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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

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

 

 

For the quarterly period ended June 30, 2017

 

 

OR

 

 

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

 

For the transition period from_____to_____

 

Commission

 

Registrant; State of Incorporation;

 

IRS Employer

File Number

 

Address; and Telephone Number

 

Identification No.

1-9513

 

CMS ENERGY CORPORATION

 

38-2726431

 

 

(A Michigan Corporation)

 

 

 

 

One Energy Plaza, Jackson, Michigan 49201

 

 

 

 

(517) 788-0550

 

 

 

 

 

 

 

1-5611

 

CONSUMERS ENERGY COMPANY

 

38-0442310

 

 

(A Michigan Corporation)

 

 

 

 

One Energy Plaza, Jackson, Michigan 49201

 

 

 

 

(517) 788-0550

 

 

 

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

CMS Energy Corporation: Yes x  No o

Consumers Energy Company: Yes x  No o

 

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

CMS Energy Corporation: Yes x  No o

Consumers Energy Company: Yes x  No o

 

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

CMS Energy Corporation:

 

Large accelerated filer x

Accelerated filer o

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

Smaller reporting company o

Emerging growth company o

 

Consumers Energy Company:

 

Large accelerated filer o

Accelerated filer o

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

Smaller reporting company o

Emerging growth company o

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

CMS Energy Corporation: o

Consumers Energy Company: o

 

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

CMS Energy Corporation: Yes o  No x

Consumers Energy Company: Yes o  No x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock at July 11, 2017:

CMS Energy Corporation:

 

 

CMS Energy Common Stock, $0.01 par value

 

 

(including 443,148 shares owned by Consumers Energy Company)

 

282,012,704

Consumers Energy Company:

 

 

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

 

84,108,789

 



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CMS Energy Corporation

Consumers Energy Company

Quarterly Reports on Form 10-Q to the Securities and Exchange Commission for the Period Ended June 30, 2017

 

TABLE OF CONTENTS

 

Glossary

2

Filing Format

7

Available Information

7

Forward-Looking Statements and Information

7

Part I—Financial Information

11

Item 1.

Financial Statements

11

Item 2.

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

70

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

70

Item 4.

Controls and Procedures

70

Part II—Other Information

70

Item 1.

Legal Proceedings

70

Item 1A.

Risk Factors

71

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

71

Item 3.

Defaults Upon Senior Securities

71

Item 4.

Mine Safety Disclosures

71

Item 5.

Other Information

71

Item 6.

Exhibits

71

 

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GLOSSARY

 

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

 

2016 Energy Law
Comprehensive energy reform package enacted in Michigan in 2016

 

2016 Form 10-K
Each of CMS Energy’s and Consumers’ Annual Report on Form 10-K for the year ended December 31, 2016

 

ABATE
Association of Businesses Advocating Tariff Equity

 

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

 

Cantera Gas Company
Cantera Gas Company LLC, a non-affiliated company, formerly known as CMS Field Services

 

Cantera Natural Gas, Inc.
Cantera Natural Gas, Inc., a non-affiliated company that purchased CMS Field Services

 

CCR
Coal combustion residual

 

CEO
Chief Executive Officer

 

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

 

CFO
Chief Financial Officer

 

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

 

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

 

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

 

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

 

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

 

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

 

CSAPR
The Cross-State Air Pollution Rule

 

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

 

DB SERP
Defined Benefit Supplemental Executive Retirement Plan

 

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

 

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

 

EBITDA
Earnings before interest, taxes, depreciation, and amortization

 

EEI
Edison Electric Institute, an association representing all U.S. investor-owned electric companies

 

EnerBank
EnerBank USA, a wholly owned subsidiary of CMS Capital

 

energy waste reduction
The reduction of energy consumption through energy efficiency and demand-side energy conservation, as established under the 2016 Energy Law

 

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Entergy
Entergy Corporation, a non-affiliated company

 

EPA
U.S. Environmental Protection Agency

 

EPS
Earnings per share

 

Exchange Act
Securities Exchange Act of 1934

 

FDIC
Federal Deposit Insurance Corporation

 

FERC
The Federal Energy Regulatory Commission

 

Forsite
Forsite Development, Inc. and its subsidiaries, each a non-affiliated company

 

FTR
Financial transmission right

 

GAAP
U.S. Generally Accepted Accounting Principles

 

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

 

GCR
Gas cost recovery

 

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

 

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

 

Ludington
Ludington pumped-storage plant, jointly owned by Consumers and DTE Electric Company, a non-affiliated company

 

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

 

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

 

MDEQ
Michigan Department of Environmental Quality

 

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MGP
Manufactured gas plant

 

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

 

MISO
Midcontinent Independent System Operator, Inc.

 

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

 

MPSC
Michigan Public Service Commission

 

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

 

NAAQS
National Ambient Air Quality Standards

 

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

 

PCB
Polychlorinated biphenyl

 

PPA
Power purchase agreement

 

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PSCR
Power supply cost recovery

 

RCRA
The Federal Resource Conservation and Recovery Act of 1976

 

REC
Renewable energy credit

 

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

 

SEC
U.S. Securities and Exchange Commission

 

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

 

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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FILING FORMAT

 

This combined Form 10-Q is separately filed by CMS Energy and Consumers. Information in this combined Form 10-Q relating to each individual registrant is filed by such registrant on its own behalf. Consumers makes no representation regarding information relating to any other companies affiliated with CMS Energy other than its own subsidiaries. None of CMS Energy, CMS Enterprises, nor any of CMS Energy’s other subsidiaries (other than Consumers) has any obligation in respect of Consumers’ debt securities and holders of such debt securities should not consider the financial resources or results of operations of CMS Energy, CMS Enterprises, nor any of CMS Energy’s other subsidiaries (other than Consumers and its own subsidiaries (in relevant circumstances)) in making a decision with respect to Consumers’ debt securities. Similarly, neither Consumers nor any other subsidiary of CMS Energy has any obligation in respect of debt securities of CMS Energy.

 

This report should be read in its entirety. No one section of this report deals with all aspects of the subject matter of this report. This report should be read in conjunction with the consolidated financial statements and related notes and with MD&A included in the 2016 Form 10-K.

 

AVAILABLE INFORMATION

 

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

 

FORWARD-LOOKING STATEMENTS AND INFORMATION

 

This Form 10-Q and other CMS Energy and Consumers disclosures may contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. The use of “might,” “may,” “could,” “should,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “projects,” “forecasts,” “predicts,” “assumes,” and other similar words is intended to identify forward-looking statements that involve risk and uncertainty. This discussion of potential risks and uncertainties is designed to highlight important factors that may impact CMS Energy’s and Consumers’ businesses and financial outlook. CMS Energy and Consumers have no obligation to update or revise forward-looking statements regardless of whether new information, future events, or any other factors affect the information contained in the statements. These forward-looking statements are subject to various factors that could cause CMS Energy’s and Consumers’ actual results to differ materially from the results anticipated in these statements. These factors include, but are not limited to, the following, all of which are potentially significant:

 

·                 the impact of new regulation by the MPSC, FERC, and other applicable governmental proceedings and regulations, including any associated impact on electric or gas rates or rate structures

 

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

 

·                 changes in the performance of or regulations applicable to MISO, Michigan Electric Transmission Company, LLC, 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 challenges to 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, infrastructure integrity or security,

 

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gas pipeline safety, gas pipeline capacity, energy waste reduction, the environment, regulation or deregulation, reliability, health care reforms (including comprehensive health care reform enacted in 2010), taxes, accounting matters, climate change, air emissions, renewable energy, potential effects of the Dodd-Frank Act, and other business issues that could have an impact on CMS Energy’s, Consumers’, or any of their affiliates’ businesses or financial results

 

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

 

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

 

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

 

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

 

·                 changes in energy markets, including availability and price of electric capacity and the timing and extent of changes in commodity prices and availability and deliverability of coal, natural gas, natural gas liquids, electricity, oil, and certain related products

 

·                 the price of CMS Energy common stock, the credit ratings of CMS Energy and Consumers, capital and financial market conditions, and the effect of these market conditions on CMS Energy’s and Consumers’ interest costs and access to the capital markets, including availability of financing to CMS Energy, Consumers, or any of their affiliates

 

·                 the investment performance of the assets of CMS Energy’s and Consumers’ pension and benefit plans, the discount rates used in calculating the plans’ obligations, and the resulting impact on future funding requirements

 

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

 

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

 

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

 

·                 national, regional, and local economic, competitive, and regulatory policies, conditions, and developments

 

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

 

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·                 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 and consumer protection 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, acquisition of property rights, and government approvals

 

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

 

·                 changes or disruption in fuel supply, including but not limited to supplier bankruptcy and delivery disruptions

 

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

 

·                 technological developments in energy production, storage, delivery, usage, and metering

 

·                 the ability to implement technology successfully

 

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

 

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

 

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

 

·                 the reputational impact on CMS Energy and Consumers of operational incidents, violations of corporate policies, regulatory violations, inappropriate use of social media, and other events

 

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

 

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

 

·                 changes in financial or regulatory accounting principles or policies

 

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

 

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

 

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Part I—Financial Information

 

Item 1.                     Financial Statements

 

INDEX TO FINANCIAL STATEMENTS

 

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

12

CMS Energy Consolidated Financial Statements

36

Consolidated Statements of Income (Unaudited)

36

Consolidated Statements of Comprehensive Income (Unaudited)

37

Consolidated Statements of Cash Flows (Unaudited)

39

Consolidated Balance Sheets (Unaudited)

40

Consolidated Statements of Changes in Equity (Unaudited)

42

Consumers Consolidated Financial Statements

44

Consolidated Statements of Income (Unaudited)

44

Consolidated Statements of Comprehensive Income (Unaudited)

45

Consolidated Statements of Cash Flows (Unaudited)

47

Consolidated Balance Sheets (Unaudited)

48

Consolidated Statements of Changes in Equity (Unaudited)

50

Notes to the Unaudited Consolidated Financial Statements

51

1:

New Accounting Standards

51

2:

Regulatory Matters

53

3:

Contingencies and Commitments

54

4:

Financings and Capitalization

58

5:

Fair Value Measurements

59

6:

Financial Instruments

61

7:

Notes Receivable

63

8:

Retirement Benefits

64

9:

Income Taxes

65

10:

Earnings Per Share—CMS Energy

65

11:

Cash and Cash Equivalents

66

12:

Reportable Segments

67

 

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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

·                 their securities’ credit ratings

 

CMS Energy’s purpose is to achieve world class performance to enable delivering hometown service. CMS Energy is focused on the “triple bottom line” of people, planet, and profit, which is underpinned by performance. This purpose and focus enhance and are supported by CMS Energy’s and Consumers’ business strategy, whose key elements are safe and excellent operations, customer value, utility investment, fair and timely regulation, and consistent financial performance. The companies are committed to sustainable business practices and to a strong ethical culture. Consumers’ 2017 Sustainability Report, which is available to the public, describes the progress that Consumers has made in the four foundational areas of safe and excellent operations, environmental quality, social responsibility, and economic prosperity. In a 2016 report published by Sustainalytics, a global leader in sustainability research and analysis, CMS Energy scored the highest among 54 U.S. utilities in environmental, social, and governance performance.

 

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Safe and 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. The number of recordable safety incidents in 2016 was the lowest in Consumers’ history and its incident rate was the lowest among its EEI peer group.

 

Customer Value

 

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

 

Additionally, Consumers has undertaken several initiatives to keep electricity and natural gas affordable for its customers. These initiatives include the adoption of a lean operating model that is focused on completing work safely and correctly the first time, thus minimizing rework and waste, while delivering services on time. Other cost-saving initiatives undertaken by Consumers 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 declined by 68 percent from 2006 through 2016, due not only to a decrease in market prices but also to Consumers’ improvements to its gas infrastructure and optimization of its gas purchasing and storage strategy. These gas commodity savings are passed on to customers.

 

In December 2016, Consumers and Entergy reached an agreement to terminate their PPA in May 2018, four years ahead of schedule. Under the PPA, Consumers purchases virtually all of the capacity and energy produced by Palisades, up to the annual average capacity of 798 MW. The prices that Consumers pays under the PPA, and which it recovers from its electric customers, are presently higher than the cost to purchase electricity from the market operated by MISO. Under the agreement, Consumers will make a termination payment of $172 million to Entergy. Consumers expects that, as a result of terminating the PPA, its electric customers will realize substantial savings from lower future energy and capacity costs. Actual savings will depend on market conditions. The agreement is contingent on the MPSC’s approval of Consumers’ recovery in electric rates of the termination payment. The MPSC has indicated that it will make a final determination on this recovery by the end of September 2017, after full evaluation of the prudency of the termination payment and of how the termination will impact Michigan’s electric reliability and resource adequacy.

 

Utility Investment

 

Consumers expects to make capital investments of $18 billion from 2017 through 2026. While it 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 affordable service to its customers. Consumers’ capital investment program is expected to result in annual rate-base growth of six to eight percent. This rate-base growth, together with cost-control initiatives, should allow Consumers to maintain sustainable customer base rate increases (excluding PSCR and GCR charges) at or below the rate of inflation.

 

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Presented in the following illustration are planned capital investments of $9.0 billion that Consumers expects to make from 2017 through 2021:

 

 

 

 

 

 

 

 

 

Gas distribution
($4.0 billion)

 

 

Electric distribution
($4.0 billion)

 

 

Electric supply ($1.0 billion)

 

 

 

 

 

 

 

 

 

Consumers’ planned distribution capital investments of $8.0 billion represent projects to maintain its gas and electric systems, enhance reliability, and improve customer satisfaction. These investments comprise $4.0 billion at the gas utility to sustain deliverability, enhance pipeline integrity and safety, replace mains, and enhance transmission and storage systems, and $4.0 billion at the electric utility to strengthen circuits and substations and replace poles. Consumers also expects to spend $1.0 billion on electric supply investments, representing new generation, including renewable generation, and environmental investments needed to comply with state and federal laws and regulations.

 

Regulation

 

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

 

·                 Electric Rate Case: In March 2017, Consumers filed an application with the MPSC seeking an annual rate increase of $173 million, based on a 10.5 percent authorized return on equity.

 

·                 Gas Rate Case: In August 2016, Consumers filed an application with the MPSC seeking an annual rate increase of $90 million, based on a 10.6 percent authorized return on equity. In March 2017, Consumers reduced its requested annual rate increase to $80 million. The filing seeks approval of two rate adjustment mechanisms: one that would reconcile annually Consumers’ actual nonfuel revenues with the revenues approved by the MPSC, and another that would provide for additional annual rate increases of $35 million beginning in 2018 and another $35 million beginning in 2019 for incremental investments that Consumers plans to make in those years, subject to reconciliation. The MPSC issued an order in January 2017, limiting Consumers’ self-implementation to an annual rate increase of $20 million. Accordingly, in January 2017, Consumers self-implemented an annual rate increase of $20 million, subject to refund with interest. A final order is expected at the end of July 2017.

 

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In December 2016, Michigan’s governor signed the 2016 Energy Law, which became effective in April 2017. Among other things, the 2016 Energy Law:

 

·                 raises the renewable energy standard from the present ten-percent requirement to 12.5 percent in 2019 and 15 percent in 2021

·                 establishes a goal of 35 percent combined renewable energy and energy waste reduction by 2025

·                 authorizes incentives for demand response programs and expands existing incentives for energy efficiency programs

·                 authorizes incentives for new PPAs with non-affiliates

·                 establishes an integrated planning process for new generation resources

·                 shortens from twelve months to ten months the time by which the MPSC must issue a final order in general rate cases, but prohibits electric and gas utilities from filing general rate cases for increases in rates more often than once every twelve months

·                 eliminates utilities’ self-implementation of rates under general rate cases

·                 requires the MPSC to implement equitable cost-of-service rates for customers participating in a net metering program

 

The 2016 Energy Law also establishes a path to ensure that forward capacity is secured for all electric customers in Michigan, including customers served by alternative electric suppliers under ROA. Under existing Michigan 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 2016 Energy Law retains the ten percent cap on ROA, with certain exceptions. The new law also authorizes the MPSC to ensure that alternative electric suppliers have procured enough capacity to cover their anticipated capacity requirements for the four-year forward period. In March 2017, the MPSC indicated that it plans to achieve this objective through the use of a state reliability mechanism. Under such a mechanism, if an alternative electric supplier did not demonstrate that it had procured its capacity requirements for the four-year forward period, ROA customers would pay a charge to the utility for capacity that is not provided by the alternative electric supplier.

 

CMS Energy’s and Consumers’ operations are subject to various state and federal environmental and health and safety laws and regulations. The companies are monitoring numerous legislative and regulatory initiatives, including those to regulate greenhouse gases, and related litigation. They are also monitoring potential changes in policy under the Trump administration. While CMS Energy and Consumers cannot predict the outcome of these matters, they intend to continue to move forward with their clean energy plan, their carbon reduction goals, and their emphasis on supply diversity. Environmental statutes and regulations are expected to continue to have a material effect on CMS Energy and Consumers.

 

Financial Performance

 

For the six months ended June 30, 2017, CMS Energy’s net income available to common stockholders was $291 million and diluted EPS were $1.04. This compares with net income available to common stockholders of $288 million and diluted EPS of $1.04 for the six months ended June 30, 2016. In 2017, benefits from electric and gas rate increases and higher weather-adjusted electric and gas deliveries were offset by higher depreciation and property taxes on increased plant in service and by the impacts of mild weather on electric and gas sales.

 

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

 

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Table of Contents

 

affecting CMS Energy’s and Consumers’ performance can be found in the Results of Operations section that follows this Executive Overview.

 

Consumers expects that continued economic growth in its service territory will drive its total electric deliveries to increase annually by about one-half percent on average through 2021. Excluding the impacts of energy waste reduction programs, Consumers expects its total electric deliveries to increase by about 1.5 percent annually through 2021. Consumers is projecting that its gas deliveries will remain stable through 2021. 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 will continue to pursue cost savings through its lean operations model, and will continue to give priority to capital investments that increase customer value or lower costs.

 

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

 

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Table of Contents

 

RESULTS OF OPERATIONS

 

CMS Energy Consolidated Results of Operations

 

 

In Millions, Except Per Share Amounts

 

 

 

Three Months Ended

 

Six Months Ended

 

June 30

 

2017

 

2016

 

Change

 

2017

 

2016

 

Change

 

Net Income Available to Common Stockholders

 

$

92

 

$

124

 

$

(32

)

$

291

 

$

288

 

$

3

 

Basic Earnings Per Share

 

$

0.33

 

$

0.45

 

$

(0.12

)

$

1.04

 

$

1.04

 

$

-

 

Diluted Earnings Per Share

 

$

0.33

 

$

0.45

 

$

(0.12

)

$

1.04

 

$

1.04

 

$

-

 

 

 

 

In Millions

 

 

 

Three Months Ended

 

Six Months Ended

 

June 30

 

2017

 

2016

 

Change

 

2017

 

2016

 

Change

 

Electric utility

 

$

94

 

$

113

 

$

(19

)

$

218

 

$

204

 

$

14

 

Gas utility

 

9

 

18

 

(9

)

96

 

99

 

(3

)

Enterprises

 

7

 

3

 

4

 

19

 

9

 

10

 

Corporate interest and other

 

(18

)

(10

)

(8

)

(42

)

(24

)

(18

)

Net Income Available to Common Stockholders

 

$

92

 

$

124

 

$

(32

)

$

291

 

$

288

 

$

3

 

 

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

 

 

 

In Millions

 

 

 

June 30, 2017 better/(worse) than 2016

 

Reasons for the change

 

Three Months Ended

 

Six Months Ended

 

Consumers electric utility and gas utility

 

 

 

 

 

 

 

 

 

 

 

 

 

Electric sales

 

 

 

 

 

 

 

 

 

 

 

 

 

Weather

 

$     (4)

 

 

 

 

 

$     (7)

 

 

 

 

 

Non-weather

 

 

$     (4)

 

 

 

 

$     1 

 

 

 

Gas sales

 

 

 

 

 

 

 

 

 

 

 

 

 

Weather

 

(11)

 

 

 

 

 

(13)

 

 

 

 

 

Non-weather

 

 

(7)

 

 

 

 

(10)

 

 

 

Electric rate increase

 

 

 

14 

 

 

 

 

 

33 

 

 

 

Gas rate increase

 

 

 

 

 

 

 

 

 

 

 

Property tax settlement

 

 

 

 

 

 

 

 

 

 

 

Depreciation and property taxes, net

 

 

 

(15)

 

 

 

 

 

(33)

 

 

 

Operating and maintenance costs

 

 

 

(13)

 

 

 

 

 

(8)

 

 

 

Other, including intercompany gain

 

 

 

(5)

 

$     (28)

 

 

 

13 

 

$     11 

 

Enterprises

 

 

 

 

 

 

 

 

 

 

 

 

 

Subsidiary earnings

 

 

 

 

 

 

 

 

 

 

10 

 

Corporate interest and other

 

 

 

 

 

 

 

 

 

 

 

 

 

Elimination of intercompany gain

 

 

 

 

 

 

 

 

 

 

(9)

 

Michigan tax settlement in 2016

 

 

 

 

 

(5)

 

 

 

 

 

(5)

 

Other

 

 

 

 

 

(3)

 

 

 

 

 

(4)

 

Total change

 

 

 

 

 

$     (32)

 

 

 

 

 

$     3 

 

 

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Table of Contents

 

Consumers Electric Utility Results of Operations

 

 

 

 

 

 

 

 

 

 

 

 

In Millions  

 

 

 

Three Months Ended

 

Six Months Ended

 

June 30

 

2017

 

2016

 

Change

 

2017

 

2016

 

Change

 

Net Income Available to Common Stockholders

 

   $

94

 

   $

113

 

   $

(19

)

   $

218

 

   $

204

 

   $

14

 

Reasons for the change

 

 

 

 

 

 

 

 

 

 

 

 

 

Electric deliveries and rate increases

 

 

 

 

 

   $

19

 

 

 

 

 

   $

64

 

Maintenance and other operating expenses

 

 

 

 

 

(23

)

 

 

 

 

(20

)

Depreciation and amortization

 

 

 

 

 

(17

)

 

 

 

 

(30

)

General taxes

 

 

 

 

 

(2

)

 

 

 

 

7

 

Other income, net of expenses

 

 

 

 

 

(2

)

 

 

 

 

4

 

Interest charges

 

 

 

 

 

(3

)

 

 

 

 

(4

)

Income taxes

 

 

 

 

 

9

 

 

 

 

 

(7

)

Total change

 

 

 

 

 

   $

(19

)

 

 

 

 

   $

14

 

 

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

Electric Deliveries and Rate Increases: For the three months ended June 30, 2017, electric delivery revenues increased $19 million compared with 2016. This change reflected a $22 million rate increase and a $6 million increase in energy efficiency program revenues, offset partially by $9 million in lower sales due primarily to milder weather. Deliveries to end-use customers were 9.0 billion kWh in 2017 and 9.1 billion kWh in 2016.

For the six months ended June 30, 2017, electric delivery revenues increased $64 million compared with 2016. This change reflected a $54 million rate increase, $11 million in higher weather-adjusted deliveries, an $8 million increase in energy efficiency program revenues, and a $3 million increase in other revenues. The increases were offset partially by $12 million in lower sales due to milder weather. Deliveries to end-use customers were 18.2 billion kWh in 2017 and in 2016.

Maintenance and Other Operating Expenses: For the three months ended June 30, 2017, maintenance and other operating expenses increased $23 million compared with 2016. This change reflected increases of $10 million in service restoration costs following severe storms, $6 million in energy efficiency program costs, and $6 million in forestry and other operating and maintenance expenses. Also contributing to the change was the absence, in 2017, of a $4 million benefit associated with a State of Michigan use tax settlement. These increases were offset partially by a $3 million decrease in postretirement benefit costs, reflecting a $5 million reduction associated with the early adoption of a new accounting standard, less $2 million of cost increases. For additional details on the implementation of this standard, see Note 1, New Accounting Standards.

For the six months ended June 30, 2017, maintenance and other operating expenses increased $20 million compared with 2016. This change reflected increases of $15 million in service restoration costs following severe storms, $8 million in energy efficiency program costs, and $7 million in forestry and other operating and maintenance expenses. Also contributing to the change was the absence, in 2017, of a $4 million benefit associated with a State of Michigan use tax settlement. These increases were offset partially by the absence, in 2017, of $8 million in expenses at the seven coal-fuel electric generating units that Consumers retired in April 2016. The increases were also offset partially by a $6 million decrease in postretirement benefit costs, reflecting an $10 million reduction associated with the early adoption of a new accounting standard, less $4 million of cost increases. For additional details on the implementation of this standard, see Note 1, New Accounting Standards.

 

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Table of Contents

 

Depreciation and Amortization: For the three months ended June 30, 2017, depreciation and amortization expense increased $17 million compared with 2016, and for the six months ended June 30, 2017, depreciation and amortization expense increased $30 million compared with 2016. These increases were due primarily to increased plant in service.

General Taxes: For the six months ended June 30, 2017, general taxes decreased $7 million compared with 2016. This change was due to a $10 million benefit from the settlement of a property tax appeal related to Consumers’ Zeeland plant, offset partially by a $3 million increase in property taxes.

Other Income, Net of Expenses: For the three months ended June 30, 2017, other income, net of expenses, decreased $2 million compared with 2016. This change was due to a $4 million reduction in nonoperating retirement benefit credits associated with the early adoption of a new accounting standard, offset partially by a $2 million increase in other income, net of expenses. For additional details on the implementation of this standard, see Note 1, New Accounting Standards.

For the six months ended June 30, 2017, other income, net of expenses, increased $4 million compared with 2016. This change was due to a $9 million gain on a donation of CMS Energy stock by Consumers, which was eliminated on CMS Energy’s consolidated statements of income, and a $3 million increase in other income, net of expenses. These increases were offset partially by an $8 million reduction in nonoperating retirement benefit credits associated with the early adoption of a new accounting standard. For additional details on the implementation of this standard, see Note 1, New Accounting Standards.

Interest Charges: For the three months ended June 30, 2017, interest charges increased $3 million compared with 2016, and for the six months ended June 30, 2017, interest charges increased $4 million compared with 2016. These changes were attributable primarily to higher average debt levels.

Income Taxes: For the three months ended June 30, 2017, income taxes decreased $9 million compared with 2016, attributable to lower electric utility earnings.

For the six months ended June 30, 2017, income taxes increased $7 million compared with 2016, attributable to higher electric utility earnings.

Consumers Gas Utility Results of Operations

 

 

 

 

 

 

 

 

 

 

 

 

In Millions

 

 

 

Three Months Ended

 

Six Months Ended

 

June 30

 

2017

 

2016

 

Change

 

2017

 

2016

 

Change

 

Net Income Available to Common Stockholders

 

$

9

 

$

18

 

$

(9

)

$

96

 

$

99

 

$

(3

)

Reasons for the change

 

 

 

 

 

 

 

 

 

 

 

 

 

Gas deliveries and rate increases

 

 

 

 

 

$

(4

)

 

 

 

 

$

6

 

Maintenance and other operating expenses

 

 

 

 

 

-

 

 

 

 

 

10

 

Depreciation and amortization

 

 

 

 

 

(4

)

 

 

 

 

(15

)

General taxes

 

 

 

 

 

(1

)

 

 

 

 

(4

)

Other income, net of expenses

 

 

 

 

 

(4

)

 

 

 

 

(2

)

Interest charges

 

 

 

 

 

(1

)

 

 

 

 

(1

)

Income taxes

 

 

 

 

 

5

 

 

 

 

 

3

 

Total change

 

 

 

 

 

$

(9

)

 

 

 

 

$

(3

)

 

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Table of Contents

 

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

Gas Deliveries and Rate Increases: For the three months ended June 30, 2017, gas delivery revenues decreased $4 million compared with 2016. This change reflected $10 million in lower sales due primarily to milder weather, offset partially by $4 million attributable to a January 2017 self-implemented rate increase and a $2 million increase in other revenues. Deliveries to end-use customers were 43 bcf in 2017 and 49 bcf in 2016.

For the six months ended June 30, 2017, gas delivery revenues increased $6 million compared with 2016. This change reflected $10 million attributable to a January 2017 self-implemented rate increase, a $2 million increase in energy efficiency program revenues, and a $6 million increase in other revenues. These changes were offset partially by a $12 million decrease in sales due primarily to milder weather. Deliveries to end-use customers were 162 bcf in 2017 and 170 bcf in 2016.

Maintenance and Other Operating Expenses: For the six months ended June 30, 2017, maintenance and other operating expenses decreased $10 million compared with 2016. This change was due to $6 million in lower gas distribution and customer operations expense and a $2 million reduction in uncollectible accounts expense. Also contributing to the change was a $4 million decrease in postretirement benefit costs, reflecting an $7 million reduction associated with the early adoption of a new accounting standard, less $3 million of cost increases. For additional details on the implementation of this standard, see Note 1, New Accounting Standards. These decreases were offset partially by a $2 million increase in energy efficiency program costs.

Depreciation and Amortization: For the three months ended June 30, 2017, depreciation and amortization expense increased $4 million compared with 2016, and for the six months ended June 30, 2017, depreciation and amortization expense increased $15 million compared with 2016. These increases were due primarily to increased plant in service.

General Taxes: For the six months ended June 30, 2017, general taxes increased $4 million compared with 2017, due to increased property taxes, reflecting higher capital spending.

Other Income, Net of Expenses: For the three months ended June 30, 2017, other income, net of expenses, decreased $4 million compared with 2016. This change was due to a $3 million reduction in nonoperating retirement benefit credits associated with the early adoption of a new accounting standard and a $1 million decrease in other income, net of expenses. For additional details on the implementation of this standard, see Note 1, New Accounting Standards.

For the six months ended June 30, 2017, other income, net of expenses, decreased $2 million compared with 2016. This change was due to a $5 million reduction in nonoperating retirement benefit credits associated with the early adoption of a new accounting standard and a $2 million decrease in other income, net of expenses. For additional details on the implementation of this standard, see Note 1, New Accounting Standards. These reductions were offset partially by a $5 million gain on a donation of CMS Energy stock by Consumers, which was eliminated on CMS Energy’s consolidated statements of income.

Income Taxes: For the three months ended June 30, 2017, income taxes decreased $5 million compared with 2016, and for the six months ended June 30, 2017, income taxes decreased $3 million compared with 2016. These reductions were attributable to lower gas utility earnings.

 

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Table of Contents

 

Enterprises Results of Operations

 

 

 

 

 

 

 

 

 

 

 

In Millions

 

 

 

Three Months Ended

 

Six Months Ended

 

June 30

 

2017

 

2016

 

Change 

 

2017

 

2016

 

Change 

 

Net Income Available to Common Stockholders

 

$

7

 

$

3

 

$

4

 

$

19

 

$

9

 

$

10

 

 

For the three months ended June 30, 2017, net income of the enterprises segment increased $4 million compared with 2016, and for the six months ended June 30, 2017, net income of the enterprises segment increased $10 million compared with 2016. These changes were due primarily to higher prices for capacity and demand revenue at DIG.

 

Corporate Interest and Other Results of Operations

 

 

 

 

 

 

 

 

 

 

 

In Millions

 

 

 

Three Months Ended

 

Six Months Ended

 

June 30

 

2017

 

2016

 

Change 

 

2017

 

2016

 

Change 

 

Net Income (Loss) Available to Common Stockholders

 

$

(18

)

$

(10

)

$

(8

)

$

(42

)

$

(24

)

$

(18

)

 

For the three months ended June 30, 2017, corporate interest and other net expenses increased $8 million compared with 2016, due primarily to the absence, in 2017, of a settlement reached with the Michigan Department of Treasury that resulted in a $2 million after-tax reduction in general taxes and a $3 million reduction in income tax expense. Also contributing to the increase were $2 million of higher administrative and other corporate expenses and $1 million of lower net earnings at EnerBank.

For the six months ended June 30, 2017, corporate interest and other net expenses increased $18 million compared with 2016, due primarily to the elimination of a $9 million after-tax gain resulting from the donation of CMS Energy stock by Consumers, $3 million of higher administrative and other corporate expenses and $1 million of lower net earnings at EnerBank. Also contributing to the increase was the absence, in 2017, of a settlement reached with the Michigan Department of Treasury that resulted in a $2 million after-tax reduction in general taxes and a $3 million reduction in income tax expense.

 

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Table of Contents

 

CASH POSITION, INVESTING, AND FINANCING

At June 30, 2017, CMS Energy had $441 million of consolidated cash and cash equivalents, which included $23 million of restricted cash and cash equivalents. At June 30, 2017, Consumers had $364 million of consolidated cash and cash equivalents, which included $21 million of restricted cash and cash equivalents. For additional details, see Note 11, Cash and Cash Equivalents.

Operating Activities

Presented in the following table are specific components of net cash provided by operating activities for the six months ended June 30, 2017 and 2016:

 

 

 

 

 

 

In Millions  

 

Six Months Ended June 30

 

2017

 

2016

 

Change 

 

CMS Energy, including Consumers

 

 

 

 

 

 

 

Net income

 

$

292

 

$

289

 

$

3

 

Non-cash transactions1

 

638

 

574

 

64

 

Changes in core working capital2

 

235

 

274

 

(39

)

Postretirement benefits contributions

 

(7

)

(4

)

(3

)

Changes in other assets and liabilities, net

 

(39

)

(32

)

(7

)

Net cash provided by operating activities

 

$

1,119

 

$

1,101

 

$

18

 

Consumers

 

 

 

 

 

 

 

Net income

 

$

315

 

$

304

 

$

11

 

Non-cash transactions1

 

656

 

567

 

89

 

Changes in core working capital2

 

239

 

301

 

(62

)

Postretirement benefits contributions

 

(5

)

(2

)

(3

)

Changes in other assets and liabilities, net

 

(80

)

(38

)

(42

)

Net cash provided by operating activities

 

$

1,125

 

$

1,132

 

$

(7

)

 

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

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

For the six months ended June 30, 2017, net cash provided by operating activities at CMS Energy increased $18 million compared with 2016 and net cash provided by operating activities at Consumers decreased $7 million compared with 2016. At both CMS Energy and Consumers, higher net income, net of non-cash transactions, and higher collections from customers, including higher PSCR overrecoveries, were offset partially by lower gas sales as a result of milder weather. The change at Consumers also reflected the absence, in 2017, of a reimbursement received from CMS Energy in 2016 for a prior-year postretirement benefits contribution.

 

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Table of Contents

 

Investing Activities

Presented in the following table are specific components of net cash used in investing activities for the six months ended June 30, 2017 and 2016:

 

 

 

 

 

 

In Millions  

 

Six Months Ended June 30

 

2017

 

2016

 

Change 

 

CMS Energy, including Consumers

 

 

 

 

 

 

 

Capital expenditures

 

$

(746

)

$

(817

)

$

71

 

Increase in EnerBank notes receivable

 

(25

)

(43

)

18

 

Proceeds from the sale of EnerBank notes receivable

 

19

 

-

 

19

 

Costs to retire property and other investing activities

 

(54

)

(51

)

(3

)

Net cash used in investing activities

 

$

(806

)

$

(911

)

$

105

 

Consumers

 

 

 

 

 

 

 

Capital expenditures

 

$

(741

)

$

(813

)

$

72

 

Costs to retire property and other investing activities

 

(61

)

(52

)

(9

)

Net cash used in investing activities

 

$

(802

)

$

(865

)

$

63

 

 

For the six months ended June 30, 2017, net cash used in investing activities at CMS Energy decreased $105 million compared with 2016 and net cash used in investing activities at Consumers decreased $63 million compared with 2016. These changes were due primarily to lower capital expenditures at Consumers. The change at CMS Energy also reflected slower growth in EnerBank consumer lending and proceeds from the sale of EnerBank notes receivable in 2017.

 

Financing Activities

 

Presented in the following table are specific components of net cash used in financing activities for the six months ended June 30, 2017 and 2016:

 

 

 

 

 

 

 

In Millions  

 

Six Months Ended June 30

 

2017

 

2016

 

Change 

 

CMS Energy, including Consumers

 

 

 

 

 

 

 

Issuance of debt

 

$

923

 

$

329

 

$

594

 

Issuance of common stock

 

76

 

66

 

10

 

Net increase (decrease) in EnerBank certificates of deposit

 

(27

)

12

 

(39

)

Payment of dividends on common and preferred stock

 

(188

)

(173

)

(15

)

Retirement of debt

 

(488

)

(42

)

(446

)

Decrease in notes payable

 

(398

)

(249

)

(149

)

Payment of capital leases and other financing activities

 

(27

)

(15

)

(12

)

Net cash used in financing activities

 

$

(129

)

$

(72

)

$

(57

)

Consumers

 

 

 

 

 

 

 

Issuance of debt

 

$

349

 

$

-

 

$

349

 

Stockholder contribution from CMS Energy

 

 

450

 

 

275

 

 

175

 

Payment of dividends on common and preferred stock

 

 

(237

)

 

(214

)

 

(23

)

Retirement of debt

 

 

(263

)

 

(12

)

 

(251

)

Decrease in notes payable

 

 

(398

)

 

(249

)

 

(149

)

Payment of capital leases and other financing activities

 

(12

)

(1

)

(11

)

Net cash used in financing activities

 

$

(111

)

$

(201

)

$

90

 

 

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Table of Contents

 

For the six months ended June 30, 2017, net cash used in financing activities at CMS Energy increased $57 million compared with 2016 and net cash used in financing activities at Consumers decreased $90 million compared with 2016. These changes reflected higher debt retirements and higher repayments under Consumers’ commercial paper program offset partially by higher debt issuances. At Consumers, the decrease was due to an increased stockholder contribution from CMS Energy.

CAPITAL RESOURCES AND LIQUIDITY

CMS Energy uses dividends and tax-sharing payments from its subsidiaries and external financing and capital transactions to invest in its utility and non-utility businesses, retire debt, pay dividends, and fund its other obligations. The ability of CMS Energy’s subsidiaries, including Consumers, to pay dividends to CMS Energy depends upon each subsidiary’s revenues, earnings, cash needs, and other factors. In addition, Consumers’ ability to pay dividends is restricted by certain terms included in its debt covenants and articles of incorporation and potentially by FERC requirements and provisions under the Federal Power Act and the Natural Gas Act. For additional details on Consumers’ dividend restrictions, see Note 4, Financings and Capitalization—Dividend Restrictions. For the six months ended June 30, 2017, Consumers paid $236 million in dividends on its common stock to CMS Energy.

As a result of federal tax legislation passed in 2015 that extends bonus depreciation, CMS Energy expects to be able to extend the use of federal net operating loss carryforwards and, accordingly, defer its federal income tax payments through 2020. As a consequence, however, CMS Energy expects to receive lower tax-sharing payments from Consumers during that period. This may require CMS Energy to maintain higher levels of debt in order to invest in its businesses, pay dividends, and fund its general obligations. Despite this, CMS Energy does not anticipate a need for a block equity offering.

In March 2017, CMS Energy entered into an updated continuous equity offering program. Under this program, CMS Energy may sell, from time to time in “at the market” offerings, common stock having an aggregate sales price of up to $100 million. In June 2017, CMS Energy issued common stock under this program and received net proceeds of $70 million.

Consumers uses cash flows generated from operations and external financing transactions, as well as stockholder contributions from CMS Energy, to fund capital expenditures, retire debt, pay dividends, contribute to its employee benefit plans, and fund its other obligations. As a result of accelerated pension funding in recent years and several initiatives to reduce costs, Consumers anticipates continued strong cash flows from operating activities for the remainder of 2017.

Access to the financial and capital markets depends on CMS Energy’s and Consumers’ credit ratings and on market conditions. As evidenced by past financing transactions, CMS Energy and Consumers have had ready access to these markets. Barring major market dislocations or disruptions, CMS Energy and Consumers expect to continue to have ready access to the financial and capital markets. If access to these markets were to diminish or otherwise become restricted, CMS Energy and Consumers would implement contingency plans to address debt maturities, which could include reduced capital spending.

At June 30, 2017, CMS Energy had $549 million of its secured revolving credit facility available and Consumers had $891 million available. CMS Energy and Consumers use these credit facilities for general working capital purposes and to issue letters of credit. An additional source of liquidity is Consumers’ commercial paper program, which allows Consumers to issue, in one or more placements, up to $500 million in the aggregate in commercial paper notes with maturities of up to 365 days and that bear interest at fixed or floating rates. These issuances are supported by Consumers’ revolving credit facilities. While the amount of outstanding commercial paper does not reduce the available capacity of the revolving credit facilities, Consumers does not intend to issue commercial paper in an amount exceeding the available capacity. At June 30, 2017, no commercial paper notes were outstanding under this program. For additional details on CMS Energy’s and Consumers’ secured revolving credit facilities and commercial paper program, see Note 4, Financings and Capitalization.

 

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Certain of CMS Energy’s and Consumers’ credit agreements, debt indentures, and other facilities contain covenants that require CMS Energy and Consumers to maintain certain financial ratios, as defined therein. At June 30, 2017, no default had occurred with respect to any financial covenants contained in CMS Energy’s and Consumers’ credit agreements, debt indentures, or other facilities. CMS Energy and Consumers were each in compliance with these covenants as of June 30, 2017, as presented in the following table:

 

 

 

 

 

 

 

June 30, 2017

 

Credit Agreement, Indenture, or Facility

 

Limit 

 

Actual 

 

CMS Energy, parent only

 

 

 

 

 

Debt to EBITDA1

 

< 6.0 to 1.0

 

4.2 to 1.0 

 

Consumers

 

 

 

 

 

Debt to Capital2

 

< 0.65 to 1.0

 

0.46 to 1.0 

 

 

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

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

Components of CMS Energy’s and Consumers’ cash management plan include controlling operating expenses and capital expenditures and evaluating market conditions for financing and refinancing opportunities. CMS Energy’s and Consumers’ present level of cash and expected cash flows from operating activities, together with access to sources of liquidity, are anticipated to be sufficient to fund the companies’ contractual obligations for 2017 and beyond.

Off-Balance-Sheet Arrangements

CMS Energy, Consumers, and certain of their subsidiaries enter into various arrangements in the normal course of business to facilitate commercial transactions with third parties. These arrangements include indemnities, surety bonds, letters of credit, and financial and performance guarantees. Indemnities are usually agreements to reimburse a counterparty that may incur losses due to outside claims or breach of contract terms. The maximum payment that could be required under a number of these indemnity obligations is not estimable; the maximum obligation under indemnities for which such amounts were estimable was $153 million at June 30, 2017. While CMS Energy and Consumers believe it is unlikely that they will incur any material losses related to indemnities they have not recorded as liabilities, they cannot predict the impact of these contingent obligations on their liquidity and financial condition. For additional details on these and other guarantee arrangements, see Note 3, Contingencies and Commitments—Guarantees.

 

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OUTLOOK

 

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

 

Consumers Electric Utility and Gas Utility Outlook and Uncertainties

 

Energy Waste Reduction Plan: The 2016 Energy Law, which became effective in April 2017, expands the existing energy optimization program to include demand response programs, calling the combined initiatives energy waste reduction. The 2016 Energy Law:

 

·                 extends the requirement to achieve annual reductions of 1.0 percent in customers’ electricity use through 2021 and 0.75 percent in customers’ natural gas use indefinitely

·                 removes limits on investments under the program and provides for a higher return on those investments; together, these provisions effectively double the financial incentives Consumers may earn for exceeding the statutory targets

·                 establishes a goal of 35 percent combined renewable energy and energy waste reduction by 2025

 

Under its existing energy optimization plan, Consumers provides its customers with incentives to reduce usage by offering energy audits, rebates and discounts on purchases of highly efficient appliances, and other incentives and programs. In March 2017, Consumers filed applications with the MPSC for approval of an energy waste reduction plan that would amend and expand Consumers’ existing energy optimization plan and allow for recovery of increased investments to meet the requirements of the 2016 Energy Law. In July 2017, Consumers filed with the MPSC a partial settlement agreement addressing the amendments to its 2017 energy optimization plan. The agreement authorized the increased investments proposed for 2017, but deferred ruling on the financial incentive that Consumers may earn for exceeding savings targets during the year.

 

Smart Energy and Gas AMR: Consumers began the full-scale deployment of smart meters in 2012 and expects to complete it by the end of 2017. Smart meters allow customers to monitor and manage their energy usage, which Consumers expects will help reduce demand during critical peak times, resulting in lower peak electric capacity requirements. In addition, Consumers is able to disconnect and reconnect service, read, and bill from smart meters remotely. Consumers will continue to add further functionality to its smart meters. Consumers is also installing communication modules on gas meters in areas where it provides both electricity and natural gas to customers. The communication modules allow Consumers to read and bill from gas meters remotely.

 

Consumers expects that under its Smart Energy program it will have installed a total of 1.8 million smart meters and 600,000 communication modules throughout its service territory by the end of 2017. As of June 30, 2017, Consumers had upgraded 1.7 million electric customers to smart meters and had installed 585,000 communication modules on gas meters.

 

In areas where it provides only natural gas to customers, Consumers began the deployment of Gas AMR technology in 2017 and expects to complete it in 2019. Under this program, Consumers plans to install communication modules on 1.2 million gas meters, allowing it to conduct drive-by meter reading.

 

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Consumers Electric Utility Outlook and Uncertainties

 

Energy Resource Planning: Consumers continues to experience increasing demand for electricity due to Michigan’s growing economy and increased use of air conditioning, consumer electronics, and other electric devices, offset partially by the predicted effects of energy efficiency and conservation.

 

In April 2016, Consumers retired seven of its coal-fueled electric generating units, representing 950 MW of capacity. In December 2016, Consumers and Entergy reached an agreement to terminate their PPA under which Consumers purchases virtually all of the capacity and energy produced by Palisades, up to the annual average capacity of 798 MW. Under the agreement, which is contingent on the MPSC’s approval of Consumers’ recovery in electric rates of the termination payment, the PPA would terminate in May 2018, four years ahead of schedule.

 

Even with the retirements of seven of its coal-fueled units and the expected termination of the Palisades PPA, Consumers expects to meet the capacity requirements of its full-service customers through:

 

·                 energy waste reduction

·                 expanded use of renewable energy

·                 the use of the Jackson plant, a 540-MW natural gas-fueled electric generating plant purchased in 2015

·                 construction or purchase of electric generating units

·                 continued operation or upgrade of existing units, including upgrades at Ludington

·                 renegotiations of existing PPAs

·                 purchases of short-term market capacity

 

Specifically, to address the potential termination of the Palisades PPA, Consumers issued a request for proposals in April 2017 to acquire a natural gas-fueled generating plant of up to 800 MW. Consumers is interested in acquiring a simple-cycle or combined-cycle generating plant operating in Michigan’s Lower Peninsula. Also, Consumers completed an auction to purchase generation capacity for 2018. Any contracts entered into as a result of the request for proposals and the auction are subject to MPSC approval and are contingent on the MPSC’s approval of the termination of the Palisades PPA.

 

Additionally, in May 2017, Consumers reached an agreement with T.E.S. Filer City to amend their PPA in anticipation of the conversion of T.E.S. Filer City’s plant to use natural gas as its primary fuel instead of coal. The conversion is expected to increase the amount of capacity and energy produced by the plant from 73 MW to 225 MW. Under the amendment to the PPA, Consumers will purchase the increased capacity and electricity generated by the converted facility for 15 years. The original PPA was set to expire in 2025. The amendment is contingent on approval by the MPSC and on a finding by FERC that sales made under the amended PPA are exempt from, or authorized under, Section 205 of the Federal Power Act.

 

Renewable Energy Plan: The 2016 Energy Law raises the renewable energy standard from the present ten-percent requirement to 15 percent in 2021, with an interim target of 12.5 percent in 2019. Consumers is required to submit RECs, which represent proof that the associated electricity was generated from a renewable energy resource, in an amount equal to at least the required percentage of Consumers’ electric sales volume each year. Under its renewable energy plan, Consumers expects to meet its renewable energy requirement each year with a combination of newly generated RECs and previously generated RECs carried over from prior years.

 

In conjunction with its renewable energy plan, Consumers signed a 15-year agreement in 2015 to purchase renewable capacity, energy, and RECs from a 100-MW wind park to be constructed in Huron County, Michigan. The wind park is expected to be operational by the end of 2017. In addition, Consumers has obtained the MPSC’s approval to construct two additional phases at its Cross Winds®

 

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Energy Park. Phase II of the park, with a nameplate capacity of 44 MW, is expected to be operational in early 2018, while Phase III, with a nameplate capacity of 76 MW, is expected to be operational in 2020. Consumers began construction of Phase II in June 2017. Both phases of the project are expected to qualify for certain federal production tax credits, which are expected to generate cost savings that will be passed on to customers.

 

In June 2017, Consumers issued requests for proposals to acquire up to 450 MW of wind and solar generation projects within MISO’s service territory, specifically wind generation projects ranging in size from 100 MW to 200 MW and up to 100 MW of solar generation projects at least 10 MW in size. Consumers is interested in wind and solar generation projects to support its renewable energy plan and its future energy and capacity needs. Any contracts entered into as a result of the request for proposals would be subject to MPSC approval.

 

Voluntary Large Customer Renewable Energy Pilot Program: In May 2017, Consumers filed an application with the MPSC proposing a pilot program that would provide large full-service electric customers with the opportunity to advance the development of renewable energy beyond the requirements of the 2016 Energy Law. Under the pilot program, customers would have the ability to match up to 100 percent of their energy use with renewable energy generated from wind resources.

 

Electric Customer Deliveries and Revenue: Consumers’ electric customer deliveries are largely dependent on Michigan’s economy. Consumers expects weather-adjusted electric deliveries to increase in 2017 by about one-half percent compared with 2016.

 

Over the next five years, Consumers plans conservatively for average electric delivery growth of about one-half percent annually. This increase reflects growth in electric demand, offset partially by the predicted effects of energy waste reduction programs and appliance efficiency standards. Actual delivery levels will depend on:

 

·                 energy conservation measures and results of energy waste reduction programs

·                 weather fluctuations

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

 

Electric ROA: Under existing Michigan 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. At June 30, 2017, electric deliveries under the ROA program were at the ten-percent limit. Of Consumers’ 1.8 million electric customers, 302 customers, or 0.02 percent, purchased electric generation service under the ROA program.

 

The 2016 Energy Law, which became effective in April 2017, retains the ten percent cap on ROA, with certain exceptions, but establishes a path to ensure that forward capacity is secured for all electric customers in Michigan, including customers served by alternative electric suppliers under ROA. The new law also authorizes the MPSC to ensure that alternative electric suppliers have procured enough capacity to cover their anticipated capacity requirements for the four-year forward period. To this end, the MPSC issued an order in March 2017, directing Consumers to file an application to implement a state reliability mechanism. Under such a mechanism, if an alternative electric supplier did not demonstrate that it had procured its capacity requirements for the four-year forward period, ROA customers would pay a charge to the utility for capacity that is not provided by the alternative electric supplier. Consumers filed its application in April 2017.

 

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

 

Electric Rate Case: In March 2017, Consumers filed an application with the MPSC seeking an annual rate increase of $173 million, based on a 10.5 percent authorized return on equity. The filing requested authority to recover new investment in system reliability, environmental compliance, and technology enhancements. Presented in the following table are the components of the requested increase in revenue:

 

 

 

In Millions

 

Components of the rate increase

 

 

 

Investment in rate base

 

$

47 

 

Operating and maintenance costs

 

56 

 

Gross margin

 

42 

 

Cost of capital

 

37 

 

Working capital

 

(9)

 

Total

 

$

173 

 

 

Palisades PPA: In December 2016, Consumers and Entergy reached an agreement to terminate their PPA in May 2018, four years ahead of schedule. Under the PPA, Consumers purchases virtually all of the capacity and energy produced by Palisades, up to the annual average capacity of 798 MW. The prices that Consumers pays under the PPA, and which it recovers from its electric customers through the PSCR ratemaking process, are presently higher than the cost to purchase electricity from the market operated by MISO. In exchange for early termination, Consumers agreed to pay Entergy $172 million on the termination date.

 

The agreement is subject to MPSC approval. In February 2017, Consumers requested authorization to recover the termination payment through securitization. The MPSC indicated that it will make a final determination on the securitization filing by the end of September 2017. If the MPSC does not approve Consumers’ request by September 30, 2017, the agreement will be null and void (unless otherwise extended) and the PPA will continue until April 2022 under its original terms.

 

Depreciation Rate Case: In November 2016, Consumers filed a depreciation rate case related to its Ludington electric utility property, requesting to increase depreciation expense by $15 million annually. In July 2017, the MPSC approved a settlement agreement authorizing Consumers to recover an increase in depreciation expense of $2 million annually, based on December 31, 2015 balances. The new depreciation rates will go into effect with a final order in Consumers’ next electric rate case following the electric rate case filed in 2017.

 

Sale of Coal-Fueled Generating Units: In April 2017, Consumers reached an agreement to sell its retired B.C. Cobb and J.R. Whiting coal-fueled electric generating units to Forsite. Under the terms of the agreement, which is contingent on MPSC approval, Consumers will transfer the generating units and associated land to Forsite. Consumers securitized the generating units in 2014; thus, the book value of the assets is zero. In addition, Consumers will pay Forsite $63 million to decommission the units and perform cleanup activities at the sites. This payment will be recorded as a reduction to Consumers’ cost of removal regulatory liability. Consumers estimates that this divestiture will save its electric customers $30 million in decommissioning costs.

 

Electric Environmental Outlook: Consumers’ operations are subject to various state and federal environmental laws and regulations. Consumers estimates that it will incur capital expenditures of $0.5 billion from 2017 through 2021 to continue to comply with the Clean Air Act, Clean Water Act, and numerous state and federal environmental regulations. Consumers expects to recover these costs in customer rates, but cannot guarantee this result. Consumers’ primary environmental compliance focus includes, but is not limited to, the following matters.

 

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Air Quality: CSAPR, which became effective in 2015, requires Michigan and 27 other states to improve air quality by reducing power plant emissions that, according to EPA computer models, contribute to ground-level ozone and fine particle pollution in other downwind states. In September 2016, the EPA finalized new ozone season standards for CSAPR, which became effective in May 2017. CSAPR is presently being litigated; however, any decision will not impact Consumers’ compliance strategy, as Consumers expects its emissions to be within the CSAPR allowance allocations.

 

In 2012, the EPA published emission standards for electric generating units, based on Section 112 of the Clean Air Act, calling the final rule MATS. Under MATS, all of Consumers’ existing coal-fueled electric generating units were required to add additional controls for hazardous air pollutants. Consumers met the extended deadline of April 2016 for five coal-fueled units and two oil/gas-fueled units it continues to operate and retired its seven remaining coal-fueled units. MATS is presently being litigated, but any decision is not expected to impact Consumers’ MATS compliance strategy. In addition, Consumers must comply with the Michigan Mercury Rule and with its settlement agreement with the EPA entered into in 2014 concerning opacity and NSR.

 

In 2015, the EPA released its new rule to lower the NAAQS for ozone. The new ozone NAAQS will make it more difficult to construct or modify power plants in many areas of the country, including some parts of Michigan, if the areas are designated to be in nonattainment of the new standard. The NAAQS for ozone are presently being litigated and the EPA’s decision on nonattainment areas has been delayed from October 2017 to October 2018. Consumers is monitoring the designation process of this rule, as well as the litigation, but does not anticipate any impact on its electric generating units.

 

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

 

·                 a change in Consumers’ fuel mix

·                 changes in the types of generating units Consumers may purchase or build in the future

·                 changes in how certain units are used

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

·                 changes in Consumers’ environmental compliance costs

 

Greenhouse Gases: There have been numerous legislative and regulatory initiatives at the state, regional, national, and international levels that involve the potential regulation of greenhouse gases. Consumers continues to monitor and comment on these initiatives and to follow litigation involving greenhouse gases.

 

In 2015, the EPA finalized new rules pursuant to Section 111(b) of the Clean Air Act to limit carbon dioxide emissions from new electric generating units. New coal-fueled units will not be able to meet this limit without installing carbon dioxide control equipment using such methods as carbon capture and sequestration. In addition, the EPA finalized new rules pursuant to Section 111(b) of the Clean Air Act to limit carbon dioxide emissions from modified or reconstructed electric generating units. Both of these rules are being litigated.

 

Also in 2015, the EPA published final rules pursuant to Section 111(d) of the Clean Air Act to limit carbon dioxide emissions from existing electric generating units, calling the rules the “Clean Power Plan.” The rules required a 32-percent nationwide reduction in carbon emissions from existing power plants by 2030 (based on 2005 levels), and states choosing not to develop their own implementation plans would be subject to the federal plan. Certain states, corporations, and industry groups initiated litigation opposing the proposed Clean Power Plan, and in 2016, the U.S. Supreme Court stayed the Clean Power Plan while the litigation proceeded. In March 2017, the Trump administration issued an executive order directing the

 

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EPA and other federal agencies to review rules and policies that burden domestic energy production, including the Clean Power Plan. The EPA subsequently filed motions to hold the Section 111(b) and Clean Power Plan litigation in abeyance while it reconsiders the rule. Consumers does not expect that any changes to the Clean Power Plan will have an adverse impact on its environmental strategy.

 

In 2015, a group of 195 countries finalized the Paris Agreement, which governs carbon dioxide reduction measures beginning in 2020. As part of this agreement, the United States pledged a 26-percent reduction in greenhouse gas emissions by 2025 (with aspirations to achieve a 28-percent reduction) compared with 2005 levels. These targets are in line with the now-stayed Clean Power Plan targets. While these emission reduction commitments are non-binding, they will be governed by the Clean Power Plan should it survive judicial and administrative scrutiny. The Trump administration has now withdrawn from the Paris Agreement, but also stated a desire to renegotiate a new agreement in the future. Consumers does not expect any adverse changes to its environmental strategy as a result of these events.

 

While Consumers cannot predict the outcome of changes in policy under the Trump administration or of other legislative or regulatory initiatives involving the potential regulation of greenhouse gases, it intends to continue to move forward with its clean energy plan, its present carbon reduction target, and its emphasis on supply diversity. Consumers will continue to monitor regulatory activity regarding greenhouse gas emissions standards that may affect electric generating units.

 

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

 

CCRs: In 2015, the EPA published a final rule regulating CCRs, such as coal ash, under RCRA. The final rule adopts minimum standards for beneficially reusing and disposing of non-hazardous CCRs. The rule establishes new minimum requirements for site location, groundwater monitoring, flood protection, storm water design, fugitive dust control, and public disclosure of information. The rule also sets out conditions under which CCR units would be forced to cease receiving CCR and non-CCR waste and initiate closure based on the inability to achieve minimum safety standards, meet a location standard, or meet minimum groundwater standards. Consumers continues to develop work plans for submission to the MDEQ for concurrence to ensure coordination between federal and state requirements. Furthermore, Congress passed legislation in December 2016 that allows states to develop a permitting program for CCR under RCRA, and Michigan is taking steps to adopt such a program. As a result, Consumers may need to adjust its recorded ARO associated with coal ash disposal sites depending on the outcome of its submissions to the MDEQ and on a future RCRA permitting program under MDEQ, if the EPA approves a state-level program. Consumers has historically been authorized to recover in electric rates costs incurred related to cleanup and closure of coal ash disposal sites.

 

Water: The EPA’s rule to regulate existing electric generating plant cooling water intake systems under Section 316(b) of the Clean Water Act became effective in 2014. The rule is aimed at reducing alleged harmful impacts on fish and shellfish. In 2015, the EPA released its final effluent limitation guidelines, which set stringent new requirements for the discharge from electric generating units into wastewater streams. In April 2017, the EPA announced a decision to reconsider the final effluent limitation guidelines, which are being litigated, and administratively stayed and delayed the compliance dates. Consumers believes that its environmental strategy will allow it to achieve compliance with the final rule, should it survive reconsideration and judicial review.

 

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In June 2015, the EPA and the U.S. Army Corps of Engineers published a final rule redefining “waters of the United States,” which designates the EPA’s jurisdiction under the Clean Water Act. Numerous states and other interested parties, including Michigan’s Attorney General, have filed suits in federal courts to block the rule, which was stayed in October 2015. The Trump administration issued an executive order in February 2017 directing the EPA and the U.S. Army Corps of Engineers to re-examine the “waters of the United States” rule. In June 2017, the EPA and the U.S. Army Corps of Engineers indicated that they intend to rescind the rule and revert to regulatory language that had been in effect prior to the June 2015 final rule. Consumers does not expect any adverse changes to its environmental strategy as a result of these events.

 

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

 

PCBs: In 2010, the EPA issued an Advance Notice of Proposed Rulemaking, indicating that it is considering a variety of regulatory actions with respect to PCBs. One approach would aim to phase out equipment containing PCBs by 2025. Another approach would eliminate an exemption for small equipment containing PCBs. To comply with any such regulatory actions, Consumers could incur substantial costs associated with existing electrical equipment potentially containing PCBs. The timing of any future rulemaking is uncertain as the Trump administration has not indicated that a PCB rulemaking is a priority.

 

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

 

Consumers Gas Utility Outlook and Uncertainties

 

Gas Deliveries: Consumers expects weather-adjusted gas deliveries in 2017 and over the next five years to remain stable relative to 2016. This outlook reflects modest growth in gas demand offset by the predicted effects of energy efficiency and conservation. Actual delivery levels from year to year may vary from this expectation due to:

 

·                 weather fluctuations

·                 use by power producers

·                 availability and development of renewable energy sources

·                 gas price changes

·                 Michigan economic conditions, including population trends and housing activity

·                 the price of competing energy sources or fuels

·                 energy efficiency and conservation impacts

 

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

 

Gas Transmission: In September 2016, Consumers filed an application with the MPSC to invest $610 million in the construction of a 95-mile, 24-inch-diameter natural gas pipeline in Saginaw, Genesee, and Oakland Counties, Michigan. The MPSC issued an order in March 2017 authorizing Consumers to construct and operate the pipeline. Consumers expects the pipeline to be operational by the end of 2022.

 

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Gas Pipeline Safety: A new rule from the U.S. Department of Transportation’s Pipeline and Hazardous Materials Safety Administration, effective in April 2017, requires the installation of additional safety valves on certain gas distribution service lines. Consumers is evaluating the cost of complying with this rule, but expects that it will be able to recover the cost in rates, consistent with the recovery of other reasonable costs of complying with laws and regulations.

 

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

 

Enterprises Outlook and Uncertainties

 

The primary focus with respect to CMS Energy’s non-utility businesses is to maximize the value of their generating assets, which represent 1,079 MW of capacity, and to pursue opportunities for the development of renewable generation projects.

 

T.E.S. Filer City plans to convert its plant to use natural gas as its primary fuel instead of coal. The conversion is expected to increase the amount of capacity and energy produced by the plant from 73 MW to 225 MW. In May 2017, in anticipation of the planned conversion, T.E.S. Filer City reached an agreement with Consumers to amend their PPA. Under the amendment to the PPA, Consumers will purchase the increased capacity and electricity generated by the converted facility for 15 years. The original PPA was set to expire in 2025. The amendment is contingent on approval by the MPSC and on a finding by FERC that sales made under the amended PPA are exempt from, or authorized under, Section 205 of the Federal Power Act.

 

CMS Enterprises completed the development and construction of a 2.5-MW solar project in Phillips, Wisconsin; the facility began operations in May 2017. Energy produced by the solar project is sold to a local power cooperative through a 25-year PPA.

 

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

 

·                 changes in energy and capacity prices

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

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

·                 the outcome of certain legal proceedings

·                 indemnity and environmental remediation obligations at Bay Harbor

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

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

 

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

 

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Other Outlook and Uncertainties

 

EnerBank: EnerBank is a Utah state-chartered, FDIC-insured industrial bank providing unsecured consumer installment loans for financing home improvements. EnerBank represented four percent of CMS Energy’s net assets at June 30, 2017 and five percent of CMS Energy’s net income available to common stockholders for the six months ended June 30, 2017. The carrying value of EnerBank’s loan portfolio was $1.3 billion at June 30, 2017. Its loan portfolio was funded primarily by certificates of deposit of $1.2 billion. The twelve-month rolling average net default rate on loans held by EnerBank was 1.1 percent at June 30, 2017. CMS Energy is required both by law and by contract to provide financial support, including infusing additional capital, to ensure that EnerBank satisfies mandated capital requirements and has sufficient liquidity to operate. With its self-funding plan, EnerBank has exceeded these requirements historically and exceeded them as of June 30, 2017.

 

Litigation: CMS Energy, Consumers, and certain of their subsidiaries are named as parties in various litigation matters, as well as in administrative proceedings before various courts and governmental agencies, arising in the ordinary course of business. For additional details regarding these and other legal matters, see Note 2, Regulatory Matters and Note 3, Contingencies and Commitments.

 

NEW ACCOUNTING STANDARDS

 

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

 

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CMS Energy Corporation

Consolidated Statements of Income (Unaudited)

 

 

 

 

 

In Millions, Except Per Share Amounts

 

 

 

Three Months Ended

 

Six Months Ended

 

June 30

 

2017

 

2016

 

2017

 

2016

 

 

 

 

 

 

 

 

 

 

 

Operating Revenue

 

1,449

 

1,371

 

3,278

 

3,172

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

 

Fuel for electric generation

 

125

 

97

 

242

 

222

 

Purchased and interchange power

 

373

 

365

 

706

 

711

 

Purchased power – related parties

 

21

 

21

 

43

 

43

 

Cost of gas sold

 

111

 

91

 

447

 

445

 

Maintenance and other operating expenses

 

315

 

286

 

605

 

589

 

Depreciation and amortization

 

197

 

176

 

459

 

414

 

General taxes

 

66

 

60

 

147

 

147

 

Total operating expenses

 

1,208

 

1,096

 

2,649

 

2,571

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

241

 

275

 

629

 

601

 

 

 

 

 

 

 

 

 

 

 

Other Income (Expense)

 

 

 

 

 

 

 

 

 

Interest income

 

2

 

2

 

7

 

3

 

Allowance for equity funds used during construction

 

2

 

3

 

4

 

6

 

Income from equity method investees

 

3

 

3

 

7

 

7

 

Nonoperating retirement benefits, net

 

4

 

10

 

7

 

20

 

Other income

 

-

 

2

 

2

 

5

 

Other expense

 

(2

)

(4

)

(4

)

(7

)

Total other income

 

9

 

16

 

23

 

34

 

 

 

 

 

 

 

 

 

 

 

Interest Charges

 

 

 

 

 

 

 

 

 

Interest on long-term debt

 

103

 

103

 

203

 

203

 

Other interest expense

 

8

 

7

 

16

 

14

 

Allowance for borrowed funds used during construction

 

(1

)

(2

)

(2

)

(3

)

Total interest charges

 

110

 

108

 

217

 

214

 

 

 

 

 

 

 

 

 

 

 

Income Before Income Taxes

 

140

 

183

 

435

 

421

 

Income Tax Expense

 

47

 

58

 

143

 

132

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

93

 

125

 

292

 

289

 

Income Attributable to Noncontrolling Interests

 

1

 

1

 

1

 

1

 

 

 

 

 

 

 

 

 

 

 

Net Income Available to Common Stockholders

 

92

 

124

 

291

 

288

 

 

 

 

 

 

 

 

 

 

 

Basic Earnings Per Average Common Share

 

0.33

 

0.45

 

1.04

 

1.04

 

Diluted Earnings Per Average Common Share

 

0.33

 

0.45

 

1.04

 

1.04

 

 

 

 

 

 

 

 

 

 

 

Dividends Declared Per Common Share

 

0.3325

 

0.3100

 

0.6650

 

0.6200

 

 

The accompanying notes are an integral part of these statements.

 

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CMS Energy Corporation

Consolidated Statements of Comprehensive Income (Unaudited)

 

 

 

 

 

In Millions

 

 

 

Three Months Ended

 

Six Months Ended

 

June 30

 

2017

 

2016

 

2017

 

2016

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

93

 

$

125

 

$

292

 

$

289

 

 

 

 

 

 

 

 

 

 

 

Retirement Benefits Liability

 

 

 

 

 

 

 

 

 

Amortization of net actuarial loss, net of tax of $- for all periods

 

1

 

1

 

1

 

1

 

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

 

-

 

(1

)

-

 

(1

)

 

 

 

 

 

 

 

 

 

 

Investments

 

 

 

 

 

 

 

 

 

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

 

-

 

-

 

1

 

-

 

 

 

 

 

 

 

 

 

 

 

Other Comprehensive Income

 

1

 

-

 

2

 

-

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Income

 

94

 

125

 

294

 

289

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Income Attributable to Noncontrolling Interests

 

1

 

1

 

1

 

1

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Income Attributable to CMS Energy

 

$

93

 

$

124

 

$

293

 

$

288

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these statements.

 

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CMS Energy Corporation

Consolidated Statements of Cash Flows (Unaudited)

 

 

 

In Millions

 

Six Months Ended June 30

 

2017

 

2016

 

 

 

 

 

 

 

Cash Flows from Operating Activities

 

 

 

 

 

Net income

 

$

292

 

$

289

 

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

 

 

 

 

 

Depreciation and amortization

 

459

 

414

 

Deferred income taxes and investment tax credit

 

132

 

127

 

Other non-cash operating activities and reconciling adjustments

 

47

 

33

 

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

 

 

 

 

 

Accounts and notes receivable and accrued revenue

 

154

 

97

 

Inventories

 

44

 

198

 

Accounts payable and accrued refunds

 

37

 

(21

)

Other current and non-current assets and liabilities

 

(46

)

(36

)

Net cash provided by operating activities

 

1,119

 

1,101

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

Capital expenditures (excludes assets placed under capital lease)

 

(746

)

(817

)

Increase in EnerBank notes receivable

 

(25

)

(43

)

Proceeds from the sale of EnerBank notes receivable

 

19

 

-

 

Cost to retire property and other investing activities

 

(54

)

(51

)

Net cash used in investing activities

 

(806

)

(911

)

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

Proceeds from issuance of debt

 

923

 

329

 

Issuance of common stock

 

76

 

66

 

Net increase (decrease) in EnerBank certificates of deposit

 

(27

)

12

 

Payment of dividends on common and preferred stock

 

(188

)

(173

)

Retirement of long-term debt

 

(488

)

(42

)

Decrease in notes payable

 

(398

)

(249

)

Payment of capital lease obligations and other financing costs

 

(27

)

(15

)

Net cash used in financing activities

 

(129

)

(72

)

 

 

 

 

 

 

Net Increase in Cash and Cash Equivalents, Including Restricted Amounts

 

184

 

118

 

Cash and Cash Equivalents, Including Restricted Amounts, Beginning of Period

 

257

 

288

 

 

 

 

 

 

 

Cash and Cash Equivalents, Including Restricted Amounts, End of Period

 

$

441

 

$

406

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other non-cash investing and financing activities

 

 

 

 

 

Non-cash transactions

 

 

 

 

 

Capital expenditures not paid

 

$

146

 

$

178

 

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

 

-

 

29

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these statements.

 

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CMS Energy Corporation

Consolidated Balance Sheets (Unaudited)

 

ASSETS

 

 

 

 

 

 

 

 

 

In Millions

 

 

 

June 30

 

December 31

 

 

 

2017

 

2016

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

 

$

418

 

$

235

 

Restricted cash and cash equivalents

 

17

 

19

 

Accounts receivable and accrued revenue, less allowance of $22 in 2017
and $24 in 2016

 

666

 

821

 

Notes receivable, less allowance of $18 in 2017 and $16 in 2016

 

193

 

180

 

Notes receivable held for sale

 

18

 

39

 

Accounts receivable – related parties

 

12

 

12

 

Inventories at average cost

 

 

 

 

 

Gas in underground storage

 

395

 

446

 

Materials and supplies

 

121

 

119

 

Generating plant fuel stock

 

66

 

61

 

Deferred property taxes

 

179

 

250

 

Regulatory assets

 

9

 

17

 

Prepayments and other current assets

 

117

 

81

 

Total current assets

 

2,211

 

2,280

 

 

 

 

 

 

 

Plant, Property, and Equipment

 

 

 

 

 

Plant, property, and equipment, gross

 

21,628

 

21,010

 

Less accumulated depreciation and amortization

 

6,311

 

6,056

 

Plant, property, and equipment, net

 

15,317

 

14,954

 

Construction work in progress

 

802

 

761

 

Total plant, property, and equipment

 

16,119

 

15,715

 

 

 

 

 

 

 

Other Non-current Assets

 

 

 

 

 

Regulatory assets

 

2,050

 

2,091

 

Accounts and notes receivable

 

1,125

 

1,118

 

Investments

 

68

 

65

 

Other

 

294

 

353

 

Total other non-current assets

 

3,537

 

3,627

 

 

 

 

 

 

 

Total Assets

 

$

21,867

 

$

21,622

 

 

 

 

 

 

 

 

 

 

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LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

In Millions 

 

 

 

June 30

 

December 31

 

 

 

2017

 

2016

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

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

 

$

840

 

$

886

 

Notes payable

 

-

 

398

 

Accounts payable

 

599

 

598

 

Accounts payable – related parties

 

9

 

12

 

Accrued rate refunds

 

77

 

21

 

Accrued interest

 

104

 

98

 

Accrued taxes

 

256

 

348

 

Regulatory liabilities

 

85

 

95

 

Other current liabilities

 

145

 

199

 

Total current liabilities

 

2,115

 

2,655

 

 

 

 

 

 

 

Non-current Liabilities

 

 

 

 

 

Long-term debt

 

9,091

 

8,640

 

Non-current portion of capital leases and financing obligation

 

99

 

110

 

Regulatory liabilities

 

2,054

 

2,041

 

Postretirement benefits

 

770

 

789

 

Asset retirement obligations

 

452

 

447

 

Deferred investment tax credit

 

89

 

73

 

Deferred income taxes

 

2,422

 

2,287

 

Other non-current liabilities

 

289

 

290

 

Total non-current liabilities

 

15,266

 

14,677

 

 

 

 

 

 

 

Commitments and Contingencies (Notes 2 and 3)

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

Common stockholders’ equity

 

 

 

 

 

Common stock, authorized 350.0 shares; outstanding 281.6 shares in 2017
and 279.2 shares in 2016

 

3

 

3

 

Other paid-in capital

 

5,006

 

4,916

 

Accumulated other comprehensive loss

 

(48

)

(50

)

Accumulated deficit

 

(512

)

(616

)

Total common stockholders’ equity

 

4,449

 

4,253

 

Noncontrolling interests

 

37

 

37

 

Total equity

 

4,486

 

4,290

 

 

 

 

 

 

 

Total Liabilities and Equity

 

$

21,867

 

$

21,622

 

 

The accompanying notes are an integral part of these statements.

 

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CMS Energy Corporation

Consolidated Statements of Changes in Equity (Unaudited)