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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, 2015

 

 

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 (Do not check if a smaller reporting company)

Smaller reporting company o

Consumers Energy Company:

 

Large accelerated filer o

Accelerated filer o

Non-Accelerated filer x (Do not check if a smaller reporting company)

Smaller reporting company o

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 13, 2015:

CMS Energy Corporation:

CMS Energy Common Stock, $0.01 par value

 

 

(including 803,551 shares owned by Consumers Energy Company)

 

277,879,646

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, 2015

 

TABLE OF CONTENTS

 

 

Page

Glossary

3

Filing Format

8

Available Information

8

Forward-Looking Statements and Information

8

 

 

PART I. Financial Information

 

 

 

 

Item 1.

Consolidated Financial Statements (Unaudited)

 

 

CMS Energy Corporation

34

 

Consumers Energy Company

42

 

Notes to the Unaudited Consolidated Financial Statements

49

Item 2.

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

13

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

68

Item 4.

Controls and Procedures

68

 

 

 

PART II. Other Information

 

 

 

 

Item 1.

Legal Proceedings

68

Item 1A.

Risk Factors

68

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

69

Item 3.

Defaults Upon Senior Securities

69

Item 4.

Mine Safety Disclosures

69

Item 5.

Other Information

69

Item 6.

Exhibits

69

Signatures

70

 

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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

 

 

 

2014 Form 10-K

 

Each of CMS Energy’s and Consumers’ Annual Report on Form 10-K for the year ended December 31, 2014

 

 

 

ABATE

 

Association of Businesses Advocating Tariff Equity

 

 

 

ARO

 

Asset retirement obligation

 

 

 

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 and its consolidated subsidiaries, unless otherwise noted; the parent of Consumers and CMS Enterprises

 

 

 

CMS Enterprises

 

CMS Enterprises Company, a wholly owned subsidiary of CMS Energy

 

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CMS Field Services

 

CMS Field Services, Inc., a former wholly owned subsidiary of 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 Energy Resource Management Company in 2004

 

 

 

Consumers

 

Consumers Energy Company and its consolidated subsidiaries, unless otherwise noted; a wholly owned subsidiary of CMS Energy

 

 

 

CSAPR

 

The Cross-State Air Pollution Rule

 

 

 

DB Pension Plan

 

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

 

 

 

DB SERP

 

Defined Benefit Supplemental Executive Retirement Plan

 

 

 

Dodd-Frank Act

 

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

 

 

 

DTIA

 

Distribution-Transmission Interconnection Agreement dated April 1, 2001 between METC and Consumers, as amended

 

 

 

EBITDA

 

Earnings before interest, taxes, depreciation, and amortization

 

 

 

EnerBank

 

EnerBank USA, a wholly owned subsidiary of CMS Capital

 

 

 

EPA

 

U.S. Environmental Protection Agency

 

 

 

EPS

 

Earnings per share

 

 

 

Exchange Act

 

Securities Exchange Act of 1934

 

 

 

FDIC

 

Federal Deposit Insurance Corporation

 

 

 

FERC

 

The Federal Energy Regulatory Commission

 

 

 

FMB

 

First mortgage bond

 

 

 

FTR

 

Financial transmission right

 

 

 

GAAP

 

U.S. Generally Accepted Accounting Principles

 

 

 

GCR

 

Gas cost recovery

 

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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

 

 

 

METC

 

Michigan Electric Transmission Company, LLC, a non-affiliated company

 

 

 

MGP

 

Manufactured gas plant

 

 

 

Michigan Mercury Rule

 

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

 

 

 

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

 

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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

 

 

 

PSCR

 

Power supply cost recovery

 

 

 

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

 

 

 

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 that 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 the utility

 

 

 

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

 

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USW

 

United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union, AFL-CIO-CLC

 

 

 

UWUA

 

Utility Workers Union of America, AFL-CIO

 

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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 2014 Form 10-K.

 

AVAILABLE INFORMATION

 

CMS Energy routinely posts important information on its website and considers the Investor Relations section, www.cmsenergy.com/investor-relations, a channel of distribution.  This website information is not incorporated by reference herein.

 

FORWARD-LOOKING STATEMENTS AND INFORMATION

 

This Form 10-Q and other CMS Energy and Consumers disclosures 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, METC, 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, energy efficiency, the environment, regulation or deregulation, health care reforms (including the Health Care Acts), taxes, accounting matters,

 

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climate change, air emissions, potential effects of the Dodd-Frank Act, and other business issues that could have an impact on CMS Energy’s, Consumers’, or any of their affiliates’ businesses or financial results;

 

·                 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, 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 those 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;

 

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

 

·                 factors affecting operations, such as costs and availability of personnel, equipment, and materials, unusual weather conditions, catastrophic weather-related damage, scheduled or unscheduled equipment outages, maintenance or repairs, environmental incidents, 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, vandalism, 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;

 

·                 the ability to implement technology, including Smart Energy, successfully;

 

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

 

·                 adverse consequences resulting from any past, present, 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 claims, proceedings, investigations, or settlements;

 

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

 

·                 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 public documents.

 

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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, transmission, 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, transmission, 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’ 2015 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 2014, Consumers achieved a 70 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 accelerated pension funding, employee and retiree health care cost sharing, negotiated labor agreements, information and control system efficiencies, and productivity improvements.

 

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UTILITY INVESTMENT

 

Consumers expects to make capital investments of about $15.5 billion from 2015 through 2024.  This amount includes $7.8 billion through 2019, as presented in the following illustration:

 

Electric base ($2.8 billion)

Gas base ($1.7 billion)

Gas reliability enhancements

($1.0 billion)

Environmental ($0.8 billion)

Electric reliability

enhancements ($0.7 billion)

Smart Energy ($0.5 billion)

New gas-fueled

generation ($0.2 billion)

Decommissioning

($0.1 billion)

 

While Consumers has substantially more opportunities for capital investments that add customer value, 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 $4.5 billion represent projects to maintain Consumers’ system and comprise $2.8 billion at the electric utility to preserve reliability and capacity and $1.7 billion at the gas utility to sustain deliverability and enhance pipeline integrity.  An additional $1.7 billion of planned reliability investments at Consumers are aimed at reducing outages and improving customer satisfaction; these investments comprise $0.7 billion at the electric utility to strengthen circuits and substations, replace poles, and upgrade Ludington and $1.0 billion at the gas utility to replace mains and enhance transmission and storage systems.  Consumers also expects to spend $0.8 billion on environmental investments needed to comply with state and federal laws and regulations.

 

Consumers’ Smart Energy program 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 2014 on its Smart Energy program and expects to spend an additional $0.5 billion, following a phased approach, from 2015 through 2017.

 

Consumers also expects to spend $0.2 billion on new natural gas-fueled electric generation.  The majority of this amount relates to an agreement that Consumers signed in 2013 to purchase a 540-MW natural gas-fueled electric generating plant located in Jackson, Michigan for $155 million.  As provided for in the

 

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agreement, the purchase is subject to MPSC and other approvals.  Consumers expects to close the purchase in late 2015 or early 2016.

 

REGULATION

 

Regulatory matters are a key aspect of CMS Energy’s and Consumers’ businesses, particularly Consumers’ rate cases and regulatory proceedings before the MPSC.  In July 2015, Michigan Governor Rick Snyder appointed Norm Saari to serve on the three-member MPSC for a six-year term beginning in August 2015, replacing retiring Commissioner Greg White.  Other important regulatory events and developments are summarized below.

 

·                 Electric Rate Case:  Consumers filed a general electric rate case with the MPSC in December 2014, seeking an annual rate increase of $163 million, based on a 10.7 percent authorized return on equity.  The filing also seeks approval of an investment recovery mechanism that would allow recovery of an additional $163 million in total for incremental investments that Consumers plans to make in 2016 and 2017 and $78 million for incremental investments planned in 2018, subject to reconciliation.  In June 2015, Consumers self-implemented an annual rate increase of $110 million, subject to refund with interest.

 

·                 Gas Rate Case:  In July 2015, Consumers filed an application with the MPSC seeking an annual rate increase of $85 million, based on a 10.7 percent authorized return on equity.  The largest component of the request is an annual revenue requirement of $64 million related to new investments that will allow Consumers to strengthen infrastructure and improve system capacity and deliverability.

 

The filing also seeks approval of two rate adjustment mechanisms:  one that would reconcile annually Consumers’ actual weather-adjusted nonfuel revenues with the revenues approved by the MPSC, and another that would allow recovery of an additional $147 million associated with investments to be made from January 2017 through December 2019, subject to reconciliation.  These future investments would help to ensure adequate system capacity and deliverability.

 

The 2008 Energy Law allows electric customers in Consumers’ service territory to buy electric generation service from alternative electric suppliers in an aggregate amount up to ten percent of Consumers’ weather-adjusted retail sales of the preceding calendar year.  At September 30, 2015, Consumers’ electric deliveries under the ROA program were at the ten-percent limit.  Earlier this year, members of the Michigan Senate and House of Representatives introduced various bills related to ROA.  These bills propose a range of changes to ROA, including eliminating ROA, maintaining the existing ROA program but imposing conditions on a customer’s return to utility service, and raising the ROA limit.  Consumers is unable to predict the form and timing of any final legislation or whether other bills might be introduced in 2015.  An increase to the ROA limit could negatively affect Consumers’ financial results and operations.

 

In March 2015, Michigan’s governor outlined several key goals for the state’s energy policy, with a focus on increasing the use of clean energy sources, reducing Michigan’s reliance on coal, deploying smart meters, investing in the power grid and pipeline system, eliminating energy waste, and ensuring affordable, reliable, and adaptable energy while protecting the environment.  The governor also created the Michigan Agency for Energy, a single entity dedicated to providing all of state government the information and context needed to support Michigan’s energy priorities.

 

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

 

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additional substantial capital expenditures for emissions control equipment, CCR disposal and storage, 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, 2015, CMS Energy’s net income available to common stockholders was $417 million and diluted EPS were $1.51.  This compares with net income available to common stockholders of $381 million and diluted EPS of $1.39 for the nine months ended September 30, 2014.  Among the factors contributing to CMS Energy’s improved performance in 2015 were electric and gas rate increases, which were offset partially by higher depreciation and property taxes on new capital investments.

 

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.

 

Michigan is placed in the first quartile of states based on its strong economic growth since 2010.  Consumers expects that the continued rise in industrial production will drive its electric deliveries to increase annually by about one-half to one percent on average through 2019.  Excluding the impacts of energy efficiency programs, Consumers expects its electric deliveries to increase by about 1.5 to 2 percent annually through 2019.  Consumers is projecting that its gas deliveries will remain stable through 2019.  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.  To identify potential implications for CMS Energy’s and Consumers’ businesses and future financial needs, the companies will continue to monitor developments in the financial and credit markets, as well as government policy responses to those developments.

 

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Table of Contents

 

RESULTS OF OPERATIONS

 

CMS ENERGY CONSOLIDATED RESULTS OF OPERATIONS

 

 

 

In Millions, Except Per Share Amounts

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30

 

2015

 

2014

 

Change

 

2015

 

2014

 

Change

 

Net Income Available to Common Stockholders

 

$

148

 

$

94

 

$

54

 

$

417

 

$

381

 

$

36

 

Basic Earnings Per Share

 

$

0.53

 

$

0.34

 

$

0.19

 

$

1.51

 

$

1.41

 

$

0.10

 

Diluted Earnings Per Share

 

$

0.53

 

$

0.34

 

$

0.19

 

$

1.51

 

$

1.39

 

$

0.12

 

 

 

 

In Millions

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30

 

2015

 

2014

 

Change

 

2015

 

2014

 

Change

 

Electric utility

 

$

166

 

$

128

 

$

38

 

$

342

 

$

326

 

$

16

 

Gas utility

 

 

(7

)

 

(9

)

 

2

 

 

115

 

 

121

 

 

(6

)

Enterprises

 

 

3

 

 

(7

)

 

10

 

 

10

 

 

(3

)

 

13

 

Corporate interest and other

 

 

(14

)

 

(18

)

 

4

 

 

(50

)

 

(63

)

 

13

 

Net Income Available to Common Stockholders

 

$

148

 

$

94

 

$

54

 

$

417

 

$

381

 

$

36

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

In Millions

 

 

 

September 30, 2015 better/(worse) than 2014

 

Reasons for the change

 

Three Months Ended

 

Nine Months Ended

 

Consumers electric utility and gas utility

 

 

 

 

 

 

 

 

 

 

 

 

 

Electric sales

 

 

 

 

 

 

 

 

 

 

 

 

 

Weather

 

$

20

 

 

 

 

 

$

7

 

 

 

 

 

Non-weather

 

1

 

$

21

 

 

 

2

 

$

9

 

 

 

Gas sales

 

 

 

 

 

 

 

 

 

 

 

 

 

Weather

 

(2

)

 

 

 

 

(17

)

 

 

 

 

Non-weather

 

(2

)

(4

)

 

 

5

 

(12

)

 

 

Electric rate increase

 

 

 

16

 

 

 

 

 

29

 

 

 

Gas rate increase

 

 

 

4

 

 

 

 

 

20

 

 

 

Operating and maintenance costs

 

 

 

10

 

 

 

 

 

15

 

 

 

Depreciation and property taxes

 

 

 

(7

)

 

 

 

 

(44

)

 

 

Employee benefit costs

 

 

 

(5

)

 

 

 

 

(19

)

 

 

Other

 

 

 

5

 

$

40

 

 

 

12

 

$

10

 

Enterprises

 

 

 

 

 

 

 

 

 

 

 

 

 

Absence of increase in Bay Harbor environmental liability

 

 

 

 

 

9

 

 

 

 

 

9

 

Subsidiary earnings

 

 

 

 

 

1

 

 

 

 

 

4

 

Corporate interest and other

 

 

 

 

 

 

 

 

 

 

 

 

 

Absence of early extinguishment of debt

 

 

 

 

 

-

 

 

 

 

 

8

 

EnerBank earnings

 

 

 

 

 

2

 

 

 

 

 

5

 

Other

 

 

 

 

 

2

 

 

 

 

 

-

 

Total change

 

 

 

 

 

$

54

 

 

 

 

 

$

36

 

 

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Table of Contents

 

CONSUMERS ELECTRIC UTILITY RESULTS OF OPERATIONS

 

 

 

 

 

 

 

 

 

 

 

 

 

In Millions

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30

 

2015

 

2014

 

Change 

 

2015

 

2014

 

Change 

 

Net Income Available to Common Stockholders

 

$

166

 

$

128

 

$

38

 

$

342

 

$

326

 

$

16

 

Reasons for the change

 

 

 

 

 

 

 

 

 

 

 

 

 

Electric deliveries and rate increases

 

 

 

 

 

 

$

73

 

 

 

 

 

$

67

 

Power supply costs and related revenue

 

 

 

 

 

-

 

 

 

 

 

1

 

Other income, net of expenses

 

 

 

 

 

-

 

 

 

 

 

8

 

Maintenance and other operating expenses

 

 

 

 

 

3

 

 

 

 

 

-

 

Depreciation and amortization

 

 

 

 

 

(19

)

 

 

 

 

(47

)

General taxes

 

 

 

 

 

(2

)

 

 

 

 

(6

)

Interest charges

 

 

 

 

 

-

 

 

 

 

 

(8

)

Income taxes

 

 

 

 

 

(17

)

 

 

 

 

1

 

Total change

 

 

 

 

 

 

$

38

 

 

 

 

 

$

16

 

 

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, 2015, electric delivery revenues increased $73 million compared with 2014.  This change reflected a $41 million increase in sales due primarily to warmer weather in 2015, $30 million from a rate increase that Consumers self-implemented in June 2015, and a $2 million increase in other revenues.  Deliveries to end-use customers were 10.1 billion kWh in 2015 and 9.6 billion kWh in 2014.

 

For the nine months ended September 30, 2015, electric delivery revenues increased $67 million compared with 2014.  This change reflected a $24 million increase in sales due primarily to warmer weather in 2015, $38 million from a rate increase that Consumers self-implemented in June 2015, and a $5 million increase in other revenues.  Deliveries to end-use customers were 28.4 billion kWh in 2015 and 28.3 billion kWh in 2014.

 

Other income, net of expenses:  For the nine months ended September 30, 2015, other income, net of expenses, increased $8 million compared with 2014.  This change was due to a $6 million gain related to a donation of CMS Energy stock by Consumers and the absence in 2015 of $2 million of other costs incurred in 2014.  The gain was eliminated on CMS Energy’s consolidated statements of income.

 

Maintenance and other operating expenses:  For the three months ended September 30, 2015, maintenance and other operating expenses decreased $3 million compared with 2014.  This change reflected a $6 million decrease in forestry and other operating expenses and a $3 million decrease in service restoration costs, reflecting in part the increased capitalization of utility pole units, consistent with a change in regulatory treatment.  These decreases were offset partially by $6 million of higher postretirement benefits expense.

 

For the nine months ended September 30, 2015, maintenance and other operating expenses were unchanged compared with 2014, reflecting $19 million of higher postretirement benefits expense offset by a $15 million reduction in service restoration costs and a $4 million decrease in other operating expenses.  The reduction in service restoration costs was due primarily to the increased capitalization of utility pole units, consistent with a change in regulatory treatment.

 

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Depreciation and amortization:  For the three months ended September 30, 2015, depreciation and amortization expense increased $19 million compared with 2014, and for the nine months ended September 30, 2015, depreciation and amortization expense increased $47 million compared with 2014.  These increases were due primarily to increased plant in service and higher amortization of securitized assets.

 

General taxes:  For the nine months ended September 30, 2015, general taxes increased $6 million compared with 2014 due to increased property taxes, reflecting higher capital spending.

 

Interest charges:  For the nine months ended September 30, 2015, interest charges increased $8 million compared with 2014 due primarily to higher average debt levels.

 

Income taxes:  For the three months ended September 30, 2015, income taxes increased $17 million compared with 2014.  Of this increase, $22 million was attributable to higher electric utility earnings, which was offset partially by a $3 million benefit associated with Cross Winds® Energy Park production tax credits and $2 million in other tax-related items.

 

For the nine months ended September 30, 2015, income taxes decreased $1 million compared with 2014.  This decrease reflected a $6 million benefit associated with Cross Winds® Energy Park production tax credits, offset partially by $5 million attributable to higher electric utility earnings.

 

CONSUMERS GAS UTILITY RESULTS OF OPERATIONS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In Millions

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

September 30

 

2015

 

2014

 

Change

 

 

2015

 

2014

 

Change

 

Net Income (Loss) Available to Common Stockholders

 

$

(7

)

$

(9

)

$

2

 

 

$

115

 

$

121

 

$

(6

)

Reasons for the change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gas deliveries and rate increases

 

 

 

 

 

$

2

 

 

 

 

 

 

$

23

 

Other income, net of expenses

 

 

 

 

 

-

 

 

 

 

 

 

4

 

Maintenance and other operating expenses

 

 

 

 

 

4

 

 

 

 

 

 

(11

)

Depreciation and amortization

 

 

 

 

 

(1

)

 

 

 

 

 

(15

)

General taxes

 

 

 

 

 

(1

)

 

 

 

 

 

(5

)

Interest charges

 

 

 

 

 

(1

)

 

 

 

 

 

(4

)

Income taxes

 

 

 

 

 

(1

)

 

 

 

 

 

2

 

Total change

 

 

 

 

 

$

2

 

 

 

 

 

 

$

(6

)

 

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

 

Gas deliveries and rate increases:  For the three months ended September 30, 2015, gas delivery revenues increased $2 million compared with 2014.  This change reflected $7 million from a January 2015 rate increase, offset partially by a $5 million decrease in sales.  Deliveries to end-use customers were 27 bcf in 2015 and 29 bcf in 2014.

 

For the nine months ended September 30, 2015, gas delivery revenues increased $23 million compared with 2014.  This change reflected $32 million from a January 2015 rate increase and a $2 million increase in other revenues.  These increases were offset partially by an $11 million decrease in sales, due primarily to colder winter weather in 2014.  Deliveries to end-use customers were 223 bcf in 2015 and 234 bcf in 2014.

 

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Other income, net of expenses:  For the nine months ended September 30, 2015, other income, net of expenses, increased $4 million compared with 2014 due primarily to a gain related to a donation of CMS Energy stock by Consumers.  The gain was eliminated on CMS Energy’s consolidated statements of income.

 

Maintenance and other operating expenses:  For the three months ended September 30, 2015, maintenance and other operating expenses decreased $4 million compared with 2014.  This change was due primarily to a $4 million reduction in uncollectible accounts expense and a $4 million decrease in other operating and maintenance expenses.  These decreases were offset partially by a $4 million increase in postretirement benefits expense.

 

For the nine months ended September 30, 2015, maintenance and other operating expenses increased $11 million compared with 2014.  This change was due to a $12 million increase in postretirement benefits expense and a $4 million increase in other operating and maintenance expenses, offset partially by a $5 million reduction in uncollectible accounts expense.

 

Depreciation and amortization:  For the nine months ended September 30, 2015, depreciation and amortization expense increased $15 million compared with 2014 due primarily to increased plant in service.

 

General taxes:  For the nine months ended September 30, 2015, general taxes increased $5 million compared with 2014 due to increased property taxes, reflecting higher capital spending.

 

Interest charges:  For the nine months ended September 30, 2015, interest charges increased $4 million compared with 2014 due primarily to higher average debt levels.

 

Income taxes:  For the nine months ended September 30, 2015, income taxes decreased $2 million compared with 2014 attributable primarily to lower gas utility earnings.

 

ENTERPRISES RESULTS OF OPERATIONS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In Millions

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

September 30

 

2015

 

2014

 

Change

 

 

2015

 

2014

 

Change

 

Net Income (Loss) Available to Common Stockholders

 

$

3

 

$

(7

)

$

10

 

 

$

10

 

$

(3

)

$

13

 

 

For the three months ended September 30, 2015, net income of the enterprises segment increased $10 million compared with 2014, due primarily to the absence in 2015 of a $9 million after-tax increase in the environmental remediation liability associated with Bay Harbor.

 

For the nine months ended September 30, 2015, net income of the enterprises segment increased $13 million compared with 2014, due to the absence in 2015 of a $9 million after-tax increase in the environmental remediation liability associated with Bay Harbor, and a $4 million benefit resulting primarily from lower fuel costs, offset partially by higher costs associated with planned major maintenance.

 

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Table of Contents

 

CORPORATE INTEREST AND OTHER RESULTS OF OPERATIONS

 

 

 

 

 

 

 

 

 

 

 

 

 

In Millions

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

September 30

 

2015

 

2014

 

Change

 

 

2015

 

2014

 

Change

 

Net Income (Loss) Available to Common Stockholders

 

$

(14

)

$

(18

)

$

4

 

 

$

(50

)

$

(63

)

$

13

 

 

For the three months ended September 30, 2015, corporate interest and other net expenses decreased $4 million compared with 2014, due to $2 million of lower fixed charges on lower average debt levels in 2015 and $2 million of higher earnings at EnerBank.

 

For the nine months ended September 30, 2015, corporate interest and other net expenses decreased $13 million compared with 2014, due to the absence in 2015 of an $8 million loss on the early extinguishment of debt and $5 million of higher earnings at EnerBank.

 

CASH POSITION, INVESTING, AND FINANCING

 

At September 30, 2015, CMS Energy had $202 million of consolidated cash and cash equivalents, which included $52 million of restricted cash and cash equivalents.  At September 30, 2015, Consumers had $95 million of consolidated cash and cash equivalents, which included $52 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, 2015 and 2014:

 

 

 

 

 

 

 

In Millions

 

Nine Months Ended September 30

 

2015

 

2014

 

Change 

 

CMS Energy, including Consumers

 

 

 

 

 

 

 

Net income

 

$

418

 

$

382

 

$

36

 

Non-cash transactions1

 

898

 

762

 

136

 

 

 

1,316

 

1,144

 

172

 

Changes in core working capital2

 

239

 

(64

)

303

 

Postretirement benefits contributions

 

(35

)

(5

)

(30

)

Changes in other assets and liabilities, net

 

(100

)

(113

)

13

 

Net cash provided by operating activities

 

$

1,420

 

$

962

 

$

458

 

Consumers

 

 

 

 

 

 

 

Net income

 

$

459

 

$

449

 

$

10

 

Non-cash transactions1

 

709

 

634

 

75

 

 

 

1,168

 

1,083

 

85

 

Changes in core working capital2

 

244

 

(49

)

293

 

Postretirement benefits contributions

 

(33

)

(3

)

(30

)

Changes in other assets and liabilities, net

 

48

 

(83

)

131

 

Net cash provided by operating activities

 

$

1,427

 

$

948

 

$

479

 

 

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.

 

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Table of Contents

 

For the nine months ended September 30, 2015, net cash provided by operating activities at CMS Energy increased $458 million compared with 2014 and net cash provided by operating activities at Consumers increased $479 million compared with 2014.  These changes were due primarily to gas purchases at lower prices, the absence of large increases in GCR and PSCR underrecoveries that were a result of severe winter weather in 2014, and higher net income, net of non-cash transactions.  Lower income tax payments to CMS Energy also contributed to the improvement in 2015 at Consumers.

 

INVESTING ACTIVITIES

 

Presented in the following table are specific components of net cash used in investing activities for the nine months ended September 30, 2015 and 2014:

 

 

 

 

 

 

 

In Millions

 

Nine Months Ended September 30

 

2015

 

2014

 

Change

 

CMS Energy, including Consumers

 

 

 

 

 

 

 

Capital expenditures

 

$

(1,102

)

$

(1,125

)

$

23

 

Increase in EnerBank notes receivable

 

(186

)

(164

)

(22

)

DB SERP fund contributions

 

(25

)

-

 

(25

)

Proceeds from the sale of EnerBank notes receivable

 

48

 

-

 

48

 

Costs to retire property and other

 

(75

)

(58

)

(17

)

Net cash used in investing activities

 

$

(1,340

)

$

(1,347

)

$

7

 

Consumers

 

 

 

 

 

 

 

Capital expenditures

 

$

(1,093

)

$

(1,123

)

$

30

 

DB SERP fund contributions

 

(17

)

-

 

(17

)

Costs to retire property and other

 

(76

)

(59

)

(17

)

Net cash used in investing activities

 

$

(1,186

)

$

(1,182

)

$

(4

)

 

For the nine months ended September 30, 2015, net cash used in investing activities at CMS Energy decreased $7 million compared with 2014 and net cash used in investing activities at Consumers increased $4 million compared with 2014.  At CMS Energy, the change was due primarily to proceeds from the sale of EnerBank notes receivable and lower capital expenditures at Consumers, offset partially by DB SERP fund contributions and continued growth in EnerBank consumer lending.  The change at Consumers was due primarily to DB SERP fund contributions and an increase in restricted cash related to surcharges collected to cover Securitization bonds that Consumers issued in 2014, offset partially by lower capital expenditures.

 

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Table of Contents

 

FINANCING ACTIVITIES

 

Presented in the following table are specific components of net cash provided by (used in) financing activities for the nine months ended September 30, 2015 and 2014:

 

 

 

 

 

 

 

In Millions

 

Nine Months Ended September 30

 

2015

 

2014

 

Change

 

CMS Energy, including Consumers

 

 

 

 

 

 

 

Payment of dividends on common and preferred stock

 

$

(241

)

$

(220

)

$

(21

)

Retirement of debt

 

(148

)

(488

)

340

 

Net increase in EnerBank certificates of deposit

 

135

 

147

 

(12

)

Issuance of debt

 

100

 

1,428

 

(1,328

)

Increase (decrease) in notes payable

 

8

 

(170

)

178

 

Other financing activities

 

9

 

9

 

-

 

Net cash provided by (used in) financing activities

 

$

(137

)

$

706

 

$

(843

)

Consumers

 

 

 

 

 

 

 

Payment of dividends on common and preferred stock

 

$

(360

)

$

(376

)

$

16

 

Retirement of debt

 

(48

)

(208

)

160

 

Stockholder contribution from CMS Energy, net

 

150

 

317

 

(167

)

Increase (decrease) in notes payable

 

8

 

(170

)

178

 

Issuance of debt

 

-

 

878

 

(878

)

Other financing activities

 

(19

)

(25

)

6

 

Net cash provided by (used in) financing activities

 

$

(269

)

$

416

 

$

(685

)

 

For the nine months ended September 30, 2015, net cash used in financing activities at CMS Energy increased $843 million compared with 2014 and net cash used in financing activities at Consumers increased $685 million compared with 2014.  These changes were due primarily to a decrease in debt issuances, offset partially by a decrease in debt retirements and by lower repayments under Consumers’ commercial paper and accounts receivable sales programs.  Lower stockholder contributions from CMS Energy also contributed to the increase in net cash used in financing activities in 2015 at Consumers.

 

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 FERC requirements and provisions under the Federal Power Act and the Natural Gas Act.  For additional details on Consumers’ dividend restrictions, see Note 4, Financings and Capitalization Dividend Restrictions.  For the nine months ended September 30, 2015, Consumers paid $359 million in dividends on its common stock to CMS Energy.

 

In April 2015, CMS Energy renewed its continuous equity offering program.  Under this program, CMS Energy may sell, from time to time in “at the market” offerings, common stock having an aggregate sales price of up to $100 million.  CMS Energy issued common stock under the program and received net proceeds of $30 million through September 30, 2015.  With these transactions, CMS Energy has completed its planned stock issuances under the program for 2015.

 

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

 

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funding in recent years and several initiatives to reduce costs, Consumers anticipates continued strong cash flows from operating activities for the remainder of 2015.

 

Access to the financial and capital markets depends on CMS Energy’s and Consumers’ credit ratings and on market conditions.  As evidenced by past financing transactions, CMS Energy and Consumers have had ready access to these markets.  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, CMS Energy and Consumers would implement contingency plans to address debt maturities, which could include reduced capital spending.  Presented in the following table are CMS Energy’s and Consumers’ secured revolving credit facilities available at September 30, 2015:

 

 

 

 

 

 

 

 

 

 

 

In Millions

 

 

 

Amount of

 

Amount

 

Letters of Credit

 

Amount

 

 

 

 

 

Facility

 

Borrowed

 

Outstanding

 

Available

 

Expiration Date

 

CMS Energy parent

 

 

 

 

 

 

 

 

 

 

 

Revolving credit facility1

 

$   550

 

$        -

 

$    3

 

$  547

 

May 2020

 

Consumers

 

 

 

 

 

 

 

 

 

 

 

Revolving credit facility2

 

$   650

 

$        -

 

$    9

 

$  641

 

May 2020

 

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.  Additional sources of liquidity are Consumers’ revolving accounts receivable sales program and its commercial paper program.  Consumers’ revolving accounts receivable sales program allows it to transfer up to $250 million of eligible accounts receivable as a secured borrowing.  At September 30, 2015, $250 million of accounts receivable were eligible and available for transfer under this program.  Consumers’ commercial paper program allows Consumers to issue, in one or more placements, commercial paper notes with maturities of up to 365 days and that bear interest at fixed or floating rates.  These issuances are supported by Consumers’ $650 million revolving credit facility and may have an aggregate principal amount outstanding of up to $500 million.  While the amount of outstanding commercial paper does not reduce the revolving credit facility’s available capacity, Consumers would not issue commercial paper in an amount exceeding the available facility capacity.  At September 30, 2015, $68 million of commercial paper notes were outstanding under this program.

 

Certain of CMS Energy’s and Consumers’ credit agreements, debt indentures, and other facilities contain covenants that require CMS Energy and Consumers to maintain certain financial ratios, as defined therein.  At September 30, 2015, 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, 2015, as presented in the following table:

 

 

 

September 30, 2015

 

Description

 

Limit

 

Actual

 

CMS Energy parent1

 

 

 

 

 

 

Debt to EBITDA2

 

< 

6.0 to 1.0

 

4.1 to 1.0

 

Consumers

 

 

 

 

 

 

Debt to Capital3

 

< 

0.65 to 1.0

 

0.47 to 1.0

 

 

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1 In June 2015, CMS Energy replaced its $180 million term loan agreement with a new term loan agreement.  Under the new agreement, CMS Energy is no longer required to calculate an interest coverage ratio.

 

2 Applies to CMS Energy’s $550 million revolving and $180 million term loan credit agreements.

 

3 Applies to Consumers’ $650 million and $30 million revolving credit agreements, $35 million and $68 million reimbursement agreements, and $250 million revolving accounts receivable sales agreement.

 

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’s and Consumers’ present level of cash and expected cash flows from operating activities, together with access to sources of liquidity, are anticipated to be sufficient to fund the companies’ contractual obligations for 2015 and beyond.

 

OFF-BALANCE-SHEET ARRANGEMENTS

 

CMS Energy, Consumers, and certain of their subsidiaries 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 $143 million at September 30, 2015.  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 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 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, 2015, Consumers had achieved cumulative reductions of 6.5 percent in customers’ electricity use and 4.6 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:  In 2012, Consumers began installing smart meters for electric residential and small business customers in western Michigan.  Smart meters 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.  In addition, Consumers is able to disconnect and reconnect service, read, and bill from smart meters remotely.  Consumers will continue to add further functionality to its smart meters.

 

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As of September 30, 2015, Consumers had upgraded 686,000 electric customers in Michigan to smart meters.  Consumers expects that it will have installed a total of 1.8 million smart meters throughout its service territory by the end of 2017.  Of the customers scheduled for the upgrade, 0.5 percent have chosen not to participate in the smart meter program.  Also as of September 30, 2015, Consumers had installed 2,800 communication modules on gas meters in areas where Consumers provides both electricity and natural gas to customers.  Consumers expects that it will have installed a total of 600,000 communication modules on gas meters throughout its service territory by the end of 2017.

 

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.  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;

·                 continued operation or upgrade of existing units; and

·                 purchases of short-term market capacity.

 

In 2013, Consumers signed an agreement to purchase a 540-MW natural 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.  As provided for in the agreement, the purchase is subject to FERC, MPSC, and other approvals.  Consumers received approval from FERC for the purchase in September 2014.  Consumers expects to close the purchase in late 2015 or early 2016.

 

In January 2014, as a result of this planned purchase, Consumers announced plans to defer the development of its proposed 700-MW natural gas-fueled electric generating plant at its Thetford complex in Genesee County, Michigan, which Consumers estimated would have cost $700 million.  The MDEQ granted an extension of the project’s air permit in January 2015.  The permit will be void if Consumers does not start construction or obtain a further extension before July 2016.

 

Despite the planned retirement of seven smaller coal-fueled electric generating units in 2016, with the purchase of the natural gas-fueled electric generating plant, upgrades at Ludington, energy efficiency programs, and demand management programs, Consumers expects its existing resources to be adequate to meet the capacity requirements of its full-service customers for 2016 through 2020.  As demand forecasts become more certain, Consumers may take additional actions to cover any remaining capacity requirements, including participation in the annual MISO planning resource auction.

 

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 submit RECs, which represent proof that the associated electricity was generated from a renewable energy resource 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, 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

 

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agreements to purchase capacity from other parties.  Consumers met its renewable capacity requirement in December 2014, one year earlier than required, through construction of its Lake Winds® and Cross Winds® Energy Parks, with a combined nameplate capacity of 212 MW, and through agreements to purchase 298 MW of nameplate capacity from renewable energy suppliers.  Additionally, in September 2015, Consumers signed a 15-year agreement to purchase renewable capacity, energy, and RECs from a 100-MW wind park to be constructed in Huron County, Michigan.  The wind park is expected to be operational in late 2016.

 

Cross Winds® Energy Park qualifies for certain federal production tax credits that should reduce significantly the cost of complying with the renewable requirements of the 2008 Energy Law.  Consumers expects to receive $100 million to $120 million of federal production tax credits, which will be realized over the first ten years of the wind project’s 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 be flat in 2015 compared with 2014.

 

Over the next five years, Consumers plans conservatively for average electric delivery growth of about one-half to one 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;

·                 weather fluctuations; and

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

 

Electric ROA:  The 2008 Energy Law allows electric customers in Consumers’ service territory to buy electric generation service from alternative electric suppliers in an aggregate amount up to ten percent of Consumers’ weather-adjusted retail sales of the preceding calendar year.  At September 30, 2015, electric deliveries under the ROA program were at the ten-percent limit and alternative electric suppliers were providing 752 MW of generation service to ROA customers.  Of Consumers’ 1.8 million electric customers, 305 customers, or 0.02 percent, purchased electric generation service under the ROA program.

 

2015 Michigan Energy Legislation:  In March 2015, Michigan’s governor outlined several key goals for the state’s energy policy, with a focus on increasing the use of clean energy sources, reducing Michigan’s reliance on coal, deploying smart meters, investing in the power grid and pipeline system, eliminating energy waste, and ensuring affordable, reliable, and adaptable energy while protecting the environment.  The governor also created the Michigan Agency for Energy, a single entity dedicated to providing all of state government the information and context needed to support Michigan’s energy priorities.

 

Earlier this year, members of the Michigan Senate and House of Representatives introduced various bills related to energy policy.  The bills address renewable energy, energy efficiency, and changes to the regulatory process, such as eliminating the self-implementation of utility rates, revising net metering, and establishing an energy planning process to determine the need for new energy investment.  These bills also propose a range of changes to ROA, including eliminating ROA, maintaining the existing ROA program but imposing conditions on a customer’s return to utility service, and raising the ROA limit.  An increase to the ROA limit could negatively affect Consumers’ financial results and operations.  Consumers is unable to predict the form and timing of any final legislation or whether other bills might be introduced in 2015.

 

Electric Transmission:  In 2012, ReliabilityFirst Corporation informed Consumers that Consumers may not have been properly registered to meet certain NERC electric reliability standards.  Consumers

 

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assessed its registration status, taking into consideration FERC’s December 2012 order on the definition of a bulk electric system, and decided to register as a transmission owner, transmission planner, and transmission operator.  Consumers received approval from the MPSC in October 2014 and from FERC in April 2015 to reclassify $34 million of net plant assets from distribution to transmission.  Consumers was registered under the NERC standards as a transmission owner, planner, and operator in October 2015.  Consumers is actively pursuing FERC approval to begin earning transmission revenues under MISO’s transmission tariff.

 

In a separate matter, METC notified Consumers that the reclassified assets need to be conveyed by Consumers to METC under the terms of the DTIA.  Consumers disagrees with METC’s interpretation of the provisions of the DTIA.

 

Electric Rate Matters:  Rate matters are critical to Consumers’ electric utility business.  For additional details on rate matters, see Note 2, Regulatory Matters.

 

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, Consumers submitted to the MPSC a proposal for a new electric rate design in October 2014.  In June 2015, the MPSC issued an order on Consumers’ proposal, authorizing a reallocation of annual costs among customer classes.  This new allocation will better ensure that rates reflect the cost of service for each customer class and will have the effect of making rates for energy-intensive industrial customers more competitive, while keeping residential bills below the national average.  The new rate design will go into effect on or before December 1, 2015.

 

Depreciation Rate Case:  In June 2014, Consumers filed a depreciation case related to its electric and common utility property.  In this case, Consumers requested an increase in depreciation expense, and its recovery of that expense, of $28 million annually.  In May 2015, the MPSC approved a settlement agreement authorizing an increase in Consumers’ depreciation expense, and its recovery of that expense, of $6 million annually based on December 31, 2013 balances.  The new depreciation rates will go into effect with a final order in Consumers’ electric rate case, which Consumers expects on or before December 1, 2015.

 

Electric Environmental Outlook:  Consumers’ operations are subject to various state and federal environmental laws and regulations.  Consumers estimates that it will incur expenditures of $0.8 billion from 2015 through 2019 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 reinstated CSAPR, effective January 2015, delaying the original CSAPR deadlines by three years.  Several states and industry groups continued to challenge CSAPR in the D.C. Circuit.  In July 2015, the D.C. Circuit denied the broader challenges and remanded CSAPR back to the EPA to address specific issues on some emission allocations.  Consumers’ allocations did not change and Consumers expects its emissions to be within the CSAPR allowance allocations.

 

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

 

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generating units are required to add additional controls for hazardous air pollutants.  Consumers expects to meet the extended deadline of April 2016 for five coal-fueled units and two oil/gas-fueled units it intends to continue operating and plans to retire its seven remaining coal-fueled units by the extended deadline.  MATS is presently being litigated, and in June 2015 the U.S. Supreme Court reversed and remanded the case back to the U.S. Court of Appeals for the D.C. Circuit.  Numerous states and industry parties have filed motions to vacate the rule in its entirety, while other parties, including the EPA, have sought to have the matter remanded back to the EPA to cure any deficiencies while keeping the rule in effect.  The Supreme Court’s decision does not presently impact Consumers’ MATS compliance strategy.  In addition, Consumers must still comply with the Michigan Mercury Rule and with its settlement agreement with the EPA entered into in November 2014 concerning opacity and NSR.

 

In October 2015, the EPA released its new rule to lower the NAAQS for ozone.  The new ozone NAAQS will make it more difficult to construct or modify power plants in many areas of the country, including some parts of Michigan, if the areas are designated to be in nonattainment of the new standard.  Consumers is evaluating this rule to determine what, if any, effect it will have on its electric generating units.

 

Presently, Consumers’ strategy to comply with air quality regulations, including 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 units;

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

·                 changes in how certain units are used; and

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

 

Greenhouse Gases:  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 August 2015, the EPA finalized new 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 will not be able to meet this limit without installing carbon dioxide control equipment using such methods as carbon capture and sequestration.  Also in August 2015, the EPA finalized new rules pursuant to Section 111(b) of the Clean Air Act to limit carbon dioxide emissions from modified or reconstructed electric generating units.

 

In October 2015, the EPA published final 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 rules will require a 32 percent nationwide reduction in carbon emissions from existing power plants by 2030 (based on 2005 levels).  Initial state implementation plans are due by September 2016, but extensions are available until 2018.  States choosing not to develop their own implementation plans will be subject to the federal plan.

 

Certain states, corporations, and industry groups initiated litigation opposing the proposed Clean Power Plan.  In June 2015, the U.S. Court of Appeals for the D.C. Circuit dismissed this litigation without prejudice.  In July and August 2015, other challenges were filed against the EPA and the Clean Power Plan in federal district court, and those suits were also dismissed.  New legal challenges were filed

 

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upon publication of the rules in the Federal Register in October 2015.  Michigan plans to file a state carbon implementation plan while litigation proceeds.

 

Consumers believes that its clean energy plan, its present carbon reduction target, and its emphasis on supply diversity position it favorably to deal with the impact of carbon regulation.  Consumers cannot, however, predict the outcome of these EPA rules in court, or of Michigan’s implementation plan, which may not be submitted for EPA review and approval until 2018.  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 April 2015, the EPA published a final rule regulating CCRs, such as coal ash, under the Resource Conservation and Recovery Act.  The final rule adopts minimum standards for beneficially reusing and disposing of non-hazardous CCRs.  The rule establishes new minimum requirements for site location, groundwater monitoring, flood protection, storm water design, fugitive dust control, and public disclosure of information.  The rule also sets out conditions under which CCR units would be forced to cease receiving CCR and non-CCR waste and initiate closure based on the inability to achieve minimum safety standards, meet a location standard, or meet minimum groundwater standards.  For additional details regarding the impact of this rule on Consumers, see Note 3, Contingencies and Commitments – Consumers Electric Utility Contingencies, “Electric Environmental Matters” and Note 8, Asset Retirement Obligations.

 

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 adverse changes to its environmental strategy as a result of the final rule.  In September 2015, the EPA released a pre-publication copy of its final effluent limitation guidelines, which set stringent new requirements for the discharge of arsenic, mercury, selenium, and nitrogen from electric generating units into wastewater streams.  Consumers is evaluating this rule and its potential impact on Consumers’ electric generating units.

 

In June 2015, the EPA and the U.S. Army Corps of Engineers published a final rule redefining “waters of the United States,” which designates the EPA’s jurisdiction under the Clean Water Act.  Numerous states and other interested parties, including Michigan’s Attorney General, have filed suits in federal courts to block the rule, which was stayed in October 2015, and that litigation remains pending.  Consumers does not expect any adverse changes to its environmental strategy as a result of the final rule.

 

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

 

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substantial costs associated with existing electrical equipment potentially containing PCBs.  A proposed rule is expected in 2016.

 

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

 

CONSUMERS GAS UTILITY BUSINESS OUTLOOK AND UNCERTAINTIES

 

Gas Deliveries:  Consumers expects weather-adjusted gas deliveries in 2015 to increase by 1 to 1.5 percent compared with 2014.  Over the next five years, Consumers plans conservatively for stable deliveries.  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:

 

·                 weather fluctuations;

·                 use by power producers;

·                 availability and development of renewable energy sources;

·                 gas price changes;

·                 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 2015, Consumers filed an application with the MPSC seeking an annual rate increase of $85 million, based on a 10.7 percent authorized return on equity.  The largest component of the request is an annual revenue requirement of $64 million related to new investments that will allow Consumers to strengthen infrastructure and improve system capacity and deliverability.

 

The filing also seeks approval of two rate adjustment mechanisms:  one that would reconcile annually Consumers’ actual weather-adjusted nonfuel revenues with the revenues approved by the MPSC, and another that would allow recovery of an additional $147 million associated with investments to be made from January 2017 through December 2019, subject to reconciliation.  These future investments would help to ensure adequate system capacity and deliverability.

 

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.

 

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 in connection with previous sales of assets;

 

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·                 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, 2015 and five percent of CMS Energy’s net income available to common stockholders for the nine months ended September 30, 2015.  The carrying value of EnerBank’s loan portfolio was $1.1 billion at September 30, 2015.  Its loan portfolio was funded primarily by certificates of deposit of $1.0 billion.  The twelve-month rolling average default rate on loans held by EnerBank has remained stable at 0.6 percent at September 30, 2015.  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, 2015.

 

Union Contracts:  The UWUA ratified new five-year agreements with Consumers for operating, maintenance, and construction employees in May 2015 and for call center employees in July 2015.  The USW ratified a new five-year agreement with Consumers for Zeeland employees in September 2015.

 

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

 

2015

 

2014

 

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

Operating Revenue

 

$

1,486

 

$

1,430

 

 

$

4,947

 

$

5,421

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

Fuel for electric generation

 

161

 

161

 

 

462

 

534

 

Purchased and interchange power

 

392

 

387

 

 

1,082

 

1,244

 

Purchased power – related parties

 

21

 

21

 

 

61

 

67

 

Cost of gas sold

 

52

 

86

 

 

754

 

1,107

 

Maintenance and other operating expenses

 

311

 

329

 

 

906

 

899

 

Depreciation and amortization

 

173

 

153

 

 

564

 

503

 

General taxes

 

59

 

57

 

 

200

 

188

 

Total operating expenses

 

1,169

 

1,194

 

 

4,029

 

4,542

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

317

 

236

 

 

918

 

879

 

 

 

 

 

 

 

 

 

 

 

 

Other Income (Expense)

 

 

 

 

 

 

 

 

 

 

Interest income

 

1

 

1

 

 

3

 

2

 

Allowance for equity funds used during construction

 

3

 

2

 

 

7

 

6

 

Income from equity method investees

 

4

 

4

 

 

9

 

11

 

Other income

 

2

 

2

 

 

8

 

8

 

Other expense

 

(3

)

(3

)

 

(11

)

(26

)

Total other income

 

7

 

6

 

 

16

 

1

 

 

 

 

 

 

 

 

 

 

 

 

Interest Charges

 

 

 

 

 

 

 

 

 

 

Interest on long-term debt

 

95

 

98

 

 

288

 

294

 

Other interest expense

 

7

 

4

 

 

20

 

12

 

Allowance for borrowed funds used during construction

 

(1

)

(1

)

 

(3

)

(3

)

Total interest charges

 

101

 

101

 

 

305

 

303

 

 

 

 

 

 

 

 

 

 

 

 

Income Before Income Taxes

 

223

 

141

 

 

629

 

577

 

Income Tax Expense

 

75

 

47

 

 

211

 

195

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

148

 

94

 

 

418

 

382

 

Income Attributable to Noncontrolling Interests

 

-

 

-

 

 

1

 

1

 

 

 

 

 

 

 

 

 

 

 

 

Net Income Available to Common Stockholders

 

$

148

 

$

94

 

 

$

417

 

$

381

 

 

 

 

 

 

 

 

 

 

 

 

Basic Earnings Per Average Common Share

 

$

0.53

 

$

0.34

 

 

$

1.51

 

$

1.41

 

Diluted Earnings Per Average Common Share

 

$

0.53

 

$

0.34

 

 

$

1.51

 

$

1.39

 

 

 

 

 

 

 

 

 

 

 

 

Dividends Declared Per Common Share

 

$

0.29

 

$

0.27

 

 

$

0.87

 

$

0.81

 

 

The accompanying notes are an integral part of these statements.

 

34



Table of Contents

 

CMS Energy Corporation

Consolidated Statements of Comprehensive Income

(Unaudited)

 

 

 

 

 

 

 

 

 

In Millions

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

September 30

 

2015

 

2014

 

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

148

 

$

94

 

 

$

418

 

$

382

 

 

 

 

 

 

 

 

 

 

 

 

Retirement Benefits Liability

 

 

 

 

 

 

 

 

 

 

Amortization of net actuarial loss, net of tax of $1, $-, $3, and $1

 

2

 

1

 

 

4

 

2

 

Amortization of prior service credit, net of tax of $- for all periods

 

(1

)

(1

)

 

(1

)

(1

)

 

 

 

 

 

 

 

 

 

 

 

Investments

 

 

 

 

 

 

 

 

 

 

Unrealized loss on investments, net of tax of $1, $-, $1, and $-

 

(2

)

-

 

 

(3

)

-

 

 

 

 

 

 

 

 

 

 

 

 

Derivative Instruments

 

 

 

 

 

 

 

 

 

 

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

 

-

 

-

 

 

-

 

1

 

 

 

 

 

 

 

 

 

 

 

 

Other Comprehensive Income (Loss)

 

(1

)

-

 

 

-

 

2

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Income

 

147

 

94

 

 

418

 

384

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Income Attributable to Noncontrolling Interests

 

-

 

-

 

 

1

 

1

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Income Attributable to CMS Energy

 

$

147

 

$

94

 

 

$

417

 

$

383

 

 

The accompanying notes are an integral part of these statements.

 

35



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(This page intentionally left blank)

 

36



Table of Contents

 

CMS Energy Corporation

Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

 

 

In Millions

 

Nine Months Ended September 30

 

2015

 

2014

 

 

 

 

 

 

 

Cash Flows from Operating Activities

 

 

 

 

 

Net income

 

$

418

 

$

382

 

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

 

 

 

 

 

Depreciation and amortization

 

564

 

503

 

Deferred income taxes and investment tax credit

 

210

 

178

 

Postretirement benefits expense

 

68

 

17

 

Other non-cash operating activities

 

56

 

64

 

Postretirement benefits contributions

 

(35

)

(5

)

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

 

-

 

-

 

Accounts receivable, notes receivable, and accrued revenue

 

219

 

111

 

Inventories

 

54

 

(161

)

Accounts payable and accrued refunds

 

(34

)

(14

)

Other current and non-current assets and liabilities

 

(100

)

(113

)

Net cash provided by operating activities

 

1,420

 

962

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

Capital expenditures (excludes assets placed under capital lease)

 

(1,102

)

(1,125

)

Cost to retire property

 

(60

)

(62

)

Increase in EnerBank notes receivable

 

(186

)

(164

)

Proceeds from the sale of EnerBank notes receivable

 

48

 

-

 

Other investing activities

 

(40

)

4

 

Net cash used in investing activities

 

(1,340

)

(1,347

)

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

Proceeds from issuance of debt

 

100

 

1,428

 

Net increase in EnerBank certificates of deposit

 

135

 

147

 

Issuance of common stock

 

40

 

40

 

Retirement of long-term debt

 

(148

)

(488

)

Payment of dividends on common and preferred stock

 

(241

)

(220

)

Increase (decrease) in notes payable

 

8

 

(170

)

Payment of capital lease obligations and other financing costs

 

(31

)

(31

)

Net cash provided by (used in) financing activities

 

(137

)

706

 

 

 

 

 

 

 

Net Increase (Decrease) in Cash and Cash Equivalents

 

(57

)

321

 

 

 

 

 

 

 

Cash and Cash Equivalents, Beginning of Period

 

207

 

172

 

 

 

 

 

 

 

Cash and Cash Equivalents, End of Period

 

$

150

 

$

493

 

 

 

 

 

 

 

Other non-cash investing and financing activities

 

 

 

 

 

Non-cash transactions

 

 

 

 

 

Capital expenditures not paid

 

$

147

 

$

168

 

 

The accompanying notes are an integral part of these statements.

 

37



Table of Contents

 

CMS Energy Corporation

Consolidated Balance Sheets

(Unaudited)

 

ASSETS

 

 

 

 

 

 

 

 

 

In Millions

 

 

 

September 30

 

December 31

 

 

 

2015

 

2014