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| CMS > SEC Filings for CMS > Form 10-Q on 30-Oct-2009 | All Recent SEC Filings |
30-Oct-2009
Quarterly Report
• the impact of the continued downturn in the economy and the sharp downturn and extreme volatility in the financial and credit markets on CMS Energy, Consumers, or any of their affiliates, including their:
• revenues;
• capital expenditure programs and related earnings growth;
• ability to collect accounts receivable from customers;
• cost of capital and availability of capital; and
• Pension Plan and postretirement benefit plans assets and required contributions;
• changes in the economic and financial viability of CMS Energy's and Consumers' suppliers, customers, and other counterparties and the continued ability of these third parties, including third parties in bankruptcy, to meet their obligations to CMS Energy and Consumers;
• population growth or decline in the geographic areas where CMS Energy and Consumers conduct business;
• changes in applicable laws, rules, regulations, principles or practices, or in their interpretation, including those related to taxes, the environment, and accounting matters, that could have an impact on CMS Energy's and Consumers' businesses, including the impact of any future regulations or laws regarding:
• carbon dioxide and other greenhouse gas emissions, including potential future legislation to establish a cap and trade system;
• mercury emissions;
• coal ash;
• limitations on the use or construction of coal-fueled electric power plants; and
• renewable portfolio standards and energy efficiency mandates;
• national, regional, and local economic, competitive, and regulatory policies, conditions, and developments;
• adverse regulatory or legal interpretations or decisions, including those related to environmental laws and regulations, and potential environmental remediation costs associated with these interpretations or decisions, including but not limited to those that may affect Bay Harbor or Consumers' RMRR classification under NSR regulations;
• potentially adverse regulatory treatment or failure to receive timely regulatory orders concerning a number of significant matters affecting Consumers that are presently or potentially before the MPSC, including:
• sufficient and timely recovery of:
• Clean Air Act capital and operating costs and other environmental and safety-related expenditures;
• power supply and natural gas supply costs;
• operating and maintenance expenses;
• additional utility rate-based investments;
• increased MISO energy and transmission costs;
• costs associated with energy efficiency investments and state or federally mandated renewable resource standards; and
• Big Rock decommissioning funding shortfalls;
• actions of regulators with respect to expenditures subject to tracking mechanisms;
• actions of regulators to prevent or curtail shutoffs for non-paying customers;
• regulatory orders preventing or curtailing rights to self-implement rate requests;
• regulatory orders potentially requiring a refund of previously self-implemented rates;
• authorization of a new coal-fueled plant; and
• implementation of new energy legislation;
• potentially adverse regulatory treatment resulting from pressure on regulators to oppose annual rate increases or to lessen rate impacts upon customers, particularly in difficult economic times;
• potentially adverse regulatory treatment concerning a number of significant matters affecting Consumers that are presently before the MDEQ, including the approval of Consumers' air permit application for its proposed coal-fueled plant;
• the ability of Consumers to recover its regulatory assets in full and in a timely manner;
• the ability of Consumers to recover nuclear fuel storage costs incurred as a result of the DOE's failure to accept spent nuclear fuel on schedule, and the outcome of pending litigation with the DOE;
• loss of customer load to alternative energy suppliers;
• the impact of expanded enforcement powers and investigation activities at the FERC;
• federal regulation of electric sales and transmission of electricity, including periodic re-examination by federal regulators of CMS Energy's and Consumers' market-based sales authorizations in wholesale power markets without price restrictions;
• effects of weather conditions, such as unusually cool weather during the summer or warm weather during the winter, on sales;
• the market perception of the energy industry or of CMS Energy, Consumers, or any of their affiliates;
• the credit ratings of CMS Energy or Consumers;
• the impact of credit markets, economic conditions, and new banking regulations on EnerBank;
• disruptions in the normal commercial insurance and surety bond markets that may increase costs or reduce traditional insurance coverage, particularly terrorism and sabotage insurance, performance bonds, and tax-exempt debt insurance, and stability of insurance providers;
• energy markets, including availability of capacity and the timing and extent of changes in commodity prices for oil, coal, natural gas, natural gas liquids, electricity, and certain related products due to lower or higher demand, shortages, transportation problems, or other developments, and their impact on CMS Energy's and Consumers' cash flows and working capital;
• changes in construction material prices and the availability of qualified construction personnel to implement Consumers' construction program;
• factors affecting operations, such as unusual weather conditions, catastrophic weather-related damage, unscheduled generation outages, maintenance or repairs, environmental incidents, or electric transmission or gas pipeline system constraints;
• potential disruption or interruption of facilities or operations due to accidents, war, or terrorism, and the ability to obtain or maintain insurance coverage for these events;
• technological developments in energy production, delivery, usage, and storage;
• achievement of capital expenditure and operating expense goals;
• the impact of CMS Energy's and Consumers' integrated business software system on their operations, including utility customer billing and collections;
• the effectiveness of CMS Energy's and Consumers' risk management policies and procedures;
• CMS Energy's and Consumers' ability to achieve generation planning goals and the occurrence and duration of planned or unplanned generation outages;
• adverse outcomes regarding tax positions;
• adverse consequences resulting from any past or future assertion of indemnity or warranty claims associated with assets and businesses previously owned by CMS Energy or Consumers, including
the F.T. Barr matter and claims resulting from attempts by foreign or domestic governments to assess taxes on past operations or transactions;
• the outcome, cost, and other effects of legal or administrative proceedings, settlements, investigations, or claims;
• earnings volatility resulting from the application of fair value accounting to certain energy commodity contracts, such as electricity sales agreements and interest rate and foreign currency contracts;
• changes in financial or regulatory accounting principles or policies, including possible changes to rules involving fair value accounting;
• new or revised interpretations of GAAP by regulators, which could affect how accounting principles are applied, and could impact future periods' financial statements or previously filed financial statements;
• a possible future requirement to comply with International Financial Reporting Standards, which differ from GAAP in various ways, including the present lack of special accounting treatment for regulated activities; and
• other business or investment matters that may be disclosed from time to time in CMS Energy's and Consumers' SEC filings, or in other publicly issued documents.
For additional details regarding these and other uncertainties, see the "Outlook" section included in this MD&A, Note 4, Contingencies, Note 5, Utility Rate Matters, and Part II, Item 1A. Risk Factors.
EXECUTIVE OVERVIEW
CMS Energy is an energy company operating primarily in Michigan and is the
parent holding company of several subsidiaries, including Consumers and
Enterprises. Consumers is a combination electric and gas utility company serving
Michigan's Lower Peninsula. Consumers' electric utility operations include the
generation, purchase, distribution, and sale of electricity. Consumers' gas
utility operations include the purchase, transportation, storage, distribution,
and sale of natural gas. Consumers' customer base includes a mix of residential,
commercial, and diversified industrial customers. Enterprises, through its
equity investments and subsidiaries, is primarily engaged in independent power
production.
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 investments and
operations. 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 power generation,
gas distribution, transmission and storage, and other energy-related services.
Their businesses are affected primarily by:
• weather, especially during the heating and cooling seasons;
• economic conditions;
• regulation and regulatory matters;
• energy commodity prices;
• interest rates; and
• CMS Energy's and Consumers' debt credit ratings.
During the past several years, CMS Energy's business strategy has emphasized
improving its consolidated balance sheet and maintaining focus on its core
strength, which is Consumers' utility operations and service.
Consumers' forecast calls for capital investments in excess of $6 billion from
2009 through 2013, with a key aspect of its strategy being the balanced energy
initiative. The balanced energy initiative is a comprehensive energy resource
plan to meet Consumers' projected short-term and long-term electric power
requirements with energy efficiency; demand management; expanded use of
renewable energy; development of new power plants; pursuit of additional power
purchase agreements to complement existing generating sources; and potential
retirement of older, less efficient generating units.
Consumers filed an air permit application with the MDEQ in October 2007 for its
proposed new 830 MW coal-fueled plant. Consumers expects the MDEQ to act on the
application by the end of 2009. Consumers prepared and filed with the MDEQ and
the MPSC a needs-and-alternatives analysis that supported Consumers' current
balanced energy initiative and the construction of its proposed power plant. In
September 2009, the MPSC staff issued a report to the MDEQ on Consumers'
analysis, concluding that the long-term capacity need was unjustified without
the retirement of certain existing coal-fueled power plants from its fleet and
that the proposed coal-fueled plant is only one alternative out of a range of
alternatives that Consumers may use to fill the projected capacity need.
The 2008 Energy Legislation requires that at least ten percent of Consumers'
electric sales volume come from renewable energy sources by 2015, and includes
requirements for specific capacity additions. In compliance with this
legislation, Consumers filed a renewable energy plan with the MPSC in
February 2009 outlining its plans to build or contract for additional renewable
energy capacity of 200 MW by December 31, 2013, and an additional 300 MW of
renewable energy capacity by December 31, 2015. Consumers' plan proposed that
half of the new renewable capacity would be obtained through long-term
agreements to purchase power from third parties, with the remaining capacity to
be supplied by facilities built and owned by Consumers. At the same time,
Consumers filed an energy optimization plan, also called for by the 2008 Energy
Legislation, under which Consumers will promote energy efficiency and provide
incentives to reduce customer usage. Consumers' filings include a request for
recovery of the cost of the renewable energy and energy optimization measures.
In May 2009, the MPSC approved the energy optimization plan and, with minor
exceptions, the renewable energy plan.
In April 2009, Consumers filed tariff sheets indicating that it planned to
self-implement an electric rate increase in the annual amount of $179 million
based on an 11 percent authorized return on equity, beginning in May 2009. The
MPSC issued an order in May 2009 requiring that, if Consumers self-implemented
the $179 million electric rate increase, it must simultaneously distribute to
customers $36 million of proceeds from the April 2007 sale of Palisades.
Accordingly, Consumers self-implemented an annual electric rate increase of
$179 million, subject to refund with interest, and also implemented a one-time
distribution of $36 million. Consumers anticipates a final order in this rate
filing in November 2009. Additionally, in May 2009, Consumers filed an
application with the MPSC seeking an annual increase in gas revenue of
$114 million based on an 11 percent authorized return on equity. In
October 2009, Consumers filed tariff sheets indicating it plans to
self-implement a gas rate case in the annual amount of $89 million beginning
November 19, 2009. These rate filings include requests for increases in rates to
cover various costs, including capital additions under the balanced energy
initiative.
In October 2009, the MPSC issued a show-cause order that directed Consumers to
present details of its forestry and fossil-fueled plant operation and
maintenance expenditures for 2006 through 2008, as well as available detail for
2009 expenditures, and also to explain why Consumers should not be found in
violation of the MPSC's December 2005 order, which required certain minimum
operation and maintenance expenditures on these activities.
There is uncertainty associated with federal legislative and regulatory
proposals related to the regulation of carbon dioxide emissions, particularly
associated with coal-fueled generation. Federal legislation is being considered
to establish a cap and trade system, or alternatively, to tax carbon dioxide
emissions. In addition, in April 2009, the EPA issued a proposed finding that
greenhouse gases, including carbon dioxide, contribute to air pollution that may
endanger the public health and welfare, thus setting the stage for regulation of
carbon dioxide emissions under the Clean Air Act. CMS Energy and Consumers are
monitoring these developments for potential effects on their plans and
operations.
Consumers is developing an advanced metering infrastructure system that will
provide enhanced controls over and information about energy usage, as well as
timely notification of service interruptions. Consumers is using a phased
implementation approach that will allow it to analyze, test, and pilot the new
technology prior to widespread investment and deployment. Consumers will also
make certain modifications to its software to enable the new system.
In the future, CMS Energy will focus its strategy on:
• investing in Consumers' utility system;
• growing earnings and operating cash flow while controlling operating and fuel costs; and
• maintaining principles of safe, efficient operations, customer value, fair and timely regulation, and consistent financial performance.
As CMS Energy and Consumers execute this strategy, they will need to overcome a Michigan economy that has been impacted adversely by the continued downturn and uncertainty in Michigan's automotive industry marked by the bankruptcies of GM and Chrysler. The financial market crisis, the effects of which became evident in a global economic downturn during the fourth quarter of 2008, continues to result in a negative economic outlook. A range of possible outcomes exists due to the uncertain financial market environment and ongoing government policy responses. Consumers expects its annual 2009 weather-adjusted sales to decline by four percent for the electric utility and five percent for the gas utility and it projects slower growth in the longer term. While CMS Energy and Consumers believe that their sources of liquidity will be sufficient to meet their requirements, they continue to monitor developments in the financial and credit markets and government policy responses to those developments for potential implications for CMS Energy's and Consumers' businesses and their future financial needs.
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