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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

x          ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2015

OR

 

o             TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from_____to_____

 

Commission

 

Registrant; State of Incorporation;

 

IRS Employer

File Number

 

Address; and Telephone Number

 

Identification No.

1-9513

 

CMS ENERGY CORPORATION

 

38-2726431

 

 

(A Michigan Corporation)

 

 

 

 

One Energy Plaza, Jackson, Michigan 49201

 

 

 

 

(517) 788-0550

 

 

 

 

 

 

 

1-5611

 

CONSUMERS ENERGY COMPANY

 

38-0442310

 

 

(A Michigan Corporation)

 

 

 

 

One Energy Plaza, Jackson, Michigan 49201

 

 

 

 

(517) 788-0550

 

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

 

Name of Each Exchange

Registrant

 

Title of Class

 

on Which Registered

CMS Energy Corporation

 

Common Stock, $0.01 par value

 

New York Stock Exchange

Consumers Energy Company

 

Cumulative Preferred Stock, $100 par value: $4.50 Series

 

New York Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Act:  None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

CMS Energy Corporation: Yes x No o

Consumers Energy Company: Yes x No o

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

CMS Energy Corporation: Yes o No x

 

Consumers Energy Company: Yes o No x

 

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

 

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

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

 

Accelerated filer o

Smaller reporting company o

 

 

Consumers Energy Company:

Large accelerated filer o

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

 

Accelerated filer o

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

 

The aggregate market value of CMS Energy voting and non-voting common equity held by non-affiliates was $8.736 billion for the 274,372,316 CMS Energy Common Stock shares outstanding on June 30, 2015 based on the closing sale price of $31.84 for CMS Energy Common Stock, as reported by the New York Stock Exchange on such date. There were no shares of Consumers common equity held by non-affiliates as of June 30, 2015.

 

There were 277,970,146 shares of CMS Energy Common Stock outstanding on January 13, 2016, including 803,551 shares owned by Consumers Energy Company. On January 13, 2016, CMS Energy held all 84,108,789 outstanding shares of common equity of Consumers.

 

Documents incorporated by reference in Part III: CMS Energy’s proxy statement and Consumers’ information statement relating to the 2016 Annual Meeting of Shareholders to be held May 6, 2016.

 



Table of Contents

 

CMS Energy Corporation

Consumers Energy Company

Annual Reports on Form 10-K to the Securities and Exchange Commission for the Year Ended December 31, 2015

 

TABLE OF CONTENTS

 

 

 

Page

Glossary

3

Filing Format

11

Forward-Looking Statements and Information

11

 

 

Part I

 

 

 

 

 

 

 

Item 1.

Business

 

14

Item 1A.

Risk Factors

 

30

Item 1B.

Unresolved Staff Comments

 

41

Item 2.

Properties

 

41

Item 3.

Legal Proceedings

 

42

Item 4.

Mine Safety Disclosures

 

42

 

 

 

 

Part II

 

 

 

 

 

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

42

Item 6.

Selected Financial Data

 

43

Item 7.

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

 

43

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

 

44

Item 8.

Financial Statements and Supplementary Data

 

45

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

155

Item 9A.

Controls and Procedures

 

155

Item 9B.

Other Information

 

157

 

 

 

 

Part III

 

 

 

 

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

 

157

Item 11.

Executive Compensation

 

158

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

158

Item 13.

Certain Relationships and Related Transactions, and Director Independence

 

158

Item 14.

Principal Accountant Fees and Services

 

158

 

 

 

 

Part IV

 

 

 

 

 

 

 

Item 15.

Exhibits and Financial Statement Schedules

 

159

 

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GLOSSARY

 

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

 

2008 Energy Law
Comprehensive energy reform package enacted in Michigan in 2008

 

ABATE
Association of Businesses Advocating Tariff Equity

 

ABO
Accumulated benefit obligation; the liabilities of a pension plan based on service and pay to date, which differs from the PBO in that it does not reflect expected future salary increases

 

AFUDC
Allowance for borrowed and equity funds used during construction

 

AOCI
Accumulated other comprehensive income (loss)

 

ARO
Asset retirement obligation

 

ASU
Financial Accounting Standards Board Accounting Standards Update

 

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

 

bcf
Billion cubic feet

 

Btu
British thermal unit

 

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

 

CAO
Chief Accounting Officer

 

Cash Balance Pension Plan
Cash balance pension plan of CMS Energy and Consumers

 

CCR
Coal combustion residual

 

CEO
Chief Executive Officer

 

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CERCLA
Comprehensive Environmental Response, Compensation, and Liability Act of 1980

 

CFO
Chief Financial Officer

 

city-gate contract
An arrangement made for the point at which a local distribution company physically receives gas from a supplier or pipeline

 

Clean Air Act
Federal Clean Air Act of 1963, as amended

 

Clean Water Act
Federal Water Pollution Control Act of 1972, as amended

 

CMS Capital
CMS Capital, L.L.C., a wholly owned subsidiary of CMS Energy

 

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

 

CMS Enterprises
CMS Enterprises Company, a wholly owned subsidiary of CMS Energy

 

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

 

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

 

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

 

CMS Land
CMS Land Company, a wholly owned subsidiary of CMS Capital

 

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

 

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

 

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

 

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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

 

DCCP
Defined Company Contribution Plan

 

DC SERP
Defined Contribution 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

 

DOE
U.S. Department of Energy

 

DTE Electric
DTE Electric Company, a non-affiliated company

 

DTE Gas
DTE Gas Company, a non-affiliated company

 

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

 

Entergy
Entergy Corporation, a non-affiliated company

 

EPA
U.S. Environmental Protection Agency

 

EPS
Earnings per share

 

Exchange Act
Securities Exchange Act of 1934

 

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FDIC
Federal Deposit Insurance Corporation

 

FERC
The Federal Energy Regulatory Commission

 

First Mortgage Bond Indenture
The indenture dated as of September 1, 1945 between Consumers and The Bank of New York Mellon, as Trustee, as amended and supplemented

 

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

 

FMB
First mortgage bond

 

FTR
Financial transmission right

 

GAAP
U.S. Generally Accepted Accounting Principles

 

GCC
Gas Customer Choice, which allows gas customers to purchase gas from alternative suppliers

 

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

 

Grayling
Grayling Generating 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

 

GWh
Gigawatt-hour, a unit of energy equal to one billion watt-hours

 

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

 

IRS
Internal Revenue Service

 

kilovolts
Thousand volts, a unit used to measure the difference in electrical pressure along a current

 

kVA
Thousand volt-amperes, a unit used to reflect the electrical power capacity rating of equipment or a system

 

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

 

LIBOR
The London Interbank Offered Rate

 

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

 

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

 

MBT
Michigan Business Tax

 

mcf
Thousand cubic feet

 

MCIT
Michigan Corporate Income Tax

 

MCV Facility
A 1,647 MW natural gas-fueled, combined-cycle cogeneration facility operated by the MCV Partnership

 

MCV Partnership
Midland Cogeneration Venture Limited Partnership

 

MCV PPA
PPA between Consumers and the MCV Partnership

 

MD&A
Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

MDEQ
Michigan Department of Environmental Quality

 

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

 

MGP
Manufactured gas plant

 

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

 

MISO
Midcontinent Independent System Operator, Inc.

 

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

 

MPSC
Michigan Public Service Commission

 

MRV
Market-related value of plan assets

 

MW
Megawatt, a unit of power equal to one million watts

 

MWh
Megawatt-hour, a unit of energy equal to one million watt-hours

 

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

 

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

 

PBO
Projected benefit obligation

 

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PCB
Polychlorinated biphenyl

 

PISP
Performance Incentive Stock Plan

 

PPA
Power purchase agreement

 

PSCR
Power supply cost recovery

 

REC
Renewable energy credit established under the 2008 Energy Law

 

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

 

Resource Conservation and Recovery Act
Federal Resource Conservation and Recovery Act of 1976

 

RMRR
Routine maintenance, repair, and replacement

 

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

 

S&P
Standard & Poor’s Financial Services LLC

 

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

 

T.E.S. Filer City
T.E.S. Filer City 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

 

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

 

UWUA
Utility Workers Union of America, AFL-CIO

 

VEBA trust
Voluntary employees’ beneficiary association trusts accounts established specifically to set aside employer-contributed assets to pay for future expenses of the OPEB Plan

 

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FILING FORMAT

 

This combined Form 10-K is separately filed by CMS Energy and Consumers. Information in this combined Form 10-K 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.

 

FORWARD-LOOKING STATEMENTS AND INFORMATION

 

This Form 10-K 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 policy and ROA, gas pipeline safety, gas pipeline capacity, energy efficiency, the environment, regulation or deregulation, reliability, health care reforms (including the Health Care Acts), 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

 

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

 

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

 

·                 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

 

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

 

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·                 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, including Smart Energy, successfully

 

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

 

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

 

·                 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 Item 1A. Risk Factors; Item 8. Financial Statements and Supplementary Data—MD&A—Outlook; and Item 8. Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements—Note 3, Regulatory Matters and Note 4, Contingencies and Commitments.

 

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Part I

 

Item 1. Business

 

GENERAL

 

CMS Energy

 

CMS Energy was formed as a corporation in Michigan in 1987 and 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 serves individuals and businesses operating in the alternative energy, automotive, chemical, metal, and food products industries, as well as a diversified group of other industries. CMS Enterprises, through its subsidiaries and equity investments, is engaged primarily in independent power production and owns power generation facilities fueled mostly by natural gas and biomass.

 

CMS Energy manages its businesses by the nature of services each provides, and operates principally in three business segments: electric utility, gas utility, and enterprises, its non-utility operations and investments. Consumers’ consolidated operations account for the substantial majority of CMS Energy’s total assets, income, and operating revenue. CMS Energy’s consolidated operating revenue was $6.5 billion in 2015, $7.2 billion in 2014, and $6.6 billion in 2013.

 

For further information about operating revenue, income, and assets and liabilities attributable to all of CMS Energy’s business segments and operations, see Item 8. Financial Statements and Supplementary Data—CMS Energy’s Selected Financial Information, Consolidated Financial Statements, and Notes to the Consolidated Financial Statements.

 

Consumers

 

Consumers has served Michigan customers since 1886. Consumers was incorporated in Maine in 1910 and became a Michigan corporation in 1968. Consumers owns and operates electric generation, transmission, and distribution facilities and gas transmission, storage, and distribution facilities. It provides electricity and/or natural gas to 6.7 million of Michigan’s 10 million residents. Consumers’ rates and certain other aspects of its business are subject to the jurisdiction of the MPSC and FERC, as well as to NERC reliability standards, as described in “CMS Energy and Consumers Regulation” in this Item 1.

 

Consumers’ consolidated operating revenue was $6.2 billion in 2015, $6.8 billion in 2014, and $6.3 billion in 2013. For further information about operating revenue, income, and assets and liabilities attributable to Consumers’ electric and gas utility operations, see Item 8. Financial Statements and Supplementary Data—Consumers’ Selected Financial Information, Consolidated Financial Statements, and Notes to the Consolidated Financial Statements.

 

Consumers owns its principal properties in fee, except that most electric lines and gas mains are located below or adjacent to public roads or on land owned by others and are accessed by Consumers through easements and other rights. Almost all of Consumers’ properties are subject to the lien of its First Mortgage Bond Indenture. For additional information on Consumers’ properties, see Item 1. Business—Business Segments—Consumers Electric Utility—Electric Utility Properties and Consumers Gas Utility—Gas Utility Properties.

 

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In 2015, Consumers served 1.8 million electric customers and 1.7 million gas customers in Michigan’s Lower Peninsula. Presented in the following map are Consumers’ service territories:

 

 

BUSINESS SEGMENTS

 

Consumers Electric Utility

 

Electric Utility Operations: Consumers’ electric utility operations, which include the generation, purchase, transmission, distribution, and sale of electricity, generated operating revenue of $4.2 billion in 2015, $4.4 billion in 2014, and $4.2 billion in 2013. Consumers’ electric utility customer base consists of a mix of primarily residential, commercial, and diversified industrial customers in Michigan’s Lower Peninsula.

 

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Presented in the following illustration is Consumers’ 2015 electric utility operating revenue of $4.2 billion by customer class:

 

 

Consumers’ electric utility operations are not dependent on a single customer, or even a few customers, and the loss of any one or even a few of Consumers’ largest customers is not reasonably likely to have a material adverse effect on Consumers’ financial condition.

 

In 2015, Consumers’ electric deliveries were 37 billion kWh, which included ROA deliveries of four billion kWh, resulting in net bundled sales of 33 billion kWh. In 2014, Consumers’ electric deliveries were 38 billion kWh, which included ROA deliveries of four billion kWh, resulting in net bundled sales of 34 billion kWh.

 

Consumers’ electric 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.

 

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Presented in the following illustration are Consumers’ monthly weather-adjusted electric deliveries (deliveries adjusted to reflect normal weather conditions) to its customers, including ROA deliveries, during 2015 and 2014:

 

 

Consumers’ 2015 summer peak demand was 7,812 MW, which included ROA demand of 581 MW. For the 2014-2015 winter period, Consumers’ peak demand was 6,067 MW, which included ROA demand of 492 MW. As required by MISO reserve margin requirements, Consumers owns or controls, through long-term PPAs and short-term capacity purchases, essentially all of the capacity required to supply its projected firm peak load and necessary reserve margin for summer 2016.

 

Electric Utility Properties: Consumers’ distribution system consists of:

 

·                 434 miles of high-voltage distribution radial lines operating at 120 kilovolts or above

·                 4,251 miles of high-voltage distribution overhead lines operating at 46 kilovolts and 69 kilovolts

·                 18 miles of high-voltage distribution underground lines operating at 46 kilovolts

·                 56,023 miles of electric distribution overhead lines

·                 10,383 miles of underground distribution lines

·                 substations with an aggregate transformer capacity of 24 million kVA

 

Consumers is interconnected to the interstate high-voltage electric transmission system owned by METC and operated by MISO. Consumers is also interconnected to neighboring utilities and to other transmission systems.

 

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Presented in the following table are details about Consumers’ electric generating system at December 31, 2015:

 

 

 

Number of Units and

 

2015
Generation Capacity

1

2015 Net Generation

 

Name and Location (Michigan)

 

Year Entered Service

 

(MW) 

 

(GWh) 

 

Coal generation

 

 

 

 

 

 

 

J.H. Campbell 1 & 2 – West Olive

 

2 Units, 1962-1967

 

603

 

3,182

 

J.H. Campbell 3 – West Olive2

 

1 Unit, 1980

 

751

 

5,132

 

B.C. Cobb 4 & 5 – Muskegon3

 

2 Units, 1956-1957

 

280

 

1,825

 

D.E. Karn 1 & 2 – Essexville

 

2 Units, 1959-1961

 

515

 

1,990

 

J.C. Weadock 7 & 8 – Essexville3

 

2 Units, 1955-1958

 

303

 

1,934

 

J.R. Whiting 1-3 – Erie3

 

3 Units, 1952-1953

 

319

 

1,770

 

Total coal generation

 

 

 

2,771

 

15,833

 

Oil/Gas steam generation

 

 

 

 

 

 

 

Jackson – Jackson4

 

1 Unit, 2002

 

-

 

130

 

D.E. Karn 3 & 4 – Essexville5

 

2 Units, 1975-1977

 

1,155

 

1

 

Zeeland (combined cycle) – Zeeland

 

3 Units, 2002

 

527

 

3,258

 

Total oil/gas steam generation

 

 

 

1,682

 

3,389

 

Hydroelectric

 

 

 

 

 

 

 

Ludington – Ludington

 

6 Units, 1973

 

992

6

(186

)7

Conventional hydro generation – various locations

 

35 Units, 1906-1949

 

77

 

427

 

Total hydroelectric

 

 

 

1,069

 

241

 

Gas/Oil combustion turbine

 

 

 

 

 

 

 

Zeeland (simple cycle) – Zeeland

 

2 Units, 2001

 

316

 

212

 

Various plants – various locations8

 

8 Units, 1966-1971

 

13

 

-

 

Total gas/oil combustion turbine

 

 

 

329

 

212

 

Wind generation

 

 

 

 

 

 

 

Cross Winds® Energy Park – Tuscola County

 

62 Turbines, 2014

 

16

 

365

 

Lake Winds® Energy Park – Mason County

 

56 Turbines, 2012

 

18

 

264

 

Total wind generation

 

 

 

34

 

629

 

Total owned generation

 

 

 

5,885

 

20,304

 

Purchased and interchange power9

 

 

 

2,877

10

15,210

11

Total supply

 

 

 

8,762

 

35,514

 

Generation and transmission use/loss

 

 

 

 

 

2,171

 

Total net bundled sales

 

 

 

 

 

33,343

 

 

1                   Represents each plant’s electric generation capacity during the summer months.

 

2                   Represents Consumers’ share of the capacity of the J.H. Campbell 3 unit, net of the 6.69-percent ownership interest of the Michigan Public Power Agency and Wolverine Power Supply Cooperative, Inc.

 

3                   Consumers plans to retire these seven smaller coal-fueled generating units by April 2016.

 

4                   Consumers completed the purchase of this plant in December 2015.

 

5                   These units were mothballed in October 2014 and returned to service in June 2015.

 

6                   Represents Consumers’ 51-percent share of the capacity of Ludington. DTE Electric holds the remaining 49-percent ownership interest.

 

7                   Represents Consumers’ share of net pumped-storage generation. The pumped-storage facility consumes electricity to pump water during off-peak hours for storage in order to generate electricity later during peak-demand hours.

 

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8                   Includes units that were mothballed beginning on various dates between October 2010 and October 2014.

 

9                   Includes purchases from the MISO capacity and energy markets, and long-term PPAs.

 

10              Includes 1,240 MW of purchased contract capacity from the MCV Facility and 778 MW of purchased contract capacity from Palisades.

 

11              Includes 3,096 GWh of purchased energy from the MCV Facility and 6,910 GWh of purchased energy from Palisades.

 

Consumers’ generation capacity is a measure of the maximum electric output that Consumers has available to meet peak load requirements. As shown in the following illustration, Consumers’ 2015 generation capacity of 8,762 MW, including purchased capacity of 2,877 MW, relied on a variety of fuel sources:

 

 

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Electric Utility Supply: Presented in the following table are the sources of Consumers’ electric supply over the last five years:

 

 

 

 

 

 

 

 

 

 

 

GWh

 

Years Ended December 31

 

2015

 

2014

 

2013

 

2012

 

2011

 

Owned generation

 

 

 

 

 

 

 

 

 

 

 

Coal

 

15,833

 

15,684

 

15,951

 

14,027

 

15,468

 

Gas

 

3,601

 

2,012

 

1,415

 

3,003

 

1,912

 

Renewable energy

 

1,056

 

748

 

704

 

433

 

425

 

Oil

 

-

 

-

 

4

 

6

 

7

 

Net pumped storage1

 

(186

)

(300

)

(371

)

(295

)

(365

)

Total owned generation

 

20,304

 

18,144

 

17,703

 

17,174

 

17,447

 

Purchased and interchange power

 

 

 

 

 

 

 

 

 

 

 

Purchased renewable energy2

 

2,163

 

2,366

 

2,250

 

1,435

 

1,587

 

Purchased generation – other2

 

11,720

 

10,073

 

10,871

 

13,104

 

11,087

 

Net interchange power3

 

1,327

 

4,793

 

3,656

 

4,151

 

6,825

 

Total purchased and interchange power

 

15,210

 

17,232

 

16,777

 

18,690

 

19,499

 

Total supply

 

35,514

 

35,376

 

34,480

 

35,864

 

36,946

 

 

1                   Represents Consumers’ share of net pumped-storage generation. The pumped-storage facility consumes electricity to pump water during off-peak hours for storage in order to generate electricity later during peak-demand hours.

 

2                   Includes purchases from long-term PPAs.

 

3                   Includes purchases from the MISO energy market.

 

During 2015, 45 percent of the energy Consumers provided to customers was generated by its coal-fueled generating units, which burned nine million tons of coal and produced a combined total of 15,833 GWh of electricity.

 

In order to obtain the coal it needs, Consumers enters into physical coal supply contracts. At December 31, 2015, Consumers had contracts to purchase coal through 2018; payment obligations under these contracts totaled $118 million. Most of Consumers’ rail-supplied coal contracts have fixed prices, although some contain market-based pricing. Consumers’ vessel-supplied coal contracts have fixed base prices that are adjusted monthly to reflect changes to the fuel cost of vessel transportation. At December 31, 2015, Consumers had 79 percent of its 2016 expected coal requirements under contract, as well as a 34-day supply of coal on hand.

 

In conjunction with its coal supply contracts, Consumers leases a fleet of rail cars and has transportation contracts with various companies to provide rail and vessel services for delivery of purchased coal to Consumers’ generating facilities. Consumers’ coal transportation contracts expire through 2019; payment obligations under these contracts totaled $321 million at December 31, 2015.

 

During 2015, Consumers acquired 43 percent of the electricity it provided to customers through long-term PPAs and the MISO energy market. Consumers offers its generation into the MISO energy market on a day-ahead and real-time basis and bids for power in the market to serve the demand of its customers. Consumers is a net purchaser of power and supplements its generation capability with purchases from the MISO energy market to meet its customers’ needs during peak demand periods.

 

At December 31, 2015, Consumers had unrecognized future commitments (amounts for which, in accordance with GAAP, liabilities have not been recorded on its balance sheet) to purchase capacity and energy under long-term PPAs with various generating plants. These contracts require monthly capacity payments based on the plants’ availability or deliverability. The payments for 2016 through 2036 are

 

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estimated to total $10 billion and, for each of the next five years, $1.0 billion annually. These amounts may vary depending on plant availability and fuel costs. For further information about Consumers’ future capacity and energy purchase obligations, see Item 8. Financial Statements and Supplementary Data—MD&A—Capital Resources and Liquidity and Note 4, Contingencies and Commitments—Contractual Commitments.

 

During 2015, ten percent of the energy Consumers provided to customers was generated by natural gas-fueled generating units, which burned 25 bcf of natural gas and produced a combined total of 3,601 GWh of electricity.

 

In order to obtain the gas it needs for electric generation fuel, Consumers’ electric utility purchases gas from the market near the time of consumption, at prices that allow it to compete in the electric wholesale market. For units 3 and 4 of D.E. Karn and for the Jackson and Zeeland plants, Consumers utilizes an agent that owns firm transportation rights to each plant to purchase gas from the market and transport the gas to the facilities. For its smaller combustion turbines, Consumers’ electric utility purchases and transports gas to its facilities as a bundled-rate tariff customer of either the gas utility or DTE Gas.

 

Presented in the following table is the cost per million Btu of all fuels consumed, which fluctuates with the mix of fuel used.

 

 

 

 

 

 

 

 

 

Cost Per Million Btu

 

Years Ended December 31

 

2015

 

2014

 

2013

 

2012

 

2011

 

Coal

 

$

2.49

 

$

2.72

 

$

2.90

 

$

2.98

 

$

2.94

 

Gas

 

3.06

 

7.19

 

4.68

 

3.16

 

4.95

 

Oil

 

12.28

 

20.16

 

19.47

 

19.08

 

18.55

 

Weighted-average fuel cost

 

$

2.59

 

$

3.17

 

$

3.07

 

$

3.05

 

$

3.18

 

 

Electric Utility Competition: Consumers’ electric utility business is subject to actual and potential competition from many sources, in both the wholesale and retail markets, as well as in electric generation, electric delivery, and retail services.

 

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 December 31, 2015, electric deliveries under the ROA program were at the ten-percent limit and alternative electric suppliers were providing 751 MW of generation service to ROA customers. Of Consumers’ 1.8 million electric customers, 304 customers, or 0.02 percent, purchased generation service under the ROA program.

 

In early 2015, members of the Michigan Senate and House of Representatives introduced various bills related to energy policy. Among other things, the bills propose a range of changes to ROA, including eliminating ROA, maintaining the existing ROA program but imposing conditions on a customer’s return to utility service, and raising the ROA limit. If the ROA limit were increased or if electric generation service in Michigan were deregulated, it could have a material adverse effect on Consumers’ financial results and operations. Presently, the Michigan Senate and House of Representatives are considering two separate but similar pieces of legislation to address energy policy, including ROA. Consumers is unable to predict the form and timing of any final legislation.

 

Consumers also faces competition or potential competition associated with:

 

·                 industrial customers relocating all or a portion of their production capacity outside of Consumers’ service territory for economic reasons

·                 municipalities owning or operating competing electric delivery systems

·                 customer self-generation

 

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Consumers addresses this competition by monitoring activity in adjacent geographical areas, by providing non-energy services and value to customers through Consumers’ rates and service, and by offering tariff-based incentives that support economic development.

 

Consumers Gas Utility

 

Gas Utility Operations: Consumers’ gas utility operations, which include the purchase, transmission, storage, distribution, and sale of natural gas, generated operating revenue of $1.9 billion in 2015, $2.4 billion in 2014, and $2.1 billion in 2013. Consumers’ gas utility customer base consists of a mix of primarily residential, commercial, and diversified industrial customers in Michigan’s Lower Peninsula.

 

Presented in the following illustration is Consumers’ 2015 gas utility operating revenue of $1.9 billion by customer class:

 

 

Consumers’ gas utility operations are not dependent on a single customer, or even a few customers, and the loss of any one or even a few of Consumers’ largest customers is not reasonably likely to have a material adverse effect on Consumers’ financial condition.

 

In 2015, deliveries of natural gas, including off-system transportation deliveries, through Consumers’ pipeline and distribution network, totaled 356 bcf, which included GCC deliveries of 57 bcf. In 2014, deliveries of natural gas, including off-system transportation deliveries, through Consumers’ pipeline and distribution network, totaled 373 bcf, which included GCC deliveries of 65 bcf. Consumers’ gas utility operations are seasonal. Consumers injects natural gas into storage during the summer months for use during the winter months when the demand for natural gas is higher. Peak demand occurs in the winter due to colder temperatures and the resulting use of natural gas as a heating fuel. During 2015, 42 percent of the natural gas supplied to all customers during the winter months was supplied from storage.

 

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Presented in the following illustration are Consumers’ monthly weather-adjusted gas deliveries (deliveries adjusted to reflect normal weather conditions) to its customers, including GCC deliveries, during 2015 and 2014:

 

 

Gas Utility Properties: Consumers’ gas transmission, storage, and distribution system consists of:

 

·                 1,686 miles of transmission lines

·                 15 gas storage fields with a total storage capacity of 309 bcf and a working gas volume of 151 bcf

·                 27,537 miles of distribution mains

·                 seven compressor stations with a total of 157,939 installed and available horsepower

 

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Gas Utility Supply: In 2015, Consumers purchased 69 percent of the gas it delivered from U.S. producers and five percent from Canadian producers. The remaining 26 percent was purchased from authorized GCC suppliers and delivered by Consumers to customers in the GCC program. Presented in the following illustration are the supply arrangements for the gas Consumers delivered to GCC and GCR customers during 2015:

 

 

Firm gas transportation or firm city-gate contracts are those that define a fixed amount, price, and delivery time frame. Consumers’ firm gas transportation contracts are with ANR Pipeline Company, Great Lakes Gas Transmission Limited Partnership, Panhandle Eastern Pipe Line Company, and Trunkline Gas Company, LLC, each a non-affiliated company. Under these contracts, Consumers purchases and transports gas to Michigan for ultimate delivery to its customers. Consumers’ firm gas transportation contracts expire through 2023 and provide for the delivery of 47 percent of Consumers’ total gas supply requirements in 2016. Consumers purchases the balance of its required gas supply under firm city-gate contracts and through authorized suppliers under the GCC program.

 

Gas Utility Competition: Competition exists in various aspects of Consumers’ gas utility business. Competition comes from GCC and from alternative fuels and energy sources, such as propane, oil, and electricity.

 

Enterprises Segment—Non-Utility Operations and Investments

 

CMS Energy’s enterprises segment, through various subsidiaries and certain equity investments, is engaged primarily in domestic independent power production and the marketing of independent power production. The enterprises segment’s operating revenue was $190 million in 2015, $299 million in 2014, and $181 million in 2013.

 

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Independent Power Production: At December 31, 2015, CMS Energy had ownership interests in independent power plants totaling 1,177 MW or 1,077 net MW. (Net MW reflects that portion of the capacity relating to CMS Energy’s ownership interests.) Presented in the following table are CMS Energy’s interests in independent power plants at December 31, 2015:

 

 

 

Ownership

 

Primary

 

Gross
Capacity

1

2015 Net Generation

 

Location

 

Interest (%)

 

Fuel Type

 

(MW)

 

(GWh)

 

Dearborn, Michigan

 

100

 

Natural gas

 

752

2

3,399

 

Gaylord, Michigan

 

100

 

Natural gas

 

156

 

4

 

Comstock, Michigan

 

100

 

Natural gas

 

68

 

 

Filer City, Michigan

 

50

 

Coal and biomass

 

73

 

505

 

New Bern, North Carolina

 

50

 

Biomass

 

50

 

369

 

Flint, Michigan

 

50

 

Biomass

 

40

 

71

 

Grayling, Michigan

 

50

 

Biomass

 

38

 

122

 

Total

 

 

 

 

 

1,177

 

4,470

 

 

1                   Represents the intended full-load sustained output of each plant.

 

2                   In December 2015, capital upgrades and modifications to the plant’s turbines increased gross capacity from 710 MW to 752 MW.

 

The operating revenue from independent power production was $17 million in 2015, $18 million in 2014, and $17 million in 2013. CMS Energy’s independent power production business faces competition from generators, marketers and brokers, and utilities marketing power in the wholesale market.

 

Energy Resource Management: CMS ERM purchases and sells energy commodities in support of CMS Energy’s generating facilities with a focus on optimizing CMS Energy’s independent power production portfolio. In 2015, CMS ERM marketed eight bcf of natural gas and 4,579 GWh of electricity. Electricity marketed by CMS ERM was generated by independent power production of the enterprises segment and by unrelated third parties. CMS ERM’s operating revenue was $173 million in 2015, $281 million in 2014, and $164 million in 2013.

 

Other Businesses

 

EnerBank: EnerBank is a Utah state-chartered, FDIC-insured industrial bank providing unsecured consumer installment loans for financing home improvements. EnerBank’s operating revenue was $101 million in 2015, $80 million in 2014, and $64 million in 2013.

 

CMS ENERGY AND CONSUMERS REGULATION

 

CMS Energy, Consumers, and their subsidiaries are subject to regulation by various federal, state, and local governmental agencies, including those described in the following sections.

 

FERC and NERC

 

FERC has exercised limited jurisdiction over several independent power plants and exempt wholesale generators in which CMS Enterprises has ownership interests, as well as over CMS ERM, CMS Gas Transmission, and DIG. FERC’s jurisdiction includes, among other things, acquisitions, operations, disposals of certain assets and facilities, services provided and rates charged, and conduct among affiliates. FERC also has limited jurisdiction over holding company matters with respect to CMS Energy. FERC, in connection with NERC and with regional reliability organizations, also regulates generation and

 

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transmission owners and operators, load serving entities, purchase and sale entities, and others with regard to reliability of the bulk power system.

 

FERC regulates limited aspects of Consumers’ gas business, principally compliance with FERC capacity release rules, shipping rules, the prohibition against certain buy/sell transactions, and the price-reporting rule.

 

FERC also regulates certain aspects of Consumers’ electric operations, including compliance with FERC accounting rules, wholesale and transmission rates, operation of licensed hydroelectric generating plants, transfers of certain facilities, corporate mergers, and issuances of securities.

 

MPSC

 

Consumers is subject to the jurisdiction of the MPSC, which regulates public utilities in Michigan with respect to retail utility rates, accounting, utility services, certain facilities, certain asset transfers, corporate mergers, and other matters.

 

The Michigan Attorney General, ABATE, the MPSC Staff, and certain other parties typically participate in MPSC proceedings concerning Consumers. These parties often challenge various aspects of those proceedings, including the prudence of Consumers’ policies and practices, and seek cost disallowances and other relief. The parties also have appealed significant MPSC orders.

 

Rate Proceedings: For information regarding open rate proceedings, see Item 8. Financial Statements and Supplementary Data—MD&A—Outlook and Notes to the Consolidated Financial Statements—Note 3, Regulatory Matters.

 

Other Regulation

 

The U.S. Secretary of Energy regulates imports and exports of natural gas and has delegated various aspects of this jurisdiction to FERC and the DOE’s Office of Fossil Fuels.

 

The U.S. Department of Transportation Office of Pipeline Safety regulates the safety and security of gas pipelines through the Natural Gas Pipeline Safety Act of 1968 and subsequent laws.

 

EnerBank is regulated by the Utah Department of Financial Institutions and the FDIC.

 

Energy Legislation

 

CMS Energy, Consumers, and their subsidiaries are subject to various legislative-driven matters, including Michigan’s 2008 Energy Law. This law requires that at least ten percent of Consumers’ electric sales volume come from renewable energy sources. It also allows electric customers in Consumers’ service territory to buy electric generation service from alternative electric suppliers in an aggregate amount up to ten percent of Consumers’ weather-adjusted retail sales of the preceding calendar year. For additional information regarding Consumers’ renewable energy plan and electric ROA, see Item 8. Financial Statements and Supplementary Data—MD&A—Outlook.

 

CMS ENERGY AND CONSUMERS ENVIRONMENTAL COMPLIANCE

 

CMS Energy, Consumers, and their subsidiaries are subject to various federal, state, and local regulations for environmental quality, including air and water quality, solid waste management, and other matters. Consumers expects to recover costs to comply with environmental regulations in customer rates, but cannot guarantee this result. For additional information concerning environmental matters, see Item 1A. Risk Factors and Item 8. Financial Statements and Supplementary Data—Notes to the Consolidated

 

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Financial Statements—Note 4, Contingencies and Commitments and Note 11, Asset Retirement Obligations.

 

CMS Energy has recorded a $58 million liability for its subsidiaries’ obligations associated with Bay Harbor and Consumers has recorded a $114 million liability for its obligations at a number of MGP sites. For additional information, see Item 1A. Risk Factors and Item 8. Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements—Note 4, Contingencies and Commitments.

 

Air: Consumers continues to install state-of-the-art emissions control equipment at its electric generating plants. Consumers estimates that it will incur capital expenditures of $84 million from 2016 through 2020 to comply with present and future federal and state environmental regulations that will require extensive reductions in nitrogen oxides, sulfur dioxides, particulate matter, and mercury emissions. Consumers’ estimate may increase if additional or more stringent laws or regulations are adopted, including regulations regarding greenhouse gases.

 

Solid Waste Disposal: Costs related to the construction, operation, and closure of solid waste disposal facilities for coal ash are significant. Consumers’ solid waste disposal areas are regulated under Michigan’s solid waste rules. In April 2015, the EPA published a final rule regulating CCRs, such as coal ash, under the Resource Conservation and Recovery Act. The final rule adopts minimum standards for beneficially reusing and disposing of non-hazardous CCRs. The rule establishes new minimum requirements for site location, groundwater monitoring, flood protection, storm water design, fugitive dust control, and public disclosure of information. The rule also sets out conditions under which CCR units would be forced to cease receiving CCR and non-CCR waste and initiate closure based on the inability to achieve minimum safety standards, meet a location standard, or meet minimum groundwater standards. Consumers has converted all of its fly ash handling systems to dry systems to minimize applicable requirements. In addition, all of Consumers’ ash facilities have programs designed to protect the environment and are subject to quarterly MDEQ inspections. Consumers’ preliminary estimate of capital and cost of removal expenditures to comply with regulations relating to ash disposal is $243 million from 2016 through 2020.

 

Water: Consumers uses substantial amounts of water to operate and cool its electric generating plants. Water discharge quality is regulated and administered by the MDEQ under the federal NPDES program. To comply with such regulation, Consumers’ facilities have discharge monitoring programs. The EPA issued final regulations for wastewater discharges from electric generating plants in 2015. Consumers’ preliminary estimate of capital expenditures to comply with these regulations is $69 million from 2016 through 2020.

 

In 2014, the EPA finalized its cooling water intake rule, which requires Consumers to evaluate the biological impact of its cooling water intake systems and ensure that it is using the best technology available to minimize adverse environmental impacts. Consumers’ preliminary estimate of capital expenditures to comply with these regulations is $58 million from 2016 through 2020.

 

For further information concerning estimated capital expenditures related to air, solid waste disposal, and water see Item 8. Financial Statements and Supplementary Data—MD&A—Outlook—Consumers Electric Utility Outlook and Uncertainties—Electric Environmental Outlook.

 

INSURANCE

 

CMS Energy and its subsidiaries, including Consumers, maintain insurance coverage generally similar to comparable companies in the same lines of business. The insurance policies are subject to terms, conditions, limitations, and exclusions that might not fully compensate CMS Energy or Consumers for all losses. A portion of each loss is generally assumed by CMS Energy or Consumers in the form of deductibles and self-insured retentions that, in some cases, are substantial. As CMS Energy or Consumers

 

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renews its policies, it is possible that some of the present insurance coverage may not be renewed or obtainable on commercially reasonable terms due to restrictive insurance markets.

 

CMS Energy’s and Consumers’ present insurance program does not cover the risks of certain environmental costs, such as the cleanup of sites owned by CMS Energy or Consumers, or claims for the long-term storage or disposal of pollutants or for air pollution.

 

EMPLOYEES

 

Presented in the following table are the number of employees of CMS Energy and Consumers:

 

 

 

 

 

 

 

 

December 31

 

2015

 

2014

 

2013

 

CMS Energy, including Consumers

 

 

 

 

 

 

 

Full-time employees

 

7,711

 

7,671

 

7,415

 

Seasonal employees1

 

39

 

33

 

321

 

Part-time employees

 

54

 

43

 

45

 

Total employees

 

7,804

 

7,747

 

7,781

 

Consumers

 

 

 

 

 

 

 

Full-time employees

 

7,339

 

7,336

 

7,089

 

Seasonal employees1

 

39

 

33

 

321

 

Part-time employees

 

16

 

19

 

25

 

Total employees

 

7,394

 

7,388

 

7,435

 

 

1                   Consumers’ seasonal workforce peaked at 477 employees during 2015, 394 employees during 2014, and 321 employees during 2013. Seasonal employees work primarily during the construction season and are subject to yearly layoffs.

 

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CMS ENERGY AND CONSUMERS EXECUTIVE OFFICERS
(AS OF FEBRUARY 1, 2016)

 

 

 

 

 

 

 

Name

 

Age

 

Position

 

Period

John G. Russell

 

58

 

President, CEO, and Director of CMS Energy

 

5/2010 – Present

 

 

 

 

President, CEO, and Director of Consumers

 

5/2010 – Present

 

 

 

 

Chairman of the Board, President, CEO, and Director

 

 

 

 

 

 

of CMS Enterprises

 

5/2010 – Present

Thomas J. Webb

 

63

 

Executive Vice President and CFO of CMS Energy

 

8/2002 – Present

 

 

 

 

Executive Vice President and CFO of Consumers

 

8/2002 – Present

 

 

 

 

Executive Vice President, CFO, and Director of CMS Enterprises

 

8/2002 – Present

John M. Butler

 

51

 

Senior Vice President of CMS Enterprises

 

9/2006 – Present

 

 

 

 

Senior Vice President of CMS Energy

 

7/2006 – Present

 

 

 

 

Senior Vice President of Consumers

 

7/2006 – Present

Daniel J. Malone

 

55

 

Senior Vice President of CMS Energy

 

3/2015 – Present

 

 

 

 

Senior Vice President of Consumers

 

5/2010 – Present

David G. Mengebier

 

58

 

Senior Vice President of CMS Energy

 

11/2006 – Present

 

 

 

 

Senior Vice President of Consumers

 

11/2006 – Present

 

 

 

 

Senior Vice President of CMS Enterprises

 

3/2003 – Present

 

 

 

 

Chief Compliance Officer of CMS Energy

 

11/2006 – 1/2016

 

 

 

 

Chief Compliance Officer of Consumers

 

11/2006 – 1/2016

Patricia K. Poppe

 

47

 

Senior Vice President of CMS Energy

 

3/2015 – Present

 

 

 

 

Senior Vice President of Consumers

 

3/2015 – Present

 

 

 

 

Vice President of Consumers

 

1/2011 – 3/2015

Catherine M. Reynolds

 

58

 

Senior Vice President, General Counsel, and Director

 

 

 

 

 

 

of CMS Enterprises

 

1/2014 – Present

 

 

 

 

Senior Vice President and General Counsel of CMS Energy

 

10/2013 – Present

 

 

 

 

Senior Vice President and General Counsel of Consumers

 

10/2013 – Present

 

 

 

 

Vice President, Deputy General Counsel, and Corporate

 

 

 

 

 

 

Secretary of CMS Energy

 

1/2012 – 10/2013

 

 

 

 

Vice President, Deputy General Counsel, and Corporate

 

 

 

 

 

 

Secretary of Consumers

 

1/2012 – 10/2013

 

 

 

 

Vice President and Corporate Secretary of CMS Energy

 

9/2006 – 1/2012

 

 

 

 

Vice President and Corporate Secretary of Consumers

 

9/2006 – 1/2012

 

 

 

 

Vice President and Secretary of CMS Enterprises

 

9/2006 – 1/2014

Glenn P. Barba

 

50

 

Vice President, Controller, and CAO of CMS Enterprises

 

11/2007 – Present

 

 

 

 

Vice President, Controller, and CAO of CMS Energy

 

2/2003 – Present

 

 

 

 

Vice President, Controller, and CAO of Consumers

 

1/2003 – Present

Garrick J. Rochow

 

41

 

Vice President of CMS Energy

 

3/2015 – Present

 

 

 

 

Vice President of Consumers

 

10/2010 – Present

 

There are no family relationships among executive officers and directors of CMS Energy or Consumers. The term of office of each of the executive officers extends to the first meeting of the Board of Directors of CMS Energy and Consumers after the next annual election of Directors of CMS Energy and Consumers (to be held on May 6, 2016). Ms. Poppe will succeed Mr. Russell as Chief Executive Officer of CMS Energy and Consumers effective July 1, 2016, when Mr. Russell retires.

 

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

 

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herein. CMS Energy’s and Consumers’ annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed pursuant to Section 13(a) or 15(d) of the Exchange Act are accessible free of charge on CMS Energy’s website. These reports are available soon after they are electronically filed with the SEC. Also on CMS Energy’s website are:

 

·                 Corporate Governance Principles

·                 Articles of Incorporation

·                 Bylaws

·                 Charters and Codes of Conduct (including the Audit, Compensation and Human Resources, Finance, and Governance and Public Responsibility Committee Charters, as well as the Employee, Boards of Directors, EnerBank, and Third Party Codes of Conduct)

 

CMS Energy will provide this information in print to any stockholder who requests it.

 

Any materials CMS Energy files with the SEC may also be read and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address is www.sec.gov.

 

Item 1A. Risk Factors

 

Actual results in future periods for CMS Energy and Consumers could differ materially from historical results and the forward-looking statements contained in this report. Factors that might cause or contribute to these differences include, but are not limited to, those discussed in the following sections. CMS Energy’s and Consumers’ businesses are influenced by many factors that are difficult to predict, that involve uncertainties that may materially affect results, and that are often beyond their control. Additional risks and uncertainties not presently known or that management believes to be immaterial may also adversely affect CMS Energy or Consumers. The risk factors described in the following sections, as well as the other information included in this report and in other documents filed with the SEC, should be considered carefully before making an investment in securities of CMS Energy or Consumers. Risk factors of Consumers are also risk factors of CMS Energy. All of these risk factors are potentially significant.

 

CMS Energy depends on dividends from its subsidiaries to meet its debt service obligations.

 

Due to its holding company structure, CMS Energy depends on dividends from its subsidiaries to meet its debt service and other payment obligations. If sufficient dividends were not paid to CMS Energy by its subsidiaries, CMS Energy might not be able to generate the funds necessary to fulfill its payment obligations, which could have a material adverse effect on CMS Energy’s liquidity and financial condition.

 

Consumers’ ability to pay dividends or acquire its own stock from CMS Energy is limited by restrictions contained in Consumers’ preferred stock provisions and potentially by other legal restrictions, such as certain terms in its articles of incorporation and FERC requirements.

 

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CMS Energy has indebtedness that could limit its financial flexibility and its ability to meet its debt service obligations.

 

The level of CMS Energy’s present and future indebtedness could have several important effects on its future operations, including, among others, that:

 

·                 a significant portion of CMS Energy’s cash flow from operations could be dedicated to the payment of principal and interest on its indebtedness and would not be available for other purposes

·                 covenants contained in CMS Energy’s existing debt arrangements, which require it to meet certain financial tests, could affect its flexibility in planning for, and reacting to, changes in its business

·                 CMS Energy’s ability to obtain additional financing for working capital, capital expenditures, acquisitions, and general corporate and other purposes could become limited

·                 CMS Energy could be placed at a competitive disadvantage to its competitors that are less leveraged

·                 CMS Energy’s vulnerability to adverse economic and industry conditions could increase

·                 CMS Energy’s future credit ratings could fluctuate

 

CMS Energy’s ability to meet its debt service obligations and to reduce its total indebtedness will depend on its future performance, which will be subject to general economic conditions, industry cycles, changes in laws or regulatory decisions, and financial, business, and other factors affecting its operations, many of which are beyond its control. CMS Energy cannot make assurances that its businesses will continue to generate sufficient cash flow from operations to service its indebtedness. If CMS Energy were unable to generate sufficient cash flows from operations, it could be required to sell assets or obtain additional financing.

 

CMS Energy and Consumers have financing needs and could be unable to obtain bank financing or access the capital markets.

 

CMS Energy and Consumers may be subject to liquidity demands under commercial commitments, guarantees, indemnities, letters of credit, and other contingent liabilities. Consumers’ capital requirements are expected to be substantial over the next several years as it invests in the Smart Energy program, construction or acquisition of power generation, environmental controls, decommissioning of older facilities, conversions and expansions, and other electric and gas infrastructure to upgrade delivery systems. Those requirements may increase if additional laws or regulations are adopted or implemented.

 

CMS Energy and Consumers rely on the capital markets, particularly for publicly offered debt, as well as on bank syndications, to meet their financial commitments and short-term liquidity needs if sufficient internal funds are not available from Consumers’ operations and, in the case of CMS Energy, from dividends paid by Consumers and its other subsidiaries. CMS Energy and Consumers also use letters of credit issued under certain of their revolving credit facilities to support certain operations and investments.

 

Disruptions in the capital and credit markets as a result of uncertainty, changing or increased regulation, reduced alternatives, or failures of significant financial institutions could adversely affect CMS Energy’s and Consumers’ access to liquidity needed for their businesses. Consumers’ inability to obtain prior FERC authorization for any securities issuances, including publicly offered debt, as is required under the Federal Power Act, could adversely affect Consumers’ access to liquidity. Any liquidity disruption could require CMS Energy and Consumers to take measures to conserve cash. These measures could include, but are not limited to, deferring capital expenditures, changing CMS Energy’s and Consumers’ commodity purchasing strategy to avoid collateral-posting requirements, and reducing or eliminating future share repurchases, dividend payments, or other discretionary uses of cash.

 

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CMS Energy continues to explore financing opportunities to supplement its financial strategy. These potential opportunities include refinancing and/or issuing new debt, preferred stock and/or common equity, commercial paper, and bank financing. Similarly, Consumers may seek funds through the capital markets, commercial lenders, and leasing arrangements. Entering into new financings is subject in part to capital market receptivity to utility industry securities in general and to CMS Energy’s and Consumers’ securities in particular. CMS Energy and Consumers cannot guarantee the capital markets’ acceptance of their securities or predict the impact of factors beyond their control, such as actions of rating agencies.

 

Certain of CMS Energy’s and Consumers’ securities and those of their affiliates are rated by various credit rating agencies. Any reduction or withdrawal of one or more of its credit ratings could have a material adverse impact on CMS Energy’s or Consumers’ ability to access capital on acceptable terms and maintain commodity lines of credit, could increase its cost of borrowing, and could cause CMS Energy or Consumers to reduce capital expenditures. If it were unable to maintain commodity lines of credit, CMS Energy or Consumers might have to post collateral or make prepayments to certain suppliers under existing contracts. Further, since Consumers provides dividends to CMS Energy, any adverse developments affecting Consumers that result in a lowering of its credit ratings could have an adverse effect on CMS Energy’s credit ratings. CMS Energy and Consumers cannot guarantee that any of their present ratings will remain in effect for any given period of time or that a rating will not be lowered or withdrawn entirely by a rating agency.

 

If CMS Energy or Consumers were unable to obtain bank financing or access the capital markets to incur or refinance indebtedness, or were unable to obtain commercially reasonable terms for any financing, this could have a material adverse effect on its liquidity, financial condition, and results of operations.

 

There are risks associated with Consumers’ substantial capital investment program planned for the next five years.

 

Consumers’ planned investments include the Smart Energy program, construction or acquisition of power generation, gas infrastructure, conversions and expansions, environmental controls, decommissioning of older facilities, and other electric and gas investments to upgrade delivery systems. The success of these capital investments depends on or could be affected by a variety of factors that include, but are not limited to:

 

·                 effective pre-acquisition evaluation of asset values, future operating costs, potential environmental and other liabilities, and other factors beyond Consumers’ control

·                 effective cost and schedule management of new capital projects

·                 availability of qualified construction personnel

·                 changes in commodity and other prices

·                 governmental approvals and permitting

·                 operational performance

·                 changes in environmental, legislative, and regulatory requirements

·                 regulatory cost recovery

 

It is possible that adverse events associated with these factors could have a material adverse effect on Consumers’ liquidity, financial condition, and results of operations.

 

Changes to ROA could have a material adverse effect on CMS Energy’s and Consumers’ businesses.

 

The 2008 Energy Law allows electric customers in Consumers’ service territory to buy electric generation service from alternative electric suppliers in an aggregate amount up to ten percent of Consumers’ weather-adjusted retail sales of the preceding calendar year. Lower natural gas prices due to a large supply of natural gas on the market, coupled with low capacity prices in the electric supply market, are

 

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placing increasing competitive pressure on the cost of Consumers’ electric supply. Presently, Consumers’ electric rates are above the Midwest average, while the ROA level on Consumers’ system is at the ten-percent limit and the proportion of Consumers’ electric deliveries under the ROA program and on the ROA waiting list is 25 percent. If the ROA limit were increased or if electric generation service in Michigan were deregulated, it could have a material adverse effect on Consumers’ financial results and operations.

 

CMS Energy and Consumers are subject to rate regulation, which could have an adverse effect on financial results.

 

CMS Energy and Consumers are subject to rate regulation. Consumers’ electric and gas retail rates are set by the MPSC and cannot be increased without regulatory authorization. Consumers is permitted by the 2008 Energy Law to self-implement rate changes six months after a rate filing with the MPSC, subject to certain limitations. If Consumers self-implements rates that result in higher revenues than would have resulted from rates that the MPSC authorizes in its final order, Consumers must refund the difference, with interest. Also, the MPSC may delay or deny implementation of a rate increase upon showing of good cause.

 

In addition, if rate regulators fail to provide timely rate relief, it could have a material adverse effect on Consumers or Consumers’ plans for making significant capital investments could be materially adversely affected. Regulators seeking to avoid or minimize rate increases could resist raising customer rates sufficiently to permit Consumers to recover the full cost of these investments. In addition, because there are statutory requirements mandating that regulators must allow Consumers to recover from customers certain costs, such as resource additions to meet Michigan’s renewable resource standard, energy optimization, and environmental compliance, regulators could be more inclined to oppose rate increases for other requested items and investments. Rate regulators could also face pressure to avoid or limit rate increases for a number of reasons, including an economic downturn in the state or diminishment of Consumers’ customer base. In addition to its potential effects on Consumers’ investment program, any limitation of cost recovery through rates could have a material adverse effect on Consumers’ liquidity, financial condition, and results of operations.

 

Orders of the MPSC could limit recovery of costs of providing service including, but not limited to, environmental and safety related expenditures for coal-fueled plants and other utility properties, regulatory assets, power supply and natural gas supply costs, operating and maintenance expenses, additional utility-based investments, sunk investment in mothballed or retired generating plants, costs associated with the proposed retirement and decommissioning of facilities, depreciation expense, MISO energy and transmission costs, costs associated with energy efficiency investments and state or federally mandated renewable resource standards, Smart Energy program costs, or expenditures subject to tracking mechanisms. These orders could also result in adverse regulatory treatment of other matters. For example, MPSC orders could prevent or curtail Consumers from shutting off non-paying customers, could prevent or curtail Consumers from self-implementing rate changes, could prevent or curtail the implementation of a gas revenue mechanism, or could require Consumers to refund previously self-implemented rates.

 

FERC authorizes certain subsidiaries of CMS Energy to sell electricity at market-based rates. Failure of these subsidiaries to maintain this FERC authority could have a material adverse effect on CMS Energy’s and Consumers’ liquidity, financial condition, and results of operations. Transmission rates are also set by FERC. FERC orders related to transmission costs could have a material adverse effect on Consumers’ liquidity, financial condition, and results of operations.

 

The various risks associated with the MPSC and FERC regulation of CMS Energy’s and Consumers’ businesses, which include the risk of adverse decisions in any number of rate or regulatory proceedings before either agency, as well as judicial proceedings challenging any agency decisions, could have a material adverse effect on CMS Energy’s and Consumers’ liquidity, financial condition, investment plans, and results of operations.

 

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Utility regulation, state or federal legislation, and compliance could have a material adverse effect on CMS Energy’s and Consumers’ businesses.

 

CMS Energy and Consumers are subject to, or affected by, extensive utility regulation and state and federal legislation. CMS Energy and Consumers believe that they comply with applicable laws and regulations. If it were determined that they failed to comply, CMS Energy or Consumers could become subject to fines or penalties or be required to implement additional compliance, cleanup, and remediation programs, the cost of which could be material. Adoption of new laws, rules, regulations, principles, or practices by federal or state agencies, or changes to present laws, rules, regulations, principles, or practices and the interpretation of any adoption or change, could have a material adverse effect on CMS Energy’s and Consumers’ liquidity, financial condition, and results of operations. Furthermore, any state or federal legislation concerning CMS Energy’s or Consumers’ operations could have a similar effect.

 

Utility regulation could be impacted by various matters, such as electric industry restructuring, hydro relicensing, asset reclassification, gas pipeline capacity and gas storage, new generation facilities or investments, environmental controls, climate change, air emissions, renewable energy, energy policy and ROA, regulation or deregulation, energy capacity standards or markets, reliability, and safety. CMS Energy and Consumers cannot predict the impact of these matters on their liquidity, financial condition, and results of operations.

 

CMS Energy and Consumers could incur substantial costs to comply with environmental requirements.

 

CMS Energy and Consumers are subject to costly and stringent environmental regulations and expect that environmental laws and regulations will continue to become more stringent and require additional significant capital expenditures for emissions control equipment, CCR disposal and storage, cooling water intake equipment, effluent treatment, and PCB remediation. Present and reasonably anticipated state and federal environmental statutes and regulations, including but not limited to the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, and CERCLA, will continue to have a material effect on CMS Energy and Consumers.

 

In 2015, 95 percent of the energy generated by Consumers came from fossil-fuel-fired power plants, with 77 percent coming from coal-fueled power plants. CMS Enterprises also has interests in fossil-fuel-fired power plants and other types of power plants that produce greenhouse gases. In October 2015, the EPA published rules pursuant to Section 111(d) of the Clean Air Act to limit carbon dioxide emissions from existing electric generating units, calling the rules the “Clean Power Plan.” The rules require a 32 percent nationwide reduction in carbon emissions from existing power plants by 2030 (based on 2005 levels). Federal environmental laws and rules and international accords and treaties could require CMS Energy and Consumers to install additional equipment for emission controls, purchase carbon emissions allowances, curtail operations, invest in generating capacity with fewer carbon dioxide emissions, or take other significant steps to manage or lower the emission of greenhouse gases.

 

The following risks related to climate change, emissions, and environmental regulations could also have a material adverse impact on CMS Energy’s and Consumers’ liquidity, financial condition, and results of operations:

 

·                 litigation originated by third parties against CMS Energy, Consumers, or their subsidiaries due to CMS Energy’s or Consumers’ greenhouse gas or other emissions or CCR disposal and storage

·                 impairment of CMS Energy’s or Consumers’ reputation due to their greenhouse gas or other emissions and public perception of their response to potential environmental regulations, rules, and legislation

·                 extreme weather conditions, such as severe storms, that may affect customer demand, company operations, or assets

 

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Consumers plans to retire seven smaller coal-fueled electric generating units by April 2016. Once the facilities and equipment on these sites are taken out of service, Consumers may encounter previously unknown environmental conditions that will need to be addressed in a timely fashion with state and federal environmental regulators.

 

Consumers expects to collect fully from its customers, through the ratemaking process, expenditures incurred to comply with environmental regulations, but cannot guarantee this outcome. If Consumers were unable to recover these expenditures from customers in rates, it could negatively affect CMS Energy’s and/or Consumers’ liquidity, results of operations, and financial condition and CMS Energy and/or Consumers could be required to seek significant additional financing to fund these expenditures.

 

For additional information regarding compliance with environmental regulations, see Item 1. Business—CMS Energy and Consumers Environmental Compliance and Item 8. Financial Statements and Supplementary Data—MD&A—Outlook—Consumers Electric Utility Outlook and Uncertainties.

 

CMS Energy’s and Consumers’ businesses could be affected adversely by any delay in meeting environmental requirements.

 

A delay or failure by CMS Energy or Consumers to obtain or maintain any necessary environmental permits or approvals to satisfy any applicable environmental regulatory requirements or install emission control equipment could:

 

·                 prevent the construction of new facilities

·                 prevent the continued operation and sale of energy from existing facilities

·                 prevent the suspension of operations at existing facilities

·                 prevent the modification of existing facilities

·                 result in significant additional costs that could have a material adverse effect on their liquidity, financial condition, and results of operations

 

CMS Energy and Consumers expect to incur additional substantial costs related to remediation of legacy environmental sites.

 

Consumers expects to incur additional substantial costs related to the remediation of its former MGP sites. Based upon prior MPSC orders, Consumers expects to be able to recover the costs of these cleanup activities through its gas rates, but cannot guarantee that outcome.

 

Consumers also expects to incur remediation and other response activity costs at a number of other sites under NREPA and CERCLA. Consumers believes these costs should be recoverable in rates, but cannot guarantee that outcome.

 

In addition, CMS Energy retained environmental remediation obligations for the collection, treatment, and discharge of leachate at Bay Harbor after selling its interests in the development in 2002. Leachate is produced when water enters into cement kiln dust piles left over from former cement plant operations at the site. CMS Energy has signed agreements with the EPA and the MDEQ relating to Bay Harbor. If CMS Energy were unable to meet its commitments under these agreements, or if unanticipated events occurred, CMS Energy could incur additional material costs relating to its Bay Harbor remediation obligations.

 

CMS Energy and Consumers could be affected adversely by legacy litigation and retained liabilities.

 

CMS Energy, CMS MST, CMS Field Services, Cantera Natural Gas, Inc., and Cantera Gas Company were named as defendants in various lawsuits arising as a result of alleged inaccurate natural gas price

 

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reporting. Allegations include price-fixing conspiracies, restraint of trade, and artificial inflation of natural gas retail prices in Kansas, Missouri, and Wisconsin. CMS Energy cannot predict the outcome of the lawsuits or the amount of damages for which CMS Energy may be liable. It is possible that the outcome in one or more of the lawsuits could have a material adverse effect on CMS Energy’s liquidity, financial condition, and results of operations.

 

The agreements that CMS Energy and Consumers enter into for the sale of assets customarily include provisions whereby they are required to:

 

·                 retain specified preexisting liabilities, such as for taxes, pensions, or environmental conditions

·                 indemnify the buyers against specified risks, including the inaccuracy of representations and warranties that CMS Energy and Consumers make

·                 make payments to the buyers depending on the outcome of post-closing adjustments, litigation, audits, or other reviews, including claims resulting from attempts by foreign or domestic governments to assess taxes on past operations or transactions

 

Many of these contingent liabilities can remain open for extended periods of time after the sales are closed. Depending on the extent to which the buyers might ultimately seek to enforce their rights under these contractual provisions, and the resolution of any disputes concerning them, there could be a material adverse effect on CMS Energy’s or Consumers’ liquidity, financial condition, and results of operations.

 

In 2002, CMS Energy sold its oil, gas, and methanol investments in Equatorial Guinea. The government of Equatorial Guinea claims that CMS Energy owes $152 million in taxes, plus significant penalties and interest, in connection with the sale. The matter is proceeding to formal arbitration. CMS Energy is contesting the claim, but cannot predict the financial impact or outcome of the matter. An unfavorable outcome could have a material adverse effect on CMS Energy’s liquidity, financial condition, and results of operations.

 

CMS Energy’s and Consumers’ energy sales and operations are affected by seasonal factors and varying weather conditions from year to year.

 

CMS Energy’s and 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. Accordingly, CMS Energy’s and Consumers’ overall results may fluctuate substantially on a seasonal basis. Mild temperatures during the summer cooling season and winter heating season as well as the impact of extreme weather events on Consumers’ system could have a material adverse effect on CMS Energy’s and Consumers’ liquidity, financial condition, and results of operations.

 

Consumers is exposed to risks related to general economic conditions in its service territories.

 

Consumers’ electric and gas utility businesses are affected by the economic conditions impacting the customers they serve. If the Michigan economy becomes sluggish or declines, Consumers could experience reduced demand for electricity or natural gas that could result in decreased earnings and cash flow. In addition, economic conditions in Consumers’ service territory affect its collections of accounts receivable and levels of lost or stolen gas, which in turn impact its liquidity, financial condition, and results of operations.

 

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CMS Energy and Consumers are subject to information security risks, risks of unauthorized access to their systems, and technology failures.

 

In the regular course of business, CMS Energy and Consumers handle a range of sensitive security and customer information. CMS Energy and Consumers are subject to laws and rules issued by various agencies concerning safeguarding and maintaining the confidentiality of this information. A security breach of CMS Energy’s and Consumers’ information or control systems could involve theft or the inappropriate release of certain types of information, such as confidential customer information or, separately, system operating information. These events could disrupt operations, subject CMS Energy and Consumers to possible financial liability, damage their reputation and diminish the confidence of customers, and have a material adverse effect on CMS Energy’s and Consumers’ liquidity, financial conditions, and results of operations.

 

CMS Energy and Consumers operate in a highly regulated industry that requires the continued operation of sophisticated information and control technology systems and network infrastructure. Despite implementation of security measures, technology systems are vulnerable to being disabled, failures, cyber crime, and unauthorized access. These events could impact the reliability of electric generation and electric and gas delivery and also subject CMS Energy and Consumers to financial harm. Cyber crime, which includes the use of malware, computer viruses, and other means for disruption or unauthorized access against companies, including CMS Energy and Consumers, has increased in frequency, scope, and potential impact in recent years. While CMS Energy and Consumers have not been subject to cyber crime incidents that have had a material impact on their operations to date, their security measures in place may be insufficient to prevent a major cyber incident in the future. If technology systems were to fail or be breached, CMS Energy and Consumers might not be able to fulfill critical business functions, and sensitive confidential and proprietary data could be compromised, which could have a material adverse effect on CMS Energy’s and Consumers’ liquidity, financial condition, and results of operations. In addition, because CMS Energy’s and Consumers’ generation, transmission, and distribution systems are part of an interconnected system, a disruption caused by a cyber incident at another utility, electric generator, system operator, or commodity supplier could also adversely affect CMS Energy’s or Consumers’ businesses, financial condition, and results of operations.

 

A variety of technological tools and systems, including both company-owned information technology and technological services provided by outside parties, support critical functions. The failure of these technologies, or the inability of CMS Energy and Consumers to have these technologies supported, updated, expanded, or integrated into other technologies, could hinder their business operations and materially adversely affect their liquidity, financial condition, and results of operations.

 

CMS Energy’s and Consumers’ businesses have liability risks.

 

Consumers’ electric and gas delivery systems, power plants, gas infrastructure including storage facilities, wind energy or solar equipment, energy products, and the independent power plants owned in whole or in part by CMS Energy could be involved in incidents, failures, or accidents that result in injury, loss of life, or property loss to customers, employees, or the public. Although CMS Energy and Consumers have insurance coverage for many potential incidents (subject to deductibles and self-insurance amounts that could be material), depending upon the nature or severity of any incident, failure, or accident, CMS Energy or Consumers could suffer financial loss, reputational damage, and negative repercussions from regulatory agencies or other public authorities.

 

CMS Energy’s and Consumers’ revenues and results of operations are subject to risks that are beyond their control, including but not limited to natural disasters, terrorist attacks and related acts of war, cyber incidents, vandalism, and other catastrophic events.

 

The impact of natural disasters, severe weather, wars, terrorist acts, vandalism, cyber incidents, pandemics, and other catastrophic events on the facilities and operations of CMS Energy and Consumers

 

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could have a material adverse effect on CMS Energy’s and Consumers’ liquidity, financial condition, and results of operations. These events could result in severe damage to CMS Energy’s and Consumers’ assets beyond what could be recovered through insurance policies, could require CMS Energy and Consumers to incur significant upfront costs, and could severely disrupt operations, resulting in loss of service to customers. There is also a risk that regulators could, after the fact, conclude that Consumers’ preparedness or response to such an event was inadequate and take adverse actions as a result.

 

CMS Energy and Consumers are exposed to significant reputational risks.

 

CMS Energy and Consumers could suffer negative impacts to their reputations as a result of operational incidents, violations of corporate policies, regulatory violations, inappropriate use of social media, or other events. Reputational damage could have a material adverse effect on CMS Energy’s and Consumers’ liquidity, financial condition, and results of operations. It could also result in negative customer perception and increased regulatory oversight.

 

Consumers is exposed to changes in customer usage that could impact financial results.

 

Distributed electricity generation: Technology advances and government incentives and subsidies could increase the cost effectiveness of customer-owned methods of producing electricity, such as fuel cells, microturbines, wind turbines, and solar photovoltaics, resulting in reduced load, cross subsidization, and increased costs. This could have a material adverse effect on CMS Energy’s and Consumers’ liquidity, financial condition, and results of operations.

 

Energy efficiency: Customers could reduce their consumption through demand-side energy conservation and energy efficiency programs. These reductions could have a material adverse effect on CMS Energy’s and Consumers’ liquidity, financial condition, and results of operations.

 

Energy risk management strategies might not be effective in managing fuel and electricity pricing risks, which could result in unanticipated liabilities to CMS Energy and Consumers or increased volatility in their earnings.

 

Consumers is exposed to changes in market prices for natural gas, coal, electric capacity, electric energy, emission allowances, gasoline, diesel fuel, and RECs. Prices for these commodities may fluctuate substantially over relatively short periods of time and expose Consumers to price risk. A substantial portion of Consumers’ operating expenses for its electric generating plants and vehicle fleet consists of the costs of obtaining these commodities. The contracts associated with Consumers’ fuel and purchased power costs are executed in conjunction with the PSCR mechanism, which is designed to allow Consumers to recover prudently incurred costs associated with those positions. If the MPSC determined that any of these contracts or related contracting policies were imprudent, recovery of these costs could be disallowed. Consumers manages commodity price risk using established policies and procedures, and it may use various contracts to manage this risk, including swaps, options, futures, and forward contracts. No assurance can be made that these strategies will be successful in managing Consumers’ pricing risk or that they will not result in net liabilities to Consumers as a result of future volatility in these markets.

 

Natural gas prices in particular have been historically volatile. Consumers routinely enters into contracts to mitigate exposure to the risks of demand, market effects of weather, and changes in commodity prices associated with its gas distribution business. These contracts are executed in conjunction with the GCR mechanism, which is designed to allow Consumers to recover prudently incurred costs associated with those positions. If the MPSC determined that any of these contracts or related contracting policies were imprudent, recovery of these costs could be disallowed. Consumers does not always hedge the entire exposure of its operations from commodity price volatility. Furthermore, the ability to hedge exposure to commodity price volatility depends on liquid commodity markets. As a result, to the extent the commodity markets are illiquid, Consumers might not be able to execute its risk management strategies, which could result in larger unhedged positions than preferred at a given time. To the extent that

 

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unhedged positions exist, fluctuating commodity prices could have a negative effect on CMS Energy’s and Consumers’ liquidity, financial condition, and results of operations. Changes in laws that limit Consumers’ ability to hedge could also have a negative effect on CMS Energy’s and Consumers’ liquidity, financial condition, and results of operations.

 

CMS Energy and Consumers are exposed to counterparty risk.

 

Adverse economic conditions or financial difficulties experienced by counterparties with whom CMS Energy and Consumers do business could impair the ability of these counterparties to pay for CMS Energy’s and Consumers’ services and/or fulfill their contractual obligations, including performance and payment of damages. CMS Energy and Consumers depend on these counterparties to remit payments and perform contracted services in a timely fashion. Any delay or default in payment or performance of contractual obligations could have a material adverse effect on CMS Energy’s and Consumers’ liquidity, financial condition, and results of operations.

 

Volatility and disruptions in capital and credit markets could have a negative impact on CMS Energy’s and Consumers’ lenders, vendors, contractors, suppliers, customers, and other counterparties, causing them to fail to meet their obligations. Adverse economic conditions could also have a negative impact on the loan portfolio of CMS Energy’s banking subsidiary, EnerBank.

 

Consumers might not be able to obtain an adequate supply of natural gas or coal, which could limit its ability to operate its electric generation facilities or serve its natural gas customers.

 

Consumers has natural gas and coal supply and transportation contracts in place for the natural gas and coal it requires for its electric generating capacity. Consumers also has interstate transportation and supply agreements in place to facilitate delivery of natural gas to its customers. Apart from the contractual and monetary remedies available to Consumers in the event of a counterparty’s failure to perform under any of these contracts, there can be no assurances that the counterparties to these contracts will fulfill their obligations to provide natural gas or coal to Consumers. The counterparties under the agreements could experience financial or operational problems that inhibit their ability to fulfill their obligations to Consumers. In addition, counterparties under these contracts might not be required to supply natural gas or coal to Consumers under certain circumstances, such as in the event of a natural disaster or severe weather.

 

If, for its electric generating capacity, Consumers were unable to obtain its natural gas or coal requirements under existing or future natural gas and coal supply and transportation contracts, it could be required to purchase natural gas or coal at higher prices or forced to purchase electricity from higher-cost generating resources in the MISO energy market. If, for natural gas delivery to its customers, Consumers were unable to obtain its natural gas supply requirements under existing or future natural gas supply and transportation contracts, it could be required to purchase natural gas at higher prices from other sources or implement its natural gas curtailment program filed with the MPSC. These alternatives could increase Consumers’ working capital requirements and could decrease its revenues.

 

Market performance and other changes could decrease the value of employee benefit plan assets, which then could require substantial funding.

 

The performance of the capital markets affects the values of assets that are held in trust to satisfy future obligations under CMS Energy’s and Consumers’ pension and postretirement benefit plans. CMS Energy and Consumers have significant obligations under these plans and hold significant assets in these trusts. These assets are subject to market fluctuations and will yield uncertain returns, which could fall below CMS Energy’s and Consumers’ forecasted return rates. A decline in the market value of the assets or a change in the level of interest rates used to measure the required minimum funding levels could significantly increase the funding requirements of these obligations. Also, changes in demographics, including an increased number of retirements or changes in life expectancy assumptions, could

 

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significantly increase the funding requirements of the obligations related to the pension and postretirement benefit plans. If CMS Energy and Consumers were unable to manage their pension and postretirement plan assets successfully, it could have a material adverse effect on their liquidity, financial condition, and results of operations.

 

A work interruption or other union actions could adversely affect Consumers.

 

Over 40 percent of Consumers’ employees are represented by unions. In 2015, both of Consumers’ unions, representing all union employees, ratified three separate five-year agreements, expiring in 2020. If these employees were to engage in a strike, work stoppage, or other slowdown, Consumers could experience a significant disruption in its operations and higher ongoing labor costs.

 

Failure to attract and retain an appropriately qualified workforce could adversely impact CMS Energy’s and Consumers’ results of operations.

 

The workforce of CMS Energy and Consumers is aging and a number of employees will become eligible to retire within the next few years. If CMS Energy and Consumers were unable to match skill sets to future needs, they could encounter operating challenges and increased costs. These challenges could include a lack of resources, loss of knowledge, and delays in skill development. Additionally, higher costs could result from the use of contractors to replace employees, loss of productivity, and safety incidents. Failing to train replacement employees adequately and to transfer internal knowledge and expertise could adversely affect CMS Energy’s and Consumers’ ability to manage and operate their businesses. If CMS Energy and Consumers were unable to attract and retain an appropriately qualified workforce, their financial condition and results of operations could be affected negatively.

 

Unplanned power plant outages could be costly for Consumers.

 

Unforeseen maintenance of Consumers’ power plants may be required for many reasons, including catastrophic events such as fires, explosions, extreme weather, floods or other acts of God, equipment failure, operator error, or the need to comply with environmental or safety regulations. When unplanned maintenance work is required on power plants or other equipment, Consumers will not only incur unexpected maintenance expenses, but it may also have to make spot market purchases of replacement electricity that exceed Consumers’ costs of generation or be forced to retire a given unit if the cost or timing of the maintenance is not reasonable and prudent. Additionally, unplanned maintenance work could reduce the capacity credit Consumers receives from MISO and could cause Consumers to incur additional capacity costs in future years. If Consumers were unable to recover any of these increased costs in rates, it could have a material adverse effect on Consumers’ liquidity, financial condition, and results of operations.

 

Changes in taxation as well as the inherent difficulty in quantifying potential tax effects of business decisions could negatively impact CMS Energy and Consumers.

 

CMS Energy and Consumers are required to make judgments regarding the potential tax effects of various financial transactions and results of operations in order to estimate their obligations to taxing authorities. The tax obligations include income, real estate, sales and use taxes, employment-related taxes, and ongoing issues related to these tax matters. The judgments include determining reserves for potential adverse outcomes regarding tax positions that have been taken and may be subject to challenge by the IRS and/or other taxing authorities. Unfavorable settlements of any of the issues related to these reserves or other tax matters at CMS Energy or Consumers could have a material adverse effect on their liquidity, financial condition, and results of operations.

 

CMS Energy and Consumers are subject to changing tax laws. Increases in federal, state, or local tax rates or other changes in tax laws could have adverse impacts on their liquidity, financial condition, and results of operations.

 

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CMS Energy and its subsidiaries, including Consumers and EnerBank, must comply with the Dodd-Frank Act and its related regulations, which are subject to change and could involve material costs or affect operations.

 

Regulations that are intended to implement the Dodd-Frank Act have been and are still being adopted by the appropriate agencies. The Dodd-Frank Act added a new Section 13 to the Bank Holding Company Act. Known as the Volcker Rule, it generally restricts certain banking entities (such as EnerBank) and their subsidiaries or affiliates from engaging in proprietary trading activities and from owning equity in or sponsoring any private equity or hedge fund. The statutory effective date of the Volcker Rule was July 2012, but it is subject to certain transition periods and exceptions for “permitted activities.” In 2013, the Federal Reserve Board issued final regulations clarifying that banks and other financial institutions had until 2015 to conform fully their activities and investments to the requirements. In December 2014, the Federal Reserve Board issued an order extending to July 2016 the date by which banking entities must comply with the Volcker Rule’s prohibition on owning interests in covered funds and further indicated its intention to grant another extension, in December 2015, of the covered funds deadline to July 2017. Under the statute, the activities of CMS Energy and its subsidiaries (including EnerBank) are not expected to be materially affected; however, they will be restricted from engaging in proprietary trading, investing in third-party hedge or private equity funds, and sponsoring these funds in the future unless CMS Energy qualifies for an exemption from the rule. CMS Energy and its subsidiaries are also subject to certain ongoing compliance requirements pursuant to the regulations. CMS Energy cannot predict the full impact of the Volcker Rule on CMS Energy’s or EnerBank’s operations or financial condition.

 

Effective July 2011, all companies that directly or indirectly control an FDIC-insured bank are required to serve as a source of financial strength for that institution. As a result, CMS Energy could be called upon by the FDIC to infuse additional capital into EnerBank to the extent that EnerBank fails to satisfy its capital requirements. In addition, CMS Energy is contractually required (i) to make cash capital contributions to EnerBank in the event that EnerBank does not maintain required minimum capital ratios and (ii) to provide EnerBank financial support, in an amount and duration as may be necessary for EnerBank to meet the cash needs of its depositors and other operations. EnerBank has exceeded these requirements historically and exceeds them as of February 2016.

 

In addition, the Dodd-Frank Act provides for regulation by the Commodity Futures Trading Commission of certain commodity-related contracts. Although CMS Energy, Consumers, and CMS ERM qualify for an end-user exception from mandatory clearing of commodity-related swaps, these regulations could affect the ability of these entities to participate in these markets and could add additional regulatory oversight over their contracting activities.

 

Item 1B. Unresolved Staff Comments

 

None.

 

Item 2. Properties

 

Descriptions of CMS Energy’s and Consumers’ properties are found in the following sections of Item 1. Business, all of which are incorporated by reference in this Item 2:

 

·                 General—CMS Energy

·                 General—Consumers

·                 Business Segments—Consumers Electric Utility—Electric Utility Properties

·                 Business Segments—Consumers Gas Utility—Gas Utility Properties

·                 Business Segments—Enterprises Segment—Non-Utility Operations and Investments—Independent Power Production

 

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Item 3. Legal Proceedings

 

For information regarding CMS Energy’s and Consumers’ significant pending administrative and judicial proceedings involving regulatory, operating, transactional, environmental, and other matters, see Item 8. Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements—Note 3, Regulatory Matters and Note 4, Contingencies and Commitments.

 

CMS Energy, Consumers, and certain of their affiliates are also parties to routine lawsuits and administrative proceedings incidental to their businesses involving, for example, claims for personal injury and property damage, contractual matters, various taxes, and rates and licensing.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Part II

 

Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

CMS ENERGY

 

CMS Energy’s common stock is traded on the New York Stock Exchange. Market prices for CMS Energy’s common stock and related security holder matters are contained in Item 8. Financial Statements and Supplementary Data—MD&A and Notes to the Consolidated Financial Statements—Note 20, Quarterly Financial and Common Stock Information (Unaudited), which are incorporated by reference herein. At January 13, 2016, the number of registered holders of CMS Energy’s common stock totaled 33,451, based on the number of record holders. Presented in the following table are CMS Energy’s dividends on its common stock:

 

 

 

 

 

 

 

 

 

Per Share

 

Period

 

February

 

May

 

August

 

November

 

2015

 

$   0.29

 

$   0.29

 

$   0.29

 

$   0.29

 

2014

 

 0.27

 

 0.27

 

 0.27

 

 0.27

 

 

For additional information regarding securities authorized for issuance under equity compensation plans, see Item 8. Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements—Note 13, Stock-Based Compensation and Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. For additional information regarding dividends and dividend restrictions, see Item 8. Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements—Note 5, Financings and Capitalization.

 

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CONSUMERS

 

Consumers’ common stock is privately held by its parent, CMS Energy, and does not trade in the public market. Presented in the following table are Consumers’ cash dividends on its common stock:

 

 

 

 

 

 

 

 

 

In Millions

 

Period

 

February

 

May

 

August

 

November

 

2015

 

$      122

 

$    132

 

$    105

 

$   115

 

2014

 

135

 

120

 

120

 

82

 

 

For additional information regarding dividends and dividend restrictions, see Item 8. Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements—Note 5, Financings and Capitalization.

 

ISSUER REPURCHASES OF EQUITY SECURITIES

 

Presented in the following table are CMS Energy’s repurchases of equity securities for the three months ended December 31, 2015:

 

 

 

 

 

 

 

Total Number of

 

Maximum Number of

 

 

 

 

 

 

 

Shares Purchased as

 

Shares That May Yet Be

 

 

 

Total Number

 

Average

 

Part of Publicly

 

Purchased Under

 

 

 

of Shares

 

Price Paid

 

Announced Plans or

 

Publicly Announced

 

Period

 

Purchased1

 

per Share

 

Programs

 

Plans or Programs

 

October 1, 2015 to

 

 

 

 

 

 

 

 

 

October 31, 2015

 

2,042

 

$  36.45

 

-

 

-

 

November 1, 2015 to

 

 

 

 

 

 

 

 

 

November 30, 2015

 

-

 

-

 

-

 

-

 

December 1, 2015 to

 

 

 

 

 

 

 

 

 

December 31, 2015

 

634

 

34.24

 

-

 

-

 

Total

 

2,676

 

$  35.93

 

-

 

-

 

 

1                   All of the common shares were repurchased to satisfy the minimum statutory income tax withholding obligation for common shares that have vested under the PISP. The value of shares repurchased is based on the market price on the vesting date.

 

UNREGISTERED SALES OF EQUITY SECURITIES

 

None.

 

Item 6. Selected Financial Data

 

Selected financial information for CMS Energy and Consumers is contained in Item 8. Financial Statements and Supplementary Data—Selected Financial Information, which is incorporated by reference herein.

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Management’s discussion and analysis of financial condition and results of operations for CMS Energy and Consumers is contained in Item 8. Financial Statements and Supplementary Data—MD&A, which is incorporated by reference herein.

 

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

 

Quantitative and qualitative disclosures about market risk for CMS Energy and Consumers are contained in Item 8. Financial Statements and Supplementary Data—MD&A—Critical Accounting Policies and Estimates—Financial and Derivative Instruments and Market Risk Information, which is incorporated by reference herein.

 

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Item 8. Financial Statements and Supplementary Data

 

Index to Financial Statements

Page

Selected Financial Information

 

CMS Energy

46

Consumers

47

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

48

Consolidated Financial Statements

 

CMS Energy

78

Consumers

86

Notes to the Consolidated Financial Statements

93

Reports of Independent Registered Public Accounting Firm

 

CMS Energy

153

Consumers

154

 

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CMS Energy Corporation

Selected Financial Information

 

 

 

 

2015

 

2014

 

2013

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenue (in millions)

 

($)

6,456

 

7,179

 

6,566

 

6,253

 

6,503

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from equity method investees (in millions)

 

($)

14

 

15

 

13

 

17

 

9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations (in millions)1

 

($)

525

 

479

 

454

 

377

 

415

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from discontinued operations (in millions)

 

($)

 

 

 

7

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income available to common stockholders (in millions)

 

($)

523

 

477

 

452

 

382

 

415

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average common shares outstanding (in thousands)

 

 

275,600

 

270,580

 

264,511

 

260,678

 

250,824

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings from continuing operations per average common share

 

 

 

 

 

 

 

 

 

 

 

 

CMS Energy

– Basic

 

($)

1.90

 

1.76

 

1.71

 

1.43

 

1.65

 

 

– Diluted

 

($)

1.89

 

1.74

 

1.66

 

1.39

 

1.57

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per average common share

 

 

 

 

 

 

 

 

 

 

 

 

CMS Energy

– Basic

 

($)

1.90

 

1.76

 

1.71

 

1.46

 

1.66

 

 

– Diluted

 

($)

1.89

 

1.74

 

1.66

 

1.42

 

1.58

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash provided by operations (in millions)

 

($)

1,640

 

1,447

 

1,421

 

1,241

 

1,169

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures, excluding assets placed under capital lease (in millions)

 

($)

1,564

 

1,577

 

1,325

 

1,227

 

882

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets (in millions)2

 

($)

20,340

 

19,185

 

17,290

 

17,131

 

16,428

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt, excluding current portion (in millions)

 

($)

8,441

 

8,016

 

7,101

 

6,710

 

6,040

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-current portion of capital leases and financing obligation (in millions)

 

($)

118

 

123

 

138

 

153

 

167

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

 

($)

1.16

 

1.08

 

1.02

 

0.96

 

0.84

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Market price of common stock at year-end

 

($)

36.08

 

34.75

 

26.77

 

24.38

 

22.08

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Book value per common share at year-end

 

($)

14.21

 

13.33

 

12.98

 

12.09

 

11.92

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total employees at year-end

 

 

7,804

 

7,747

 

7,781

 

7,541

 

7,754

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Electric Utility Statistics

 

 

 

 

 

 

 

 

 

 

 

 

Sales (billions of kWh)

 

 

37

 

38

 

37

 

38

 

38

 

Customers (in thousands)

 

 

1,803

 

1,793

 

1,793

 

1,786

 

1,791

 

Average sales rate per kWh

 

(¢)

11.39

 

12.04

 

11.52

 

10.94

 

10.80

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gas Utility Statistics

 

 

 

 

 

 

 

 

 

 

 

 

Sales and transportation deliveries (bcf)

 

 

356

 

373

 

352

 

329

 

337

 

Customers (in thousands)3

 

 

1,741

 

1,733

 

1,724

 

1,715

 

1,713

 

Average sales rate per mcf

 

($)

7.89

 

8.83

 

8.51

 

9.55

 

9.98

 

 

1                   Income from continuing operations includes income attributable to noncontrolling interests of $2 million in each of 2015, 2014, 2013, 2012, and 2011.

 

2                   At December 31, 2015, CMS Energy changed the reporting of current deferred income taxes on the consolidated balance sheets in accordance with ASU 2015-17, Balance Sheet Classification of Deferred Taxes, and retrospectively adjusted prior period amounts for comparability. Specifically, current deferred income tax assets of $126 million in 2013 and $24 million in 2011 were reclassified to and netted against non-current deferred income tax liabilities, which reduced total assets in those years. For further details on the adoption of this standard, see Note 2, New Accounting Standards.

 

3                   Excludes off-system transportation customers.

 

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Consumers Energy Company

Selected Financial Information

 

 

 

 

2015

 

2014

 

2013

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenue (in millions)

 

($)

6,165

 

6,800

 

6,321

 

6,013

 

6,253

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (in millions)

 

($)

594

 

567

 

534

 

439

 

467

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income available to common stockholder (in millions)

 

($)

592

 

565

 

532

 

437

 

465

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash provided by operations (in millions)

 

($)

1,794

 

1,338

 

1,351

 

1,353

 

1,323

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures, excluding assets placed under capital lease (in millions)

 

($)

1,537

 

1,573

 

1,320

 

1,222

 

876

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets (in millions)

 

($)

18,658

 

17,847

 

16,179

 

16,275

 

15,662

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt, excluding current portion (in millions)

 

($)

5,206

 

5,154

 

4,579

 

4,297

 

3,987

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-current portion of capital leases and financing obligation (in millions)

 

($)

118

 

123

 

138

 

153

 

167

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total preferred stock (in millions)

 

($)

37

 

37

 

37

 

44

 

44

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of preferred stockholders at year-end

 

 

1,156

 

1,191

 

1,248

 

1,378

 

1,428

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total employees at year-end

 

 

7,394

 

7,388

 

7,435

 

7,221

 

7,452

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Electric Utility Statistics

 

 

 

 

 

 

 

 

 

 

 

 

Sales (billions of kWh)

 

 

37

 

38

 

37

 

38

 

38

 

Customers (in thousands)

 

 

1,803

 

1,793

 

1,793

 

1,786

 

1,791

 

Average sales rate per kWh

 

(¢)

11.39

 

12.04

 

11.52

 

10.94

 

10.80

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gas Utility Statistics

 

 

 

 

 

 

 

 

 

 

 

 

Sales and transportation deliveries (bcf)

 

 

356

 

373

 

352

 

329

 

337

 

Customers (in thousands)1

 

 

1,741

 

1,733

 

1,724

 

1,715

 

1,713

 

Average sales rate per mcf

 

($)

7.89

 

8.83

 

8.51

 

9.55

 

9.98

 

 

1                   Excludes off-system transportation customers.

 

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CMS Energy Corporation

Consumers Energy Company

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

 

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

 

EXECUTIVE OVERVIEW

 

CMS Energy is an energy company operating primarily in Michigan. It is the parent holding company of several subsidiaries, including Consumers, an electric and gas utility, and CMS Enterprises, primarily a domestic independent power producer. Consumers’ electric utility operations include the generation, purchase, 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

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

 

CMS Energy’s and Consumers’ business strategy emphasizes the key elements depicted below:

 

 

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Accountability is part of CMS Energy’s and Consumers’ corporate culture. CMS Energy and Consumers are committed to making the right choices to serve their customers safely and affordably and to acting responsibly as corporate citizens. CMS Energy and Consumers hold themselves accountable to the highest standards of safety, operational performance, and ethical behavior, and work diligently to comply with all laws, rules, and regulations that govern the electric and gas industry. Consumers’ 2015 Accountability Report, which is available to the public, provides an overview of Consumers’ efforts to continue meeting Michigan’s energy needs safely and efficiently, and highlights Consumers’ commitment to Michigan businesses, its corporate citizenship, and its role in reducing the state’s air emissions.

 

Safe, Excellent Operations

 

The safety of employees, customers, and the general public remains a priority of CMS Energy and Consumers. Accordingly, CMS Energy and Consumers have worked to integrate a set of safety principles into their business operations and culture. These principles include complying with applicable safety, health, and security regulations and implementing programs and processes aimed at continually improving safety and security conditions. 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.

 

Customer Value

 

Consumers is undertaking a number of initiatives that reflect its intensified customer focus. Consumers’ planned investments in reliability are aimed at improving safety, reducing customer outage frequency, reducing repetitive outages, and increasing customer satisfaction. In 2015, Consumers attained reductions in the duration of electric customer outages and in the frequency of forced outages of its electric generation facilities. Consumers’ intensified customer focus has led to measureable improvements in customer satisfaction.

 

Also, in order to minimize increases in customer base rates, Consumers has undertaken several additional initiatives to reduce costs. 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. In addition, Consumers’ gas commodity costs have declined by 64 percent over the last ten years, 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’ investment program focuses on projects that will enhance customer value. During 2015, Consumers completed the purchase of a 540-MW natural gas-fueled electric generating plant located in Jackson, Michigan for $155 million. Anticipating the planned retirement of seven coal-fueled electric generating units by April 2016, Consumers acquired the natural gas-fueled plant to help address its future capacity requirements and to provide customers with a reliable, cost-effective, and cleaner source of electricity.

 

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 five to seven percent while allowing Consumers to maintain sustainable customer base rate increases (excluding PSCR and GCR charges) at or below the rate of inflation.

 

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Over the next five years, Consumers expects to make capital investments of about $8.4 billion, as presented in the following illustration:

 

 

Consumers’ planned base capital investments of $4.1 billion represent projects to maintain Consumers’ system and comprise $2.5 billion at the electric utility to preserve reliability and capacity and $1.6 billion at the gas utility to sustain deliverability and enhance pipeline integrity. An additional $2.7 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 $1.1 billion at the electric utility to strengthen circuits and substations and replace poles. Consumers also expects to spend $0.7 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, from 2016 through 2017.

 

Regulation

 

Regulatory matters are a key aspect of CMS Energy’s and Consumers’ businesses, particularly Consumers’ rate cases and regulatory proceedings before the MPSC. In July 2015, Michigan Governor Rick Snyder appointed Norm Saari to serve on the three-member MPSC for a six-year term beginning in August 2015, replacing retiring Commissioner Greg White. The governor also appointed Commissioner Sally Talberg to chair the MPSC beginning in January 2016, replacing John Quackenbush, who will remain a commissioner through March 2016. Other important regulatory events and developments are summarized below.

 

·                 Electric Rate Cases: In December 2014, Consumers filed an application with the MPSC seeking an annual rate increase of $163 million, based on a 10.7 percent authorized return on equity. In June 2015, Consumers self-implemented an annual rate increase of $110 million, subject to refund with interest. The MPSC issued an order in November 2015, authorizing an annual rate

 

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increase of $165 million, based on a 10.3 percent authorized rate of return on equity. In April 2016, upon the planned retirement of seven coal-fueled electric generating units, the annual rate increase will be reduced by $39 million to $126 million.

 

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

 

The filing also seeks approval of two rate adjustment mechanisms: one that would reconcile annually Consumers’ actual weather-adjusted nonfuel revenues with the revenues approved by the MPSC, and another that would allow recovery of an additional $147 million associated with investments to be made from January 2017 through December 2019, subject to reconciliation. These future investments would help to ensure adequate system capacity and deliverability. In January 2016, Consumers self-implemented an annual rate increase of $60 million, subject to refund with interest.

 

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

 

In early 2015, members of the Michigan Senate and House of Representatives introduced various bills addressing renewable energy and energy efficiency and proposing changes to the regulatory process, such as establishing an energy planning process to determine the need for new energy investment. The bills also address ROA. 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. The bills introduced during 2015 propose a range of changes to ROA, including eliminating ROA, maintaining the existing ROA program but imposing conditions on a customer’s return to utility service, and raising the ROA limit. If the ROA limit were increased or if electric generation service in Michigan were deregulated, it could have a material adverse effect on Consumers’ financial results and operations. Presently, 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.

 

Environmental regulation is another area of importance for CMS Energy and Consumers, and they are monitoring numerous legislative and regulatory initiatives, including initiatives to regulate greenhouse gases, and related litigation. CMS Energy and Consumers believe that environmental laws and regulations related to their operations will continue to become more stringent and require them to make additional substantial capital expenditures for emissions control equipment, CCR disposal and storage, cooling water intake equipment, effluent treatment, and PCB remediation. Present and reasonably anticipated state and federal environmental statutes and regulations, including but not limited to the Clean Air Act, including the Clean Power Plan, as well as the Clean Water Act, the Resource Conservation and Recovery Act, and CERCLA, will continue to have a material effect on CMS Energy and Consumers.

 

Financial Performance in 2015 and Beyond

 

In 2015, CMS Energy’s net income available to common stockholders was $523 million, and diluted EPS were $1.89. This compares with net income available to common stockholders of $477 million and

 

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diluted EPS of $1.74 in 2014. Among the various factors contributing to CMS Energy’s improved performance in 2015 were electric and gas rate increases, which were offset partially by decreased gas sales due primarily to colder winter weather in 2014.

 

Consumers’ utility operations are seasonal. The consumption of electric energy typically increases in the summer months, due primarily to the use of air conditioners and other cooling equipment, while peak demand for natural gas occurs in the winter due to colder temperatures and the resulting use of natural gas as heating fuel. In addition, Consumers’ electric rates, which follow a seasonal rate design, are higher in the summer months than in the remaining months of the year. A more detailed discussion of the factors affecting CMS Energy’s and Consumers’ performance can be found in the Results of Operations section that follows this Executive Overview.

 

Michigan is ranked third among states based on its strong economic growth since 2010. Consumers expects that the continued rise in industrial production will drive its electric deliveries to increase annually by about 0.5 to 1.0 percent on average through 2020. Excluding the impacts of energy efficiency programs, Consumers expects its electric deliveries to increase by about 1.0 to 1.5 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.

 

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RESULTS OF OPERATIONS

 

CMS Energy Consolidated Results of Operations

 

 

 

In Millions, Except Per Share Amounts

 

Years Ended December 31

 

2015

 

2014

 

2013

 

Net Income Available to Common Stockholders

 

$

523

 

$

477

 

$

452

 

Basic Earnings Per Share

 

$

1.90

 

$

1.76

 

$

1.71

 

Diluted Earnings Per Share

 

$

1.89

 

$

1.74

 

$

1.66

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In Millions

 

Years Ended December 31

 

2015

 

2014

 

Change

 

2014

 

2013

 

Change

 

Electric utility

 

$

437

 

$

384

 

$

53

 

$

384

 

$

363

 

$

21

 

Gas utility

 

154

 

179

 

(25

)

179

 

168

 

11

 

Enterprises

 

4

 

(1

)

5

 

(1

)

2

 

(3

)

Corporate interest and other

 

(72

)

(85

)

13

 

(85

)

(81

)

(4

)

Net Income Available to Common Stockholders

 

$

523

 

$

477

 

$

46

 

$

477

 

$

452

 

$

25

 

 

Presented in the following table are specific after-tax changes to net income available to common stockholders for 2015 versus 2014:

 

 

 

In Millions

 

Reasons for the change

 

2015 better/(worse) than 2014

 

Consumers electric utility and gas utility

 

 

 

 

 

 

 

Electric sales

 

 

 

 

 

 

 

Weather

 

$

(2

)

 

 

 

 

Non-weather

 

1

 

$

(1)

 

 

 

Gas sales

 

 

 

 

 

 

 

Weather

 

(49

)

 

 

 

 

Non-weather

 

3

 

(46)

 

 

 

Electric rate increase

 

 

 

38

 

 

 

Gas rate increase

 

 

 

27

 

 

 

Operating and maintenance costs

 

 

 

27

 

 

 

Charitable and political contributions

 

 

 

15

 

 

 

State of Michigan use tax settlement

 

 

 

14

 

 

 

Cross Winds® Energy Park production tax credits

 

 

 

8

 

 

 

Depreciation and property taxes

 

 

 

(43)

 

 

 

Employee benefit costs

 

 

 

(24)

 

 

 

Other

 

 

 

13

 

$

28

 

Enterprises

 

 

 

 

 

 

 

Absence of increase in Bay Harbor environmental liability

 

 

 

 

 

9

 

Subsidiary earnings

 

 

 

 

 

5

 

DIG outage, including planned major maintenance

 

 

 

 

 

(9

)

Corporate interest and other

 

 

 

 

 

 

 

Absence of early extinguishment of debt

 

 

 

 

 

12