CMS Energy 10-K 2009
Documents found in this filing:
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2008
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Securities registered pursuant to Section 12(b) of the Act:
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
CMS Energy Corporation: Yes [X] No o Consumers Energy Company: Yes [X] No o
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
CMS Energy Corporation: Yes o No [X] Consumers Energy Company: Yes o No [X]
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
CMS Energy Corporation: Yes [X] No o Consumers Energy Company: Yes [X] No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
(Do not check if a smaller reporting company)
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).
CMS Energy Corporation: Yes o No [X] Consumers Energy Company: Yes o No [X]
The aggregate market value of CMS Energy voting and non-voting common equity held by non-affiliates was $3.344 billion for the 224,418,751 CMS Energy Common Stock shares outstanding on June 30, 2008 based on the closing sale price of $14.90 for CMS Energy Common Stock, as reported by the New York Stock Exchange on such date.
There were 226,623,039 shares of CMS Energy Common Stock outstanding on February 23, 2009. On February 23, 2009, CMS Energy held all voting and non-voting common equity of Consumers.
Documents incorporated by reference: CMS Energys proxy statement and Consumers information statement relating to the 2009 annual meeting of shareholders to be held May 22, 2009, are incorporated by reference in Part III.
CMS Energy Corporation
Consumers Energy Company
Annual Reports on Form 10-K to the Securities and Exchange Commission for the Year Ended
December 31, 2008
This combined Form 10-K is separately filed by CMS Energy Corporation and Consumers Energy Company. Information in this combined Form 10-K relating to each individual registrant is filed by such registrant on its own behalf. Consumers Energy Company makes no representation regarding information relating to any other companies affiliated with CMS Energy Corporation other than its own subsidiaries. None of CMS Energy Corporation, CMS Enterprises Company nor any of CMS Energy Corporations other subsidiaries (other than Consumers Energy Company) has any obligation in respect of Consumers Energy Companys debt securities and holders of such securities should not consider CMS Energy Corporation, CMS Enterprises Company or any of CMS Energy Corporations other subsidiaries (other than Consumers Energy Company and its own subsidiaries (in relevant circumstances)) financial resources or results of operations in making a decision with respect to Consumers Energy Companys debt securities. Similarly, Consumers Energy Company has no obligation in respect of debt securities of CMS Energy Corporation.
TABLE OF CONTENTS
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Certain terms used in the text and financial statements are defined below
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ITEM 1. BUSINESS
CMS Energy was formed in Michigan in 1987 and is an energy company operating primarily in Michigan. It is the parent holding company of several subsidiaries, including Consumers and Enterprises. Consumers is a combination electric and gas utility company that provides electricity and/or natural gas to almost 6.5 million of Michigans 10 million residents and serves customers in all 68 counties of Michigans Lower Peninsula. Enterprises, through its subsidiaries and equity investments, is engaged primarily in domestic independent power production.
CMS Energys consolidated operating revenue was $6.821 billion in 2008, $6.464 billion in 2007, and $6.126 billion in 2006. CMS Energy manages its businesses by the nature of services each provides and operates principally in three business segments: electric utility, gas utility, and enterprises. See BUSINESS SEGMENTS in this Item 1 for further discussion of each segment.
Consumers was formed in Michigan in 1968 and is the successor to a corporation organized in Maine in 1910 that conducted business in Michigan from 1915 to 1968. Consumers serves individuals and companies operating in the alternative energy, automotive, metal, chemical and food products industries as well as a diversified group of other industries. In 2008, Consumers served 1.8 million electric customers and 1.7 million gas customers.
Consumers consolidated operations account for a majority of CMS Energys total assets, income, and operating revenue. Consumers consolidated operating revenue was $6.421 billion in 2008, $6.064 billion in 2007, and $5.721 billion in 2006.
Consumers rates and certain other aspects of its business are subject to the jurisdiction of the MPSC and the FERC, as described in CMS ENERGY AND CONSUMERS REGULATION in this Item 1.
Consumers Properties General: Consumers owns its principal properties in fee, except that most electric lines and gas mains are located below public roads or on land owned by others and are accessed by Consumers pursuant to easements and other rights. Almost all of Consumers properties are subject to the lien of its First Mortgage Bond Indenture. For additional information on Consumers properties, see BUSINESS SEGMENTS Consumers Electric Utility Electric Utility Properties, and Consumers Gas Utility Gas Utility Properties as described later in this Item 1.
For further information with respect to operating revenue, net operating income, and identifiable assets and liabilities attributable to all of CMS Energys business segments and operations, see ITEM 8. CMS ENERGYS FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA SELECTED FINANCIAL INFORMATION, CONSOLIDATED FINANCIAL STATEMENTS and NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
For further information with respect to operating revenue, net operating income, and identifiable assets and liabilities attributable to Consumers electric and gas utility operations, see ITEM 8. CONSUMERS FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA SELECTED FINANCIAL INFORMATION, CONSOLIDATED FINANCIAL STATEMENTS and NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Consumers Electric Utility
Consumers electric utility operating revenue was $3.594 billion in 2008, $3.443 billion in 2007, and $3.302 billion in 2006. Consumers electric utility operations include the generation, purchase, distribution and sale of electricity. At year-end 2008, Consumers was authorized to provide electric utility service in 61 of the 68 counties of Michigans Lower Peninsula. Principal cities served include Battle Creek, Flint, Grand Rapids, Jackson, Kalamazoo, Midland, Muskegon and Saginaw. Consumers electric utility customer base comprises a mix of residential, commercial and diversified industrial customers, the largest segment of which is the automotive industry (which represents four percent of Consumers 2008 revenues). Consumers electric utility operations are not dependent upon a single customer, or even a few customers, and the loss of any one or even a few of these customers is not reasonably likely to have a material adverse effect on its financial condition.
Consumers electric utility operations are seasonal. The consumption of electric energy typically increases in the summer months, primarily due to the use of air conditioners and other cooling equipment. In 2008, Consumers electric deliveries were 39 billion kWh, which included ROA deliveries of 1.5 billion kWh. In 2007, Consumers electric deliveries were 39 billion kWh, which included ROA deliveries of 1.4 billion kWh.
Consumers 2008 summer peak demand was 7,488 MW excluding ROA loads and 7,705 MW including ROA loads. For the 2007-08 winter period, Consumers peak demand was 5,739 MW excluding ROA loads and 5,925 MW including ROA loads. Alternative electric suppliers were providing generation services to ROA customers of 332 MW at December 31, 2008 and 315 MW at December 31, 2007. Consumers had a 13.7 percent Reserve Margin target for summer 2008, which was achieved. Consumers owns or controls, through long-term contract, capacity necessary to supply 96.4 percent of projected firm peak load for summer 2009 and has purchased the remainder from others.
Electric Utility Properties
Generation: At December 31, 2008, Consumers electric generating system consisted of the following:
Distribution: Consumers distribution system includes:
Consumers is interconnected to METC. METC owns an interstate high-voltage electric transmission system in Michigan and is interconnected with neighboring utilities as well as other transmission systems.
Fuel Supply: As shown in the following table, Consumers generated electricity primarily from coal and from its former ownership in nuclear power.
The cost of all fuels consumed, shown in the following table, fluctuates with the mix of fuel used.
Consumers has four generating sites that burn coal. In 2008, these plants produced a combined total of 17,701 million kWh of electricity, which represents 95 percent of the energy produced by Consumers plants. These plants burned 9.5 million tons of coal in 2008. On December 31, 2008, Consumers had on hand a 40-day supply of coal.
Consumers has entered into coal supply contracts with various suppliers and associated rail transportation contracts for its coal-based generating plants. Under the terms of these agreements, Consumers is obligated to take physical delivery of the coal and make payment based upon the contract terms. Consumers coal supply contracts expire through 2011 and total an estimated $478 million. Its coal transportation contracts expire through 2009 and total an estimated $163 million. Long-term coal supply contracts have accounted for approximately 60 to 90 percent of Consumers annual coal requirements over the last 10 years.
At December 31, 2008, Consumers had future unrecognized commitments to purchase capacity and energy under long-term power purchase agreements with various generating plants. These contracts require monthly capacity payments based on the plants availability or deliverability. These payments for 2009 through 2030 total an estimated $13.770 billion and average $626 million per year. This amount may vary depending upon plant availability and fuel costs. Consumers is obligated to pay capacity charges based upon the amount of capacity available at a given time, whether or not power is delivered to Consumers.
Consumers Gas Utility
Consumers gas utility operating revenue was $2.827 billion in 2008, $2.621 billion in 2007, and $2.374 billion in 2006. Consumers gas utility operations purchase, transport, store, distribute and sell natural gas. Consumers is authorized to provide gas utility service in 46 of the 68 counties in Michigans Lower Peninsula. Principal cities served include Flint, Jackson, Kalamazoo, Lansing, Pontiac, Saginaw, Macomb, Royal Oak, Howell, and Livonia, where more than 1.5 million of Consumers gas customers are located. Consumers gas utility operations are not dependent upon a single customer, or even a few customers, and the loss of any one or even a few of these customers is not reasonably likely to have a material adverse effect on its financial condition.
Consumers gas utility operations are seasonal. Consumers injects natural gas into storage during the summer months for use during the winter months when the demand for natural gas is higher. Peak demand occurs in the winter due to colder temperatures and the resulting use of heating fuels. In 2008, deliveries of natural gas sold through Consumers pipeline and distribution network totaled 344 bcf.
Gas Utility Properties: Consumers gas distribution and transmission system located throughout Michigans Lower Peninsula consists of:
Gas Supply: In 2008, Consumers purchased 67 percent of the gas it delivered from United States producers and 23 percent from Canadian producers. Authorized suppliers in the gas customer choice program supplied the remaining 10 percent of gas that Consumers delivered.
Consumers firm gas transportation agreements are with ANR Pipeline Company, Great Lakes Gas Transmission, L.P., Trunkline Gas Co., Panhandle Eastern Pipe Line Company, and Vector Pipeline. Consumers uses these agreements to deliver gas to Michigan for ultimate deliveries to market. Consumers firm transportation and city gate arrangements are capable of delivering over 90 percent of Consumers total gas supply requirements. As of December 31, 2008, Consumers portfolio of firm transportation from pipelines to Michigan is as follows:
Consumers purchases the balance of its required gas supply under incremental firm transportation contracts, firm city gate contracts and, as needed, interruptible transportation contracts. The amount of interruptible transportation service and its use vary primarily with the price for this service and the availability and price of the spot supplies being purchased and transported. Consumers use of interruptible transportation is generally in off-peak summer months and after Consumers has fully utilized the services under the firm transportation agreements.
Enterprises, through various subsidiaries and certain equity investments, is engaged primarily in domestic independent power production and the marketing of independent power production. In 2007, Enterprises made a significant change in business strategy by exiting the international marketplace and refocusing its business strategy to concentrate on its independent power business in the United States.
Enterprises operating revenue included in Continuing Operations in our consolidated financial statements was $379 million in 2008, $383 million in 2007, and $438 million in 2006. Operating revenue included in Discontinued Operations in our consolidated financial statements was $235 million in 2007 and $684 million in 2006.
CMS Generation was formed in 1986. It invested in and operated non-utility power generation plants in the United States and abroad. In 2007, Enterprises sold CMS Generation and all of its international assets and power production facilities and transferred its domestic independent power plant operations to its subsidiary, HYDRA-CO. For more information on the asset sales, see ITEM 8. CMS ENERGYS FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3. ASSET SALES, DISCONTINUED OPERATIONS AND IMPAIRMENT CHARGES ASSET SALES.
The independent power productions operating revenue included in Continuing Operations in our consolidated financial statements was $36 million in 2008, $41 million in 2007, and $103 million in 2006. Operating revenue included in Discontinued Operations in our consolidated financial statements was $124 million in 2007 and $437 million in 2006.
Independent Power Production Properties: At December 31, 2008, CMS Energy had ownership interests in independent power plants totaling 1,199 gross MW or 1,078 net MW (net MW reflects that portion of the gross capacity in relation to CMS Energys ownership interest).
The following table details CMS Energys interest in independent power plants at December 31, 2008:
For information on capital expenditures, see ITEM 7. CMS ENERGYS MANAGEMENTS DISCUSSION AND ANALYSIS CAPITAL RESOURCES AND LIQUIDITY.
CMS ERM was formed in 1996. It purchases and sells energy commodities in support of CMS Energys generating facilities. In 2004, CMS ERM discontinued its natural gas retail program as customer contracts expired and changed its name from CMS Marketing, Services and Trading Company to CMS Energy Resource Management Company.
In 2008, CMS ERM marketed approximately 22 bcf of natural gas and 1,778 GWh of electricity. Its operating revenue was $343 million in 2008, $342 million in 2007, and $334 million in 2006.
CMS Gas Transmission was formed in 1988 and owned, developed and managed domestic and international natural gas facilities. In March 2007, CMS Gas Transmission sold a portfolio of its businesses in Argentina and its northern Michigan non-utility natural gas assets to Lucid Energy. In August 2007, CMS Gas Transmission sold its investment in GasAtacama to Endesa S.A. In June 2008, CMS Gas Transmission completed the sale of TGN in Argentina. For more information on these asset sales see ITEM 8. CMS ENERGYS FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3. ASSET SALES, DISCONTINUED OPERATIONS AND IMPAIRMENT CHARGES ASSET SALES.
CMS Gas Transmissions operating revenue included in Continuing Operations in our consolidated financial statements was less than $1 million in 2008 and 2007, and $1 million in 2006. Operating revenue included in Discontinued Operations in our consolidated financial statements was $3 million in 2007 and $17 million in 2006.
In April 2007, CMS Energy sold its ownership interest in SENECA. In June 2007, CMS Energy sold CPEE. For more information on these asset sales, see ITEM 8. CMS ENERGYS FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3. ASSET SALES, DISCONTINUED OPERATIONS AND IMPAIRMENT CHARGES ASSET SALES.
The international energy distributions operating revenue, all of which was reflected in Discontinued Operations in our consolidated financial statements was $108 million in 2007 and $230 million in 2006.
CMS Energy, Consumers and their subsidiaries are subject to regulation by various federal, state, local and foreign governmental agencies, including those described in the following sections.
Consumers is subject to the jurisdiction of the MPSC, which regulates public utilities in Michigan with respect to retail utility rates, accounting, utility services, certain facilities and other matters.
The Michigan Attorney General, ABATE, and the MPSC staff typically participate in MPSC proceedings concerning Consumers. The Michigan Attorney General or ABATE often appeal significant MPSC orders.
Rate Proceedings: In 2008, the MPSC issued an order that established the electric authorized rate of return on common equity at 10.7 percent. During 2008, we filed an electric rate case with the MPSC requesting an 11 percent authorized rate of return, which is still pending. In February 2008, we filed a gas rate case with the MPSC requesting an 11 percent authorized rate of return. In December 2008, the MPSC approved a settlement agreement that established the gas authorized rate of return on common equity at 10.55 percent.
The PSCR and GCR processes allow for recovery of reasonable and prudent power supply and gas costs. The MPSC reviews these costs for reasonableness and prudency in annual plan proceedings and in plan reconciliation proceedings. For additional information, see ITEM 8. CMS ENERGYS FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTE 4 OF CMS ENERGYS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINGENCIES) CONSUMERS ELECTRIC UTILITY RATE MATTERS and CONSUMERS GAS UTILITY RATE MATTERS and ITEM 8. CONSUMERS FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTE 4 OF CONSUMERS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINGENCIES) ELECTRIC RATE MATTERS and GAS RATE MATTERS.
MPSC Regulation and Michigan Legislation: In October 2008, the Michigan governor signed into law a comprehensive energy reform package. Significant features of the new legislation include:
Consumers transports some of the natural gas it sells to customers through facilities owned by competitors including gas producers, marketers and others. Pursuant to a self-implemented gas customer choice program, all of Consumers gas customers are eligible to select an alternative gas commodity supplier.
The FERC has exercised limited jurisdiction over several independent power plants and exempt wholesale generators in which Enterprises has ownership interests, as well as over CMS ERM, CMS Gas Transmission, and DIG. Among other things, the FERC has jurisdiction over acquisitions, operation and disposal of certain assets and facilities, services provided and rates charged, conduct among affiliates, and limited jurisdiction over holding company matters with respect to CMS Energy. The FERC, in connection with the North American Electric Reliability Corporation and regional reliability organizations, also regulates generation owners and operators, load serving entities, purchase and sale entities and others with regard to reliability of the bulk power system. Some of Consumers gas business is also subject to regulation by the FERC, including a blanket transportation tariff pursuant to which Consumers may transport gas in interstate commerce.
The FERC also regulates certain aspects of Consumers electric operations including compliance with the FERC accounting rules, wholesale rates, operation of licensed hydro-electric generating plants, transfers of certain facilities, and corporate mergers and issuance of securities.
The Secretary of Energy regulates imports and exports of natural gas and has delegated various aspects of this jurisdiction to the FERC and the DOEs Office of Fossil Fuels.
Consumers pipelines are subject to the Natural Gas Pipeline Safety Act of 1968 and the Pipeline Safety Improvement Act of 2002, which regulate the safety of gas pipelines.
CMS Energy, Consumers and their subsidiaries are subject to various federal, state and local regulations for environmental quality, including air and water quality, waste management, zoning and other matters.
Consumers continues to install modern emission controls at its electric generating plants and convert electric generating units to burn cleaner fuels. Consumers expects that the cost of future environmental compliance, especially compliance with the federal Clean Air Act, will be significant because of the EPA regulations and
proposed regulations regarding nitrogen oxides, particulate-related emissions, and mercury. Consumers plans to spend $817 million for equipment installation through 2017 to comply with a number of these environmental regulations, including regulations limiting nitrogen oxides and sulfur dioxide emissions. The MDEQ is currently reviewing public comments on Michigans proposed mercury rule. If the proposed rule is enacted, Consumers expects to spend approximately $782 million by 2015 to comply with the rule. For additional information concerning estimated capital expenditures related to environmental compliance, including capital expenditures to reduce nitrogen oxides-related emissions, see ITEM 7. CMS ENERGYS MANAGEMENTS DISCUSSION AND ANALYSIS OUTLOOK ELECTRIC UTILITY BUSINESS UNCERTAINTIES ELECTRIC ENVIRONMENTAL ESTIMATES.
Construction, operation, and closure of a modern solid waste disposal area for ash can be expensive because of strict federal and state requirements. In order to achieve significant reductions in ash field closure costs, Consumers has worked with others to use bottom ash and fly ash as part of a temporary and final cover for ash disposal areas instead of native materials, in cases where the use of bottom ash and fly ash is compatible with environmental standards. To reduce disposal volumes, Consumers sells coal ash for use as a Portland cement replacement in concrete products, as a filler for asphalt, as feedstock for the manufacture of Portland cement and for other environmentally compatible uses.
The EPA has been considering the development of new federal standards for ash disposal areas for several years. Michigans solid waste rules that regulate coal ash landfills were developed in 1993 and have been updated since that time. All Consumers ash facilities have groundwater monitoring programs and are subject to quarterly MDEQ inspections. With the installation of a new dry ash handling system at its Karn and Weadock plants in the fourth quarter of 2008, the vast majority of Consumers fly ash is collected dry. Consumers is working through industry groups to ensure the development of cost-effective rules that are consistent with protection of the environment.
Like most electric utilities, Consumers has PCB in some of its electrical equipment. During routine maintenance activities, Consumers identified PCB as a component in certain paint, grout and sealant materials at Ludington. Consumers removed and replaced part of the PCB material with non-PCB material. Since proposing a plan to deal with the remaining materials, Consumers has had several communications with the EPA. We are not able to predict when the EPA will issue a final ruling. Consumers is awaiting a response from the EPA.
Certain environmental regulations affecting CMS Energy and Consumers include, but are not limited to, the NREPA and Superfund. Despite some differences between the statutes, both NREPA and Superfund can require the sharing of remediation and other response costs among current site owners and operators, owners and operators at the time of disposal, transporters, and those who arranged for disposal of hazardous substances at the site. For additional information on Consumers NREPA and Superfund sites and information on notices of violation from the EPA related to alleged violations of NSR regulations at three of Consumers coal-based facilities and alleged emission limits violations related to fourteen of Consumers utility boilers, see ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTE 4 (CONTINGENCIES) OF CMS ENERGYS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AND NOTE 4 OF CONSUMERS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
CMS Energy has recorded a significant liability for its obligations associated with Bay Harbor. For additional information, see ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTE 4 (CONTINGENCIES) OF CMS ENERGYS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS and ITEM 1A. RISK FACTORS.
CMS Energys and Consumers current insurance program does not extend to cover the risks of certain environmental cleanup costs or environmental damages, such as claims for air pollution, damage to sites owned by CMS Energy or Consumers, and for some past PCB contamination, and for some long-term storage or disposal of pollutants.
CMS ENERGY AND CONSUMERS COMPETITION
Consumers electric utility business experiences actual and potential competition from many sources, both in the wholesale and retail markets, as well as in electric generation, electric delivery, and retail services.
The Customer Choice Act allows all of our electric customers to buy electric generation service from us or from an alternative electric supplier. However, legislation enacted in Michigan in October 2008 revised the Customer Choice Act and generally limits alternative electric supply to 10 percent of our weather-adjusted retail sales for the preceding calendar year. At December 2008, alternative electric suppliers were providing 332 MW of generation service to ROA customers, which is equivalent to 4 percent of our weather-adjusted retail sales from the preceding calendar year.
Consumers also has competition or potential competition from:
Consumers addresses this competition by monitoring activity in adjacent areas and enforcing compliance with the MPSC and the FERC rules, providing non-energy services, and providing tariff-based incentives that support economic development.
Consumers offers non-energy revenue-producing services to electric customers, municipalities and other utilities in an effort to offset costs. These services include engineering and consulting, construction of customer-owned distribution facilities, sales of equipment (such as transformers), power quality analysis, energy management services, meter reading, and joint construction for phone and cable. In these activities, Consumers faces competition from many sources, including energy management services companies, other utilities, contractors, and retail merchandisers.
CMS ERM, a non-utility electric subsidiary, continues to focus on optimizing CMS Energys independent power production portfolio. CMS Energys independent power production business, a non-utility electric subsidiary, faces competition from generators, marketers and brokers, as well as other utilities marketing power in the wholesale market.
Competition exists in various aspects of Consumers gas utility business, and is likely to increase. Competition comes from other gas suppliers taking advantage of direct access to Consumers customers and from alternative fuels and energy sources, such as propane, oil, and electricity.
CMS Energy and its subsidiaries, including Consumers, maintain insurance coverage similar to comparable companies in the same lines of business. The insurance policies are subject to terms, conditions, limitations and exclusions that might not fully compensate CMS Energy for all losses. A portion of each loss is generally assumed by CMS Energy in the form of deductibles and self-insured retentions that, in some cases, are substantial. As CMS Energy renews its policies it is possible that some of the current insurance coverage may not be renewed or obtainable on commercially reasonable terms due to restrictive insurance markets.
For a discussion of environmental insurance coverage, see ITEM 1. BUSINESS CMS ENERGY AND CONSUMERS ENVIRONMENTAL COMPLIANCE.
At December 31, 2008, CMS Energy and its wholly owned subsidiaries, including Consumers, had 7,970 full-time equivalent employees. Included in the total are 3,475 employees who are covered by union contracts.
At December 31, 2008, Consumers and its subsidiaries had 7,697 full-time equivalent employees. Included in the total are full-time operating, maintenance and construction employees and full-time and part-time call center employees who are represented by the Union.
CMS ENERGY EXECUTIVE OFFICERS (as of February 1, 2009)
There are no family relationships among executive officers and directors of CMS Energy.
The present term of office of each of the executive officers extends to the first meeting of the Board of Directors after the next annual election of Directors of CMS Energy (scheduled to be held on May 22, 2009).
CONSUMERS EXECUTIVE OFFICERS (as of February 1, 2009)
There are no family relationships among executive officers and directors of Consumers.
The present term of office of each of the executive officers extends to the first meeting of the Board of Directors after the next annual election of Directors of Consumers (scheduled to be held on May 22, 2009).
CMS Energys internet address is www.cmsenergy.com. Information contained in CMS Energys website is not incorporated herein. You can access free of charge on our website all of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed pursuant to Section 13(a) or 15(d) of the Exchange Act. These reports are available soon after they are electronically filed with the SEC. Also on our website are our:
We will provide this information in print to any shareholder who requests it.
You may also read and copy any materials we file with the SEC at the SECs Public Reference Room at 100 F Street, NE, Washington DC, 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address is http://www.sec.gov.
ITEM 1A. RISK FACTORS
Actual results in future periods for CMS Energy and Consumers could differ materially from historical results and the forward-looking statements contained in this report. Factors that might cause or contribute to these differences include, but are not limited to, those discussed in the following sections. The companies business is influenced by many factors that are difficult to predict, involve uncertainties that may materially affect actual results and are often beyond the companies control. Additional risks and uncertainties not presently known or that the companies management currently believes to be immaterial may also adversely affect the companies. The risk factors described in the following sections, as well as the other information included in this annual report and in the other documents filed with the SEC, should be considered carefully before making an investment in securities of CMS Energy and Consumers. Risk factors of Consumers are also risk factors of CMS Energy.
Due to its holding company structure, CMS Energy depends on dividends from its subsidiaries to meet its debt service obligations. Restrictions contained in Consumers preferred stock provisions and other legal restrictions, such as certain terms in its articles of incorporation and FERC requirements, limit Consumers ability to pay dividends or acquire its own stock from CMS Energy. At December 31, 2008, Consumers had $331 million of unrestricted retained earnings available to pay common stock dividends. If sufficient dividends are not paid to CMS Energy by its subsidiaries, CMS Energy may not be able to generate the funds necessary to fulfill its cash obligations, thereby adversely affecting its liquidity and financial condition.
CMS Energy has substantial indebtedness that could limit its financial flexibility and hence its ability to meet its debt service obligations.
As of December 31, 2008, CMS Energy had $1.881 billion aggregate principal amount of indebtedness, including $178 million of subordinated indebtedness relating to its convertible preferred securities. Subsidiary debt of $4.549 billion is not included in the preceding total. As of December 31, 2008, there were $105 million of borrowings and $24 million of letters of credit outstanding under CMS Energys revolving credit agreement. CMS Energy and its subsidiaries may incur additional indebtedness in the future.
The level of CMS Energys present and future indebtedness could have several important effects on its future operations, including, among others:
CMS Energys ability to meet its debt service obligations and to reduce its total indebtedness will depend on its future performance, which will be subject to general economic conditions, industry cycles, regulatory decisions and financial, business and other factors affecting its operations, many of which are beyond its control. CMS Energy cannot make assurances that its business will continue to generate sufficient cash flow from operations to service its indebtedness. If it is unable to generate sufficient cash flows from operations, it may be required to sell additional assets or obtain additional financing. CMS Energy cannot assure that additional financing will be available on commercially acceptable terms or at all.
CMS Energy cannot predict the outcome of claims regarding its participation in the development of Bay Harbor.
As part of the development of Bay Harbor by certain subsidiaries of CMS Energy, pursuant to an agreement with the MDEQ, third parties constructed a golf course and park over several abandoned CKD piles, left over from the former cement plant operations on the Bay Harbor site. The third parties also undertook a series of remedial actions, including removing abandoned buildings and equipment; consolidating, shaping and covering CKD piles with soil and vegetation; removing CKD from streams and beaches; and constructing a leachate collection system at an identified seep. Leachate is formed when water passes through CKD. In 2002, CMS Energy sold its interest in Bay Harbor, but retained its obligations under environmental indemnifications entered into at the start of the project.
In 2005, the EPA along with CMS Land and CMS Capital voluntarily executed an AOC under Superfund and approved a Removal Action Work Plan to address issues at Bay Harbor. Collection systems required under the plan have been installed and shoreline monitoring is ongoing. In February 2008, CMS Land and CMS Capital submitted a proposed augmentation plan to the EPA to address areas where pH measurements are not satisfactory. CMS Land, CMS Capital and the EPA have agreed upon the augmentation measures and a schedule for their installation. The augmentation measures are being implemented and are anticipated to be completed in 2009.
In February 2008, the MDEQ and the EPA granted permits for CMS Land or its affiliate, Beeland, to construct and operate a deep injection well near Alba, Michigan in eastern Antrim County. Certain environmental groups, a local township, and a local county filed an appeal of the EPAs decision and, following denial by the MDEQ of a right to a hearing, filed lawsuits in the Ingham Circuit Court appealing the permits. The EPA has denied the appeal. One appeal relating to the state permit remains pending in the state court. Groups opposed to the injection well filed a lawsuit in Antrim County seeking an injunction against development of the well. In January 2009, the trial judge issued a preliminary injunction. Beeland is considering an appeal of the courts order.
CMS Land and CMS Capital, the MDEQ, the EPA, and other parties are having ongoing discussions concerning the long-term remedy for the Bay Harbor sites. These discussions are addressing, among other things, issues relating to:
CMS Energy has recorded a cumulative charge of $141 million, which includes accretion expense, for its obligations. Depending on the size of any indemnification obligation or liability under environmental laws, an adverse outcome of this matter could have a material adverse effect on CMS Energys liquidity and financial condition and could negatively impact CMS Energys financial results. CMS Energy cannot predict the financial impact or outcome of this matter.
CMS Energy may be adversely affected by regulatory investigations and civil lawsuits regarding pricing information that CMS MST and CMS Field Services provided to market publications.
CMS Energy notified appropriate regulatory and governmental agencies that some employees at CMS MST and CMS Field Services appeared to have provided inaccurate information regarding natural gas trades to various energy industry publications which compile and report index prices. CMS Energy is cooperating with an ongoing investigation by the DOJ regarding this matter. CMS Energy is unable to predict the outcome of the DOJ investigation and what effect, if any, the investigation will have on CMS Energy.
CMS Energy, CMS MST, CMS Field Services, Cantera Natural Gas, Inc. (the company that purchased CMS Field Services) and Cantera Gas Company were named as defendants in various lawsuits arising as a result of alleged false natural gas price reporting. Allegations included manipulation of NYMEX natural gas futures and options prices, price-fixing conspiracies and artificial inflation of natural gas retail prices in California, Colorado, Kansas, Missouri, Tennessee and Wisconsin. CMS Energy cannot predict the outcome of the lawsuits. It is possible that the outcome in one or more of the lawsuits could affect adversely CMS Energys liquidity, financial condition and results of operations.
The agreements that CMS Energy and Consumers enter into for the sale of assets customarily include provisions whereby they are required to:
Many of these contingent liabilities can remain open for extended periods of time after the sales are closed. Depending on the extent to which the buyers may ultimately seek to enforce their rights under these contractual provisions, and the resolution of any disputes concerning them, there could be a material adverse effect on CMS Energys or Consumers liquidity, financial condition and results of operations.
CMS Energy and Consumers have financing needs and may be unable to obtain bank financing or access the capital markets. If the national and worldwide financial crisis intensifies, potential disruption in the capital and credit markets may adversely affect CMS Energys and Consumers businesses, including the availability and cost of short-term funds for liquidity requirements and their ability to meet long-term commitments; each could adversely affect their liquidity, financial condition and results of operations.
CMS Energy and Consumers may be subject to liquidity demands pursuant to commercial commitments, under guarantees, indemnities and letters of credit. Consumers capital requirements are expected to be substantial over the next several years as it implements generation and environmental projects.
CMS Energy and Consumers rely on the capital markets, particularly for publicly offered debt, as well as the banking and commercial paper markets, to meet their financial commitments and short-term liquidity needs if internal funds are not available from CMS Energys and Consumers respective operations. CMS Energy and Consumers also use letters of credit issued under each of their revolving credit facilities to support certain operations and investments. Disruptions in the capital and credit markets, as have been experienced during 2008, and continuing in 2009, could adversely affect CMS Energys and Consumers ability to draw on their respective bank revolving credit facilities. CMS Energys and Consumers access to funds under those credit facilities is dependent on the ability of the banks that are parties to the facilities to meet their funding commitments. Those banks may not be able to meet their funding commitments to CMS Energy and Consumers if they experience shortages of capital and liquidity or if they experience excessive volumes of borrowing requests from CMS Energy and Consumers and other borrowers within a short period of time.
Longer term disruptions in the capital and credit markets as a result of uncertainty, changing or increased regulation, reduced alternatives or failures of significant financial institutions could adversely affect CMS Energys and Consumers access to liquidity needed for their respective businesses. Any disruption could require CMS Energy and Consumers to take measures to conserve cash until the markets stabilize or until alternative credit arrangements or other funding for their business needs can be arranged. These measures could include deferring capital expenditures, changing CMS Energys and Consumers commodity purchasing strategy to avoid collateral-posting requirements, and reducing or eliminating future share repurchases, dividend payments or other discretionary uses of cash.
CMS Energy continues to explore financing opportunities to supplement its financial plan. These potential opportunities include refinancing and/or issuing new capital markets debt, preferred stock and/or common equity, and bank financing. CMS Energy cannot guarantee the capital markets acceptance of its securities or predict the impact of factors beyond its control, such as actions of rating agencies. If CMS Energy is unable to obtain bank financing or access the capital markets to incur or refinance indebtedness, there could be a material adverse effect on its liquidity, financial condition and results of operations. Similarly, Consumers currently plans to seek funds through the capital markets, commercial lenders and leasing arrangements. Entering into new financings is subject in part to capital market receptivity to utility industry securities in general and to Consumers securities issuances in particular. Consumers cannot guarantee the capital markets acceptance of its securities or predict the impact of factors beyond its control, such as actions of rating agencies. If Consumers is unable to obtain bank financing or access the capital markets to incur or refinance indebtedness, there could be a material adverse effect on its liquidity, financial condition and results of operations.
Certain of CMS Energys securities and those of its affiliates, including Consumers, are rated by various credit rating agencies. Any reduction or withdrawal of one or more of its credit ratings could have a material adverse impact on CMS Energys or Consumers ability to access capital on acceptable terms and maintain commodity lines of credit and could make its cost of borrowing higher. If it is unable to maintain commodity lines of credit, CMS Energy or Consumers may have to post collateral or make prepayments to certain of its suppliers pursuant to existing contracts with them. Further, any adverse developments to Consumers, which provides dividends to CMS Energy, that result in a lowering of Consumers credit ratings could have an adverse effect on CMS Energys credit ratings. CMS Energy and Consumers cannot guarantee that any of their current ratings will remain in effect for any given period of time or that a rating will not be lowered or withdrawn entirely by a rating agency.
Electric industry regulation could adversely affect CMS Energys and Consumers business, including their ability to recover costs from their customers.
Federal and state regulation of electric utilities has changed dramatically in the last two decades and could continue to change over the next several years. These changes could have a material adverse effect on CMS Energys and Consumers liquidity, financial condition and results of operations.
CMS Energy and Consumers are subject to, or affected by, extensive federal and state utility regulation. In CMS Energys and Consumers business planning and management of operations, they must address the effects of existing and proposed regulation on their businesses and changes in the regulatory framework, including initiatives by federal and state legislatures, regional transmission organizations, utility regulators and taxing authorities. Adoption of new regulations by federal or state agencies, or changes to current regulations and interpretations of these regulations may adversely affect CMS Energys and Consumers liquidity, financial condition, and results of operations.
There are multiple proceedings pending before the FERC involving transmission rates, regional transmission organizations and electric bulk power markets and transmission. The FERC reviewed the standards under which electric utilities are allowed to participate in wholesale power markets without price restrictions. In June 2007, the FERC issued a final rule on these standards that did not impact negatively Consumers ability to retain its market-based rate authority. The U.S. Court of Appeals for the Ninth Circuit has been petitioned to review portions of this final rule. CMS Energy and Consumers cannot predict the impact of these electric industry restructuring proceedings on their liquidity, financial condition or results of operations.
CMS Energy and Consumers could incur significant costs to comply with environmental standards and face difficulty in recovering these costs on a current basis.
CMS Energy, Consumers and their subsidiaries are subject to costly and increasingly stringent environmental regulations. They expect that the cost of future environmental compliance, especially compliance with clean air and water laws, will be significant. Federal rules governing coal-based electric generating plant emission controls for nitrogen oxides, sulfur dioxide and mercury are being reviewed by the courts.
The U.S. Supreme Court, in Massachusetts v. EPA, has remanded a claim to the EPA to consider whether greenhouse gases should be regulated as a pollutant under the Clean Air Act. The EPA is reviewing the matter. There
are also pending regulatory and judicial actions which seek to have either existing or new coal-based power plants be subject to greenhouse gas regulation under the Clean Air Act. In addition, legislative proposals have been before the U.S. Congress pertaining to the potential regulation or control of carbon dioxide emissions and other greenhouse gases. These or similar proposals are considered likely to be enacted in some form and could have a significant impact upon the operation and cost of existing and planned future coal-based power plants.
In 2008, Consumers obtained 52 percent of its energy from purchased and interchange power and 48 percent of its energy from Consumers-owned generation. Of the amount of energy obtained from Consumers-owned generation, 95 percent came from coal-based power plants. The electric energy from its coal, gas and oil-based power plants would be subject to carbon dioxide emissions regulations. In 2008, it is estimated that carbon dioxide emissions from Consumers-owned coal-based power plants, excluding the portion of jointly-owned Campbell Unit 3, exceeded approximately 19 million tons of carbon dioxide. Enterprises also has interests in coal-based power plants and other types of power plants that produce carbon emissions. These plants would also be subject to carbon dioxide emissions regulations. These proposals, if enacted, could require the purchase of allowances for, or taxation of, carbon emissions, could require the curtailment of use of coal-based power plants, or could require the use of other alternatives to fossil-fuel based generating capacity and/or otherwise could significantly affect Consumers and Enterprises operations and plans for, and costs associated with their fossil-fuel generating plants and purchased power.
There are ongoing state-level and Midwest regional greenhouse gas regulatory initiatives. The State of Michigan has convened the Michigan Climate Action Council, a climate change stakeholder process. Michigan is also a signatory participant in the Midwest Governors Greenhouse Gas Reduction Accord process. The governor of Michigan recently proposed a 45 percent reduction in the use of fossil fuel for electric generation by 2020. The governors office has subsequently advised us that the 45 percent is only a suggested target, and is intended to apply only to coal-based generation. She also issued an executive directive requiring the MDEQ to determine whether an electric generation need exists that would be served by a proposed coal-based power plant; and if such need exists, to consider reasonable and prudent alternatives to coal before issuing an air permit for the proposed coal-based power plant. The Michigan attorney general issued an opinion that invalidated the governors directive on the basis that the governors directive exceeded the governors authority. If the attorney generals action is challenged and the directive is ultimately upheld, it will have a significant impact upon the operation and cost of existing and planned future coal-based power plants.
Other laws, proposals, rules and judicial interpretations of presently existing laws that govern areas such as electric generating plant cooling water intake systems and electric generating plant modifications could have a significant impact upon their generating plants. The EPA is currently contesting the applicability of NSR standards to certain of Consumers coal-based plant projects, which if the EPAs position is sustained, could lead to costly environmental upgrades, monetary sanctions, or both. If these measures or similar state measures are enacted or become effective, CMS Energy and Consumers could be required to replace equipment, install additional equipment, restructure or shut down operations at various facilities.
CMS Energy and Consumers expect to collect fully from their customers, through the ratemaking process, expenditures incurred to comply with environmental regulations. However, if these expenditures are not recovered from customers in Consumers rates, CMS Energy and/or Consumers may be required to seek significant additional financing to fund these expenditures. This action could strain their cash resources. We can give no assurances that CMS Energy and/or Consumers will have access to bank financing or capital markets to fund these environmental expenditures.
Market performance and other changes may decrease the value of benefit plan assets, which then could require significant funding.
The performance of the capital markets affects the values of assets that are held in trust to satisfy future obligations under CMS Energys and Consumers pension and postretirement benefit plans. CMS Energy and Consumers have significant obligations in this area and hold significant assets in these trusts. These assets are subject to market fluctuations and will yield uncertain returns, which may fall below CMS Energys and Consumers forecasted return rates. A decline in the market value of the assets or a change in the level of interest rates used to
measure the required minimum funding levels may increase the funding requirements of these obligations. Also, changes in demographics, including increased number of retirements or changes in life expectancy assumptions, may increase the funding requirements of the obligations related to the pension and postretirement benefit plans. If CMS Energy and Consumers are unable to successfully manage their pension and postretirement plan assets, it could affect negatively their liquidity, financial condition and results of operations.
Periodic reviews of the values of CMS Energys and Consumers assets could result in accounting charges.
CMS Energy and Consumers are required by GAAP to review periodically the carrying value of their assets, including those that may be sold. Market conditions, the operational characteristics of their assets and other factors could result in recording additional impairment charges for their assets, which could have an adverse effect on their stockholders equity and their access to additional financing. In addition, CMS Energy and Consumers may be required to record impairment charges at the time they sell assets, depending on the sale prices they are able to secure and other factors.
CMS Energys and Consumers revenues and results of operations are subject to risks that are beyond their control, including but not limited to future terrorist attacks or related acts of war.
The cost of repairing damage to CMS Energys and Consumers facilities due to storms, natural disasters, wars, terrorist acts and other catastrophic events, in excess of insurance recoveries and reserves established for these repairs, may affect adversely their liquidity, financial condition and results of operations. The occurrence or risk of occurrence of future terrorist activity and the high cost or potential unavailability of insurance to cover this terrorist activity may affect their liquidity, financial condition and results of operations in unpredictable ways. These actions could also result in disruptions of power and fuel markets. Instability in the financial markets as a result of terrorism, war or natural disasters, credit crises, recessions or other factors may adversely affect CMS Energys and Consumers liquidity, financial condition and results of operations.
Energy risk management strategies may not be effective in managing fuel and electricity pricing risks, which could result in unanticipated liabilities to Consumers and CMS Energy or increased volatility of its earnings.
Consumers is exposed to changes in market prices for natural gas, coal, electricity and emission credits. Prices for natural gas, coal, electricity and emission credits may fluctuate substantially over relatively short periods of time and expose Consumers to commodity price risk. A substantial portion of Consumers operating expenses for its plants consists of the costs of obtaining these commodities. Consumers manages these risks using established policies and procedures, and it may use various contracts to manage these risks, including swaps, options, futures and forward contracts. No assurance can be made that these strategies will be successful in managing Consumers pricing risk or that they will not result in net liabilities to Consumers as a result of future volatility in these markets.
Natural gas prices in particular have historically been volatile. Consumers routinely enters into contracts to mitigate exposure to the risks of demand, market effects of weather and changes in commodity prices associated with its gas distribution business. These contracts are executed in conjunction with the GCR mechanism, which is designed to allow Consumers to recover prudently incurred costs associated with those positions. However, Consumers does not always hedge the entire exposure of its operations from commodity price volatility. Furthermore, the ability to hedge exposure to commodity price volatility depends on liquid commodity markets. As a result, to the extent the commodity markets are illiquid, Consumers may not be able to execute its risk management strategies, which could result in greater unhedged positions than preferred at a given time. To the extent that unhedged positions exist, fluctuating commodity prices can improve or worsen CMS Energys and Consumers liquidity, financial condition and results of operations.
In addition, Consumers included in its 2009-10 GCR filing a proposal to extend the GCR forward purchase period by two years beyond the typical three-year period, through the 2013-14 GCR period. These potential additional gas purchases could have a significant impact on Consumers credit requirements and could result in significant margin calls if prices were to fall below the forward purchase prices of gas purchased.
Changes in taxation as well as inherent difficulty in quantifying potential tax effects of business decisions could negatively impact CMS Energys and Consumers results of operations.
CMS Energy and Consumers are required to make judgments regarding the potential tax effects of various financial transactions and results of operations in order to estimate their obligations to taxing authorities. The tax obligations include income, real estate, sales and use taxes, employment-related taxes and ongoing issues related to these tax matters. The judgments include reserves for potential adverse outcomes regarding tax positions that have been taken that may be subject to challenge by the IRS and/or other taxing authorities. Unfavorable settlements of any of the issues related to these reserves at CMS Energy or Consumers could adversely affect their liquidity, financial condition and results of operations.
Consumers electric and gas utility businesses are impacted by the economic conditions of the customers it serves. In its service territories in Michigan, the economy has been hampered by the continued downturn and financial uncertainty in the automotive industry. Michigans economy has also been impacted negatively by the uncertainty in the financial and credit markets resulting from the subprime mortgage crisis. In the event economic conditions in Michigan or the region continue to decline, Consumers may experience reduced demand for electricity or natural gas that could result in decreased earnings and cash flow. In addition, economic conditions in its service territory affect its collections of accounts receivable, liquidity and financial condition.
CMS Energys and Consumers energy sales and operations are impacted by seasonal factors and varying weather conditions from year to year.
CMS Energys and Consumers businesses are generally seasonal. Demand for electricity is greater in the summer and winter months associated with cooling and heating, and demand for natural gas peaks in the winter heating season. Accordingly, their overall results in the future may fluctuate substantially on a seasonal basis. Mild temperatures during the summer cooling season and winter heating season will adversely affect CMS Energys and Consumers liquidity, financial condition and results of operations.
Unforeseen maintenance may be required to produce electricity. As a result of unforeseen maintenance, Consumers may be required to incur unplanned expenses and to make spot market purchases of electricity that exceed its costs of generation. Its liquidity, financial condition and results of operations may be adversely affected if it is unable to recover those increased costs.
Failure to succeed in implementing new processes and information systems could interrupt our operations.
CMS Energy and Consumers depend on numerous information systems for operations and financial information and billings. They completed recently a multi-year company-wide initiative to improve existing processes and implement new core information systems. Failure to implement successfully new processes and new core information systems could interrupt their operations.
Consumers may not be able to obtain an adequate supply of coal, which could limit its ability to operate its facilities.
Consumers is dependent on coal for much of its electric generating capacity. While Consumers has coal supply and transportation contracts in place, there can be no assurance that the counterparties to these agreements will fulfill their obligations to supply coal to Consumers. The suppliers under the agreements may experience financial or operational problems that inhibit their ability to fulfill their obligations to Consumers. In addition, suppliers under these agreements may not be required to supply coal to Consumers under certain circumstances, such as in the event of a natural disaster. If it is unable to obtain its coal requirements under existing or future coal supply and transportation contracts, Consumers may be required to purchase coal at higher prices, or it may be forced to make additional MWh purchases through other potentially higher cost generating resources in the Midwest Energy Market. Higher coal costs increase its working capital requirements.
CMS Energy and Consumers are subject to rate regulation. Electric and gas rates for their utilities are set by the MPSC and cannot be increased without regulatory authorization. The FERC authorizes certain subsidiaries of CMS Energy to sell electricity at market-based rates. CMS Energy and Consumers may be impacted negatively by new regulations or interpretations by the MPSC, the FERC or other regulatory bodies. Failure of CMS Energy and Consumers to obtain adequate rates or regulatory approvals in a timely manner may adversely affect CMS Energys and Consumers liquidity, financial condition, and results of operations. New legislation, regulations or interpretations could change how the business of CMS Energy and Consumers operates, impact the ability of CMS Energy and Consumers to recover costs through rate increases or require CMS Energy and Consumers to incur additional expenses.
CMS Energy and Consumers are exposed to credit risk of counterparties with whom they do business. Adverse economic conditions affecting, or the financial difficulties of, counterparties with whom they do business could impair the ability of these counterparties to pay for CMS Energys and Consumers services or fulfill their contractual obligations, including performance and/or payment of damages. CMS Energy and Consumers depend on these counterparties to remit payments and perform services on a timely basis. Any delay or default in payment and/or performance of contractual obligations could adversely affect CMS Energys and Consumers liquidity, financial condition and results of operations. The capital and credit markets have been experiencing levels of volatility and disruption unprecedented in recent years. Market disruption and volatility could have a negative impact on CMS Energys and Consumers lenders, suppliers and other counterparties or Consumers customers, causing them to fail to meet their obligations. Adverse economic conditions could also have a negative impact on the loan portfolio of CMS Energys banking subsidiary, EnerBank.
CMS Energy could be required to pay cash to certain security holders in connection with the optional conversion of their convertible securities.
CMS Energy has issued three series of cash-convertible securities, of which an aggregate principal amount (or par value in the case of preferred stock) of approximately $677 million was outstanding as of December 31, 2008. If the trading price of CMS Energys common stock exceeds specified amounts at the end of a particular fiscal quarter, then holders of one or more series of these convertible securities will have the option to convert their securities in the following fiscal quarter, with the principal amount (or par value) payable in cash by CMS Energy. Accordingly, if these trading price minimums are satisfied and security holders exercise their conversion rights, CMS Energy may be required to outlay a significant amount of cash to those security holders, which could adversely affect CMS Energys liquidity and financial condition.
Consumers planned investments include a new coal-based power generation plant, an advanced metering infrastructure program, renewable power generation, gas compression, and other electric and gas infrastructure to upgrade delivery systems. The success of these investments depends on or could be affected by a variety of factors including, but not limited to, effective cost and schedule management during implementation, changes in commodity and other prices, operational performance, changes in environmental, legislative and regulatory requirements and regulatory cost recovery. Consumers cannot predict the impact that any of these factors may have on the success of its capital investment program. It is possible that adverse events reflected in these factors could adversely affect Consumers liquidity, financial condition and results of operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2. PROPERTIES
Descriptions of CMS Energys and Consumers properties are found in the following sections of Item 1, all of which are incorporated by reference in this Item 2:
ITEM 3. LEGAL PROCEEDINGS
CMS Energy, Consumers and some of their subsidiaries and affiliates are parties to certain routine lawsuits and administrative proceedings incidental to their businesses involving, for example, claims for personal injury and property damage, contractual matters, various taxes, and rates and licensing. For additional information regarding various pending administrative and judicial proceedings involving regulatory, operating and environmental matters, see ITEM 1. BUSINESS CMS ENERGY AND CONSUMERS REGULATION, both CMS Energys and Consumers ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS and both CMS Energys and Consumers ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Texas-Ohio Energy, Inc. filed a putative class action lawsuit in the United States District Court for the Eastern District of California in November 2003 against a number of energy companies engaged in the sale of natural gas in the United States (including CMS Energy). The complaint alleged defendants entered into a price-fixing scheme by engaging in activities to manipulate the price of natural gas in California. The complaint alleged violations of the federal Sherman Act, the California Cartwright Act, and the California Business and Professions Code relating to unlawful, unfair and deceptive business practices. The complaint sought both actual and exemplary damages for alleged overcharges, attorneys fees and injunctive relief regulating defendants future conduct relating to pricing and price reporting. In April 2004, a Nevada MDL panel ordered the transfer of the Texas-Ohio case to a pending MDL matter in the Nevada federal district court that at the time involved seven complaints originally filed in various state courts in California that made similar allegations. The court granted the defendants motion to dismiss on the basis of the filed rate doctrine and entered a judgment in favor of the defendants on April 11, 2005. Texas-Ohio appealed the dismissal to the Ninth Circuit Court of Appeals.
While that appeal was pending, CMS Energy agreed to settle the Texas-Ohio case and three other cases originally filed in California federal courts (Fairhaven, Abelman Art Glass and Utility Savings), for a total payment of $700,000. On September 10, 2007, the court entered an order granting final approval of the settlement and dismissing the CMS Energy defendants from these cases. On September 26, 2007, the Ninth Circuit Court of Appeals reversed and remanded the case to the federal district court. While CMS Energy is no longer a party to the Texas-Ohio case, the Ninth Circuit Court of Appeals ruling may affect the positions of CMS Energy entities in other pending cases, as it did in the Leggett case discussed in a following paragraph.
Commencing in or about February 2004, 15 state law complaints containing allegations similar to those made in the Texas-Ohio case, but generally limited to the California Cartwright Act and unjust enrichment, were filed in various California state courts against many of the same defendants named in the federal price manipulation cases discussed in the preceding paragraphs. In addition to CMS Energy, CMS MST is named in all 15 state law complaints. Cantera Gas Company and Cantera Natural Gas, LLC (erroneously sued as Cantera Natural Gas, Inc.) are named in all but one complaint. In February 2005, these 15 separate actions, as well as nine other similar actions that were filed in California state court but do not name CMS Energy or any of its former or current subsidiaries, were ordered coordinated with pending coordinated proceedings in the San Diego Superior Court. The 24 state court complaints involving price reporting were coordinated as Natural Gas Antitrust Cases V. Plaintiffs in Natural
Gas Antitrust Cases V were ordered to file a consolidated complaint, but a consolidated complaint was filed only for the two putative class action lawsuits. Pursuant to a ruling dated August 23, 2006, CMS Energy, Cantera Gas Company and Cantera Natural Gas, LLC were dismissed as defendants in the master class action and the 13 non-class actions, due to lack of personal jurisdiction. In September 2006, CMS MST reached an agreement in principle to settle the master class action for $7 million. In March 2007, CMS Energy paid $7 million into a trust fund account following preliminary approval of the settlement by the judge. On June 12, 2007, the court entered a judgment, final order and decree granting final approval to the class action settlement with CMS MST. Certain of the individual cases filed in the California State Court remain pending against CMS MST.
Samuel D. Leggett, et al. v. Duke Energy Corporation, et al., a class action complaint brought on behalf of retail and business purchasers of natural gas in Tennessee, was filed in the Chancery Court of Fayette County, Tennessee in January 2005. The complaint contains claims for violations of the Tennessee Trade Practices Act based upon allegations of false reporting of price information by defendants to publications that compile and publish indices of natural gas prices for various natural gas hubs. The complaint seeks statutory full consideration damages and attorneys fees and injunctive relief regulating defendants future conduct. The defendants include CMS Energy, CMS MST and CMS Field Services. On February 2, 2007, the state court granted defendants motion to dismiss the complaint. Plaintiffs filed a notice of appeal on April 4, 2007. Oral arguments were heard on November 8, 2007. On October 29, 2008, the appellate court reversed the trial court and remanded the case for further proceedings, finding that the trial court had mis-applied the filed rate doctrine. The CMS defendants have filed an applications for leave to appeal to the Tennessee Supreme Court which stays further proceedings in the trial court until the Supreme Court rules on the application.
J.P. Morgan Trust Company, in its capacity as Trustee of the FLI Liquidating Trust, filed an action in Kansas state court in August 2005 against a number of energy companies, including CMS Energy, CMS MST and CMS Field Services. The complaint alleges various claims under the Kansas Restraint of Trade Act relating to reporting false natural gas trade information to publications that report trade information. Plaintiff is seeking statutory full consideration damages for its purchases of natural gas between January 1, 2000 and December 31, 2001. The case was removed to the United States District Court for the District of Kansas on September 8, 2005 and transferred to the MDL proceeding on October 13, 2005. CMS Energy filed a motion to dismiss for lack of personal jurisdiction, which was initially granted on December 18, 2006. The court later reversed its ruling on reconsideration and allowed plaintiffs personal jurisdiction discovery. On September 7, 2007, CMS MST and CMS Field Services filed an answer to the complaint. CMS Energy has renewed its motion to dismiss for lack of personal jurisdiction, and is awaiting the courts decision. On September 26, 2008, defendants filed a motion for judgment on the pleadings on the ground that the claims are barred by implied antitrust immunity arising from the Commodity Exchange Act. Plaintiffs have filed a motion for class certification to which defendants response is due on March 16, 2009.
On November 20, 2005, CMS MST was served with a summons and complaint which named CMS Energy, CMS MST and CMS Field Services as defendants in a putative class action filed in Kansas state court, Learjet, Inc., et al. v. Oneok, Inc., et al. Similar to the other actions that have been filed, the complaint alleges that during the putative class period, January 1, 2000 through October 31, 2002, defendants engaged in a scheme to violate the Kansas Restraint of Trade Act by knowingly reporting false or inaccurate information to the publications, thereby affecting the market price of natural gas. Plaintiffs, who allege they purchased natural gas from defendants and others for their facilities, are seeking statutory full consideration damages consisting of the full consideration paid by plaintiffs for natural gas. On December 7, 2005, the case was removed to the United States District Court for the District of Kansas and later transferred to the MDL proceeding. On September 7, 2007, CMS MST and CMS Field Services filed an answer to the complaint. CMS Energy has a pending motion to dismiss for lack of personal jurisdiction and is awaiting the courts decision. On September 26, 2008, defendants filed a motion for judgment on the pleadings on the ground that the claims are barred by implied antitrust immunity arising from the Commodity Exchange Act. Plaintiffs filed their motion for class certification on October 17, 2008. On October 27, 2008, Defendants filed a second motion for judgment on the pleadings on statute of limitations grounds. Defendants response to the class certification motion is due on March 16, 2009.
Breckenridge Brewery of Colorado, LLC and BBD Acquisition Co. v. Oneok, Inc., et al., a class action complaint brought on behalf of retail direct purchasers of natural gas in Colorado, was filed in Colorado state court in May 2006. Defendants, including CMS Energy, CMS Field Services, and CMS MST, are alleged to have violated
the Colorado Antitrust Act of 1992 in connection with their natural gas price reporting activities. Plaintiffs are seeking full refund damages. The case was removed to the United States District Court for the District of Colorado on June 12, 2006, and later transferred to the MDL proceeding. CMS Energy filed a motion to dismiss for lack of personal jurisdiction, which was initially granted. The court later reversed its ruling on reconsideration and allowed plaintiffs personal jurisdiction discovery. CMS Energy has re-filed its personal jurisdiction motion and is awaiting the courts decision. The remaining CMS Energy defendants filed a summary judgment motion which the court granted in March 2008 on the basis that the named plaintiffs made no natural gas purchases from any named defendant. Plaintiffs requested reconsideration and the court ordered further briefing which was done. On January 8, 2009, the judge denied plaintiffs motion for reconsideration, thereby dismissing CMS MST and CMS Field Services. On September 26, 2008, defendants filed a motion for judgment on the pleadings on the ground that the claims are barred by implied antitrust immunity arising from the Commodity Exchange Act. Plaintiffs filed their motion for class certification on October 17, 2008. On February 23, 2009, the court granted CMS Energys motion to dismiss for lack of jurisdiction. The January 8, 2009 ruling also renders moot the defendants motion for judgment on the pleadings filed in September 2008 and the plaintiffs motion for class certification. An appeal of the dismissal is expected.
On October 30, 2006, CMS Energy and CMS MST were each served with a summons and complaint which named CMS Energy, CMS MST and CMS Field Services as defendants in an action filed in Missouri state court, titled Missouri Public Service Commission v. Oneok, Inc. The Missouri Public Service Commission purportedly is acting as an assignee of six local distribution companies, and it alleges that from at least January 2000 through at least October 2002, defendants knowingly reported false natural gas prices to publications that compile and publish indices of natural gas prices, and engaged in wash sales. The complaint contains claims for violation of the Missouri antitrust law, fraud and unjust enrichment. Defendants removed the case to Missouri federal court and then transferred it to the Nevada MDL proceeding. On October 30, 2007, the court granted the plaintiffs motion to remand the case to state court in Missouri. CMS Energy filed a motion to dismiss for lack of personal jurisdiction, and in November 2008, plaintiffs voluntarily dismissed CMS Energy as a party to this case. Defendants, including CMS MST and CMS Field Services, filed a motion to dismiss for lack of standing. On January 13, 2009, the state court judge in Kansas City, Missouri entered an order finding that the plaintiff Missouri Public Service Commission lacks standing to sue and the case was dismissed as to all defendants. All other pending motions were overruled as moot. An appeal of the dismissal is expected.
A class action complaint, Heartland Regional Medical Center, et al. v. Oneok Inc. et al., was filed in Missouri state court in March 2007 alleging violations of Missouri antitrust laws. Defendants, including CMS Energy, CMS Field Services, and CMS MST, are alleged to have violated the Missouri AntiTrust Law in connection with their natural gas price reporting activities. The action was removed to Missouri federal court, and later transferred to the MDL proceeding. Plaintiffs filed a motion to remand the case back to state court but later withdrew that motion and filed an amended complaint. CMS Energy filed a motion to dismiss for lack of personal jurisdiction. CMS MST and CMS Field Services filed answers to the amended complaint. On September 26, 2008, defendants filed a motion for judgment on the pleadings on the ground that the claims are barred by implied antitrust immunity arising from the Commodity Exchange Act. Plaintiffs filed their motion for class certification on October 17, 2008. Defendants response to the class certification motion is due on March 16, 2009.
A class action complaint, Arandell Corp., et al. v. XCEL Energy Inc., et al., was filed on or about December 15, 2006 in Wisconsin state court on behalf of Wisconsin commercial entities that purchased natural gas between January 1, 2000 and October 31, 2002. Defendants, including CMS Energy, CMS ERM and Cantera Gas Company, LLC, are alleged to have violated Wisconsins Anti-Trust statute by conspiring to manipulate natural gas prices. Plaintiffs are seeking full consideration damages, plus exemplary damages in an amount equal to three times the actual damages, and attorneys fees. The action was removed to Wisconsin federal district court and later transferred to the MDL proceeding. All of the CMS Energy defendants filed a motion to dismiss for lack of personal jurisdiction, which has been fully briefed. The court has not yet ruled on the motion. On September 26, 2008, defendants filed a motion for judgment on the pleadings on the ground that the claims are barred by implied antitrust immunity arising from the Commodity Exchange Act. Plaintiffs filed their motion for class certification on October 17, 2008. Defendants response to the class certification motion is due on March 16, 2009.
CMS Energy and the other CMS Energy defendants will defend themselves vigorously against these matters but cannot predict their outcome.
On November 1, 2001, Quicksilver sued CMS MST in Texas state court in Fort Worth, Texas for breach of contract in connection with a base contract for the sale and purchase of natural gas. The contract outlines Quicksilvers agreement to sell, and CMS MSTs agreement to buy, natural gas. Quicksilver believes that it is entitled to more payments for natural gas than it has received. CMS MST disagrees with Quicksilvers analysis and believes that it has paid all amounts owed for delivery of gas according to the contract. Quicksilver sought damages of up to approximately $126 million, plus prejudgment interest and attorney fees.
The jury verdict awarded Quicksilver no compensatory damages but $10 million in punitive damages. The jury found that CMS MST breached the contract and committed fraud but found no actual damage related to such a claim.
On May 15, 2007, the trial court vacated the jury award of punitive damages but held that the contract should be rescinded prospectively. The judicial rescission of the contract caused CMS Energy to record a charge in the second quarter of 2007 of $24 million, net of tax. To preserve its appellate rights, CMS MST filed a motion to modify, correct or reform the judgment and a motion for a judgment contrary to the jury verdict with the trial court. The trial court dismissed these motions. CMS MST has filed a notice of appeal with the Texas Court of Appeals. Quicksilver has filed a notice of cross appeal. Both Quicksilver and CMS MST have filed their opening briefs and briefs of cross appeal. Oral arguments were made on October 29, 2008. Quicksilver claims that the contract should be rescinded from its inception, rather than merely from the date of the judgment. Although CMS Energy believes Quicksilvers position to be without merit, if the court were to grant the relief requested by Quicksilver, it could result in a loss of up to $10 million.
In 1998, CMS Viron installed a number of energy savings measures at Texas Southern University. CMS Viron sold the master lease for the project to Academic Capital which transferred its interest to State Street Bank. Although the university accepted the improvements, it refused to pay on the technicality that the Texas Board of Higher Education had not approved the expenditure. In 2002, State Street Bank sued CMS Viron in the District Court of Harris County, Texas because state law made it difficult to sue the university. Presently, the plaintiffs are seeking approximately $6 million from CMS Viron. CMS Viron believes it has a valid defense to the claim, but cannot predict the outcome of this litigation.
On December 3, 2001, F. T. Barr, an individual with an overriding royalty interest in production from the Alba field, filed a lawsuit in Harris County District Court in Texas against CMS Energy, CMS Oil and Gas and other defendants alleging that his overriding royalty payments related to Alba field production were improperly calculated. CMS Oil and Gas believes that Barr was properly paid on gas sales and that he was not entitled to the additional overriding royalty payment sought. All parties signed a confidential settlement agreement on April 26, 2004. The settlement resolved claims between Barr and the defendants, and the involved CMS Energy entities reserved all defenses to any indemnity claim relating to the settlement. Issues exist between Marathon and certain current or former CMS Energy entities as to the existence and scope of any indemnity obligations to Marathon in connection with the settlement. Between April 2005 and April 2008, there were no further communications between Marathon and CMS Energy entities regarding this matter. In April 2008, Marathon indicated its intent to pursue the indemnity claim. Present and former CMS Energy entities and Marathon entered into an agreement tolling the statute of limitations on any claim by Marathon under the indemnity. CMS Energy entities dispute Marathons claim, and will vigorously oppose it if raised in any legal proceeding. CMS Energy entities also will assert that Marathon has suffered minimal, if any, damages. CMS Energy cannot predict the outcome of this matter. If Marathons claim were sustained, it would have a material effect on CMS Energys future earnings and cash flow.
On February 11, 2008, the FERC issued a data request to Consumers in conjunction with an investigation being conducted into possible violations of the FERCs posting and competitive bidding regulations regarding releases of firm capacity on interstate natural gas pipelines. The request asked Consumers to provide documents relating to capacity releases by Consumers, among other things. The FERC is presently investigating certain parties with regard to a practice known as flipping, which involves the release, at below the maximum tariff rate, of capacity on a short term basis to a party followed by a release of the same capacity to an affiliate of the original recipient of the released capacity in the subsequent month. In other cases, the FERC has taken the position that this practice violates the FERCs regulations that require posting and competitive bidding of some capacity releases. Consumers has provided responses to the questions posed in the February 11, 2008 data request. In June 2008, Consumers received a second set of data requests from the FERC. Consumers has provided responses to the questions posed in the June 2008 request as well as to several telephonic follow-up data requests. Consumers is fully cooperating with the FERC staff.
The EPA has alleged that some utilities have incorrectly classified major plant modifications as RMRR rather than seeking permits from the EPA to modify their plants. Consumers responded to information requests from the EPA on this subject in 2000, 2002 and 2006. Consumers believes that it has properly interpreted the requirements of RMRR. In October 2008, Consumers received another information request from the EPA under Section 114 of the Clean Air Act. Consumers responded to this information request in December 2008.
In addition to the EPAs information request, in October 2008, Consumers received a NOV for three of its coal-based facilities relating to violations of NSR regulations, alleging ten projects from 1986 to 1998 were subject to NSR review. Consumers met with the EPA in January 2009 and has additional meetings scheduled. If the EPA does not accept Consumers interpretation of RMRR, Consumers could be required to install additional pollution control equipment at some or all of its coal-based electric generating plants, surrender emission allowances, engage in supplemental environmental programs or pay fines. Additionally, Consumers would need to assess the viability of continuing operations at certain plants. Consumers cannot predict the financial impact or outcome of this matter.
CMS Energy and Consumers, as well as their subsidiaries and affiliates, are subject to various other federal, state and local laws and regulations relating to the environment. Several of these companies have been named parties to other administrative or judicial proceedings involving environmental issues. Based on their present knowledge and subject to future legal and factual developments, they believe it is unlikely that any of these other actions will have a material adverse effect on their financial condition or future results of operations. For additional information, see both CMS Energys and Consumers ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS and both CMS Energys and Consumers ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 2008, CMS Energy did not submit any matters to a vote of security holders.
During the fourth quarter of 2008, Consumers did not submit any matters to a vote of security holders.
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
CMS Energys Common Stock is traded on the New York Stock Exchange. Market prices for CMS Energys Common Stock and related security holder matters are contained in ITEM 7. CMS ENERGYS MANAGEMENTS DISCUSSION AND ANALYSIS and ITEM 8. CMS ENERGYS FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTE 18 OF CMS ENERGYS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (QUARTERLY FINANCIAL AND COMMON STOCK INFORMATION (UNAUDITED)) which is incorporated by reference herein. At February 23, 2009, the number of registered holders of CMS Energy Common Stock totaled 46,080, based upon the number of record holders. On January 26, 2007, the Board of Directors reinstated a quarterly dividend on CMS Energy Common Stock of $0.05 per share. On January 25, 2008, the Board of Directors increased the quarterly dividend on CMS Energy Common Stock to $0.09 per share. On January 23, 2009, the Board of Directors increased the quarterly dividend on CMS Energy Common Stock to $0.125 per share. Information regarding securities authorized for issuance under equity compensation plans is included in our definitive proxy statement, which is incorporated by reference herein.
For additional information regarding dividends and dividend restrictions, see ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Consumers common stock is privately held by its parent, CMS Energy, and does not trade in the public market. Consumers paid cash dividends on its common stock of $113 million in February 2008, $55 million in May 2008, $70 million in August 2008, and $59 million in November 2008. Consumers paid cash dividends on its common stock of $94 million in February 2007, $41 million in May 2007, $41 million in August 2007, and $75 million in November 2007.
For additional information regarding dividends and dividend restrictions, see ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
For the three months ended December 31, 2008, there were no repurchases of equity securities by CMS Energy. Periodically, CMS Energy repurchases certain restricted shares upon vesting under the Performance Incentive Stock Plan from participants in this plan, equal to CMS Energys minimum statutory income tax withholding obligation. Shares repurchased have a value based on the market price on the vesting date.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial information is contained in ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CMS ENERGYS SELECTED FINANCIAL INFORMATION, which is incorporated by reference herein.
Selected financial information is contained in ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSUMERS SELECTED FINANCIAL INFORMATION, which is incorporated by reference herein.
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Managements discussion and analysis of financial condition and results of operations is contained in ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CMS ENERGYS MANAGEMENTS DISCUSSION AND ANALYSIS, which is incorporated by reference herein.
Managements discussion and analysis of financial condition and results of operations is contained in ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSUMERS MANAGEMENTS DISCUSSION AND ANALYSIS, which is incorporated by reference herein.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and Qualitative Disclosures About Market Risk is contained in ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CMS ENERGYS MANAGEMENTS DISCUSSION AND ANALYSIS CRITICAL ACCOUNTING POLICIES FINANCIAL AND DERIVATIVE INSTRUMENTS AND MARKET RISK INFORMATION, which is incorporated by reference herein.
Quantitative and Qualitative Disclosures About Market Risk is contained in ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSUMERS MANAGEMENTS DISCUSSION AND ANALYSIS CRITICAL ACCOUNTING POLICIES ACCOUNTING FOR FINANCIAL AND DERIVATIVE INSTRUMENTS AND MARKET RISK INFORMATION, which is incorporated by reference herein.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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2008 Consolidated Financial Statements
CMS Energy Corporation
CMS Energy Corporation
This MD&A is a consolidated report of CMS Energy. The terms we and our as used in this report refer to CMS Energy and its subsidiaries as a consolidated entity, except where it is clear that such term means only CMS Energy.
This Form 10-K and other written and oral statements that we make contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Our intention with the use of words such as may, could, anticipates, believes, estimates, expects, intends, plans, and other similar words is to identify forward-looking statements that involve risk and uncertainty. We designed this discussion of potential risks and uncertainties to highlight important factors that may impact our business and financial outlook. We 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 our actual results to differ materially from the results anticipated in these statements. These factors include our inability to predict or control:
For additional details regarding these and other uncertainties, see the Outlook section included in this MD&A, Note 4, Contingencies, and Part I, Item 1A. Risk Factors.
CMS Energy is an energy company operating primarily in Michigan. We are the parent holding company of several subsidiaries, including Consumers and Enterprises. Consumers is a combination electric and gas utility company serving Michigans Lower Peninsula. Enterprises, through its subsidiaries and equity investments, is engaged in primarily domestic independent power production. We manage our businesses by the nature of services each provides and operate principally in three business segments: electric utility, gas utility, and enterprises.
We earn our 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. Our businesses are affected primarily by:
During the past several years, our business strategy has emphasized improving our consolidated balance sheet and maintaining focus on our core strength: utility operations and service.
Our forecast calls for investing in excess of $6 billion in the utility over the period from 2009 through 2013, with a key aspect of our strategy being our Balanced Energy Initiative. Our Balanced Energy Initiative is a comprehensive energy resource plan to meet our projected short-term and long-term electric power requirements
with energy efficiency, demand management, expanded use of renewable energy, development of new power plants, and pursuit of additional power purchase agreements to complement existing generating sources.
In October 2008, the Michigan governor signed into law a comprehensive energy reform package. In February 2009, we filed our renewable energy plan and energy optimization plan with the MPSC in order to conform to various aspects of this legislation.
As we work to implement plans to serve our customers in the future, the cost of energy and related cash flow issues continue to challenge us. Natural gas prices and eastern coal prices have been volatile. These costs are recoverable from our utility customers; however, as prices increase, the amount we pay for these commodities will require additional liquidity due to the lag in cost recoveries. There is additional uncertainty associated with state and federal legislative and regulatory proposals related to regulation of carbon dioxide emissions, particularly associated with coal-based generation. We are closely monitoring these developments for the effect on our future plans.
We are developing an advanced metering infrastructure system that will provide enhanced controls and information about our customer energy usage and notification of service interruptions. We expect to develop integration software and pilot this new technology over the next two to three years.
In the future, we will focus our strategy on:
As we execute our strategy, we will need to overcome a Michigan economy that has been adversely impacted by the continued downturn and uncertainty in Michigans automotive industry. There also has been a sharp economic downturn, uncertainty, and extreme volatility in the financial and credit markets resulting from the subprime mortgage crisis, bank failures and consolidation, and other market weaknesses. While we believe that our sources of liquidity will be sufficient to meet our requirements, we continue to monitor closely developments in the financial and credit markets and government response to those developments for potential implications for our business.
RESULTS OF OPERATIONS
CMS Energy Consolidated Results of Operations
In 2008, net income was $289 million compared with a net loss of $227 million for 2007. Combined net income from our electric and gas utility segments increased, compared with 2007, reflecting the positive impact of the MPSC rate orders and the elimination of certain costs from the power purchase agreement with the MCV
Partnership, partially offset by lower electric deliveries and increased depreciation expense. Further increasing net income was the absence of activities associated with assets sold in 2007, the absence of costs associated with the termination of contracts in 2007, and a reduction in corporate interest expense.
Specific changes to net earnings (loss) available to common stockholders for 2008 versus 2007 are:
For 2007, our net loss was $227 million compared with a net loss of $90 million for 2006. The increase in net loss was due primarily to the termination of contracts at CMS ERM. Further increasing the net loss were charges related to the exit from our international businesses, the absence of earnings from these businesses, and an increase in the provision for Bay Harbor environmental remediation costs. The increase in losses was partially offset by the absence of the shareholder settlement liability recorded in 2006, the absence of activities related to our former interest in the MCV Partnership, and increased earnings at our utility primarily due to the positive effects of rate orders and increased sales.
Specific changes to net loss available to common stockholders for 2007 versus 2006 are:
Electric Utility Results of Operations
Electric deliveries and rate increase: For 2008, electric delivery revenues increased $89 million versus 2007 primarily due to additional revenue of $168 million from the inclusion of the Zeeland power plant in rates and from the June 2008 rate order. The increase was partially offset by decreased electric revenue of $79 million primarily due to lower deliveries. Deliveries to end-use customers were 37.5 billion kWh, a decrease of 1.3 billion kWh or 3 percent versus 2007. Approximately 45 percent of the decrease in electric deliveries was due to weather.
For 2007, electric delivery revenues decreased $118 million versus 2006. The decrease was primarily due to $136 million of revenue related to Palisades that was designated toward the recovery of PSCR costs consistent with the MPSC order related to the sale in April 2007. Partially offsetting the decrease were increased electric delivery revenues of $14 million, as deliveries to end-use customers were 38.8 billion kWh, an increase of 0.3 billion kWh or 0.8 percent versus 2006. The increase in electric deliveries was primarily due to favorable weather. Also contributing to the increase was $2 million of additional revenue from the inclusion of the Zeeland power plant in rates and $2 million related to the return of additional former ROA customers.
Surcharge revenue: For 2008, surcharge revenue increased $15 million versus 2007. The increase was primarily due to the April 2008 MPSC order allowing recovery of pension and OPEB benefits through a surcharge. Consistent with the recovery of these costs, we recognized a similar amount of benefit expense. For additional details, see Depreciation and other operating expenses within this section and Note 8, Retirement Benefits.
For 2007, surcharge revenue increased $6 million versus 2006. The increase was primarily due to a surcharge that we began collecting in the first quarter of 2006 that the MPSC authorized under Section 10d(4) of the Customer Choice Act.
Power supply costs and related revenue: For 2008, PSCR revenue increased by $18 million versus 2007. The increase primarily reflects the absence of a 2007 reduction to revenue made in response to the MPSCs position that PSCR discounts given to our Transitional Primary Rate customers could not be recovered under the PSCR mechanism.
For 2007, PSCR revenue decreased by $17 million versus 2006. This decrease primarily reflects amounts excluded from recovery in the 2006 PSCR reconciliation case. The decrease also reflects the absence, in 2007, of an increase in power supply revenue associated with the 2005 PSCR reconciliation case.
Non-commodity revenue: For 2008, non-commodity revenue decreased $14 million versus 2007 primarily due to the absence, in 2008, of METC transmission services revenue. The METC transmission service agreement expired in April 2007.
For 2007, non-commodity revenue decreased $12 million versus 2006 primarily due to lower METC transmission services revenue.
Depreciation and other operating expenses: For 2008, depreciation and other operating expenses decreased $40 million versus 2007. The decrease was primarily due to the absence of operating expenses of Palisades, which
was sold in April 2007, and certain costs that are no longer incurred under our power purchase agreement with the MCV Partnership. Also contributing to the decrease in expenses was the April 2008 MPSC order allowing us to retain a portion of the proceeds from the 2006 sale of certain sulfur dioxide allowances. The decrease was partially offset by higher pension and OPEB expense due to the April 2008 MPSC order allowing recovery of certain costs through a surcharge, increased depreciation and amortization expense due to more plant in service and increased amortization of certain regulatory assets. For additional details on our power purchase agreement with the MCV Partnership, see Note 4, Contingencies, Other Consumers Electric Utility Contingencies.
For 2007, depreciation and other operating expenses decreased $150 million versus 2006. The decrease was primarily due to lower operating expenses of Palisades, which was sold in April 2007. Also contributing to the decrease was the absence, in 2007, of costs incurred in 2006 related to a refueling outage at Palisades, and lower overhead line maintenance and storm restoration costs. These decreases were offset partially by increased depreciation and amortization expense due to more plant in service and increased amortization of certain regulatory assets.
Other income: For 2008, other income decreased $46 million versus 2007. The decrease was primarily due to reduced interest income, reflecting lower levels of short-term cash investments, and the MPSCs June 2008 order, which did not allow us to recover all of our costs associated with the sale of Palisades. Also contributing to the decrease was a charge that recognized an other-than-temporary decline in the fair value of our SERP investments.
For 2007, other income increased $26 million versus 2006 primarily due to higher interest income on short-term cash investments. The increase in short-term cash investments was primarily due to proceeds from the Palisades sale and equity infusions into Consumers.
General taxes: For 2008, general tax expense decreased $15 million versus 2007 primarily due to the absence, in 2008, of MSBT, which was replaced with the Michigan Business Tax effective January 1, 2008. The Michigan Business Tax is an income tax. The decrease was partially offset by higher property tax expense.
For 2007, general tax expense increased $15 million versus 2006 primarily due to higher property tax expense, reflecting higher millage rates and lower property tax refunds versus 2006.
Interest charges: For 2008, interest charges decreased $11 million versus 2007 primarily due to lower interest associated with amounts to be refunded to our customers as a result of the sale of Palisades. The MPSC order approving the Palisades power purchase agreement with Entergy directed us to record interest on the unrefunded balances. Also contributing to the decrease was the absence, in 2008, of interest charges related to an IRS settlement.
For 2007, interest charges increased $18 million versus 2006. The increase was primarily due to interest on amounts to be refunded to customers as a result of the sale of Palisades as ordered by the MPSC and interest charges related to the IRS settlement.
Income taxes: For 2008, income taxes increased $53 million versus 2007. The increase primarily reflects $47 million due to higher earnings and $6 million due to the inclusion of the Michigan Business Tax.
For 2007, income taxes increased $5 million versus 2006 primarily due to the absence, in 2007, of a $4 million income tax benefit from the restoration and utilization of income tax credits resulting from the resolution of an IRS income tax audit.
Gas Utility Results of Operations
Gas deliveries and rate increase: For 2008, gas delivery revenues increased $44 million versus 2007 primarily due to additional revenue of $33 million from the MPSCs August 2007 and December 2008 gas rate orders. Also contributing to the increase was higher gas delivery revenue of $11 million. Gas deliveries, including miscellaneous transportation to end-use customers, were 304 bcf, an increase of 4 bcf or 1.3 percent. The increase in gas deliveries was due to colder weather in 2008.
For 2007, gas delivery revenues increased $91 million versus 2006 primarily due to additional revenue of $81 million from the MPSCs November 2006 and August 2007 gas rate orders. Gas delivery revenues also increased $10 million as gas deliveries, including miscellaneous transportation to end-use customers, were 300 bcf, an increase of 18 bcf or 6.4 percent. The increase in gas deliveries was primarily due to colder weather, partially offset by higher system losses.
Gas wholesale and retail services, other gas revenues, and other income: For 2008, gas wholesale and retail services, other gas revenues, and other income decreased $28 million versus 2007. The decrease was primarily due to lower interest income reflecting lower short-term investments, and lower pipeline capacity optimization revenue. Also contributing to the decrease was a charge that recognized an other-than-temporary decline in the fair value of our SERP investments.
For 2007, gas wholesale and retail services, other gas revenues, and other income increased $14 million versus 2006. The increase was primarily due to higher interest income on short-term cash investments. The increase in short-term cash investments was primarily due to proceeds from the Palisades sale and equity infusions into Consumers.
Other operating expenses: For 2008, other operating expenses increased $24 million versus 2007 primarily due to higher uncollectible accounts expense and higher operating expense across our storage, transmission and distribution systems.
For 2007, other operating expenses increased $19 million versus 2006 primarily due to higher uncollectible accounts expense and payments, beginning in November 2006, to a fund that provides energy assistance to low-income customers.
General taxes and depreciation: For 2008, general taxes and depreciation increased $1 million versus 2007. The increase was primarily due to higher depreciation and increased property taxes. The increase was partially offset by decreased general taxes due to the absence, in 2008, of MSBT, which was replaced by the Michigan Business Tax effective January 1, 2008. The Michigan Business Tax is an income tax.
For 2007, general taxes and depreciation increased $11 million versus 2006. The increase in general taxes reflects higher property tax expense due to higher millage rates and lower property tax refunds versus 2006. The increase in depreciation expense is primarily due to higher plant in service.
Interest charges: For 2008, interest charges decreased $9 million versus 2007 primarily due to lower average debt levels and a lower average interest rate.
For 2007, interest charges decreased $4 million versus 2006 primarily due to lower average debt levels and a lower average interest rate versus 2006.
Income taxes: For 2008, income taxes decreased $2 million versus 2007. The decrease reflects $4 million related to the tax treatment of items related to property, plant and equipment, as required by the MPSC orders. This decrease was partially offset by a $1 million increase due to the inclusion of the Michigan Business Tax and $1 million related to the forfeiture of restricted stock.
For 2007, income taxes increased $29 million versus 2006 primarily due to higher earnings by the gas utility.
CMS ERM: Net income in 2008 increased $242 million versus 2007. The increase is due to the absence of $217 million of costs incurred for the termination of certain electricity sales agreements and the rescission of a contract with Quicksilver recorded in 2007 and $33 million in net operating efficiencies from the absence of certain sales and supply contracts, offset partially by an $8 million net decrease in mark-to-market activity.
Net loss in 2007 increased by $144 million as $217 million of costs incurred for the termination of certain electricity sales agreements and the rescission of a contract with Quicksilver more than offset a $58 million net increase in mark-to-market gains, a $7 million reduction in fuel costs, and a $8 million net reduction in other expenses.
Activities associated with sale of international assets: These activities increased net income in 2008 by $164 million versus 2007 as the absences of $122 million of net impairment charges, $46 million of tax expense on deferred earnings, and $29 million of operating and maintenance expense recorded in 2007 more than offset the absence of the combined $33 million of net earnings and gains on the sale of these assets recorded in 2007. For additional information, see Note 3, Asset Sales, Discontinued Operations and Impairment Charges.
These activities increased net loss by $58 million in 2007 versus 2006. Taxes related to these assets increased net loss by $79 million as $46 million of tax expense on the recognition of previously deferred earnings recorded in 2007 replaced a benefit from the resolution of an IRS income tax audit recorded in 2006. Further increasing net loss was a $31 million net reduction in equity earnings from these businesses. The decreases were partially offset by a $19 million net decrease in impairment charges, a $14 million net gain on the sale of these assets, and a $19 million reduction in interest and other expenses. For additional information, see Note 3, Asset Sales, Discontinued Operations and Impairment Charges.
Environmental remediation: Our environmental remediation charges relate to our projections of future costs associated with Bay Harbor. These charges, net of tax, were $29 million in 2007 and $6 million in 2006. For additional information, see Note 4, Contingencies.
DIG: Net income decreased $7 million in 2008 versus 2007. The decrease is due to $5 million of higher maintenance costs and a $2 million reduction in steam sales.
Net loss increased $22 million in 2007 versus 2006. The increase is primarily due to the absences of a $13 million favorable arbitration settlement and $11 million of third-party tolling revenue recorded in 2006 partly offset by a $2 million reduction in interest costs.
Other: Net decrease of $2 million in 2008 versus 2007 primarily due to a $9 million change in the valuation of our SERP investments as the $5 million gain on re-balancing recorded in 2007 was replaced by $4 million of expense for the other-than-temporary decline in the value of these investments recorded in 2008. The impact of the SERP investment activity more than offset $3 million of reduced interest expense and a $4 million reduction in other net expenses.
Net increase of $2 million in 2007 versus 2006 primarily due to a $5 million gain on the re-balancing of our SERP investments. This gain was offset partially by a $3 million net increase in other expenses.
MCV: We sold our interest in the MCV Partnership in November 2006. In 2006, our share of the MCV Partnerships loss was $60 million, net of tax and minority interest. This was due primarily to mark-to-market losses and the net impact of the sale transaction, including asset impairment charges. These losses were partially offset by operating income and a property tax refund received in 2006.
For 2008, corporate interest and other net expenses were $85 million, an increase of $76 million versus 2007. The increase of $76 million primarily reflects the absence, in 2008, of the one-time recognition of certain tax benefits related to the sale of our international operations and reduced interest income. Partially offsetting the increase was the absence, in 2008, of the reduction in fair value of notes receivable from GasAtacama and premiums paid on the early retirement of CMS Energy debt in June 2007 and reduced interest expense due to lower debt levels in 2008.
For 2007, corporate interest and other net expenses were $9 million, a decrease of $144 million versus 2006. The $144 million decrease primarily reflects the absence, in 2007, of a charge for the settlement of our shareholder class action lawsuits partially offset by the absence of an insurance reimbursement received in June 2006. Also contributing to the decrease was the reduction in tax expense in 2007 related to the sale of our international operations. Partially offsetting the decrease was the absence, in 2007, of a tax benefit due to the resolution of an IRS income tax audit.
For 2008, there was no net income from discontinued operations. The $89 million net loss from discontinued operations in 2007 represents the net loss on the disposal of international businesses sold in 2007.
For 2007, the net loss from discontinued operations was $89 million versus $54 million of net income in 2006. The net loss on the disposal of international businesses in 2007 replaced earnings recorded for these businesses in 2006.
The following accounting policies and related information are important to an understanding of our results of operations and financial condition and should be considered an integral part of our MD&A. For additional accounting policies, see Note 1, Corporate Structure and Accounting Policies.
In preparing our consolidated financial statements, we use estimates and assumptions that may affect reported amounts and disclosures. We use accounting estimates for asset valuations, depreciation, amortization, financial and derivative instruments, employee benefits, indemnifications and contingencies. Actual results may differ from estimated results due to changes in the regulatory environment, competition, foreign exchange, regulatory decisions, lawsuits, and other factors.
Contingencies: We record a liability for contingencies when we conclude that it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. We consider all relevant factors in making these assessments.
Fair Value Measurements: We have assets and liabilities that we account for or disclose at fair value. Our fair value measurements are performed in accordance with SFAS No. 157, which requires the incorporation of all assumptions that market participants would use in pricing an asset or liability, including assumptions about risk. Development of these assumptions requires significant judgment.
The most material of our fair value measurements are of our SERP assets, our derivative instruments, and the year-end measurement of our pension and OPEB plan assets. For a detailed discussion of the methods used to calculate our fair value measurements, see Note 2, Fair Value Measurements.
Income Taxes: The amount of income taxes we pay is subject to ongoing audits by federal, state, and foreign tax authorities, which can result in proposed assessments. Our estimate of the potential outcome of any uncertain tax issue is highly judgmental. We believe we have provided adequately for these exposures; however, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved or when statutes of limitation on potential assessments expire. Additionally, our judgment as to our ability to recover our deferred tax assets may change. We believe our valuation allowances related to our deferred tax assets are adequate, but future results may include favorable or unfavorable adjustments. As a result, our effective tax rate may fluctuate significantly over time.
Long-Lived Assets and Equity Method Investments: Our assessment of the recoverability of long-lived assets and equity method investments involves critical accounting estimates. We periodically perform tests of impairment if certain triggering events occur or if there has been a decline in value that may be other than temporary. Of our total assets, recorded at $14.901 billion at December 31, 2008, 62 percent represent long-lived assets and equity method investments that are subject to this type of analysis. We base our evaluations of impairment on such indicators as:
The estimates we use can change over time, which could have a material impact on our consolidated financial statements. For additional details, see Note 1, Corporate Structure and Accounting Policies Impairment of Long-Lived Assets and Equity Method Investments.
Consumers involvement in a regulated industry requires us to use SFAS No. 71 to account for the effects of the regulators decisions that impact the timing and recognition of its revenues and expenses. As a result, Consumers may defer or recognize revenues and expenses differently than a non-regulated entity.
For example, Consumers may record as regulatory assets items that a non-regulated entity normally would expense if the actions of the regulator indicate that Consumers will recover the expenses in future rates. Conversely, Consumers may record as regulatory liabilities items that non-regulated entities may normally recognize as
revenues, if the actions of the regulator indicate that it will be required to refund the revenues to customers. Judgment is required to determine the appropriate accounting for items recorded as regulatory assets and liabilities. At December 31, 2008, Consumers had $2.438 billion recorded as regulatory assets and $1.988 billion recorded as regulatory liabilities.
Our PSCR and GCR cost recovery mechanisms also give rise to probable future revenues that will be recovered from customers or past overrecoveries that will be refunded to customers through the ratemaking process. Underrecoveries are included in Accrued power supply and gas revenue and overrecoveries are included in Accrued rate refunds on our Consolidated Balance Sheets. At December 31, 2008, we had $7 million recorded as regulatory assets for underrecoveries of power supply and gas costs and $7 million recorded as regulatory liabilities for overrecoveries of power supply and gas costs.
For additional details, see Note 1, Corporate Structure and Accounting Policies - Utility Regulation.
Financial and Derivative Instruments and Market Risk Information
Financial Instruments: Debt and equity securities classified as available-for-sale are reported at fair value determined from quoted market prices. Unrealized gains and losses resulting from changes in fair value of available-for-sale debt and equity securities are reported, net of tax, in equity as part of AOCL. Unrealized losses are excluded from earnings unless the related changes in fair value are determined to be other than temporary.
Derivative Instruments: We use the criteria in SFAS No. 133 to determine if we need to account for certain contracts as derivative instruments. These criteria are complex and often require significant judgment in applying them to specific contracts. If a contract is a derivative and does not qualify for the normal purchases and sales exception under SFAS No. 133, we record it on our consolidated balance sheet at its fair value. Each quarter, we adjust the resulting asset or liability to reflect any change in the fair value of the contract, a practice known as marking the contract to market. For additional details on our derivatives, see Note 7, Financial and Derivative Instruments.
To determine the fair value of our derivatives, we generally use information from external sources, such as quoted market prices and other valuation information. For certain contracts, this information is not available and we use mathematical models to value our derivatives. The most material of our derivative liabilities, an electricity sales agreement held by CMS ERM, extends beyond the term for which quoted electricity prices are available. Thus, to value this derivative we use a valuation model that incorporates a proprietary forward pricing curve for electricity based on forward natural gas prices and an implied heat rate. Our model incorporates discounting, credit, and modeling risks. The model is sensitive to electricity and natural gas forward prices, and the fair value of this derivative liability will increase as these forward prices increase. We adjust our model each quarter to incorporate market data as it becomes available.
The fair values we calculate for our derivatives may change significantly as commodity prices and volatilities change. The cash returns we actually realize on our derivatives may be different from the fair values that we estimate. For derivatives in an asset position, our calculations of fair value include reserves of less than $1 million to reflect the credit risk of our counterparties. For derivatives in a liability position, our calculations include reserves of $1 million to reflect our own credit risk. For additional details on how we determine the fair values of our derivatives, see Note 2, Fair Value Measurements.
The types of contracts we typically classify as derivatives are interest rate swaps, financial transmission rights, fixed price fuel contracts, natural gas futures, electricity swaps, and forward and option contracts for electricity, natural gas, and foreign currencies. Most of our commodity purchase and sale contracts are not subject to derivative accounting under SFAS No. 133 because:
Our coal purchase contracts are not derivatives because there is not an active market for the coal we purchase. If an active market for coal develops in the future, some of these contracts may qualify as derivatives. For Consumers, which is subject to regulatory accounting, the resulting mark-to-market gains and losses would be offset by changes in regulatory assets and liabilities and would not affect net income. For other CMS Energy subsidiaries, we do not believe the resulting mark-to-market impact on earnings would be material.
CMS ERM Contracts: In order to support CMS Energys ongoing non-utility operations, CMS ERM enters into contracts to purchase and sell electricity and natural gas in the future. These forward contracts are generally long-term in nature and result in physical delivery of the commodity at a contracted price. To manage commodity price risks associated with these forward purchase and sale contracts, CMS ERM also uses various financial instruments, such as swaps, options, and futures.
In the past, CMS ERM generally classified all of its derivatives that result in physical delivery of commodities as non-trading contracts and all of its derivatives that financially settle as trading contracts. Following the restructuring of our DIG investment and the resulting streamlining of CMS ERMs risk management activities in the first quarter of 2008, we reevaluated the classification of CMS ERMs derivatives as trading versus non-trading. We determined that all of CMS ERMs derivatives are held for purposes other than trading. Therefore, during 2008, we have classified all of CMS ERMs derivatives as non-trading derivatives.
Market Risk Information: We are exposed to market risks including, but not limited to, changes in interest rates, commodity prices, foreign currency exchange rates, and equity security prices. We may enter into various risk management contracts to limit our exposure to these risks, including swaps, options, futures, and forward contracts. We enter into these contracts using established policies and procedures, under the direction of an executive oversight committee consisting of senior management representatives and a risk committee consisting of business unit managers.
These contracts contain credit risk, which is the risk that our counterparties will fail to meet their contractual obligations. We reduce this risk using established policies and procedures, such as evaluating our counterparties credit quality and setting collateral requirements as necessary. If terms permit, we use standard agreements that allow us to net positive and negative exposures associated with the same counterparty. Given these policies, our current exposures, and our credit reserves, we do not expect a material adverse effect on our financial position or future earnings because of counterparty nonperformance.
The following risk sensitivities illustrate the potential loss in fair value, cash flows, or future earnings from our financial instruments, including our derivative contracts, assuming a hypothetical adverse change in market rates or prices of 10 percent. Potential losses could exceed the amounts shown in the sensitivity analyses if changes in market rates or prices were to exceed 10 percent.
Interest Rate Risk: We are exposed to interest rate risk resulting from issuing fixed-rate and variable-rate financing instruments, and from interest rate swap agreements. We use a combination of these instruments to manage this risk as deemed appropriate, based upon market conditions. These strategies are designed to provide and maintain a balance between risk and the lowest cost of capital.
Interest Rate Risk Sensitivity Analysis (assuming an increase in market interest rates of 10 percent):
Commodity Price Risk: Operating in the energy industry, we are exposed to commodity price risk, which arises from fluctuations in the price of electricity, natural gas, coal, and other commodities. Commodity prices are influenced by a number of factors, including weather, changes in supply and demand, and liquidity of commodity markets. In order to manage commodity price risk, we may enter into various non-trading derivative contracts, such as forward purchase and sale contracts, options, and swaps.
Commodity Price Risk Sensitivity Analysis (assuming an adverse change in market prices of 10 percent):
Investment Securities Price Risk: Our investments in debt and equity securities are exposed to changes in interest rates and price fluctuations in equity markets. The following table shows the potential effect of adverse changes in interest rates and fluctuations in equity prices on our available-for-sale investments.
Investment Securities Price Risk Sensitivity Analysis (assuming an adverse change in market prices of 10 percent):
For additional details on market risk and derivative activities, see Note 7, Financial and Derivative Instruments.
Pension: We have external trust funds to provide retirement pension benefits to our employees under a non-contributory, defined benefit Pension Plan. On September 1, 2005, the defined benefit Pension Plan was closed to new participants and we implemented the qualified DCCP, which provides an employer contribution of five percent of base pay to the existing 401(k) plan. An employee contribution is not required to receive the plans employer cash contribution. All employees hired on or after September 1, 2005 participate in this plan as part of their retirement benefit program. Previous cash balance pension plan participants also participate in the DCCP as of September 1, 2005. Additional pay credits under the cash balance pension plan were discontinued as of that date.
401(k): We provide an employer match in our 401(k) plan equal to 60 percent on eligible contributions up to the first six percent of an employees wages.
OPEB: We provide postretirement health and life benefits under our OPEB plan to qualifying retired employees.
In accordance with SFAS No. 158, we record liabilities for pension and OPEB on our consolidated balance sheet at the present value of the future obligations, net of any plan assets. We use SFAS No. 87 to account for pension expense and SFAS No. 106 to account for other postretirement benefit expense. The calculation of the liabilities and associated expenses requires the expertise of actuaries, and requires many assumptions, including:
A change in these assumptions could change significantly our recorded liabilities and associated expenses.
The following table provides an estimate of our pension cost, OPEB cost, and cash contributions for the next three years:
Contribution estimates include amounts required and discretionary contributions. Consumers pension and OPEB costs are recoverable through our general ratemaking process. Actual future pension cost and contributions will depend on future investment performance, changes in future discount rates, and various other factors related to the populations participating in the Pension Plan.
Lowering the expected long-term rate of return on the Pension Plan assets by 0.25 percent (from 8.25 percent to 8.00 percent) would increase estimated pension cost for 2009 by $3 million. Lowering the discount rate by 0.25 percent (from 6.50 percent to 6.25 percent) would increase estimated pension cost for 2009 by $5 million.
For additional details on postretirement benefits, see Note 8, Retirement Benefits.
We are required to record the fair value of the cost to remove assets at the end of their useful lives, if there is a legal obligation to remove them. We have legal obligations to remove some of our assets at the end of their useful lives. We calculate the fair value of ARO liabilities using an expected present value technique that reflects assumptions about costs, inflation, and profit margin that third parties would consider to assume the obligation. We did not include a market risk premium in our ARO fair value estimates since a reasonable estimate could not be made.
If a reasonable estimate of fair value cannot be made in the period in which the ARO is incurred, such as for assets with indeterminate lives, the liability is recognized when a reasonable estimate of fair value can be made. Generally, our gas transmission and electric and gas distribution assets have indeterminate lives and retirement cash flows that cannot be determined. However, we have recorded an ARO for our obligation to cut, purge, and cap abandoned gas distribution mains and gas services at the end of their useful lives. We have not recorded a liability for assets that have insignificant cumulative disposal costs, such as substation batteries. For additional details, see Note 9, Asset Retirement Obligations.
Factors affecting our liquidity and capital requirements include:
During the summer months, we buy natural gas and store it for resale during the winter heating season. Although our prudent natural gas costs are recoverable from our customers, the storage of natural gas as inventory requires additional liquidity due to the lag in cost recovery.
Components of our cash management plan include controlling operating expenses and capital expenditures and evaluating market conditions for financing opportunities, if needed. We have taken the following actions to strengthen our liquidity:
In April 2008, we redeemed two of our tax-exempt debt issues with $96 million of refinancing proceeds and converted $35 million of tax-exempt debt previously backed by municipal bond insurers to variable rate demand bonds, effectively eliminating our variable rate debt backed by municipal bond insurers.
Despite the current market volatility, we expect to be able to continue to have access to the capital markets. Consumers accounts receivable sales program is planned for renewal in May 2009. Of our $1.392 billion in letters of credit and revolving credit facilities, $342 million are planned for renewal in 2009 and $1.050 billion are planned for renewal in 2012. Our senior notes maturities are $300 million in 2010, $300 million in 2011 and $150 million in 2012. Consumers FMB maturities are $350 million in 2009, $250 million in 2010 and $300 million in 2012. We believe that our current level of cash and our anticipated cash flows from operating activities, together with access to sources of liquidity, will be sufficient to meet cash requirements. If access to the capital markets is diminished or otherwise restricted, we would implement contingency plans to address debt maturities that may include reduced capital spending. For additional details, see Note 5, Financings and Capitalization.
In January 2009, the Board of Directors voted to increase the quarterly common stock dividend from $0.09 per share to $0.125 per share, for the first quarter of 2009. The dividend is payable February 27, 2009 to shareholders of record on February 6, 2009.
Our operating, investing, and financing activities meet consolidated cash needs. At December 31, 2008, we had $248 million of consolidated cash, which includes $35 million of restricted cash and $9 million held by entities consolidated under FIN 46(R).
Our primary ongoing source of cash is dividends and other distributions from our subsidiaries. Consumers paid $297 million in common stock dividends and Enterprises paid $950 million in common stock dividends, resulting from 2007 asset sales, to CMS Energy for the year ended December 31, 2008. For details on dividend restrictions, see Note 5, Financings and Capitalization.
Our Consolidated Statements of Cash Flows include amounts related to discontinued operations through the date of disposal. The sale of our discontinued operations had no material adverse effect on our liquidity, as we used the sales proceeds to invest in our utility business and to reduce debt. For additional details on discontinued operations, see Note 3, Asset Sales, Discontinued Operations and Impairment Charges.
The following tables provide a summary of the major items affecting our cash flows from operating, investing and financing activities:
2008 versus 2007: Cash provided by operating activities increased primarily as a result of increased earnings and the timing of cash receipts from accounts receivable. We accelerate our collections from customer billings through the sale of accounts receivable. We sold $325 million of accounts receivable at the end of 2006, which reduced our collections from customers during 2007. We did not sell accounts receivable in 2007 and sold $170 million of accounts receivable during 2008. Also contributing to the increase in cash provided by operating activities were lower postretirement benefit contributions, the absence, in 2008, of a payment made to settle a shareholder class action lawsuit, and other timing differences. These increases were partially offset by a payment made by CMS ERM in February 2008 to terminate electric sales contracts, refunds to customers of excess Palisades decommissioning funds, the impact of higher commodity prices on inventory purchases, and increased accounts receivable billings at the end of 2008 due to regulatory actions and weather-driven demand.
2007 versus 2006: Cash provided by operating activities decreased primarily as result of decreased earnings and the absence, in 2007, of the sale of accounts receivable. Also contributing to the decrease in cash provided by operating activities were payments made to fund our Pension Plan and to settle a shareholder class action lawsuit, refunds to customers of excess Palisades decommissioning funds, and reduced cash distributions from international investments sold during 2007. These decreases were partially offset by a decrease in expenditures for gas inventory, as the milder winter in 2006 allowed us to accumulate more gas in our storage facilities, the absence of the release of the MCV Partnership gas supplier funds on deposit due to the sale of our interest in the MCV Partnership in 2006, and other timing differences.