)

Cost to retire property

 

(62

)

(38

)

Increase in EnerBank notes receivable

 

(164

)

(53

)

Other investing activities

 

4

 

(13

)

Net cash used in investing activities

 

(1,347

)

(1,004

)

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

Proceeds from issuance of long-term debt

 

1,428

 

1,025

 

Proceeds from EnerBank notes, net

 

147

 

48

 

Issuance of common stock

 

40

 

32

 

Retirement of long-term debt

 

(488

)

(705

)

Payment of common and preferred stock dividends

 

(220

)

(205

)

Decrease in notes payable

 

(170

)

(110

)

Payment of capital lease obligations and other financing costs

 

(31

)

(32

)

Net cash provided by financing activities

 

706

 

53

 

 

 

 

 

 

 

Net Increase in Cash and Cash Equivalents

 

321

 

167

 

 

 

 

 

 

 

Cash and Cash Equivalents, Beginning of Period

 

172

 

93

 

 

 

 

 

 

 

Cash and Cash Equivalents, End of Period

 

$

493

 

$

260

 

 

The accompanying notes are an integral part of these statements.

 

35



Table of Contents

 

CMS Energy Corporation

Consolidated Balance Sheets

(Unaudited)

 

ASSETS

 

In Millions

 

 

 

September 30

 

December 31

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

 

$

493

 

$

172

 

Restricted cash and cash equivalents

 

37

 

32

 

Accounts receivable and accrued revenue, less allowances of $36 in 2014 and $33 in 2013

 

683

 

914

 

Notes receivable

 

96

 

63

 

Accounts receivable – related parties

 

11

 

10

 

Accrued power supply and gas revenue

 

109

 

-

 

Inventories at average cost

 

 

 

 

 

Gas in underground storage

 

833

 

660

 

Materials and supplies

 

114

 

107

 

Generating plant fuel stock

 

96

 

114

 

Deferred income taxes

 

48

 

126

 

Deferred property taxes

 

128

 

202

 

Regulatory assets

 

7