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Contingencies And Commitments
9 Months Ended
Sep. 30, 2012
Contingencies And Commitments

3:CONTINGENCIES AND COMMITMENTS

CMS Energy and Consumers are involved in various matters that give rise to contingent liabilities.  Depending on the specific issues, the resolution of these contingencies could have a material effect on CMS Energy’s and Consumers’ liquidity, financial condition, and results of operations.  In their disclosures of these matters, CMS Energy and Consumers provide an estimate of the possible loss or range of loss when such an estimate can be made.  Disclosures that state that CMS Energy or Consumers cannot predict the outcome of a matter indicate that they are unable to estimate a possible loss or range of loss for the matter.

CMS Energy Contingencies

Gas Index Price Reporting Investigation:  In 2002, 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.  Although CMS Energy has not received any formal notification that the DOJ has completed its investigation, the DOJ’s last request for information occurred in 2003, and CMS Energy completed its response to this request in 2004.  CMS Energy is unable to predict the outcome of the DOJ investigation and what effect, if any, the investigation will have on CMS Energy.

Gas Index Price Reporting Litigation:  CMS Energy, along with CMS MST, CMS Field Services, Cantera Natural Gas, Inc., and Cantera Gas Company, are named as defendants in various lawsuits arising as a result of alleged inaccurate natural gas price reporting to publications that report trade information.  Allegations include manipulation of NYMEX natural gas futures and options prices, price-fixing conspiracies, restraint of trade, and artificial inflation of natural gas retail prices in Colorado, Kansas, Missouri, and Wisconsin.  The following provides more detail on these proceedings:

·

In 2005, CMS Energy, CMS MST, and CMS Field Services were named as defendants in a putative class action filed in Kansas state court, Learjet, Inc., et al. v. Oneok, Inc., et al.  The complaint alleges that during the putative class period, January 1, 2000 through October 31, 2002, the defendants engaged in a scheme to violate the Kansas Restraint of Trade Act.  The plaintiffs are seeking statutory full consideration damages consisting of the full consideration paid by plaintiffs for natural gas allegedly purchased from defendants.

·

In 2007, a class action complaint, Heartland Regional Medical Center, et al. v. Oneok, Inc. et al., was filed in Missouri state court 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 reporting activities.

·

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 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 reporting activities.  Plaintiffs are seeking full refund damages.

·

A class action complaint, Arandell Corp., et al. v. XCEL Energy Inc., et al., was filed in 2006 in Wisconsin state court on behalf of Wisconsin commercial entities that purchased natural gas between January 1, 2000 and October 31, 2002.  The defendants, including CMS Energy, CMS ERM, and Cantera Gas Company, are alleged to have violated Wisconsin’s antitrust statute.  The plaintiffs are seeking full consideration damages, plus exemplary damages and attorneys’ fees.  After dismissal on jurisdictional grounds in 2009, plaintiffs filed a new complaint in the U.S. District Court for the Eastern District of Michigan.  In 2010, the MDL judge issued an opinion and order granting the CMS Energy defendants’ motion to dismiss the Michigan complaint on statute-of-limitations grounds and all CMS Energy defendants have been dismissed from the Arandell (Michigan) action.

·

Another class action complaint, Newpage Wisconsin System v. CMS ERM, et al., was filed in 2009 in circuit court in Wood County, Wisconsin, against CMS Energy, CMS ERM, Cantera Gas Company, and others.  The plaintiff is seeking full consideration damages, treble damages, costs, interest, and attorneys’ fees.

·

In 2005, J.P. Morgan Trust Company, in its capacity as Trustee of the FLI Liquidating Trust, filed an action in Kansas state court against CMS Energy, CMS MST, CMS Field Services, and others.  The complaint alleges various claims under the Kansas Restraint of Trade Act.  The plaintiff is seeking statutory full consideration damages for its purchases of natural gas in 2000 and 2001.

After removal to federal court, all of the cases described above were transferred to the MDL.  CMS Energy was dismissed from the Learjet, Heartland, and J.P. Morgan cases in 2009, but other CMS Energy defendants remained parties.  All CMS Energy defendants were dismissed from the Breckenridge case in 2009.  In 2010, CMS Energy and Cantera Gas Company were dismissed from the Newpage case and the Arandell (Wisconsin) case was reinstated against CMS ERM.  In July 2011, all claims against remaining CMS Energy defendants in the MDL cases were dismissed based on FERC preemption.  Plaintiffs have filed appeals in all of the cases.  The issues on appeal are whether the district court erred in dismissing the cases based on FERC preemption and denying the plaintiffs’ motions for leave to amend their complaints to add a federal Sherman Act antitrust claim.  The plaintiffs did not appeal the dismissal of CMS Energy as a defendant in these cases, but other CMS Energy entities remain as defendants.  Oral argument on the appeal was held before the Ninth Circuit Court in San Francisco in October 2012.

These cases involve complex facts, a large number of similarly situated defendants with different factual positions, and multiple jurisdictions.  Presently, any estimate of liability would be highly speculative; the amount of CMS Energy’s possible loss would be based on widely varying models previously untested in this context.  If the outcome after appeals is unfavorable, these cases could have a material adverse impact on CMS Energy’s liquidity, financial condition, and results of operations.

Bay Harbor:  As part of the development of Bay Harbor by certain subsidiaries of CMS Energy, and under 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 response activities, including constructing a leachate collection system in one area where CKD-impacted groundwater was entering Little Traverse Bay.  Leachate is produced when water enters into the CKD piles.  In 2002, CMS Energy sold its interest in Bay Harbor, but retained its obligations under environmental indemnities entered into at the start of the project.  In 2005, the EPA, along with CMS Land and CMS Capital, voluntarily executed an Administrative Order on Consent under Superfund, and the EPA approved a Removal Action Work Plan to address contamination issues.  A number of remediation measures were subsequently completed.  In June 2012, CMS Energy and the MDEQ finalized an agreement that established the final remedies and the future release criteria at the site.  CMS Energy is in the process of completing all construction necessary to implement the remedies required by the agreement and will continue to maintain and operate a system to discharge treated leachate into Little Traverse Bay under an NPDES permit issued in 2010.  This permit requires renewal every five years.

Various claims have been brought against CMS Land or its affiliates, including CMS Energy, alleging environmental damage to property, loss of property value, insufficient disclosure of environmental matters, breach of agreement relating to access, or other matters.  In October 2010, CMS Land and other parties received a demand for payment from the EPA in the amount of $7 million, plus interest, whereby the EPA is seeking recovery, as allowed under Superfund, of the EPA’s response costs incurred at the Bay Harbor site.  CMS Land communicated to the EPA in November 2010 that it does not believe that this is a valid claim.

CMS Energy has recorded a cumulative charge related to Bay Harbor of $226 million, which includes accretion expense.  At September 30, 2012, CMS Energy had a recorded liability of $64 million for its remaining obligations.  CMS Energy calculated this liability based on discounted projected costs, using a discount rate of 4.34 percent and an inflation rate of one percent on annual operating and maintenance costs.  CMS Energy based the discount rate on the interest rate for 30‑year U.S. Treasury securities at December 31, 2010.  The undiscounted amount of the remaining obligation is $85 million.  CMS Energy expects to pay $4 million during the remainder of 2012, $10 million in 2013, $5 million in 2014, $4 million in 2015, $4 million in 2016, and the remaining amount thereafter on long-term liquid disposal and operating and maintenance costs.

CMS Energy’s estimate of response activity costs and the timing of expenditures could change if there are additional major changes in circumstances or assumptions, including but not limited to:

·

a significant increase in the cost of the present long-term water disposal strategy;

·

requirements to alter the present long-term water disposal strategy upon expiration of the NPDES permit if the MDEQ or EPA identify a more suitable alternative;

·

an increase in the number of contamination areas;

·

the nature and extent of contamination;

·

delays in the receipt of requested permits;

·

delays following the receipt of any requested permits due to legal appeals of third parties;

·

unanticipated difficulties in meeting the technical commitments in the agreement with the MDEQ;

·

additional or new legal or regulatory requirements; or

·

new or different landowner claims.

Depending on the size of any indemnity obligation or liability under environmental laws, an adverse outcome of this matter could have a material adverse effect on CMS Energy’s liquidity and financial condition and could negatively affect CMS Energy’s financial results.  Although a liability for its present estimate of remaining response activity costs has been recorded, CMS Energy cannot predict the ultimate financial impact or outcome of this matter.

Equatorial Guinea Tax Claim:  In January 2002, CMS Energy sold its oil, gas, and methanol investments in Equatorial Guinea.  The government of Equatorial Guinea claims that CMS Energy owes $142 million in taxes, plus interest, in connection with the sale.  CMS Energy has concluded that the government’s tax claim is without merit.  The government of Equatorial Guinea indicated through a request for arbitration in October 2011 that it still intends to pursue its claim.  CMS Energy is vigorously contesting the claim, and cannot predict the financial impact or outcome of this matter.

Panhandle Tax Indemnification:  CMS Energy recorded a liability in 2003 for an indemnification provided in conjunction with the sale of Panhandle.  As of March 31, 2012 the statute of limitations had expired for this indemnification.  Accordingly, CMS Energy eliminated the liability during the three months ended March 31, 2012 and recognized an after-tax benefit of $7 million in discontinued operations.

Consumers Electric Utility Contingencies

Electric Environmental Matters:  Consumers’ operations are subject to environmental laws and regulations.  Historically, Consumers has generally been able to recover, in customer rates, the costs to operate its facilities in compliance with these laws and regulations.

Cleanup and Solid Waste:  Consumers expects to incur remediation and other response activity costs at a number of sites under NREPA.  Consumers believes that these costs should be recoverable in rates, but cannot guarantee that outcome.  Consumers estimates that its liability for NREPA sites will be between $4 million and $7 million.  At September 30, 2012, Consumers had a recorded liability of $4 million, the minimum amount in the range of its estimated probable NREPA liability.

Consumers is a potentially responsible party at a number of contaminated sites administered under the Superfund.  Superfund liability is joint and several.  In addition to Consumers, many other creditworthy parties with substantial assets are potentially responsible with respect to the individual sites.  In 2010, Consumers received official notification from the EPA that identified Consumers as a potentially responsible party at the Kalamazoo River Superfund site.  The notification claimed that the EPA has reason to believe Consumers disposed of PCBs and arranged for the disposal and treatment of PCB-containing materials at portions of the site.  Consumers responded to the EPA in 2010, stating that it has no information showing that it disposed of PCBs or arranged for disposal or treatment of PCB-containing material at portions of the site and requesting further information from the EPA before Consumers would commit to perform or finance cleanup activities at the site.  In April 2011, Consumers received a follow-up letter from the EPA requesting that Consumers, as a potentially responsible party at the Kalamazoo River Superfund site, agree to participate in a removal action plan along with several other companies for an area of lower Portage Creek.  The letter also indicated that under Sections 106 and 107 of Superfund, Consumers may be liable for reimbursement of the EPA’s costs and potential penalties for noncompliance with any unilateral order that the EPA may issue requiring performance under the removal action plan.  All parties, including Consumers, that were asked to participate in the removal action plan declined to accept liability.  In August 2011, the EPA announced that it would proceed with the removal action plan and would continue to pursue potentially responsible parties to perform or pay for some or all of the work.  The EPA has provided limited information regarding Consumers’ potential responsibility for contamination at the site and has not yet given an indication of the share of any cleanup costs for which Consumers could be held responsible.  Consumers continues to investigate the EPA’s claim that it disposed of PCBs or arranged for disposal or treatment of PCB-containing material at portions of the site.  Until further information is received from the EPA, Consumers is unable to estimate a range of potential liability for cleanup of the river.

Based on its experience, Consumers estimates that its share of the total liability for other known Superfund sites will be between $2 million and $8 million.  Various factors, including the number of potentially responsible parties involved with each site, affect Consumers’ share of the total liability.  At September 30, 2012, Consumers had a recorded liability of $2 million for its share of the total liability at these sites, the minimum amount in the range of its estimated probable Superfund liability.

The timing of payments related to Consumers’ remediation and other response activities at its Superfund and NREPA sites is uncertain.  Consumers periodically reviews these cost estimates.  Any significant change in the underlying assumptions, such as an increase in the number of sites, different remediation techniques, the nature and extent of contamination, and legal and regulatory requirements, could affect its estimates of NREPA and Superfund liability.

Ludington PCB:  In 1998, 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.  Consumers has had several communications with the EPA regarding this matter.  Consumers is not able to predict when the EPA will issue a final ruling and cannot predict the financial impact or outcome of this matter.

Electric Utility Plant Air Permit Issues and Notices of Violation:  In 2007, Consumers received an NOV/FOV from the EPA alleging that fourteen utility boilers exceeded the visible emission limits in their associated air permits.  Consumers has responded formally to the NOV/FOV denying the allegations.  In addition, in 2008, Consumers received an NOV for three of its coal-fueled facilities alleging, among other things, violations of NSR PSD regulations relating to ten projects from 1986 to 1998 allegedly subject to review under the NSR.  The EPA has alleged that some utilities have classified incorrectly major plant modifications as RMRR rather than seeking permits from the EPA or state regulatory agencies to modify their plants.  Consumers responded to the information requests from the EPA on this subject in the past.  Consumers believes that it has properly interpreted the requirements of RMRR.

Consumers is engaged in discussions with the EPA on all of these matters.  Depending upon the outcome of these discussions, the EPA could bring legal action against Consumers and/or Consumers could be required to install additional pollution control equipment at some or all of its coal-fueled electric generating plants, surrender emission allowances, engage in Supplemental Environmental Projects, and/or pay fines.  Additionally, Consumers would need to assess the viability of continuing operations at certain plants.  The potential costs relating to these matters could be material and the extent of cost recovery cannot be reasonably estimated.  Although Consumers cannot predict the financial impact or outcome of these matters, Consumers expects that it would be able to recover some or all of the costs in rates, consistent with the recovery of other reasonable costs of complying with environmental laws and regulations.

Nuclear Matters:  The matters discussed in this section relate to Consumers’ previously owned nuclear generating plants.

In 1997, a U.S. Court of Appeals decision confirmed that the DOE was to begin accepting deliveries of spent nuclear fuel for disposal by January 1998.  Subsequent U.S. Court of Appeals litigation, in which Consumers and other utilities participated, had not been successful in producing more specific relief for the DOE’s failure to accept the spent nuclear fuel.  A number of court decisions have supported the right of utilities to pursue damage claims in the U.S. Court of Claims against the DOE for failure to take delivery of spent nuclear fuel.  Consumers filed a complaint in 2002.

In July 2011, Consumers entered into an agreement with the DOE to settle its claims for $120 million.  In September 2011, Consumers filed an application with the MPSC regarding the regulatory treatment of the settlement amount.  For further information, see Note 4: Regulatory Matters.

As part of the agreement with the DOE, Consumers settled its liability to the DOE to fund the disposal of spent nuclear fuel used at Palisades and Big Rock before 1983.  This liability, which totaled $163 million, comprised $44 million collected from customers for spent nuclear fuel disposal fees and $119 million of interest accrued on those fees, and was to be paid no later than when the DOE began accepting delivery of spent nuclear fuel.  CMS Energy and Consumers classified the liability as long-term debt on their consolidated balance sheets.

Following the settlement, Consumers terminated its letter of credit to Entergy, which Consumers had provided as security for its retained obligation to the DOE in connection with its sale of Palisades and the Big Rock ISFSI to Entergy in 2007.

In its November 2010 electric rate case order, the MPSC had directed Consumers to establish an independent trust fund for the amount payable to the DOE.  Following its settlement with the DOE, Consumers petitioned the MPSC to relieve it of the obligation to fund the trust.

Consumers Gas Utility Contingencies

Gas Environmental Matters:    Consumers expects to incur remediation and other response activity costs at a number of sites under the NREPA.  These sites include 23 former MGP facilities.  Consumers operated the facilities on these sites for some part of their operating lives.  For some of these sites, Consumers has no present ownership interest or may own only a portion of the original site.

At September 30, 2012, Consumers had a recorded liability of $125 million for its remaining obligations for these sites.  This amount represents the present value of long-term projected costs, using a discount rate of 2.57 percent and an inflation rate of 2.5 percent.  Consumers based the discount rate on the interest rate for 20‑year U.S. Treasury securities at December 31, 2011.  The undiscounted amount of the remaining obligation is $137 million.  Consumers expects to incur remediation and other response activity costs during the remainder of 2012 and in each of the next four years as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In Millions 

 

2012 
2013 
2014 
2015 
2016 

Consumers

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Remediation and other response activity costs

 

$

 

$

11 

 

$

11 

 

$

20 

 

$

11 

Consumers periodically reviews these cost estimates.  Any significant change in the underlying assumptions, such as an increase in the number of sites, changes in remediation techniques, or legal and regulatory requirements, could affect Consumers’ estimates of annual response activity costs and the MGP liability.

Pursuant to orders issued by the MPSC, Consumers defers its MGP-related remediation costs and recovers them from its customers over a ten-year period.  At September 30, 2012, Consumers had a regulatory asset of $153 million related to the MGP sites.

Consumers Other Contingencies

Other Environmental Matters:  Consumers initiated preliminary investigations during 2012 at a number of potentially contaminated sites it presently owns with the intention of determining whether any contamination exists and the extent of any identified contamination.  The sites to be investigated include combustion turbine sites, generating sites, compressor stations, and above-ground storage tanks.  Evidence of contamination led Consumers to plan remedial investigations and certain interim response measures at some of these sites.  The cost of these activities has been incorporated into Consumers’ estimated liability for NREPA sites.  Consumers will continue its preliminary investigations at other potentially contaminated sites through 2013.  Consumers cannot predict an outcome at this stage of the investigations.

Guarantees

Presented in the following table are CMS Energy’s and Consumers’ guarantees at September 30, 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In Millions 

 

 

 

Maximum 

 

Carrying 

Guarantee Description

Issue Date

Expiration Date

Obligation 

 

Amount 

CMS Energy, including Consumers

 

 

 

 

 

 

 

 

 

Indemnity obligations from asset sales

   and other agreements

Various

Various through September 2029

 

$

512 

 

$

15 

Guarantees

Various

Various through March 2021

 

 

60 

 

 

 

Consumers

 

 

 

 

 

 

 

 

 

Indemnity obligations and other guarantees

Various

Various through September 2029

 

$

30 

 

 

$

1

The majority of this amount arises from stock and asset sale agreements under which CMS Energy or a subsidiary of CMS Energy, other than Consumers, indemnified the purchaser for losses resulting from various matters, including claims related to tax disputes, claims related to power purchase agreements, and defects in title to the assets or stock sold to the purchaser by CMS Energy subsidiaries.  Except for items described elsewhere in this Note, CMS Energy believes the likelihood of material loss to be remote for the indemnity obligations not recorded as liabilities.

Presented in the following table is additional information regarding CMS Energy’s and Consumers’ guarantees:

 

 

 

 

 

 

Guarantee Description

How Guarantee Arose

Events That Would Require Performance 

CMS Energy, including Consumers

 

 

Indemnity obligations from asset

Stock and asset sale

Findings of misrepresentation, 

sales and other agreements

agreements

breach of warranties, tax claims, and 

 

 

other specific events or 

 

 

circumstances 

 

 

 

Guarantees

Normal operating

Nonperformance or non-payment by a 

 

activity

subsidiary under a related contract 

Consumers

 

 

Indemnity obligations and

Normal operating

Nonperformance or claims made by third 

other guarantees

activity

party under a related contract 

CMS Energy, Consumers, and certain other subsidiaries of CMS Energy also enter into various agreements containing tax and other indemnity provisions for which they are unable to estimate the maximum potential obligation.  These factors include unspecified exposure under certain agreements.  CMS Energy and Consumers consider the likelihood that they would be required to perform or incur substantial losses related to these indemnities to be remote.

Other Contingencies

Other:  In addition to the matters disclosed in this Note and Note 4: Regulatory Matters, there are certain other lawsuits and administrative proceedings before various courts and governmental agencies arising in the ordinary course of business to which CMS Energy, Consumers, and certain other subsidiaries of CMS Energy are parties.  These other lawsuits and proceedings may involve personal injury, property damage, contracts, environmental matters, federal and state taxes, rates, licensing, employment, and other matters.  Further, CMS Energy and Consumers occasionally self-report certain regulatory non‑compliance matters that may or may not eventually result in administrative proceedings.  CMS Energy and Consumers believe that the outcome of any one of these proceedings will not have a material adverse effect on their consolidated results of operations, financial condition, or liquidity.

Consumers Energy Company [Member]
 
Contingencies And Commitments

3:CONTINGENCIES AND COMMITMENTS

CMS Energy and Consumers are involved in various matters that give rise to contingent liabilities.  Depending on the specific issues, the resolution of these contingencies could have a material effect on CMS Energy’s and Consumers’ liquidity, financial condition, and results of operations.  In their disclosures of these matters, CMS Energy and Consumers provide an estimate of the possible loss or range of loss when such an estimate can be made.  Disclosures that state that CMS Energy or Consumers cannot predict the outcome of a matter indicate that they are unable to estimate a possible loss or range of loss for the matter.

CMS Energy Contingencies

Gas Index Price Reporting Investigation:  In 2002, 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.  Although CMS Energy has not received any formal notification that the DOJ has completed its investigation, the DOJ’s last request for information occurred in 2003, and CMS Energy completed its response to this request in 2004.  CMS Energy is unable to predict the outcome of the DOJ investigation and what effect, if any, the investigation will have on CMS Energy.

Gas Index Price Reporting Litigation:  CMS Energy, along with CMS MST, CMS Field Services, Cantera Natural Gas, Inc., and Cantera Gas Company, are named as defendants in various lawsuits arising as a result of alleged inaccurate natural gas price reporting to publications that report trade information.  Allegations include manipulation of NYMEX natural gas futures and options prices, price-fixing conspiracies, restraint of trade, and artificial inflation of natural gas retail prices in Colorado, Kansas, Missouri, and Wisconsin.  The following provides more detail on these proceedings:

·

In 2005, CMS Energy, CMS MST, and CMS Field Services were named as defendants in a putative class action filed in Kansas state court, Learjet, Inc., et al. v. Oneok, Inc., et al.  The complaint alleges that during the putative class period, January 1, 2000 through October 31, 2002, the defendants engaged in a scheme to violate the Kansas Restraint of Trade Act.  The plaintiffs are seeking statutory full consideration damages consisting of the full consideration paid by plaintiffs for natural gas allegedly purchased from defendants.

·

In 2007, a class action complaint, Heartland Regional Medical Center, et al. v. Oneok, Inc. et al., was filed in Missouri state court 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 reporting activities.

·

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 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 reporting activities.  Plaintiffs are seeking full refund damages.

·

A class action complaint, Arandell Corp., et al. v. XCEL Energy Inc., et al., was filed in 2006 in Wisconsin state court on behalf of Wisconsin commercial entities that purchased natural gas between January 1, 2000 and October 31, 2002.  The defendants, including CMS Energy, CMS ERM, and Cantera Gas Company, are alleged to have violated Wisconsin’s antitrust statute.  The plaintiffs are seeking full consideration damages, plus exemplary damages and attorneys’ fees.  After dismissal on jurisdictional grounds in 2009, plaintiffs filed a new complaint in the U.S. District Court for the Eastern District of Michigan.  In 2010, the MDL judge issued an opinion and order granting the CMS Energy defendants’ motion to dismiss the Michigan complaint on statute-of-limitations grounds and all CMS Energy defendants have been dismissed from the Arandell (Michigan) action.

·

Another class action complaint, Newpage Wisconsin System v. CMS ERM, et al., was filed in 2009 in circuit court in Wood County, Wisconsin, against CMS Energy, CMS ERM, Cantera Gas Company, and others.  The plaintiff is seeking full consideration damages, treble damages, costs, interest, and attorneys’ fees.

·

In 2005, J.P. Morgan Trust Company, in its capacity as Trustee of the FLI Liquidating Trust, filed an action in Kansas state court against CMS Energy, CMS MST, CMS Field Services, and others.  The complaint alleges various claims under the Kansas Restraint of Trade Act.  The plaintiff is seeking statutory full consideration damages for its purchases of natural gas in 2000 and 2001.

After removal to federal court, all of the cases described above were transferred to the MDL.  CMS Energy was dismissed from the Learjet, Heartland, and J.P. Morgan cases in 2009, but other CMS Energy defendants remained parties.  All CMS Energy defendants were dismissed from the Breckenridge case in 2009.  In 2010, CMS Energy and Cantera Gas Company were dismissed from the Newpage case and the Arandell (Wisconsin) case was reinstated against CMS ERM.  In July 2011, all claims against remaining CMS Energy defendants in the MDL cases were dismissed based on FERC preemption.  Plaintiffs have filed appeals in all of the cases.  The issues on appeal are whether the district court erred in dismissing the cases based on FERC preemption and denying the plaintiffs’ motions for leave to amend their complaints to add a federal Sherman Act antitrust claim.  The plaintiffs did not appeal the dismissal of CMS Energy as a defendant in these cases, but other CMS Energy entities remain as defendants.  Oral argument on the appeal was held before the Ninth Circuit Court in San Francisco in October 2012.

These cases involve complex facts, a large number of similarly situated defendants with different factual positions, and multiple jurisdictions.  Presently, any estimate of liability would be highly speculative; the amount of CMS Energy’s possible loss would be based on widely varying models previously untested in this context.  If the outcome after appeals is unfavorable, these cases could have a material adverse impact on CMS Energy’s liquidity, financial condition, and results of operations.

Bay Harbor:  As part of the development of Bay Harbor by certain subsidiaries of CMS Energy, and under 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 response activities, including constructing a leachate collection system in one area where CKD-impacted groundwater was entering Little Traverse Bay.  Leachate is produced when water enters into the CKD piles.  In 2002, CMS Energy sold its interest in Bay Harbor, but retained its obligations under environmental indemnities entered into at the start of the project.  In 2005, the EPA, along with CMS Land and CMS Capital, voluntarily executed an Administrative Order on Consent under Superfund, and the EPA approved a Removal Action Work Plan to address contamination issues.  A number of remediation measures were subsequently completed.  In June 2012, CMS Energy and the MDEQ finalized an agreement that established the final remedies and the future release criteria at the site.  CMS Energy is in the process of completing all construction necessary to implement the remedies required by the agreement and will continue to maintain and operate a system to discharge treated leachate into Little Traverse Bay under an NPDES permit issued in 2010.  This permit requires renewal every five years.

Various claims have been brought against CMS Land or its affiliates, including CMS Energy, alleging environmental damage to property, loss of property value, insufficient disclosure of environmental matters, breach of agreement relating to access, or other matters.  In October 2010, CMS Land and other parties received a demand for payment from the EPA in the amount of $7 million, plus interest, whereby the EPA is seeking recovery, as allowed under Superfund, of the EPA’s response costs incurred at the Bay Harbor site.  CMS Land communicated to the EPA in November 2010 that it does not believe that this is a valid claim.

CMS Energy has recorded a cumulative charge related to Bay Harbor of $226 million, which includes accretion expense.  At September 30, 2012, CMS Energy had a recorded liability of $64 million for its remaining obligations.  CMS Energy calculated this liability based on discounted projected costs, using a discount rate of 4.34 percent and an inflation rate of one percent on annual operating and maintenance costs.  CMS Energy based the discount rate on the interest rate for 30‑year U.S. Treasury securities at December 31, 2010.  The undiscounted amount of the remaining obligation is $85 million.  CMS Energy expects to pay $4 million during the remainder of 2012, $10 million in 2013, $5 million in 2014, $4 million in 2015, $4 million in 2016, and the remaining amount thereafter on long-term liquid disposal and operating and maintenance costs.

CMS Energy’s estimate of response activity costs and the timing of expenditures could change if there are additional major changes in circumstances or assumptions, including but not limited to:

·

a significant increase in the cost of the present long-term water disposal strategy;

·

requirements to alter the present long-term water disposal strategy upon expiration of the NPDES permit if the MDEQ or EPA identify a more suitable alternative;

·

an increase in the number of contamination areas;

·

the nature and extent of contamination;

·

delays in the receipt of requested permits;

·

delays following the receipt of any requested permits due to legal appeals of third parties;

·

unanticipated difficulties in meeting the technical commitments in the agreement with the MDEQ;

·

additional or new legal or regulatory requirements; or

·

new or different landowner claims.

Depending on the size of any indemnity obligation or liability under environmental laws, an adverse outcome of this matter could have a material adverse effect on CMS Energy’s liquidity and financial condition and could negatively affect CMS Energy’s financial results.  Although a liability for its present estimate of remaining response activity costs has been recorded, CMS Energy cannot predict the ultimate financial impact or outcome of this matter.

Equatorial Guinea Tax Claim:  In January 2002, CMS Energy sold its oil, gas, and methanol investments in Equatorial Guinea.  The government of Equatorial Guinea claims that CMS Energy owes $142 million in taxes, plus interest, in connection with the sale.  CMS Energy has concluded that the government’s tax claim is without merit.  The government of Equatorial Guinea indicated through a request for arbitration in October 2011 that it still intends to pursue its claim.  CMS Energy is vigorously contesting the claim, and cannot predict the financial impact or outcome of this matter.

Panhandle Tax Indemnification:  CMS Energy recorded a liability in 2003 for an indemnification provided in conjunction with the sale of Panhandle.  As of March 31, 2012 the statute of limitations had expired for this indemnification.  Accordingly, CMS Energy eliminated the liability during the three months ended March 31, 2012 and recognized an after-tax benefit of $7 million in discontinued operations.

Consumers Electric Utility Contingencies

Electric Environmental Matters:  Consumers’ operations are subject to environmental laws and regulations.  Historically, Consumers has generally been able to recover, in customer rates, the costs to operate its facilities in compliance with these laws and regulations.

Cleanup and Solid Waste:  Consumers expects to incur remediation and other response activity costs at a number of sites under NREPA.  Consumers believes that these costs should be recoverable in rates, but cannot guarantee that outcome.  Consumers estimates that its liability for NREPA sites will be between $4 million and $7 million.  At September 30, 2012, Consumers had a recorded liability of $4 million, the minimum amount in the range of its estimated probable NREPA liability.

Consumers is a potentially responsible party at a number of contaminated sites administered under the Superfund.  Superfund liability is joint and several.  In addition to Consumers, many other creditworthy parties with substantial assets are potentially responsible with respect to the individual sites.  In 2010, Consumers received official notification from the EPA that identified Consumers as a potentially responsible party at the Kalamazoo River Superfund site.  The notification claimed that the EPA has reason to believe Consumers disposed of PCBs and arranged for the disposal and treatment of PCB-containing materials at portions of the site.  Consumers responded to the EPA in 2010, stating that it has no information showing that it disposed of PCBs or arranged for disposal or treatment of PCB-containing material at portions of the site and requesting further information from the EPA before Consumers would commit to perform or finance cleanup activities at the site.  In April 2011, Consumers received a follow-up letter from the EPA requesting that Consumers, as a potentially responsible party at the Kalamazoo River Superfund site, agree to participate in a removal action plan along with several other companies for an area of lower Portage Creek.  The letter also indicated that under Sections 106 and 107 of Superfund, Consumers may be liable for reimbursement of the EPA’s costs and potential penalties for noncompliance with any unilateral order that the EPA may issue requiring performance under the removal action plan.  All parties, including Consumers, that were asked to participate in the removal action plan declined to accept liability.  In August 2011, the EPA announced that it would proceed with the removal action plan and would continue to pursue potentially responsible parties to perform or pay for some or all of the work.  The EPA has provided limited information regarding Consumers’ potential responsibility for contamination at the site and has not yet given an indication of the share of any cleanup costs for which Consumers could be held responsible.  Consumers continues to investigate the EPA’s claim that it disposed of PCBs or arranged for disposal or treatment of PCB-containing material at portions of the site.  Until further information is received from the EPA, Consumers is unable to estimate a range of potential liability for cleanup of the river.

Based on its experience, Consumers estimates that its share of the total liability for other known Superfund sites will be between $2 million and $8 million.  Various factors, including the number of potentially responsible parties involved with each site, affect Consumers’ share of the total liability.  At September 30, 2012, Consumers had a recorded liability of $2 million for its share of the total liability at these sites, the minimum amount in the range of its estimated probable Superfund liability.

The timing of payments related to Consumers’ remediation and other response activities at its Superfund and NREPA sites is uncertain.  Consumers periodically reviews these cost estimates.  Any significant change in the underlying assumptions, such as an increase in the number of sites, different remediation techniques, the nature and extent of contamination, and legal and regulatory requirements, could affect its estimates of NREPA and Superfund liability.

Ludington PCB:  In 1998, 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.  Consumers has had several communications with the EPA regarding this matter.  Consumers is not able to predict when the EPA will issue a final ruling and cannot predict the financial impact or outcome of this matter.

Electric Utility Plant Air Permit Issues and Notices of Violation:  In 2007, Consumers received an NOV/FOV from the EPA alleging that fourteen utility boilers exceeded the visible emission limits in their associated air permits.  Consumers has responded formally to the NOV/FOV denying the allegations.  In addition, in 2008, Consumers received an NOV for three of its coal-fueled facilities alleging, among other things, violations of NSR PSD regulations relating to ten projects from 1986 to 1998 allegedly subject to review under the NSR.  The EPA has alleged that some utilities have classified incorrectly major plant modifications as RMRR rather than seeking permits from the EPA or state regulatory agencies to modify their plants.  Consumers responded to the information requests from the EPA on this subject in the past.  Consumers believes that it has properly interpreted the requirements of RMRR.

Consumers is engaged in discussions with the EPA on all of these matters.  Depending upon the outcome of these discussions, the EPA could bring legal action against Consumers and/or Consumers could be required to install additional pollution control equipment at some or all of its coal-fueled electric generating plants, surrender emission allowances, engage in Supplemental Environmental Projects, and/or pay fines.  Additionally, Consumers would need to assess the viability of continuing operations at certain plants.  The potential costs relating to these matters could be material and the extent of cost recovery cannot be reasonably estimated.  Although Consumers cannot predict the financial impact or outcome of these matters, Consumers expects that it would be able to recover some or all of the costs in rates, consistent with the recovery of other reasonable costs of complying with environmental laws and regulations.

Nuclear Matters:  The matters discussed in this section relate to Consumers’ previously owned nuclear generating plants.

In 1997, a U.S. Court of Appeals decision confirmed that the DOE was to begin accepting deliveries of spent nuclear fuel for disposal by January 1998.  Subsequent U.S. Court of Appeals litigation, in which Consumers and other utilities participated, had not been successful in producing more specific relief for the DOE’s failure to accept the spent nuclear fuel.  A number of court decisions have supported the right of utilities to pursue damage claims in the U.S. Court of Claims against the DOE for failure to take delivery of spent nuclear fuel.  Consumers filed a complaint in 2002.

In July 2011, Consumers entered into an agreement with the DOE to settle its claims for $120 million.  In September 2011, Consumers filed an application with the MPSC regarding the regulatory treatment of the settlement amount.  For further information, see Note 4: Regulatory Matters.

As part of the agreement with the DOE, Consumers settled its liability to the DOE to fund the disposal of spent nuclear fuel used at Palisades and Big Rock before 1983.  This liability, which totaled $163 million, comprised $44 million collected from customers for spent nuclear fuel disposal fees and $119 million of interest accrued on those fees, and was to be paid no later than when the DOE began accepting delivery of spent nuclear fuel.  CMS Energy and Consumers classified the liability as long-term debt on their consolidated balance sheets.

Following the settlement, Consumers terminated its letter of credit to Entergy, which Consumers had provided as security for its retained obligation to the DOE in connection with its sale of Palisades and the Big Rock ISFSI to Entergy in 2007.

In its November 2010 electric rate case order, the MPSC had directed Consumers to establish an independent trust fund for the amount payable to the DOE.  Following its settlement with the DOE, Consumers petitioned the MPSC to relieve it of the obligation to fund the trust.

Consumers Gas Utility Contingencies

Gas Environmental Matters:    Consumers expects to incur remediation and other response activity costs at a number of sites under the NREPA.  These sites include 23 former MGP facilities.  Consumers operated the facilities on these sites for some part of their operating lives.  For some of these sites, Consumers has no present ownership interest or may own only a portion of the original site.

At September 30, 2012, Consumers had a recorded liability of $125 million for its remaining obligations for these sites.  This amount represents the present value of long-term projected costs, using a discount rate of 2.57 percent and an inflation rate of 2.5 percent.  Consumers based the discount rate on the interest rate for 20‑year U.S. Treasury securities at December 31, 2011.  The undiscounted amount of the remaining obligation is $137 million.  Consumers expects to incur remediation and other response activity costs during the remainder of 2012 and in each of the next four years as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In Millions 

 

2012 
2013 
2014 
2015 
2016 

Consumers

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Remediation and other response activity costs

 

$

 

$

11 

 

$

11 

 

$

20 

 

$

11 

Consumers periodically reviews these cost estimates.  Any significant change in the underlying assumptions, such as an increase in the number of sites, changes in remediation techniques, or legal and regulatory requirements, could affect Consumers’ estimates of annual response activity costs and the MGP liability.

Pursuant to orders issued by the MPSC, Consumers defers its MGP-related remediation costs and recovers them from its customers over a ten-year period.  At September 30, 2012, Consumers had a regulatory asset of $153 million related to the MGP sites.

Consumers Other Contingencies

Other Environmental Matters:  Consumers initiated preliminary investigations during 2012 at a number of potentially contaminated sites it presently owns with the intention of determining whether any contamination exists and the extent of any identified contamination.  The sites to be investigated include combustion turbine sites, generating sites, compressor stations, and above-ground storage tanks.  Evidence of contamination led Consumers to plan remedial investigations and certain interim response measures at some of these sites.  The cost of these activities has been incorporated into Consumers’ estimated liability for NREPA sites.  Consumers will continue its preliminary investigations at other potentially contaminated sites through 2013.  Consumers cannot predict an outcome at this stage of the investigations.

Guarantees

Presented in the following table are CMS Energy’s and Consumers’ guarantees at September 30, 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In Millions 

 

 

 

Maximum 

 

Carrying 

Guarantee Description

Issue Date

Expiration Date

Obligation 

 

Amount 

CMS Energy, including Consumers

 

 

 

 

 

 

 

 

 

Indemnity obligations from asset sales

   and other agreements

Various

Various through September 2029

 

$

512 

 

$

15 

Guarantees

Various

Various through March 2021

 

 

60 

 

 

 

Consumers

 

 

 

 

 

 

 

 

 

Indemnity obligations and other guarantees

Various

Various through September 2029

 

$

30 

 

 

$

1

The majority of this amount arises from stock and asset sale agreements under which CMS Energy or a subsidiary of CMS Energy, other than Consumers, indemnified the purchaser for losses resulting from various matters, including claims related to tax disputes, claims related to power purchase agreements, and defects in title to the assets or stock sold to the purchaser by CMS Energy subsidiaries.  Except for items described elsewhere in this Note, CMS Energy believes the likelihood of material loss to be remote for the indemnity obligations not recorded as liabilities.

Presented in the following table is additional information regarding CMS Energy’s and Consumers’ guarantees:

 

 

 

 

 

 

Guarantee Description

How Guarantee Arose

Events That Would Require Performance 

CMS Energy, including Consumers

 

 

Indemnity obligations from asset

Stock and asset sale

Findings of misrepresentation, 

sales and other agreements

agreements

breach of warranties, tax claims, and 

 

 

other specific events or 

 

 

circumstances 

 

 

 

Guarantees

Normal operating

Nonperformance or non-payment by a 

 

activity

subsidiary under a related contract 

Consumers

 

 

Indemnity obligations and

Normal operating

Nonperformance or claims made by third 

other guarantees

activity

party under a related contract 

CMS Energy, Consumers, and certain other subsidiaries of CMS Energy also enter into various agreements containing tax and other indemnity provisions for which they are unable to estimate the maximum potential obligation.  These factors include unspecified exposure under certain agreements.  CMS Energy and Consumers consider the likelihood that they would be required to perform or incur substantial losses related to these indemnities to be remote.

Other Contingencies

Other:  In addition to the matters disclosed in this Note and Note 4: Regulatory Matters, there are certain other lawsuits and administrative proceedings before various courts and governmental agencies arising in the ordinary course of business to which CMS Energy, Consumers, and certain other subsidiaries of CMS Energy are parties.  These other lawsuits and proceedings may involve personal injury, property damage, contracts, environmental matters, federal and state taxes, rates, licensing, employment, and other matters.  Further, CMS Energy and Consumers occasionally self-report certain regulatory non‑compliance matters that may or may not eventually result in administrative proceedings.  CMS Energy and Consumers believe that the outcome of any one of these proceedings will not have a material adverse effect on their consolidated results of operations, financial condition, or liquidity.