Table of Contents

 

 

 

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, 2016

 

 

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 11, 2016:

CMS Energy Corporation:

 

 

CMS Energy Common Stock, $0.01 par value

 

 

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

 

279,907,911

Consumers Energy Company:

 

 

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

 

84,108,789

 



Table of Contents

 

CMS Energy Corporation

Consumers Energy Company

Quarterly Reports on Form 10-Q to the Securities and Exchange Commission for the Period Ended September 30, 2016

 

TABLE OF CONTENTS

 

Glossary

2

Filing Format

7

Available Information

7

Forward-Looking Statements and Information

7

Part I—Financial Information

11

Item 1. Financial Statements

11

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

69

Item 3. Quantitative and Qualitative Disclosures About Market Risk

69

Item 4. Controls and Procedures

69

Part II—Other Information

69

Item 1. Legal Proceedings

69

Item 1A. Risk Factors

70

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

70

Item 3. Defaults Upon Senior Securities

70

Item 4. Mine Safety Disclosures

70

Item 5. Other Information

70

Item 6. Exhibits

70

Signatures

71

 

1



Table of Contents

 

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

 

2015 Form 10-K

Each of CMS Energy’s and Consumers’ Annual Report on Form 10-K for the year ended December 31, 2015

 

ABATE

Association of Businesses Advocating Tariff Equity

 

AOCI

Accumulated other comprehensive income (loss)

 

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

 

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

 

2



Table of Contents

 

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

 

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

 

DIG

Dearborn Industrial Generation, L.L.C., a wholly owned subsidiary of Dearborn Industrial Energy, L.L.C., a wholly owned subsidiary of CMS Energy

 

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

 

3



Table of Contents

 

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

 

Gas AMR

Consumers’ gas automated meter reading project, which involves the installation of communication modules to allow drive-by meter reading

 

GCR

Gas cost recovery

 

Genesee

Genesee Power Station Limited Partnership, a variable interest entity in which HYDRA-CO Enterprises, Inc., a wholly owned subsidiary of CMS Enterprises, has a 50 percent interest

 

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

 

4



Table of Contents

 

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

 

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

 

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

 

5



Table of Contents

 

REC

Renewable energy credit established under the 2008 Energy Law

 

ROA

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

 

SEC

U.S. Securities and Exchange Commission

 

securitization

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

 

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

 

6



Table of Contents

 

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 2015 Form 10-K.

 

AVAILABLE INFORMATION

 

CMS Energy’s internet address is www.cmsenergy.com. CMS Energy routinely posts important information on its website and considers the Investor Relations section, www.cmsenergy.com/investor-relations, a channel of distribution. Information contained on CMS Energy’s website is not incorporated 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, 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, such as those related to energy

 

7



Table of Contents

 

policy and ROA, infrastructure security, gas pipeline safety, gas pipeline capacity, energy efficiency, the environment, regulation or deregulation, reliability, health care reforms (including comprehensive health care reform enacted in 2010), taxes, accounting matters, climate change, air emissions, renewable energy, 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

 

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

 

·                 increases in demand for renewables by customers seeking to meet sustainability goals

 

·                 the ability of Consumers to execute its cost-reduction strategies

 

·                 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’ routine maintenance, repair, and replacement 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

 

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

 

8



Table of Contents

 

·                 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

 

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

 

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

 

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

 

·                 factors affecting development of electric generation projects and gas and electric transmission and 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

 

·                 potential disruption to, interruption of, or other impacts on facilities, utility infrastructure, or operations due to accidents, explosions, physical disasters, cyber incidents, 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 supplier bankruptcy and delivery disruptions

 

·                 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 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 or to impose environmental liability associated with 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 policies, regulatory violations, inappropriate use of social media, and other 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

 

9



Table of Contents

 

·                 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

 

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

 

All forward-looking statements should be considered in the context of the risk and other factors described above and as detailed from time to time in CMS Energy’s and Consumers’ SEC filings. For additional details regarding these and other uncertainties, see Part I—Item 1. Financial Statements—MD&A—Outlook and Notes to the Unaudited Consolidated Financial Statements—Note 2, Regulatory Matters and Note 3, Contingencies and Commitments; and Part II—Item 1A. Risk Factors.

 

10



Table of Contents

 

Part I—Financial Information

 

Item 1. Financial Statements

 

INDEX TO FINANCIAL STATEMENTS

 

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

12

CMS Energy Consolidated Financial Statements

34

Consolidated Statements of Income (Unaudited)

34

Consolidated Statements of Comprehensive Income (Unaudited)

35

Consolidated Statements of Cash Flows (Unaudited)

37

Consolidated Balance Sheets (Unaudited)

38

Consolidated Statements of Changes in Equity (Unaudited)

40

Consumers Consolidated Financial Statements

42

Consolidated Statements of Income (Unaudited)

42

Consolidated Statements of Comprehensive Income (Unaudited)

43

Consolidated Statements of Cash Flows (Unaudited)

45

Consolidated Balance Sheets (Unaudited)

46

Consolidated Statements of Changes in Equity (Unaudited)

48

Notes to the Unaudited Consolidated Financial Statements

49

1:

New Accounting Standards

49

2:

Regulatory Matters

51

3:

Contingencies and Commitments

53

4:

Financings and Capitalization

57

5:

Fair Value Measurements

59

6:

Financial Instruments

61

7:

Notes Receivable

63

8:

Retirement Benefits

63

9:

Income Taxes

65

10:

Earnings Per Share—CMS Energy

66

11:

Reportable Segments

66

 

 

11



Table of Contents

 

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, transmission, distribution, and sale of electricity, and Consumers’ gas utility operations include the purchase, transmission, storage, distribution, and sale of natural gas. Consumers’ customer base consists of a mix of residential, commercial, and diversified industrial customers. CMS Enterprises, through its subsidiaries and equity investments, owns and operates power generation facilities.

 

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

 

CMS Energy and Consumers earn revenue and generate cash from operations by providing electric and natural gas utility services; electric distribution, 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

·                 their securities’ credit ratings

 

The key elements of CMS Energy’s and Consumers’ business strategy are depicted below:

 

 

12



Table of Contents

 

CMS Energy and Consumers are committed to sustainable business practices and to pursuing the goals of safe and excellent operations, a strong ethical culture, environmental quality, and social responsibility. Consumers’ 2016 Sustainability Report, which is available to the public, provides an overview of Consumers’ efforts to continue meeting Michigan’s energy needs safely, efficiently, affordably, and reliably. The report also 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. In 2015, Consumers reduced recordable safety incidents by 29 percent compared with 2014. The number of recordable safety incidents in 2015 was the lowest in Consumers’ history. For the nine months ended September 30, 2016, Consumers reduced recordable safety incidents by a further 21 percent compared with the same period in 2015.

 

Customer Value

 

Consumers continues to place a high priority on customer value. Consumers’ capital investment program is aimed at improving safety and increasing electric and gas reliability, which has resulted in measureable improvements in customer satisfaction.

 

Additionally, Consumers has undertaken several initiatives to keep electricity and natural gas affordable for its customers. These include accelerated pension funding, employee and retiree health care cost sharing, replacement of coal-fueled generation with more efficient gas-fueled generation, targeted infrastructure investment, including the installation of smart meters, negotiated labor agreements, information and control system efficiencies, and productivity improvements. Consumers’ gas commodity costs declined by 64 percent from 2005 through 2015, due in part to Consumers’ improvements to its gas infrastructure and optimization of its gas purchasing and storage strategy. These savings are all passed on to customers.

 

Utility Investment

 

Consumers expects to make capital investments of about $17 billion from 2016 through 2025. While Consumers has substantially more investment opportunities that would 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 six to eight percent. This rate-base growth, together with Consumers’ cost-control initiatives, should allow Consumers to maintain sustainable customer base rate increases (excluding PSCR and GCR charges) at or below the rate of inflation.

 

13



Table of Contents

 

Presented in the following illustration are planned capital investments of about $8.5 billion that Consumers expects to make in 2016 through 2020:

 

 

 

Electric base ($2.6 billion)

Gas base ($1.8 billion)



Gas reliability enhancements
($1.6 billion)



Electric reliability
enhancements ($0.7 billion)

Environmental ($0.6 billion)

 

Smart Energy and Gas AMR
($0.5 billion)

Other ($0.7 billion)

 

 

 

Consumers’ planned base capital investments of $4.4 billion represent projects to maintain Consumers’ system and comprise $2.6 billion at the electric utility to preserve reliability and capacity and $1.8 billion at the gas utility to sustain deliverability and enhance pipeline integrity. An additional $2.3 billion of planned reliability investments at Consumers are aimed at reducing outages and improving customer satisfaction; these investments comprise $1.6 billion at the gas utility to replace mains and enhance transmission and storage systems and $0.7 billion at the electric utility to strengthen circuits and substations and replace poles. Consumers also expects to spend $0.6 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 $0.5 billion through 2015 on its Smart Energy program, and expects to spend an additional $0.3 billion, following a phased approach, through 2017. In addition, Consumers expects to spend $0.2 billion through 2019 in deploying Gas AMR technology beginning in 2017.

 

Regulation

 

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

 

·                 Electric Rate Case: In March 2016, Consumers filed an application with the MPSC seeking an annual rate increase of $225 million, based on a 10.7 percent authorized return on equity. The filing also seeks approval of an investment recovery mechanism that would provide for additional annual rate increases of $38 million beginning in 2017, $92 million beginning in 2018, and $92 million beginning in 2019 for incremental investments that Consumers plans to make in those years, subject to reconciliation. In September 2016, Consumers self-implemented an annual rate increase of $170 million, subject to refund with interest.

 

14



Table of Contents

 

·                 Gas Rate Case: In August 2016, Consumers filed an application with the MPSC seeking an annual rate increase of $90 million, based on a 10.6 percent authorized return on equity. The largest component of the request is an annual revenue requirement of $84 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 nonfuel revenues with the revenues approved by the MPSC, and another that would provide for additional annual rate increases of $35 million beginning in 2018 and another $35 million beginning in 2019 for incremental investments that Consumers plans to make in those years, subject to reconciliation. These future investments are intended to help ensure adequate system capacity and deliverability.

 

In 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 Michigan Senate and House of Representatives are considering two separate but similar pieces of legislation to address energy policy. Consumers is unable to predict the form and timing of any final legislation. While most of the proposed changes represent potential benefits to Consumers’ customers, Consumers’ business plan assumes no changes to the existing law.

 

In September 2016, Michigan’s governor and MISO announced that MISO will submit a proposal to FERC in November 2016 that would impose capacity requirements on alternative electric suppliers operating in Michigan. Presently, under the 2008 Energy Law, electric customers in Consumers’ service territory are allowed to buy electric generation service from alternative electric suppliers in an aggregate amount up to ten percent of Consumers’ weather-adjusted retail sales for the preceding calendar year. Under the joint proposal, alternative electric suppliers would be required to procure enough capacity to cover their anticipated requirements for the subsequent three-year period. If the alternative electric supplier did not procure enough capacity, its customers would then pay a capacity charge set by the MPSC. The capacity charge would be determined in a separate proceeding in 2017, should FERC approve MISO’s proposal. Consumers cannot predict the outcome of this proposal.

 

Environmental and health and safety regulations are other areas of importance for CMS Energy and Consumers, and they are monitoring numerous legislative and regulatory initiatives, including those to regulate greenhouse gases, and related litigation. CMS Energy and Consumers believe that these laws and regulations related to their operations will continue to become more stringent and require them to make additional substantial capital expenditures for emissions control equipment, CCR disposal and storage, cooling water intake equipment, effluent treatment, PCB remediation, and gas pipeline safety. 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 Federal Resource Conservation and Recovery Act of 1976, CERCLA, and the Pipeline Safety, Regulatory Certainty, and Job Creation Act of 2011, will continue to have a material effect on CMS Energy and Consumers.

 

Financial Performance

 

For the nine months ended September 30, 2016, CMS Energy’s net income available to common stockholders was $474 million and diluted EPS were $1.70. This compares with net income available to common stockholders of $417 million and diluted EPS of $1.51 for the nine months ended September 30, 2015. Among the primary factors contributing to CMS Energy’s increased earnings in 2016 were benefits from electric and gas rate increases and higher electric sales due mainly to warmer-than-normal summer weather. These changes were offset partially by higher depreciation and property

 

15



Table of Contents

 

taxes on increased plant in service and by lower gas deliveries, reflecting the second-warmest winter in Consumers’ history.

 

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.

 

Consumers expects that a continued rise in industrial production in its service territory will drive its total electric deliveries to increase annually by about one-half percent on average through 2020. Excluding the impacts of energy efficiency programs, Consumers expects its total electric deliveries to increase by about one percent annually through 2020. Consumers is projecting that its gas deliveries will remain stable through 2020. 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.

 

16



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

 

2016

 

2015

 

Change

 

2016

 

2015

 

Change

 

Net Income Available to Common Stockholders

 

$

186

 

$

148

 

$

38

 

  $

474

 

$

417

 

$

57

 

Basic Earnings Per Share

 

$

0.67

 

$

0.53

 

$

0.14

 

  $

1.71

 

$

1.51

 

$

0.20

 

Diluted Earnings Per Share

 

$

0.67

 

$

0.53

 

$

0.14

 

  $

1.70

 

$

1.51

 

$

0.19

 

 

 

 

In Millions  

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30

 

2016

 

2015

 

Change

 

2016

 

2015

 

Change

 

Electric utility

 

$

191

 

$

166

 

$

25

 

  $

395

 

$

342

 

$

53

 

Gas utility

 

3

 

(7

)

10

 

102

 

115

 

(13

)

Enterprises

 

8

 

3

 

5

 

17

 

10

 

7

 

Corporate interest and other

 

(16

)

(14

)

(2

)

(40

)

(50

)

10

 

Net Income Available to Common Stockholders

 

$

186

 

$

148

 

$

38

 

  $

474

 

$

417

 

$

57

 

 

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

 

 

 

In Millions

 

 

 

September 30, 2016 better/(worse) than 2015

 

Reasons for the change

 

Three Months Ended

 

Nine Months Ended

 

Consumers electric utility and gas utility

 

 

 

 

 

 

 

 

 

 

 

 

 

Electric sales

 

 

 

 

 

 

 

 

 

 

 

 

 

Weather

 

$        29

 

 

 

 

 

$   19

 

 

 

 

 

Non-weather

 

7

 

$     36

 

 

 

15

 

$      34

 

 

 

Gas sales

 

 

 

 

 

 

 

 

 

 

 

 

 

Weather

 

(1

)

 

 

 

 

(48

)

 

 

 

 

Non-weather

 

1

 

-

 

 

 

12

 

(36

)

 

 

Electric rate increase

 

 

 

7

 

 

 

 

 

43

 

 

 

Gas rate increase

 

 

 

2

 

 

 

 

 

14

 

 

 

Operating and maintenance costs

 

 

 

19

 

 

 

 

 

26

 

 

 

Employee benefit costs

 

 

 

6

 

 

 

 

 

18

 

 

 

Depreciation and property taxes, net

 

 

 

(22

)

 

 

 

 

(50

)

 

 

Voluntary separation program costs

 

 

 

(7

)

 

 

 

 

(7

)

 

 

Other

 

 

 

(6

)

$       35

 

 

 

(2

)

$     40

 

Enterprises

 

 

 

 

 

 

 

 

 

 

 

 

 

Subsidiary earnings

 

 

 

 

 

5

 

 

 

 

 

7

 

Corporate interest and other

 

 

 

 

 

 

 

 

 

 

 

 

 

Michigan tax settlement

 

 

 

 

 

-

 

 

 

 

 

5

 

EnerBank earnings

 

 

 

 

 

-

 

 

 

 

 

2

 

Other

 

 

 

 

 

(2

)

 

 

 

 

3

 

Total change

 

 

 

 

 

$     38

 

 

 

 

 

$    57

 

 

17



Table of Contents

 

Consumers Electric Utility Results of Operations

 

 

 

 

 

In Millions

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30

 

2016

 

2015

 

Change

 

2016

 

2015

 

Change

 

Net Income Available to Common Stockholders

 

$

191

 

$

166

 

$

25

 

    $

395

 

$

342

 

$

53

 

Reasons for the change

 

 

 

 

 

 

 

 

 

 

 

 

 

Electric deliveries and rate increases

 

 

 

 

 

$

45

 

 

 

 

 

$

88

 

Power supply costs and related revenue

 

 

 

 

 

(3

)

 

 

 

 

(3

)

Maintenance and other operating expenses

 

 

 

 

 

15

 

 

 

 

 

36

 

Depreciation and amortization

 

 

 

 

 

(6

)

 

 

 

 

(16

)

General taxes

 

 

 

 

 

(3

)

 

 

 

 

(9

)

Other income, net of expenses

 

 

 

 

 

(2

)

 

 

 

 

(8

)

Interest charges

 

 

 

 

 

(3

)

 

 

 

 

(5

)

Income taxes

 

 

 

 

 

(18

)

 

 

 

 

(30

)

Total change

 

 

 

 

 

$

25

 

 

 

 

 

$

53

 

 

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, 2016, electric delivery revenues increased $45 million compared with 2015. This change reflected a $52 million increase in sales due primarily to favorable weather. Additionally, revenues increased $14 million due to a rate increase self-implemented in September 2016. These increases were offset partially by a $15 million decrease resulting from lower summer rates as authorized in the December 2015 rate order and a $6 million decrease in other revenues associated with securitization bonds that Consumers issued in 2001 and retired in October 2015. Deliveries to end-use customers were 10.7 billion kWh in 2016 and 10.1 billion kWh in 2015.

 

For the nine months ended September 30, 2016, electric delivery revenues increased $88 million compared with 2015. This change reflected $59 million from a December 2015 rate increase and a September 2016 self-implemented rate increase, $46 million from an increase in sales due primarily to favorable weather, and a $9 million increase associated with energy efficiency programs. These increases were offset partially by a $26 million decrease in revenue associated with securitization bonds that Consumers issued in 2001 and retired in October 2015. Deliveries to end-use customers were 28.9 billion kWh in 2016 and 28.4 billion kWh in 2015.

 

Maintenance and Other Operating Expenses: For the three months ended September 30, 2016, maintenance and other operating expenses decreased $15 million compared with 2015. This change was due to a $10 million decrease in expenses at the seven coal-fueled electric generating units that Consumers retired in April 2016 and a $6 million decrease in postretirement benefit costs attributable primarily to the change to a full-yield-curve approach to calculate the service cost and interest expense components of net periodic benefit costs for the DB Pension and OPEB Plans. Also contributing to the change were a $4 million reduction in service restoration expenses and a $1 million decrease in other operating and maintenance costs. These reductions were offset partially by a $6 million charge associated with a voluntary separation program.

 

For the nine months ended September 30, 2016, maintenance and other operating expenses decreased $36 million compared with 2015. This change was due to a $21 million decrease in expenses at the seven coal-fueled electric generating units that Consumers retired in April 2016, a $19 million decrease in

 

18



Table of Contents

 

postretirement benefit costs attributable primarily to the change to a full-yield-curve approach to calculate the service cost and interest expense components of net periodic benefit costs for the DB Pension and OPEB Plans, and a $10 million decrease in uncollectible accounts expense. Also contributing to the change was a $4 million decrease associated with a State of Michigan use tax settlement reached in June 2016. These decreases were offset partially by a $9 million increase associated with energy efficiency programs, a $6 million charge associated with a voluntary separation program, and a $3 million increase in forestry expenses.

 

Depreciation and Amortization: For the three months ended September 30, 2016, depreciation and amortization expense increased $6 million compared with 2015. This change reflected a $27 million increase in depreciation expense related to increased plant in service and an increase in depreciation rates that became effective in December 2015, offset partially by a $21 million decrease in amortization of securitized assets, reflecting the conclusion in October 2015 of Consumers’ 2001 securitization program.

 

For the nine months ended September 30, 2016, depreciation and amortization expense increased $16 million compared with 2015. This change reflected a $72 million increase in depreciation expense related to increased plant in service and an increase in depreciation rates that became effective in December 2015, offset partially by a $56 million decrease in amortization associated primarily with securitized assets, reflecting the conclusion in October 2015 of Consumers’ 2001 securitization program.

 

General Taxes: For the nine months ended September 30, 2016, general taxes increased $9 million compared with 2015. This change was due primarily to an $8 million increase in property taxes, reflecting higher capital spending, and a $1 million increase to payroll taxes related to a voluntary separation program.

 

Other Income, Net of Expenses: For the nine months ended September 30, 2016, other income, net of expenses, decreased $8 million compared with 2015. This decrease reflected the absence, in 2016, of a $6 million gain related to a donation of CMS Energy stock by Consumers. The gain was eliminated on CMS Energy’s consolidated statements of income. The decrease also reflected a $2 million charitable contribution made in 2016.

 

Interest Charges: For the nine months ended September 30, 2016, interest charges increased $5 million compared with 2015. These changes were due primarily to higher average debt levels.

 

Income Taxes: For the three months ended September 30, 2016, income taxes increased $18 million compared with 2015. This change was attributable primarily to higher electric utility earnings.

 

For the nine months ended September 30, 2016, income taxes increased $30 million compared with 2015. This increase reflected $34 million related to higher electric utility earnings, offset partially by a $4 million decrease due to a change in the treatment of excess tax benefits on restricted stock awards as a result of the early adoption of a new accounting standard. For additional details on the implementation of this standard, see Note 1, New Accounting Standards.

 

19



Table of Contents

 

Consumers Gas Utility Results of Operations

 

 

 

 

 

In Millions

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30

 

2016

 

2015

 

Change

 

2016

 

2015

 

Change

 

Net Income (Loss) Available to Common Stockholders

 

$

3

 

$

(7

)

$

10

 

$

102

 

$

115

 

$

(13

)

Reasons for the change

 

 

 

 

 

 

 

 

 

 

 

 

 

Gas deliveries and rate increases

 

 

 

 

 

$

8

 

 

 

 

 

$

(27

)

Maintenance and other operating expenses

 

 

 

 

 

9

 

 

 

 

 

22

 

Depreciation and amortization

 

 

 

 

 

(3

)

 

 

 

 

(15

)

General taxes

 

 

 

 

 

(1

)

 

 

 

 

(4

)

Other income, net of expenses

 

 

 

 

 

-

 

 

 

 

 

(1

)

Income taxes

 

 

 

 

 

(3

)

 

 

 

 

12

 

Total change

 

 

 

 

 

$

10

 

 

 

 

 

$

(13

)

 

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, 2016, gas delivery revenues increased $8 million compared with 2015. This change reflected a $4 million increase from a January 2016 rate increase and a $4 million increase in other revenues. Deliveries to end-use customers were 26 bcf in 2016 and 27 bcf in 2015.

 

For the nine months ended September 30, 2016, gas delivery revenues decreased $27 million compared with 2015. This change reflected a $50 million decrease in sales due primarily to milder winter weather. This decrease was offset partially by $23 million related to a January 2016 rate increase. Deliveries to end-use customers were 196 bcf in 2016 and 223 bcf in 2015.

 

Maintenance and Other Operating Expenses: For the three months ended September 30, 2016, maintenance and other operating expenses decreased $9 million compared with 2015. This change was due to a $4 million decrease in postretirement benefit costs attributable primarily to the change to a full-yield-curve approach to calculate the service cost and interest expense components of net periodic benefit costs for the DB Pension and OPEB Plans and a $2 million decrease in uncollectible accounts expense. Also contributing to the change was a $7 million reduction in other gas distribution operating and maintenance expenses, offset partially by a $4 million charge associated with a voluntary separation program.

 

For the nine months ended September 30, 2016, maintenance and other operating expenses decreased $22 million compared with 2015. This change was due to a $12 million decrease in postretirement benefit costs attributable primarily to the change to a full-yield-curve approach to calculate the service cost and interest expense components of net periodic benefit costs for the DB Pension and OPEB Plans and a $6 million decrease in uncollectible accounts expense. Additionally, there was an $8 million reduction in other gas distribution operating and maintenance expenses. These decreases were offset partially by a $4 million charge associated with a voluntary separation program.

 

Depreciation and Amortization: For the nine months ended September 30, 2016, depreciation and amortization expense increased $15 million compared with 2015, due primarily to increased plant in service.

 

General Taxes: For the nine months ended September 30, 2016, general taxes increased $4 million compared with 2015, due primarily to increased property taxes, reflecting higher capital spending.

 

20



Table of Contents

 

Income Taxes: For the nine months ended September 30, 2016, income taxes decreased $12 million compared with 2015. This change reflected a $10 million reduction related to lower gas utility earnings and a $2 million decrease due to a change in the treatment of excess tax benefits on restricted stock awards as a result of the early adoption of a new accounting standard. For additional details on the implementation of this standard, see Note 1, New Accounting Standards.

 

Enterprises Results of Operations

 

 

 

In Millions

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30

 

2016

 

2015

 

Change

 

2016

 

2015

 

Change

 

Net Income Available to Common Stockholders

 

$

8

 

$

3

 

$

5

 

   $

17

 

$

10

 

$

7

 

 

For the three months ended September 30, 2016, net income of the enterprises segment increased $5 million compared with 2015, due primarily to higher prices for capacity and demand revenue from DIG and $1 million resulting from delays in planned maintenance at equity method investees.

 

For the nine months ended September 30, 2016, net income of the enterprises segment increased $7 million compared with 2015, due primarily to higher prices for capacity and demand revenue from DIG and $2 million resulting from lower maintenance expenses at equity method investees.

 

Corporate Interest and Other Results of Operations

 

 

 

In Millions

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30

 

2016

 

2015

 

Change

 

2016

 

2015

 

Change

 

Net Income (Loss) Available to Common Stockholders

 

$

(16

)

$

(14

)

$

(2

)

   $

(40

)

$

(50

)

$

10

 

 

For the three months ended September 30, 2016, corporate interest and other net expenses increased $2 million compared with 2015, due primarily to higher fixed charges reflecting higher debt levels, offset partially by lower average interest rates.

 

For the nine months ended September 30, 2016, corporate interest and other net expenses decreased $10 million compared with 2015, due primarily to a settlement reached with the Michigan Department of Treasury that resulted in after-tax reductions of $2 million in general taxes and $3 million in income tax expense. Also contributing to the change were the absence, in 2016, of a $5 million intercompany charge related to a donation of CMS Energy stock by Consumers and $2 million of higher net earnings at EnerBank. These decreases were offset partially by higher fixed charges.

 

For additional details on the settlement with the Michigan Department of Treasury, see Note 3, Contingencies and Commitments—Other Contingencies.

 

21



Table of Contents

 

CASH POSITION, INVESTING, AND FINANCING

 

At September 30, 2016, CMS Energy had $367 million of consolidated cash and cash equivalents, which included $28 million of restricted cash and cash equivalents. At September 30, 2016, Consumers had $49 million of consolidated cash and cash equivalents, which included $28 million of restricted cash and cash equivalents.

 

Operating Activities

 

Presented in the following table are specific components of net cash provided by operating activities for the nine months ended September 30, 2016 and 2015:

 

 

 

In Millions

 

Nine Months Ended September 30

 

2016

 

2015

 

Change

 

CMS Energy, including Consumers

 

 

 

 

 

 

 

Net income

 

$

475

 

$

418

 

$

57

 

Non-cash transactions1

 

870

 

898

 

(28

)

Changes in core working capital2

 

62

 

239

 

(177

)

Postretirement benefits contributions

 

(6

)

(35

)

29

 

Changes in other assets and liabilities, net

 

(160

)

(100

)

(60

)

Net cash provided by operating activities

 

$

1,241

 

$

1,420

 

$

(179

)

Consumers

 

 

 

 

 

 

 

Net income

 

$

499

 

$

459

 

$

40

 

Non-cash transactions1

 

857

 

709

 

148

 

Changes in core working capital2

 

76

 

244

 

(168

)

Postretirement benefits contributions

 

(4

)

(33

)

29

 

Changes in other assets and liabilities, net

 

(140

)

48

 

(188

)

Net cash provided by operating activities

 

$

1,288

 

$

1,427

 

$

(139

)

 

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

 

2                   Core working capital comprises accounts receivable, notes receivable, accrued revenue, inventories, accounts payable, and accrued rate refunds.

 

For the nine months ended September 30, 2016, net cash provided by operating activities at CMS Energy decreased $179 million compared with 2015 and net cash provided by operating activities at Consumers decreased $139 million compared with 2015. These decreases were due primarily to lower collections from customers, including collections of GCR underrecoveries and gas sold at lower prices in 2016, and higher energy optimization spending. These changes were offset partially by a decrease in postretirement benefits contributions, gas purchases at lower prices in 2016, and higher net income. At Consumers, the greater impact from changes in other assets and liabilities and the increase in non-cash transactions reflected an increase in the deferred income tax liability and expense associated with bonus depreciation on higher capital expenditures.

 

22



Table of Contents

 

Investing Activities

 

Presented in the following table are specific components of net cash used in investing activities for the nine months ended September 30, 2016 and 2015:

 

 

In Millions

 

Nine Months Ended September 30

 

2016

 

2015

 

Change

 

CMS Energy, including Consumers

 

 

 

 

 

 

 

Capital expenditures

 

$

(1,224

)

$

(1,102

)

$

(122

)

Increase in EnerBank notes receivable

 

(87

)

(186

)

99

 

Proceeds from the sale of EnerBank notes receivable

 

-

 

48

 

(48

)

DB SERP fund contributions

 

-

 

(25

)

25

 

Costs to retire property and other investing activities

 

(94

)

(75

)

(19

)

Net cash used in investing activities

 

$

(1,405

)

$

(1,340

)

$

(65

)

Consumers

 

 

 

 

 

 

 

Capital expenditures

 

$

(1,214

)

$

(1,093

)

$

(121

)

DB SERP fund contributions

 

-

 

(17

)

17

 

Costs to retire property and other investing activities

 

(95

)

(76

)

(19

)

Net cash used in investing activities

 

$

(1,309

)

$

(1,186

)

$

(123

)

 

For the nine months ended September 30, 2016, net cash used in investing activities at CMS Energy increased $65 million compared with 2015 and net cash used in investing activities at Consumers increased $123 million compared with 2015. These changes were due primarily to higher capital expenditures and costs to retire property at Consumers, offset partially by the absence, in 2016, of DB SERP fund contributions. The change at CMS Energy was also due to the absence, in 2016, of proceeds from the sale of EnerBank notes receivable and was offset partially by slower growth in EnerBank consumer lending.

 

23



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, 2016 and 2015:

 

 

 

In Millions

 

Nine Months Ended September 30

 

2016

 

2015

 

Change

 

CMS Energy, including Consumers

 

 

 

 

 

 

 

Issuance of debt

 

$

775

 

$

100

 

$

675

 

Issuance of common stock

 

69

 

40

 

29

 

Proceeds from EnerBank certificates of deposit, net

 

64

 

135

 

(71

)

Payment of dividends on common and preferred stock

 

(260

)

(241

)

(19

)

Retirement of debt

 

(215

)

(148

)

(67

)

Increase (decrease) in notes payable

 

(174

)

8

 

(182

)

Payment of capital leases and other financing activities

 

(22

)

(31

)

9

 

Net cash provided by (used in) financing activities

 

$

237

 

$

(137

)

$

374

 

Consumers

 

 

 

 

 

 

 

Issuance of debt

 

$

446

 

$

-

 

$

446

 

Stockholder contribution from CMS Energy

 

275

 

150

 

125

 

Payment of dividends on common and preferred stock

 

(362

)

(360

)

(2

)

Retirement of debt

 

(185

)

(48

)

(137

)

Increase (decrease) in notes payable

 

(174

)

8

 

(182

)

Payment of capital leases and other financing activities

 

(8

)

(19

)

11

 

Net cash used in financing activities

 

$

(8

)

$

(269

)

$

261

 

 

For the nine months ended September 30, 2016, net cash provided by financing activities at CMS Energy increased $374 million compared with 2015 and net cash used in financing activities at Consumers decreased $261 million compared with 2015. At CMS Energy, the change was due to an increase in debt and common stock issuances. These changes were offset partially by higher repayments under Consumers’ commercial paper program and an increase in debt retirements.

 

At Consumers, the change was due primarily to an increase in debt issuances and contributions from CMS Energy, offset partially by higher debt repayments under the commercial paper program and an increase in debt retirements.

 

CAPITAL RESOURCES AND LIQUIDITY

 

CMS Energy uses dividends and tax-sharing payments 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, 2016, Consumers paid $361 million in dividends on its common stock to CMS Energy.

 

As a result of federal tax legislation passed in December 2015 that extends bonus depreciation, CMS Energy expects to be able to extend the use of federal net operating loss carryforwards and, accordingly, defer its federal income tax payments through 2020. As a consequence, however, CMS Energy expects to receive lower tax-sharing payments from Consumers during that period. This may require CMS Energy to maintain higher levels of debt in order to invest in its businesses, pay

 

24



Table of Contents

 

dividends, and fund its general obligations. Despite this, CMS Energy does not anticipate a need for a block equity offering.

 

In April 2015, CMS Energy entered into an updated 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 $60 million in March 2016 and $30 million in 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 funding in recent years and several initiatives to reduce costs, Consumers anticipates continued strong cash flows from operating activities for the remainder of 2016.

 

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.

 

At September 30, 2016, CMS Energy had $549 million of its secured revolving credit facility available and Consumers had $893 million available. CMS Energy and Consumers use these credit facilities for general working capital purposes and to issue letters of credit. An additional source of liquidity is Consumers’ commercial paper program, which allows Consumers to issue, in one or more placements, up to $500 million in the aggregate in commercial paper notes with maturities of up to 365 days and that bear interest at fixed or floating rates. These issuances are supported by one of Consumers’ revolving credit facilities. While the amount of outstanding commercial paper does not reduce the revolving credit facility’s available capacity, Consumers does not intend to issue commercial paper in an amount exceeding the available facility capacity. At September 30, 2016, $75 million of commercial paper notes were outstanding under this program. For additional details on CMS Energy’s and Consumers’ secured revolving credit facilities and commercial paper program, see Note 4, Financings and Capitalization.

 

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, 2016, 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, 2016, as presented in the following table:

 

 

 

September 30, 2016

 

Credit Agreement, Indenture, or Facility

 

Limit

 

Actual

 

CMS Energy, parent only

 

 

 

 

 

Debt to EBITDA1

 

< 

6.0 to 1.0

 

4.4 to 1.0

 

Consumers

 

 

 

 

 

Debt to Capital2

 

< 

0.65 to 1.0

 

0.48 to 1.0

 

 

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

 

2                   Applies to Consumers’ $650 million, $250 million, and $30 million revolving credit agreements, and $35 million and $68 million reimbursement agreements.

 

25



Table of Contents

 

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 2016 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 $153 million at September 30, 2016. 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 Outlook and Uncertainties

 

Smart Energy and Gas AMR: Consumers began the full-scale deployment of smart meters in 2012 and expects to complete it in 2017. 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. Consumers is also installing communication modules on gas meters in areas where it provides both electricity and natural gas to customers. The communication modules allow Consumers to read and bill from gas meters remotely.

 

Consumers expects that under its Smart Energy program it will have installed a total of 1.8 million smart meters and 600,000 communication modules throughout its service territory by the end of 2017. As of September 30, 2016, Consumers had upgraded 1.2 million electric customers to smart meters and had installed 250,000 communication modules on gas meters.

 

In areas where it provides only natural gas to customers, Consumers will deploy Gas AMR technology beginning in 2017. Under this program, communication modules are expected to be installed on 1.2 million gas meters, allowing Consumers to conduct drive-by meter reading.

 

Consumers Electric Utility 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

 

26



Table of Contents

 

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

·                 purchases of short-term market capacity

 

In April 2016, Consumers retired seven of its coal-fueled electric generating units, representing 950 MW of generating capacity. Even with these retirements, Consumers expects to meet the capacity requirements of its full-service customers for 2016 through 2020 through the use of a 540-MW natural gas-fueled electric generating plant purchased in December 2015, upgrades at Ludington, expanded use of renewable energy, energy efficiency programs, and demand management programs. In October 2016, Consumers completed an auction to purchase generation capacity for 2017. The MSPC must approve any contracts that Consumers enters into as a result of the auction. As demand forecasts become more certain, Consumers may take additional actions to cover any remaining capacity requirements for its full-service customers, 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 each year. 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.

 

In conjunction with its renewable energy plan, Consumers signed a 15-year agreement in September 2015 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 2017. In September 2016, Consumers applied for a special land use permit for the construction of its Cross Winds® Energy Park Phases II and III. This project will qualify for certain federal production tax credits that are expected to reduce the cost of the construction. These cost savings will be passed on to customers. Consumers also completed construction of two community solar projects in 2016. Together, these solar projects provide a combined four MW of nameplate capacity.

 

Electric Customer Deliveries and Revenue: Consumers’ electric customer deliveries are largely dependent on Michigan’s economy. Consumers expects weather-adjusted electric deliveries to increase in 2016 by one-half to one percent compared with 2015.

 

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

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

 

27



Table of Contents

 

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 for the preceding calendar year. At September 30, 2016, electric deliveries under the ROA program were at the ten-percent limit and alternative electric suppliers were providing 748 MW of generation service to ROA customers. Of Consumers’ 1.8 million electric customers, 302 customers, or 0.02 percent, purchased electric generation service under the ROA program.

 

Michigan Energy Policy: In 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 Michigan Senate and House of Representatives are considering two separate but similar pieces of legislation to address energy policy. Consumers is unable to predict the form and timing of any final legislation. While most of the proposed changes represent potential benefits to Consumers’ customers, Consumers’ business plan assumes no changes to the existing law.

 

In September 2016, Michigan’s governor and MISO announced that MISO will submit a proposal to FERC in November 2016 that would impose capacity requirements on alternative electric suppliers operating in Michigan. Under the joint proposal, alternative electric suppliers would be required to procure enough capacity to cover their anticipated requirements for the subsequent three-year period. If the alternative electric supplier did not procure enough capacity, its customers would then pay a capacity charge set by the MPSC. The capacity charge would be determined in a separate proceeding in 2017, should FERC approve MISO’s proposal. Consumers cannot predict the outcome of this proposal.

 

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

 

FERC Transmission Order: In September 2016, FERC issued an order reducing the rate of return on equity earned by transmission owners operating within MISO to a base of 10.32 percent from 12.38 percent. FERC ordered MISO and transmission owners to provide refunds, with interest, to transmission customers such as Consumers for the period from November 2013 through February 2015. Consumers would return to its electric customers any refund it received as a result of this order, which is subject to further legal proceedings.

 

As a transmission owner since April 2016, Consumers would provide no refund to its transmission customers. In addition, Consumers is eligible for a 50-basis-point increase to its transmission return on equity as a transmission-owning member of MISO.

 

Electric Environmental Outlook: Consumers’ operations are subject to various state and federal environmental laws and regulations. Consumers estimates that it will incur capital expenditures of $0.6 billion from 2016 through 2020 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: CSAPR, which became effective in January 2015, 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 September 2016, the EPA finalized new ozone season standards for CSAPR, which will begin in May 2017. Consumers expects its emissions to be within the CSAPR allowance allocations.

 

28



Table of Contents

 

In 2012, the EPA published emission standards for electric generating units, based on Section 112 of the Clean Air Act, calling the final rule MATS. Under MATS, all of Consumers’ existing coal-fueled electric generating units were required to add additional controls for hazardous air pollutants. Consumers met the extended deadline of April 2016 for five coal-fueled units and two oil/gas-fueled units it continues to operate and retired its seven remaining coal-fueled units. MATS is presently being litigated, but any decision is not expected to 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 monitoring the designation process of this rule to determine what, if any, effect it will have on its electric generating units.

 

Consumers’ strategy to comply with air quality regulations, including CSAPR, NAAQS, and MATS, involved 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:

 

·                 a change in Consumers’ fuel mix

·                 changes in how certain units are used

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

·                 changes in Consumers’ environmental compliance costs

 

Greenhouse Gases: There have been numerous legislative and regulatory initiatives at the state, regional, national, and international levels that involve the potential 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. Both of these rules are being litigated.

 

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.” Certain states, corporations, and industry groups have initiated litigation opposing the proposed Clean Power Plan. In February 2016, the U.S. Supreme Court stayed the Clean Power Plan while the litigation proceeds. While Michigan’s Attorney General has joined the litigation, the governor had indicated that Michigan intended to file a state carbon implementation plan, which was to be submitted for EPA review and approval in 2018. Work on this plan has ceased, however, in light of the stay of the Clean Power Plan and pending outcome of the litigation.

 

The rules would require a 32 percent nationwide reduction in carbon emissions from existing power plants by 2030 (based on 2005 levels). Initial state implementation plans would have been due September 2016 with extensions available until 2018. It is expected that these deadlines will be extended as a result of the rules being stayed. States choosing not to develop their own implementation plans would be subject to the federal plan.

 

29



Table of Contents

 

In December 2015, a group of 195 countries finalized the Paris Agreement, which governs carbon dioxide reduction measures beginning in 2020. As part of this agreement, the United States pledged a 26 percent reduction in greenhouse gas emissions by 2025 (with aspirations to achieve a 28 percent reduction) compared with 2005 levels. These targets are in line with the now-stayed Clean Power Plan targets. While these emission reduction commitments are non-binding, they will be governed by the Clean Power Plan should it survive judicial scrutiny.

 

Consumers believes that it is favorably positioned to deal with the impact of carbon regulation through its clean energy plan, its present carbon reduction target, and its emphasis on supply diversity. Consumers cannot, however, predict the outcome of these EPA rules in court, or of Michigan’s potential implementation plan. Consumers will continue to monitor regulatory activity regarding greenhouse gas emissions standards that may affect electric generating units.

 

Litigation, as well as federal laws, EPA regulations regarding greenhouse gases, or similar treaties, state laws, or rules, if enacted or ratified, could require Consumers to replace equipment, install additional emission control equipment, purchase emission allowances, curtail operations, arrange for alternative sources of supply, or take other steps to manage or lower the emission of greenhouse gases. Although associated capital or operating costs relating to greenhouse gas regulation or legislation could be material and cost recovery cannot be assured, Consumers expects to recover these costs and capital expenditures in rates consistent with the recovery of other reasonable costs of complying with environmental laws and regulations.

 

CCRs: In April 2015, the EPA published a final rule regulating CCRs, such as coal ash, under the Federal Resource Conservation and Recovery Act of 1976. 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. Consumers continues to develop work plans for submission to the MDEQ for concurrence to ensure coordination between federal and state requirements. As a result, Consumers may need to adjust its recorded asset retirement obligation associated with coal ash disposal sites depending on the outcome of its submissions to the MDEQ.

 

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. In November 2015, the EPA released its final effluent limitation guidelines, which set stringent new requirements for the discharge from electric generating units into wastewater streams. Consumers believes its environmental strategy will allow it to achieve compliance with these final rules.

 

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.

 

30



Table of Contents

 

PCBs: In 2010, the EPA issued an Advance Notice of Proposed Rulemaking, indicating that it is considering a variety of regulatory actions with respect to PCBs. One approach would aim to phase out equipment containing PCBs by 2025. Another approach would eliminate an exemption for small equipment containing PCBs. To comply with any such regulatory actions, Consumers could incur substantial costs associated with existing electrical equipment potentially containing PCBs. A proposed rule is expected in 2017.

 

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 Outlook and Uncertainties

 

Gas Deliveries: Consumers expects weather-adjusted gas deliveries in 2016 to increase by about two percent compared with 2015. 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

·                 energy efficiency and conservation impacts

 

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

 

Gas Rate Case: In August 2016, Consumers filed an application with the MPSC seeking an annual rate increase of $90 million, based on a 10.6 percent authorized return on equity. The largest component of the request is an annual revenue requirement of $84 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 nonfuel revenues with the revenues approved by the MPSC, and another that would provide for additional annual rate increases of $35 million beginning in 2018 and another $35 million beginning in 2019 for incremental investments that Consumers plans to make in those years, subject to reconciliation. These future investments are intended to help ensure adequate system capacity and deliverability.

 

Depreciation Rate Case: In August 2016, Consumers filed a depreciation rate case related to its gas utility property, requesting to decrease depreciation expense by $3 million annually.

 

Gas Pipeline Safety: In October 2016, the U.S. Department of Transportation’s Pipeline and Hazardous Materials Safety Administration published a final rule that will require the installation of additional safety valves on certain gas distribution service lines beginning in 2017. Consumers is evaluating the cost of complying with this rule, but expects that it will be able to recover the cost in rates, consistent with the recovery of other reasonable costs of complying with laws and regulations.

 

31



Table of Contents

 

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 generating assets, which represent 1,077 MW of capacity.

 

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

 

·                 changes in energy and capacity prices

·                 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

·                 the outcome of certain legal proceedings

·                 indemnity and environmental remediation obligations at Bay Harbor

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

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

 

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 four percent of CMS Energy’s net assets at September 30, 2016 and five percent of CMS Energy’s net income available to common stockholders for the nine months ended September 30, 2016. The carrying value of EnerBank’s loan portfolio was $1.2 billion at September 30, 2016. Its loan portfolio was funded primarily by certificates of deposit of $1.2 billion. The twelve-month rolling average net default rate on loans held by EnerBank was 0.8 percent at September 30, 2016. 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, 2016.

 

Employee Separation Program: In June 2016, CMS Energy and Consumers announced a voluntary separation program for non-union employees. During the three months ended September 30, 2016, CMS Energy and Consumers recorded a charge of $11 million related to this program, under which 176 employees accepted and were approved for early separation. After hiring replacements for certain positions, CMS Energy and Consumers expect a net reduction of 140 employees. This will result in future cost savings, as employee staffing levels will be better matched to workload demand, which reflects CMS Energy’s and Consumers’ ongoing productivity and quality improvements.

 

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.

 

32



Table of Contents

 

NEW ACCOUNTING STANDARDS

 

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

 

33



Table of Contents

 

CMS Energy Corporation

Consolidated Statements of Income (Unaudited)

 

 

 

In Millions, Except Per Share Amounts

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

Operating Revenue

 

$

1,587

 

$

1,486

 

$

4,759

 

$

4,947

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

 

Fuel for electric generation

 

145

 

161

 

367

 

462

 

Purchased and interchange power

 

454

 

392

 

1,165

 

1,082

 

Purchased power – related parties

 

22

 

21

 

65

 

61

 

Cost of gas sold

 

45

 

52

 

490

 

754

 

Maintenance and other operating expenses

 

290

 

311

 

859

 

906

 

Depreciation and amortization

 

183

 

173

 

597

 

564

 

General taxes

 

62

 

59

 

209

 

200

 

Total operating expenses

 

1,201

 

1,169

 

3,752

 

4,029

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

386

 

317

 

1,007

 

918

 

 

 

 

 

 

 

 

 

 

 

Other Income (Expense)

 

 

 

 

 

 

 

 

 

Interest income

 

1

 

1

 

4

 

3

 

Allowance for equity funds used during construction

 

3

 

3

 

9

 

7

 

Income from equity method investees

 

5

 

4

 

12

 

9

 

Other income

 

2

 

2

 

7

 

8

 

Other expense

 

(6

)

(3

)

(13

)

(11

)

Total other income

 

5

 

7

 

19

 

16

 

 

 

 

 

 

 

 

 

 

 

Interest Charges

 

 

 

 

 

 

 

 

 

Interest on long-term debt

 

103

 

95

 

306

 

288

 

Other interest expense

 

8

 

7

 

22

 

20

 

Allowance for borrowed funds used during construction

 

(1

)

(1

)

(4

)

(3

)

Total interest charges

 

110

 

101

 

324

 

305

 

 

 

 

 

 

 

 

 

 

 

Income Before Income Taxes

 

281

 

223

 

702

 

629

 

Income Tax Expense

 

95

 

75

 

227

 

211

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

186

 

148

 

475

 

418

 

Income Attributable to Noncontrolling Interests

 

-

 

-

 

1

 

1

 

 

 

 

 

 

 

 

 

 

 

Net Income Available to Common Stockholders

 

$

186

 

$

148

 

$

474

 

$

417

 

 

 

 

 

 

 

 

 

 

 

Basic Earnings Per Average Common Share

 

$

0.67

 

$

0.53

 

$

1.71

 

$

1.51

 

Diluted Earnings Per Average Common Share

 

$

0.67

 

$

0.53

 

$

1.70

 

$

1.51

 

 

 

 

 

 

 

 

 

 

 

Dividends Declared Per Common Share

 

$

0.31

 

$

0.29

 

$

0.93

 

$

0.87

 

 

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

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

186

 

$

148

 

$

475

 

$

418

 

 

 

 

 

 

 

 

 

 

 

Retirement Benefits Liability

 

 

 

 

 

 

 

 

 

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

 

1

 

2

 

2

 

4

 

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

 

-

 

(1

)

(1

)

(1

)

 

 

 

 

 

 

 

 

 

 

Investments

 

 

 

 

 

 

 

 

 

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

 

1

 

(2

)

1

 

(3

)

 

 

 

 

 

 

 

 

 

 

Other Comprehensive Income (Loss)

 

2

 

(1

)

2

 

-

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Income

 

188

 

147

 

477

 

418

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Income Attributable to Noncontrolling Interests

 

-

 

-

 

1

 

1

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Income Attributable to CMS Energy

 

$

188

 

$

147

 

$

476

 

$

417

 

 

The accompanying notes are an integral part of these statements.

 

35



Table of Contents

 

(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

 

2016

 

2015

 

 

 

 

 

 

 

Cash Flows from Operating Activities

 

 

 

 

 

Net income

 

   $

475

 

   $

418

 

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

 

 

 

 

 

Depreciation and amortization

 

597

 

564

 

Deferred income taxes and investment tax credit

 

219

 

210

 

Other non-cash operating activities

 

54

 

124

 

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

 

 

 

 

 

Accounts receivable, notes receivable, and accrued revenue

 

51

 

219

 

Inventories

 

35

 

54

 

Accounts payable and accrued refunds

 

(24

)

(34

)

Other current and non-current assets and liabilities

 

(166

)

(135

)

Net cash provided by operating activities

 

1,241

 

1,420

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

Capital expenditures (excludes assets placed under capital lease)

 

(1,224

)

(1,102

)

Increase in EnerBank notes receivable

 

(87

)

(186

)

Proceeds from the sale of EnerBank notes receivable

 

-

 

48

 

Cost to retire property and other investing activities

 

(94

)

(100

)

Net cash used in investing activities

 

(1,405

)

(1,340

)

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

Proceeds from issuance of debt

 

775

 

100

 

Issuance of common stock

 

69

 

40

 

Proceeds from EnerBank certificates of deposit, net

 

64

 

135

 

Payment of dividends on common and preferred stock

 

(260

)

(241

)

Retirement of long-term debt

 

(215

)

(148

)

Increase (decrease) in notes payable

 

(174

)

8

 

Payment of capital lease obligations and other financing costs

 

(22

)

(31

)

Net cash provided by (used in) financing activities

 

237

 

(137

)

 

 

 

 

 

 

Net Increase (Decrease) in Cash and Cash Equivalents

 

73

 

(57

)

Cash and Cash Equivalents, Beginning of Period

 

266

 

207

 

 

 

 

 

 

 

Cash and Cash Equivalents, End of Period

 

   $

339

 

   $

150

 

 

 

 

 

 

 

Other non-cash investing and financing activities

 

 

 

 

 

Non-cash transactions

 

 

 

 

 

Capital expenditures not paid

 

   $

159

 

   $

147

 

Note receivable recorded for future refund of use taxes paid and capitalized

 

29

 

-

 

 

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

 

 

 

2016

 

2015

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

 

       $

339

 

       $

266

 

Restricted cash and cash equivalents

 

28

 

19

 

Accounts receivable and accrued revenue, less allowances of $27 in 2016 and $28 in 2015

 

634

 

774

 

Notes receivable, less allowances of $12 in 2016 and $9 in 2015

 

146

 

128

 

Notes receivable held for sale

 

41

 

16

 

Accounts receivable – related parties

 

12

 

11

 

Inventories at average cost

 

 

 

 

 

Gas in underground storage

 

553

 

568

 

Materials and supplies

 

119

 

126

 

Generating plant fuel stock

 

64

 

84

 

Deferred property taxes

 

152

 

235

 

Regulatory assets

 

16

 

16

 

Prepayments and other current assets

 

94

 

77

 

Total current assets

 

2,198

 

2,320

 

 

 

 

 

 

 

Plant, Property, and Equipment

 

 

 

 

 

Plant, property, and equipment, gross

 

20,698

 

18,943

 

Less accumulated depreciation and amortization

 

5,953

 

5,747

 

Plant, property, and equipment, net

 

14,745

 

13,196

 

Construction work in progress

 

698

 

1,509

 

Total plant, property, and equipment

 

15,443

 

14,705

 

 

 

 

 

 

 

Other Non-current Assets

 

 

 

 

 

Regulatory assets

 

1,765

 

1,840

 

Accounts and notes receivable

 

1,110

 

1,027

 

Investments

 

68

 

64

 

Other

 

258

 

343

 

Total other non-current assets

 

3,201

 

3,274

 

 

 

 

 

 

 

Total Assets

 

       $

20,842

 

       $

20,299

 

 

38



Table of Contents

 

LIABILITIES AND EQUITY

 

 

 

 

In Millions

 

 

 

September 30

 

December 31

 

 

 

2016

 

2015

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Current portion of long-term debt, capital leases, and financing obligation

 

     $

1,005

 

     $

706

 

Notes payable

 

75

 

249

 

Accounts payable

 

539

 

633

 

Accounts payable – related parties

 

9

 

9

 

Accrued rate refunds

 

33

 

26

 

Accrued interest

 

76

 

106

 

Accrued taxes

 

93

 

349

 

Regulatory liabilities

 

80

 

82

 

Other current liabilities

 

159

 

142

 

Total current liabilities

 

2,069

 

2,302

 

 

 

 

 

 

 

Non-current Liabilities

 

 

 

 

 

Long-term debt

 

8,722

 

8,400

 

Non-current portion of capital leases and financing obligation

 

110

 

118

 

Regulatory liabilities

 

2,053

 

2,088

 

Postretirement benefits

 

560

 

591

 

Asset retirement obligations

 

445

 

439

 

Deferred investment tax credit

 

74

 

56

 

Deferred income taxes

 

2,230

 

2,017

 

Other non-current liabilities

 

283

 

313

 

Total non-current liabilities

 

14,477

 

14,022

 

 

 

 

 

 

 

Commitments and Contingencies (Notes 2 and 3)

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

Common stockholders’ equity

 

 

 

 

 

Common stock, authorized 350.0 shares; outstanding 279.1 shares in 2016 and 277.2 shares in 2015

 

3

 

3

 

Other paid-in capital

 

4,908

 

4,837

 

Accumulated other comprehensive loss

 

(45

)

(47

)

Accumulated deficit

 

(607

)

(855

)

Total common stockholders’ equity

 

4,259

 

3,938

 

Noncontrolling interests

 

37

 

37

 

Total equity

 

4,296

 

3,975

 

 

 

 

 

 

 

Total Liabilities and Equity

 

     $

20,842

 

     $

20,299

 

 

The accompanying notes are an integral part of these statements.

 

39



Table of Contents

 

CMS Energy Corporation

Consolidated Statements of Changes in Equity (Unaudited)

 

 

 

 

 

 

 

 

 

 

In Millions

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

September 30

 

2016

 

2015

 

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

Total Equity at Beginning of Period

 

    $

4,193

 

    $

3,855

 

 

    $

3,975

 

    $

3,707

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

At beginning and end of period

 

3

 

3

 

 

3

 

3

 

 

 

 

 

 

 

 

 

 

 

 

Other Paid-in Capital

 

 

 

 

 

 

 

 

 

 

At beginning of period

 

4,906

 

4,812

 

 

4,837

 

4,774

 

Common stock issued

 

3

 

17

 

 

82

 

56

 

Common stock repurchased

 

(1

)

-

 

 

(11

)

(11

)

Common stock reissued

 

-

 

-

 

 

-

 

10

 

At end of period

 

4,908

 

4,829

 

 

4,908

 

4,829

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated Other Comprehensive Loss

 

 

 

 

 

 

 

 

 

 

At beginning of period

 

(47

)

(48

)

 

(47

)

(49

)

Retirement benefits liability