10-K 1 k23633e10vk.htm ANNUAL REPORT FOR FISCAL YEAR ENDED DECEMBER 31, 2007 e10vk
 

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-K
 
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2007
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from           to          
 
         
Commission
  Registrant; State of Incorporation;
  IRS Employer
File Number
 
Address; and Telephone Number
 
Identification No.
1-9513
  CMS Energy Corporation
(A Michigan Corporation)
One Energy Plaza, Jackson, Michigan 49201
(517) 788-0550
  38-2726431
         
         
1-5611
  Consumers Energy Company
(A Michigan Corporation)
One Energy Plaza, Jackson, Michigan 49201
(517) 788-0550
  38-0442310
 
Securities registered pursuant to Section 12(b) of the Act:
         
        Name of Each Exchange
Registrant
 
Title of Class
 
on Which Registered
 
CMS Energy Corporation
  Common Stock, $.01 par value   New York Stock Exchange
CMS Energy Trust I
  7.75% Quarterly Income Preferred Securities   New York Stock Exchange
Consumers Energy Company
  Preferred Stocks, $100 par value: $4.16 Series, $4.50 Series   New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:  None
 
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
 
CMS Energy Corporation: Yes [X] No o Consumers Energy Company: Yes [X] No o
 
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
 
CMS Energy Corporation: Yes o No [X] Consumers Energy Company: Yes o No [X]
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [X] No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o
 
CMS Energy Corporation:
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):
 
             
Large accelerated filer x
  Accelerated filer o   Non-accelerated filer o   Smaller reporting company o
        (Do not check if a smaller reporting company)    
 
Consumers Energy 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):
 
             
Large accelerated filer o
  Accelerated filer o   Non-accelerated filer x   Smaller reporting company o
        (Do not check if a smaller reporting company)    
 
Indicate by check mark whether the Registrant is a shell company (as defined in Exchange Act Rule 12b-2).
 
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 $3.863 billion for the 224,583,688 CMS Energy Common Stock shares outstanding on June 30, 2007 based on the closing sale price of $17.20 for CMS Energy Common Stock, as reported by the New York Stock Exchange on such date.
 
There were 225,177,071 shares of CMS Energy Common Stock outstanding on February 19, 2008. On February 19, 2008, CMS Energy held all voting and non-voting common equity of Consumers.
 
Documents incorporated by reference: CMS Energy’s proxy statement and Consumers’ information statement relating to the 2008 annual meeting of shareholders to be held May 16, 2008, is incorporated by reference in Part III, except for the compensation and human resources committee report and audit committee report contained therein.
 


 

CMS Energy Corporation
And
Consumers Energy Company
 
Annual Reports on Form 10-K to the Securities and Exchange Commission for the Year Ended
December 31, 2007
 
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’s other subsidiaries (other than Consumers Energy Company) has any obligation in respect of Consumers Energy Company’s debt securities and holders of such securities should not consider CMS Energy Corporation, CMS Enterprises Company nor any of CMS Energy’s 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 Company’s debt securities. Similarly, Consumers Energy Company has no obligation in respect of debt securities of CMS Energy Corporation.
 
TABLE OF CONTENTS
 
         
       
Page
Glossary
      4
         
         
 
PART I:
Item 1.
  Business   11
Item 1A.
  Risk Factors   25
Item 1B.
  Unresolved Staff Comments   32
Item 2.
  Properties   32
Item 3.
  Legal Proceedings   32
Item 4.
  Submission of Matters to a Vote of Security Holders   37
         
         
         
PART II:
       
Item 5.
  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   38
Item 6.
  Selected Financial Data   38
Item 7.
  Management’s Discussion and Analysis of Financial Condition and Results of Operations   39
Item 7A.
  Quantitative and Qualitative Disclosures About Market Risk   39
Item 8.
  Financial Statements and Supplementary Data   40
Item 9.
  Changes in and Disagreements With Accountants on Accounting and Financial Disclosure   CO-1
Item 9A.
  Controls and Procedures   CO-1
Item 9B.
  Other Information   CO-2
         
         
         
PART III:
       
Item 10.
  Directors, Executive Officers and Corporate Governance   CO-3
Item 11.
  Executive Compensation   CO-3
Item 12.
  Security Ownership of Certain Beneficial Owners and Management Related Stockholder Matters   CO-4
Item 13.
  Certain Relationships and Related Transactions, and Director Independence   CO-5
Item 14.
  Principal Accountant Fees and Services   CO-5
         
         
         
PART IV:
       
Item 15.
  Exhibits, Financial Statement Schedules   CO-5


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GLOSSARY
 
 
Certain terms used in the text and financial statements are defined below
 
     
ABATE
  Association of Businesses Advocating Tariff Equity
ABO
  Accumulated Benefit Obligation. The liabilities of a pension plan based on service and pay to date. This differs from the Projected Benefit Obligation that is typically disclosed in that it does not reflect expected future salary increases.
AEI
  Ashmore Energy International, a non-affiliated company
AFUDC
  Allowance for Funds Used During Construction
ALJ
  Administrative Law Judge
AMT
  Alternative minimum tax
AOC
  Administrative Order on Consent
AOCI
  Accumulated Other Comprehensive Income
AOCL
  Accumulated Other Comprehensive Loss
APB
  Accounting Principles Board
APB Opinion No. 18
  APB Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock”
APT
  Australian Pipeline Trust
ARO
  Asset retirement obligation
Bay Harbor
  A residential/commercial real estate area located near Petoskey, Michigan. In 2002, CMS Energy sold its interest in Bay Harbor.
bcf
  One billion cubic feet of gas
Big Rock
  Big Rock Point nuclear power plant
Big Rock ISFSI
  Big Rock Independent Spent Fuel Storage Installation
Board of Directors
  Board of Directors of CMS Energy
Broadway Gen Funding LLC
  Broadway Gen Funding LLC, a non-affiliated company
Btu
  British thermal unit; one Btu equals the amount of energy required to raise the temperature of one pound of water by one degree Fahrenheit
CAMR
  Clean Air Mercury Rule
CEO
  Chief Executive Officer
CFO
  Chief Financial Officer
CFTC
  Commodity Futures Trading Commission
City gate arrangement
  The arrangement made for the point at which a local distribution company physically receives gas from a supplier or pipeline
CKD
  Cement kiln dust
Clean Air Act
  Federal Clean Air Act, as amended
CMS Capital
  CMS Capital, L.L.C., a wholly owned subsidiary CMS Energy
CMS Energy
  CMS Energy Corporation, the parent of Consumers and Enterprises
CMS Energy Common Stock or common stock
  Common stock of CMS Energy, par value $.01 per share
CMS Electric and Gas
  CMS Electric & Gas Company, L.L.C., a subsidiary of Enterprises
CMS ERM
  CMS Energy Resource Management Company, formerly CMS MST, a subsidiary of Enterprises
CMS Field Services
  CMS Field Services, Inc., a former wholly owned subsidiary of CMS Gas Transmission
CMS Gas Transmission
  CMS Gas Transmission Company, a wholly owned subsidiary of Enterprises
CMS Generation
  CMS Generation Co., a former wholly owned subsidiary of Enterprises


4


 

     
CMS International Ventures
  CMS International Ventures LLC, a subsidiary of Enterprises
CMS Land
  CMS Land Company, a wholly owned subsidiary of CMS Energy
CMS Midland
  Midland Cogeneration Venture Group II, LLC, successor to CMS Midland Inc., formerly a subsidiary of Consumers that had a 49 percent ownership interest in the MCV Partnership
CMS MST
  CMS Marketing, Services and Trading Company, a wholly owned subsidiary of Enterprises, whose name was changed to CMS ERM effective January 2004
CMS Oil and Gas
  CMS Oil and Gas Company, formerly a subsidiary of Enterprises
Consumers
  Consumers Energy Company, a subsidiary of CMS Energy
Court of Appeals
  Michigan Court of Appeals
CPEE
  Companhia Paulista de Energia Eletrica, in which CMS International Ventures formerly owned a 94 percent interest
Customer Choice Act
  Customer Choice and Electricity Reliability Act, a Michigan statute enacted in June 2000
DCCP
  Defined Company Contribution Plan
DC SERP
  Defined Contribution Supplemental Executive Retirement Plan
Dekatherms/day
  A measure of the heat content value of gas per day; one dekatherm/day is equivalent to 1,000,000 British thermal units (Btu) per day
Detroit Edison
  The Detroit Edison Company, a non-affiliated company
DIG
  Dearborn Industrial Generation, LLC, a wholly owned subsidiary of CMS Energy
DOE
  U.S. Department of Energy
DOJ
  U.S. Department of Justice
Dow
  The Dow Chemical Company, a non-affiliated company
DTE Energy
  DTE Energy Company, a non-affiliated company
EISP
  Executive Incentive Separation Plan
EITF
  Emerging Issues Task Force
EITF Issue 02-03
  EITF Issue No. 02-03, “Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities”
EITF Issue 06-11
  EITF Issue No. 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards”
El Chocon
  A 1,200 MW hydro power plant located in Argentina, in which CMS Generation formerly held a 17.2 percent ownership interest
Entergy
  Entergy Corporation, a non-affiliated company
Enterprises
  CMS Enterprises Company, a subsidiary of CMS Energy
EPA
  U.S. Environmental Protection Agency
EPS
  Earnings per share
Exchange Act
  Securities Exchange Act of 1934, as amended
FASB
  Financial Accounting Standards Board
FERC
  Federal Energy Regulatory Commission
FIN 14
  FASB Interpretation No. 14, Reasonable Estimation of Amount of a Loss
FIN 46(R)
  Revised FASB Interpretation No. 46, Consolidation of Variable Interest Entities
FIN 47
  FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations
FIN 45
  FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others


5


 

     
FIN 48
  FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109
First Mortgage Bond Indenture
  The indenture dated as of September 1, 1945 between Consumers and The Bank of New York (ultimate successor to City Bank Farmers Trust Company), as Trustee, and as amended and supplemented
FMB
  First Mortgage Bonds
FMLP
  First Midland Limited Partnership, a partnership that holds a lessor interest in the MCV Facility
FSP
  FASB Staff Position
FSP FIN 39-1
  FASB Staff Position on FASB Interpretation No. 39-1, Amendment of FASB Interpretation No. 39
GAAP
  Generally Accepted Accounting Principles
GasAtacama
  GasAtacama Holding Limited, a limited liability partnership that manages GasAtacama S.A., which includes an integrated natural gas pipeline and electric generating plant in Argentina and Chile and Atacama Finance Company, in which CMS International Ventures formerly owned a 50 percent interest
GCR
  Gas cost recovery
Goldfields
  A pipeline business in Australia, in which CMS Energy formerly held a 39.7 percent ownership interest
GVK
  GVK Facility, a 250 MW gas fired power plant located in South Central India, in which CMS Generation formerly held a 33 percent interest
GWh
  Gigawatt hour (a unit of energy equal to one million kilowatt hours)
Hydra-Co
  Hydra-Co Enterprises, Inc., a wholly owned subsidiary of Enterprises
ICSID
  International Centre for the Settlement of Investment Disputes
IPP
  Independent power producer
IRS
  Internal Revenue Service
ISFSI
  Independent spent fuel storage installation
ITC
  Income tax credit
Jamaica
  Jamaica Private Power Company, Limited, a 63 MW diesel-fueled power plant in Jamaica, in which CMS Generation formerly owned a 42 percent interest
Jorf Lasfar
  A 1,356 MW coal-fueled power plant in Morocco, in which CMS Generation formerly owned a 50 percent interest
Jubail
  A 240 MW natural gas cogeneration power plant in Saudi Arabia, in which CMS Generation formerly owned a 25 percent interest
kilovolts
  One thousand volts (unit used to measure the difference in electrical pressure along a current)
kWh
  Kilowatt-hour (a unit of energy equal to one thousand watt hours)
LS Power Group
  LS Power Group, a non-affiliated company
Lucid Energy
  Lucid Energy LLC, a non-affiliated company
Ludington
  Ludington pumped storage plant, jointly owned by Consumers and Detroit Edison
mcf
  One thousand cubic feet of gas
MCV Facility
  A natural gas-fueled, combined-cycle cogeneration facility operated by the MCV Partnership
MCV GP II
  Successor of CMS Midland, Inc.
MCV Partnership
  Midland Cogeneration Venture Limited Partnership


6


 

     
MCV PPA
  The Power Purchase Agreement between Consumers and the MCV Partnership with a 35-year term commencing in March 1990, as amended, and as interpreted by the Settlement Agreement dated as of January 1, 1999 between the MCV Partnership and Consumers
MD&A
  Management’s Discussion and Analysis
MDEQ
  Michigan Department of Environmental Quality
MDL
  Multidistrict Litigation
METC
  Michigan Electric Transmission Company, LLC, a non-affiliated company owned by ITC Holdings Corporation and a member of MISO
Midwest Energy Market
  An energy market developed by the MISO to provide day-ahead and real-time market information and centralized dispatch for market participants
MISO
  Midwest Independent Transmission System Operator, Inc.
MMBtu
  Million British Thermal Units
Moody’s
  Moody’s Investors Service, Inc.
MPSC
  Michigan Public Service Commission
MRV
  Market-Related Value of Plan assets
MSBT
  Michigan Single Business Tax
MW
  Megawatt (a unit of power equal to one million watts)
MWh
  Megawatt hour (a unit of energy equal to one million watt hours)
Neyveli
  CMS Generation Neyveli Ltd, a 250 MW lignite-fired power station located in India, in which CMS International Ventures formerly owned a 50 percent interest
NMC
  Nuclear Management Company LLC, formed in 1999 by Northern States Power Company (now Xcel Energy Inc.), Alliant Energy, Wisconsin Electric Power Company, and Wisconsin Public Service Company to operate and manage nuclear generating facilities owned by the utilities
NREPA
  Michigan Natural Resources and Environmental Protection Act
NYMEX
  New York Mercantile Exchange
OPEB
  Postretirement benefit plans other than pensions
Palisades
  Palisades nuclear power plant, formerly owned by Consumers
Panhandle
  Panhandle Eastern Pipe Line Company, including its subsidiaries Trunkline, Pan Gas Storage, Panhandle Storage, and Panhandle Holdings, a former wholly owned subsidiary of CMS Gas Transmission
Parmelia
  A business located in Australia comprised of a pipeline, processing facilities, and a gas storage facility, a former subsidiary of CMS Gas Transmission
PCB
  Polychlorinated biphenyl
PDVSA
  Petroleos de Venezuela S.A., a non-affiliated company
Peabody Energy
  Peabody Energy Corporation, a non-affiliated company
Pension Plan
  The trusteed, non-contributory, defined benefit pension plan of Panhandle, Consumers and CMS Energy
PowerSmith
  A 124 MW natural gas power plant located in Oklahoma, in which CMS Generation formerly held a 6.25% limited partner ownership interest
PSCR
  Power supply cost recovery
PUHCA
  Public Utility Holding Company Act
PURPA
  Public Utility Regulatory Policies Act of 1978
Quicksilver
  Quicksilver Resources, Inc., a non-affiliated company


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RAKTL
  Ronald A. Katz Technology Licensing L.P., a non-affiliated company
RCP
  Resource Conservation Plan
Reserve Margin
  The amount of unused available electric capacity at peak demand as a percentage of total electric capacity
ROA
  Retail Open Access, which allows electric generation customers to choose alternative electric suppliers pursuant to the Customer Choice Act.
S&P
  Standard & Poor’s Ratings Group, a division of The McGraw-Hill Companies, Inc.
SEC
  U.S. Securities and Exchange Commission
Section 10d(4) Regulatory Asset
  Regulatory asset as described in Section 10d(4) of the Customer Choice Act, as amended
Securitization
  A financing method authorized by statute and approved by the MPSC which allows a utility to sell its right to receive a portion of the rate payments received from its customers for the repayment of securitization bonds issued by a special purpose entity affiliated with such utility
SENECA
  Sistema Electrico del Estado Nueva Esparta C.A., a former subsidiary of CMS International Ventures
SERP
  Supplemental Executive Retirement Plan
SFAS
  Statement of Financial Accounting Standards
SFAS No. 5
  SFAS No. 5, “Accounting for Contingencies”
SFAS No. 13
  SFAS No. 13, “Accounting for Leases”
SFAS No. 71
  SFAS No. 71, “Accounting for the Effects of Certain Types of Regulation”
SFAS No. 87
  SFAS No. 87, “Employers’ Accounting for Pensions”
SFAS No. 98
  SFAS No. 98, “Accounting for Leases”
SFAS No. 106
  SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions”
SFAS No. 109
  SFAS No. 109, “Accounting for Income Taxes”
SFAS No. 132(R)
  SFAS No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits”
SFAS No. 133
  SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities, as amended and interpreted”
SFAS No. 143
  SFAS No. 143, “Accounting for Asset Retirement Obligations”
SFAS No. 144
  SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”
SFAS No. 157
  SFAS No. 157, “Fair Value Measurement”
SFAS No. 158
  SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and 132(R)”
SFAS No. 159
  SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, Including an amendment to FASB Statement No. 115”
SFAS No. 160
  SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51”
Shuweihat
  A power and desalination plant located in the United Arab Emirates, in which CMS Generation formerly owned a 20 percent interest
SLAP
  Scudder Latin American Power Fund
SRLY
  Separate Return Limitation Year


8


 

     
Stranded Costs
  Costs incurred by utilities in order to serve their customers in a regulated monopoly environment, which may not be recoverable in a competitive environment because of customers leaving their systems and ceasing to pay for their costs. These costs could include owned and purchased generation and regulatory assets.
Superfund
  Comprehensive Environmental Response, Compensation and Liability Act
Takoradi
  A 200 MW open-cycle combustion turbine crude oil power plant located in Ghana, in which CMS Generation formerly owned a 90 percent interest
TAQA
  Abu Dhabi National Energy Company, a subsidiary of Abu Dhabi Water and Electricity Authority, a non-affiliated company
Taweelah
  Al Taweelah A2, a power and desalination plant of Emirates CMS Power Company located in the United Arab Emirates, in which CMS Generation formerly held a 40 percent interest
TGN
  A natural gas transportation and pipeline business located in Argentina, in which CMS Gas Transmission owns a 23.54 percent interest
TRAC
  Terminal Rental Adjustment Clause, a provision of a leasing agreement which permits or requires the rental price to be adjusted upward or downward by reference to the amount realized by the lessor under the agreement upon sale or other disposition of formerly leased property
Trunkline
  CMS Trunkline Gas Company, LLC, formerly a subsidiary of CMS Panhandle Holdings, LLC
Trust Preferred Securities
  Securities representing an undivided beneficial interest in the assets of statutory business trusts, the interests of which have a preference with respect to certain trust distributions over the interests of either CMS Energy or Consumers, as applicable, as owner of the common beneficial interests of the trusts
TSR
  Total shareholder return
TTT
  Gas title transfer tracking fees and services
Union
  Utility Workers Union of America, AFL-CIO
VEBA
  VEBA employees’ beneficiary association trusts accounts established to set aside specifically employer contributed assets to pay for future expenses of the OPEB plan
Zeeland
  A 935 MW gas-fired power plant located in Zeeland, Michigan


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PART I
ITEM 1. BUSINESS
 
GENERAL
 
CMS Energy
 
CMS Energy was formed in Michigan in 1987 and is an energy holding company operating through subsidiaries in the United States, primarily in Michigan. Its two principal subsidiaries are Consumers and Enterprises. Consumers is a public utility that provides electricity and/or natural gas to almost 6.5 million of Michigan’s 10 million residents and serves customers in all 68 counties of Michigan’s Lower Peninsula. Enterprises, through various subsidiaries and certain equity investments, is engaged primarily in domestic independent power production.
 
CMS Energy’s consolidated operating revenue was $6.464 billion in 2007, $6.126 billion in 2006, and $5.879 billion in 2005. 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
 
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 automotive, metal, chemical and food products industries as well as a diversified group of other industries. In 2007, Consumers served 1.8 million electric customers and 1.7 million gas customers.
 
Consumers’ consolidated operations account for a majority of CMS Energy’s total assets, income, and operating revenue. Consumers’ consolidated operating revenue was $6.064 billion in 2007, $5.721 billion in 2006, and $5.232 billion in 2005.
 
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 in 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.
 
BUSINESS SEGMENTS
 
CMS Energy Financial Information
 
For further information with respect to operating revenue, net operating income, and identifiable assets and liabilities attributable to all of CMS Energy’s business segments and operations, see ITEM 8. CMS ENERGY’S FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA — SELECTED FINANCIAL INFORMATION, CONSOLIDATED FINANCIAL STATEMENTS and NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
 
Consumers Financial Information
 
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.


11


 

Consumers Electric Utility
 
  Electric Utility Operations
 
Consumers’ electric utility operating revenue was $3.443 billion in 2007, $3.302 billion in 2006, and $2.701 billion in 2005. Consumers’ electric utility operations include the generation, purchase, distribution and sale of electricity. At year-end 2007, Consumers was authorized to provide service in 61 of the 68 counties of Michigan’s 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 5 percent of Consumers’ 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 such customers is not reasonably likely to have a material adverse effect on its financial condition.
 
Consumers’ electric utility operations are seasonal. The summer months typically increase the use of electric energy, primarily due to the use of air conditioners and other cooling equipment. In 2007, Consumers’ electric deliveries were 39 billion kWh, which included ROA deliveries of 1 billion kWh. In 2006, Consumers’ electric deliveries were 38 billion kWh, which included ROA deliveries of 1 billion kWh.
 
Consumers’ 2007 summer peak demand was 8,183 MW excluding ROA loads and 8,391 MW including ROA loads. For the 2006-07 winter period, Consumers’ peak demand was 5,985 MW excluding ROA loads and 6,178 MW including ROA loads. Alternative electric suppliers were providing generation services to ROA customers of 315 MW at December 31, 2007 and 300 MW at December 31, 2006. Consumers had an 11 percent Reserve Margin target for summer 2007. Consumers owns or controls capacity necessary to supply approximately 118 percent of projected firm peak load for summer 2008.
 
In 2007, through the Midwest Energy Market, long-term purchase contracts, options, spot market and other seasonal purchases, Consumers purchased up to 3,979 MW of net capacity from others, which amounted to 49 percent of Consumers’ total system requirements.


12


 

  Electric Utility Properties
 
Generation: At December 31, 2007, Consumers’ electric generating system consisted of the following:
 
                     
        2007
    2007 Net
 
        Summer Net
    Generation
 
    Size and Year
  Demonstrated
    (Millions
 
Name and Location (Michigan)
  Entering Service   Capability (MW)     of kWh)  
 
Coal Generation
                   
J H Campbell 1 & 2 — West Olive
  2 Units, 1962-1967     615       4,320  
J H Campbell 3 — West Olive
  1 Unit, 1980     765 (a)     3,540  
D E Karn — Essexville
  2 Units, 1959-1961     515       3,663  
B C Cobb — Muskegon
  2 Units, 1956-1957     312       2,151  
J R Whiting — Erie
  3 Units, 1952-1953     328       2,394  
J C Weadock — Essexville
  2 Units, 1955-1958     306       1,835  
                     
Total coal generation
        2,841       17,903  
                     
Oil/Gas Generation
                   
B C Cobb — Muskegon
  3 Units, 1999-2000(b)     183       7  
D E Karn — Essexville
  2 Units, 1975-1977     1,276       215  
Zeeland — Zeeland
  1 Unit, 2002           (c)
                     
Total oil/gas generation
        1,459       222  
                     
Hydroelectric
                   
Conventional Hydro Generation
  13 Plants, 1906-1949     73       416  
Ludington Pumped Storage
  6 Units, 1973     955 (d)     (478 )(e)
                     
Total hydroelectric
        1,028       (62 )
                     
Nuclear Generation
                   
Palisades — South Haven
  1 Unit, 1971           1,781 (f)
                     
Gas/Oil Combustion Turbine
                   
Various Plants
  7 Plants, 1966-1971     345       19  
Zeeland — Zeeland
  2 Units, 2001           (c)
                     
Total gas/Oil Combustion Turbine
        345       19  
                     
Total owned generation
        5,673       19,863  
Purchased and Interchange Power
                   
Capacity
        3,627 (g)        
                     
Total
        9,300          
                     
 
 
(a)  Represents Consumers’ share of the capacity of the J H Campbell 3 unit, net of the 6.69 percent ownership interest of the Michigan Public Power Agency and Wolverine Power Supply Cooperative, Inc.
 
(b) Cobb 1-3 are retired coal-fired units that were converted to gas-fired. Units were placed back into service in the years indicated.
 
(c) Zeeland was purchased on December 21, 2007. It consists of two simple cycle combustion turbines and a combined cycle plant consisting of two combustion turbines and one steam turbine. The plant was not used by Consumers during 2007.
 
(d) Represents Consumers’ 51 percent share of the capacity of Ludington. Detroit Edison owns 49 percent.
 
(e) Represents Consumers’ share of net pumped storage generation. This facility electrically pumps water during off-peak hours for storage to generate electricity later during peak-demand hours.
 
(f) Palisades was sold in April 2007 and Consumers entered into a 15-year power purchase agreement for all of the capacity and energy produced by Palisades, up to the annual average capacity of 798 MW.


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(g) Includes 1,240 MW of purchased contract capacity from the MCV Facility and 778 MW of purchased contract capacity from the Palisades plant.
 
Distribution: Consumers’ distribution system includes:
 
  •  390 miles of high-voltage distribution radial lines operating at 120 kilovolts and above;
 
  •  4,216 miles of high-voltage distribution overhead lines operating at 23 kilovolts and 46 kilovolts;
 
  •  17 subsurface miles of high-voltage distribution underground lines operating at 23 kilovolts and 46 kilovolts;
 
  •  55,656 miles of electric distribution overhead lines;
 
  •  9,780 miles of underground distribution lines; and
 
  •  substations having an aggregate transformer capacity of 23,143,920 kilovoltamperes.
 
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.
 
                                         
    Millions of kWh  
Power Generated
  2007     2006     2005     2004     2003  
 
Coal
    17,903       17,744       19,711       18,810       20,091  
Nuclear
    1,781       5,904       6,636       5,346       6,151  
Oil
    112       48       225       193       242  
Gas
    129       161       356       38       129  
Hydro
    416       485       387       445       335  
Net pumped storage
    (478 )     (426 )     (516 )     (538 )     (517 )
                                         
Total net generation
    19,863       23,916       26,799       24,294       26,431  
                                         
 
The cost of all fuels consumed, shown in the following table, fluctuates with the mix of fuel used.
 
                                         
    Cost per Million Btu  
Fuel Consumed
  2007     2006     2005     2004     2003  
 
Coal
  $ 2.04     $ 2.09     $ 1.78     $ 1.43     $ 1.33  
Oil
    8.21       8.68       5.98       4.68       3.92  
Gas
    10.29       8.92       9.76       10.07       7.62  
Nuclear
    0.42       0.24       0.34       0.33       0.34  
All Fuels(a)
    2.07       1.72       1.64       1.26       1.16  
 
 
(a) Weighted average fuel costs.
 
Consumers has four generating plant sites that burn coal. In 2007, these plants produced a combined total of 17,903 million kWh of electricity, which represents 90 percent of Consumers’ 19,863 million kWh baseload supply, the capacity used to serve a constant level of customer demand. These plants burned 9.4 million tons of coal in 2007. On December 31, 2007, Consumers had on hand a 50-day supply of coal.
 
Consumers has entered into coal supply contracts with various suppliers and associated rail transportation contracts for its coal-fired 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 2010 and total an estimated $376 million. Its coal transportation contracts expire through 2009 and total an estimated $263 million. Long-term coal supply contracts have accounted for approximately 60 to 90 percent of Consumers’ annual coal requirements over the last 10 years. Consumers believes that it is within the historical 60 to 90 percent range.
 
At December 31, 2007, 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 2008 through 2030 total an


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estimated $21.025 billion. 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
 
  Gas Utility Operations
 
Consumers’ gas utility operating revenue was $2.621 billion in 2007, $2.374 billion in 2006, and $2.483 billion in 2005. Consumers’ gas utility operations purchase, transport, store, distribute and sell natural gas. Consumers is authorized to provide service in 46 of the 68 counties in Michigan’s Lower Peninsula. Principal cities served include Bay City, Flint, Jackson, Kalamazoo, Lansing, Pontiac and Saginaw, as well as the suburban Detroit area, where nearly 900,000 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 such 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 2007, deliveries of natural gas sold through Consumers’ pipeline and distribution network totaled 347 bcf.
 
Gas Utility Properties: Consumers’ gas distribution and transmission system located throughout Michigan’s Lower Peninsula consists of:
 
  •  26,404 miles of distribution mains;
 
  •  1,669 miles of transmission lines;
 
  •  7 compressor stations with a total of 162,000 installed horsepower; and
 
  •  15 gas storage fields with an aggregate storage capacity of 308 bcf and a working storage capacity of 143 bcf.
 
Gas Supply: In 2007, Consumers purchased 67 percent of the gas it delivered from United States producers and 25 percent from Canadian producers. Authorized suppliers in the gas customer choice program supplied the remaining 8 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 ninety percent of Consumers’ total gas supply requirements. As of December 31, 2007, Consumers’ portfolio of firm transportation from pipelines to Michigan is as follows:
 
                         
    Volume
       
    (dekatherms/day)    
Expiration
 
 
ANR Pipeline Company
    50,000       March       2017  
Great Lakes Gas Transmission, L.P. 
    100,000       March       2011  
Great Lakes Gas Transmission, L.P. 
    50,000       March       2017  
Trunkline Gas Company
    290,000       October       2008  
Trunkline Gas Company (starting 11/01/08)
    240,000       October       2012  
Panhandle Eastern Pipe Line Company
    50,000       October       2008  
Panhandle Eastern Pipe Line Company (starting 4/01/08)
    50,000       October       2008  
Panhandle Eastern Pipe Line Company (starting 4/01/09)
    50,000       October       2009  
Panhandle Eastern Pipe Line Company (starting 4/01/10)
    50,000       October       2010  
Panhandle Eastern Pipe Line Company (starting 4/01/11)
    50,000       October       2011  
Panhandle Eastern Pipe Line Company (starting 4/01/12)
    50,000       October       2012  
Panhandle Eastern Pipe Line Company (starting 11/01/08)
    50,000       October       2013  
Panhandle Eastern Pipe Line Company (starting 4/01/13)
    50,000       October       2013  
Vector Pipeline
    50,000       March       2012  


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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 such 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
 
Enterprises, through various subsidiaries and certain equity investments, is engaged primarily in domestic independent power production. Enterprises’ operating revenue included in Continuing Operations in our consolidated financial statements was $383 million in 2007, $438 million in 2006, and $693 million in 2005. Operating revenue included in Discontinued Operations in our consolidated financial statements was $235 million in 2007, $684 million in 2006, and $409 million in 2005.
 
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.
 
Independent Power Production
 
CMS Generation was formed in 1986. It invested in and operated non-utility power generation plants in the United States and abroad. The independent power production business segment’s operating revenue included in Continuing Operations in our consolidated financial statements was $41 million in 2007, $103 million in 2006, and $104 million in 2005. Operating revenue included in Discontinued Operations in our consolidated financial statements was $124 million in 2007, $437 million in 2006, and $211 million in 2005. 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 ENERGY’S FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — NOTE 2. ASSET SALES, DISCONTINUED OPERATIONS AND IMPAIRMENT CHARGES — ASSET SALES.
 
Independent Power Production Properties: At December 31, 2007, 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 Energy’s ownership interest).
 
The following table details CMS Energy’s interest in independent power plants at December 31, 2007:
 
                             
                    Percentage of
 
                    Gross Capacity
 
                    Under Long-Term
 
        Ownership Interest
    Gross Capacity
    Contract
 
Location
 
Fuel Type
  (%)     (MW)     (%)  
 
California
  Wood     37.8       36       100  
Connecticut
  Scrap tire     100       31       0  
Michigan
  Coal     50       70       100  
Michigan
  Natural gas     100       710       61  
Michigan
  Natural gas     100       224       0  
Michigan
  Wood     50       40       100  
Michigan
  Wood     50       38       100  
North Carolina
  Wood     50       50       0  
                             
Total
                1,199          
                             
 
For information on capital expenditures, see ITEM 7. CMS ENERGY’S MANAGEMENT’S DISCUSSION AND ANALYSIS — CAPITAL RESOURCES AND LIQUIDITY.


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Natural Gas Transmission
 
CMS Gas Transmission was formed in 1988 and owned, developed and managed domestic and international natural gas facilities. CMS Gas Transmission’s operating revenue included in Continuing Operations in our consolidated financial statements was less than $1 million in 2007, $1 million in 2006, and less than $1 million in 2005. Operating revenue included in Discontinued Operations in our consolidated financial statements was $3 million in 2007, $17 million in 2006, and $18 million in 2005.
 
In 2003, CMS Gas Transmission sold Panhandle to Southern Union Panhandle Corp. Also in 2003, CMS Gas Transmission sold CMS Field Services to Cantera Natural Gas, Inc. In 2004, CMS Gas Transmission sold its interest in Goldfields and its Parmelia business to APT.
 
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. For more information on these asset sales, see ITEM 8. CMS ENERGY’S FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — NOTE 2. ASSET SALES, DISCONTINUED OPERATIONS AND IMPAIRMENT CHARGES — ASSET SALES.
 
Natural Gas Transmission Properties: At December 31, 2007, CMS Gas Transmission had a 23.5 percent ownership interest in 3,362 miles of pipelines in Argentina which remain subject to a potential sale to the government of Argentina or other form of disposition.
 
Energy Resource Management
 
In 2004, CMS ERM changed its name from CMS Marketing, Services and Trading Company to CMS Energy Resource Management Company. Also, in 2004, CMS ERM discontinued its natural gas retail program as customer contracts expired.
 
CMS ERM purchases and sells energy commodities in support of CMS Energy’s generating facilities. In 2007, CMS ERM marketed approximately 38 bcf of natural gas and 2,687 GWh of electricity. Its operating revenue was $342 million in 2007, $334 million in 2006, and $589 million in 2005.
 
International Energy Distribution
 
The international energy distribution business segment’s operating revenue, all of which was reflected in Discontinued Operations in our consolidated financial statements, was $108 million in 2007, $230 million in 2006, and $180 million in 2005. 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 ENERGY’S FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — NOTE 2. ASSET SALES, DISCONTINUED OPERATIONS AND IMPAIRMENT CHARGES — ASSET SALES.
 
CMS ENERGY AND CONSUMERS REGULATION
 
CMS Energy is a public utility holding company that was previously exempt from registration under the PUHCA of 1935. The PUHCA of 1935 was repealed and replaced by the Energy Policy Act of 2005, effective February 8, 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.
 
Michigan Public Service Commission
 
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 intervene in MPSC proceedings concerning Consumers and appeal most significant MPSC orders. Certain appeals of the MPSC orders are pending in the Court of Appeals.


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Rate Proceedings: In 2005, the MPSC issued an order that established the electric authorized rate of return on common equity at 11.15 percent. During 2007, we filed an electric rate case with the MPSC requesting an 11.25 percent authorized rate of return, which is still pending. In August 2007, the MPSC approved a partial settlement agreement for our 2007 gas rate case, which established the gas authorized rate of return on common equity at 10.75 percent. This proceeding is still pending with the MPSC. In February 2008, we filed a gas rate case with the MPSC requesting an 11 percent authorized rate of return.
 
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 ENERGY’S FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA — NOTE 3 OF CMS ENERGY’S NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINGENCIES) — CONSUMERS’ ELECRIC UTILITY RATE MATTERS and CONSUMERS’ GAS UTILITY RATE MATTERS and ITEM 8. CONSUMERS’ FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA — NOTE 3 OF CONSUMERS’ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINGENCIES) — ELECTRIC RATE MATTERS and GAS RATE MATTERS.
 
MPSC Regulation and Michigan Legislation: Effective January 2002, the Customer Choice Act provided that all electric customers have the choice to buy generation service from an alternative electric supplier. The Customer Choice Act also imposed rate reductions, rate freezes and rate caps, which expired at the end of 2005. The Michigan legislature introduced several bills in December 2007 that would significantly reform the Customer Choice Act. For additional information regarding the Customer Choice Act, see ITEM 7. CMS ENERGY’S MANAGEMENT’S DISCUSSION AND ANALYSIS — OUTLOOK — ELECTRIC UTILITY BUSINESS UNCERTAINTIES — ELECTRIC ROA and ITEM 7. CONSUMERS’ MANAGEMENT’S DISCUSSION AND ANALYSIS — OUTLOOK — ELECTRIC BUSINESS UNCERTAINTIES — ELECTRIC ROA.
 
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 that began in April 2003, all of Consumers’ gas customers are eligible to select an alternative gas commodity supplier.
 
Federal Energy Regulatory Commission
 
The FERC has exercised limited jurisdiction over several independent power plants in which Enterprises has ownership interests, as well as over CMS ERM and DIG. Among other things, FERC has jurisdiction over acquisitions, operation and disposal of certain assets and facilities, services provided and rates charged, and limited jurisdiction over other holding company matters with respect to CMS Energy. 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 FERC accounting rules, wholesale rates, operation of licensed hydro-electric generating plants, transfers of certain facilities, and corporate mergers and issuance of securities.
 
The Energy Policy Act of 2005 modified the FERC’s responsibilities, which affects both Consumers and Enterprises. The new law repeals the PUHCA of 1935, streamlines electric transmission siting rules, promotes wholesale competition and investment, and requires mandatory electric supply reliability planning. In addition, the 2005 Act gave the FERC the authority to require a wide range of activities to improve the bulk power system’s reliability. During 2007, more than ninety new regulations in this area went into effect.
 
The FERC is currently in the process of establishing standards for ensuring a more reliable system of providing electricity throughout North America through increased regulation of generation owners and operators, load serving entities, and others.
 
Other Regulation
 
The Secretary of Energy regulates imports and exports of natural gas and has delegated various aspects of this jurisdiction to the FERC and the DOE’s Office of Fossil Fuels.


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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 AND CONSUMERS ENVIRONMENTAL COMPLIANCE
 
CMS Energy, Consumers and their subsidiaries are subject to various federal, state and local regulations for environmental quality, including air and water quality, waste management, zoning and other matters.
 
CMS Energy has a recorded a significant liability for its obligations associated with Bay Harbor. For additional information, see ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA — NOTE 3 (CONTINGENCIES) OF CMS ENERGY’S NOTES TO CONSOLIDATED FINANCIAL STATEMENTS and ITEM 1A. RISK FACTORS.
 
Consumers has installed and is currently installing modern emission controls at its electric generating plants and has converted and is converting electric generating units to burn cleaner fuels. Consumers expects that the cost of future environmental compliance, especially compliance with clean air laws, will be significant because of EPA regulations and proposed regulations regarding nitrogen oxide, particulate-related emissions, and mercury. Consumers will spend $835 million through 2015 to comply with the Clean Air Interstate Rule and will spend $480 million through 2015 to comply with the State of Michigan’s proposed mercury plan.
 
Consumers completed the closure of an ash landfill at one plant in 2007 and is awaiting MDEQ certification of that closure. Consumers is also in the process of closing some older areas at an ash landfill at another plant. 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 significantly reduce 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 such 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 announced its intention to develop new nationwide standards for ash disposal areas. Consumers intends to work through industry groups to help ensure that any such regulations require only the minimum cost necessary to adhere to standards that are consistent with protection of the environment.
 
Consumers’ electric generating plants must comply with rules that significantly reduce the number of fish killed by plant cooling water intake systems. Consumers is studying options to determine the most cost-effective solutions for compliance.
 
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 the Ludington Pumped Storage facility. Consumers removed and replaced part of the PCB material with non-PCB material. Consumers has proposed a plan to the EPA to deal with the remaining materials and is waiting for a response from the EPA.
 
Certain environmental regulations affecting CMS Energy and Consumers include, but are not limited to, the Clean Air Act Amendments of 1990 and Superfund. Superfund can require any individual or entity that may have owned or operated a disposal site, as well as transporters or generators of hazardous substances that were sent to such a site, to share in remediation costs for the site.
 
CMS Energy’s 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.
 
For additional information concerning environmental matters, including estimated capital expenditures to reduce nitrogen oxide related emissions, see ITEM 7. CMS ENERGY’S MANAGEMENT’S DISCUSSION AND ANALYSIS — OUTLOOK — ELECTRIC UTILITY BUSINESS UNCERTAINTIES — ELECTRIC ENVIRONMENTAL ESTIMATES and ITEM 7. CONSUMERS’ MANAGEMENT’S DISCUSSION AND ANALYSIS — OUTLOOK — ELECTRIC BUSINESS UNCERTAINTIES — ELECTRIC ENVIRONMENTAL ESTIMATES.


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CMS ENERGY AND CONSUMERS COMPETITION
 
Electric 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.
 
Michigan’s Customer Choice Act gives all electric customers the right to buy generation service from an alternative electric supplier. In January 2006, the MPSC approved cost-based ROA distribution tariffs. A significant decrease in retail electric competition occurred in 2005 due to changes in market conditions, including increased uncertainty and volatility in fuel commodity prices. Energy market volatility continued into 2006. At December 31, 2007, alternative electric suppliers were providing 315 MW of generation service to ROA customers. This amount represents an increase of 5 percent compared to December 31, 2006, and is 4 percent of Consumers’ total distribution load. It is difficult to predict future ROA customer trends.
 
In addition to retail electric customer choice, Consumers has competition or potential competition from:
 
  •  industrial customers relocating all or a portion of their production capacity outside Consumers’ service territory for economic reasons;
 
  •  municipalities owning or operating competing electric delivery systems;
 
  •  customer self-generation; and
 
  •  adjacent utilities that extend lines to customers in contiguous service territories.
 
Consumers addresses this competition by monitoring activity in adjacent areas and enforcing compliance with MPSC and 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. 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 Energy’s independent power production portfolio. CMS Energy’s independent power production business, a non-utility electric subsidiary, faces competition from generators, marketers and brokers, as well as other utilities marketing power at lower prices on the wholesale market.
 
For additional information concerning electric competition, see ITEM 7. CMS ENERGY’S MANAGEMENT’S DISCUSSION AND ANALYSIS — OUTLOOK — ELECTRIC UTILITY BUSINESS UNCERTAINTIES and ITEM 7. CONSUMERS’ MANAGEMENT’S DISCUSSION AND ANALYSIS — OUTLOOK — ELECTRIC BUSINESS UNCERTAINTIES.
 
Gas Competition
 
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.
 
INSURANCE
 
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.


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EMPLOYEES
 
CMS Energy
 
At December 31, 2007, CMS Energy and its wholly owned subsidiaries, including Consumers, had 7,898 full-time equivalent employees. Included in the total are 3,475 employees who are covered by union contracts.
 
Consumers
 
At December 31, 2007, Consumers and its subsidiaries had 7,614 full-time equivalent employees. Included in the total are 3,147 full-time operating, maintenance and construction employees and 322 full-time and part-time call center employees who are represented by the Utility Workers Union of America.
 
CMS ENERGY EXECUTIVE OFFICERS (as of February 1, 2008)
 
             
Name
 
Age
 
Position
 
Period
David W. Joos
  54  
President and CEO of CMS Energy
  2004-Present
       
CEO of Consumers
  2004-Present
       
Chairman of the Board, CEO of Enterprises
  2003-Present
       
President, Chief Operating Officer of CMS Energy
  2001-2004
       
President, Chief Operating Officer of Consumers
  2001-2004
       
President, Chief Operating Officer of Enterprises
  2001-2003
       
Director of CMS Energy
  2001-Present
       
Director of Consumers
  2001-Present
       
Director of Enterprises
  2000-Present
Thomas J. Webb
  55  
Executive Vice President, CFO of CMS Energy
  2002-Present
       
Executive Vice President, CFO of Consumers
  2002-Present
       
Executive Vice President, CFO of Enterprises
  2002-Present
       
Executive Vice President, CFO of CMS Generation
  2006-5/2007
       
Director of Enterprises
  2002-Present
       
Director of CMS Generation
  2003-5/2007
James E. Brunner*
  55  
Senior Vice President and General Counsel of CMS Energy
  11/2006-Present
       
Senior Vice President and General Counsel of Consumers
  11/2006-Present
       
Senior Vice President and General Counsel of Enterprises
  11/2007-Present
       
Senior Vice President of Enterprises
  2006-11/2007
       
Senior Vice President of CMS Generation
  2006-5/2007
       
Senior Vice President, General Counsel and Chief Compliance Officer of CMS Energy
  5/2006-11/2006
       
Senior Vice President, General Counsel and Chief Compliance Officer of Consumers
  5/2006-11/2006
       
Senior Vice President, General Counsel and Interim Chief Compliance Officer of Consumers
  2/2006-5/2006
       
Senior Vice President and General Counsel of CMS Energy
  2/2006-5/2006
       
Senior Vice President and General Counsel of Consumers
  2/2006-5/2006
       
Vice President and General Counsel of Consumers
  7/2004-2/2006
       
Vice President of Consumers
  2004
       
Director of Enterprises
  2006-Present


21


 

             
Name
 
Age
 
Position
 
Period
John M. Butler **
  43  
Senior Vice President of CMS Energy
  2006-Present
       
Senior Vice President of Consumers
  2006-Present
       
Senior Vice President of Enterprises
  2006-Present
       
Senior Vice President of CMS Generation
  2006-5/2007
David G. Mengebier
  50  
Senior Vice President and Chief Compliance Officer of CMS Energy
  11/2006-Present
       
Senior Vice President and Chief Compliance Officer of Consumers
  11/2006-Present
       
Senior Vice President of Enterprises
  2003-Present
       
Senior Vice President of CMS Energy
  2001-11/2006
       
Senior Vice President of Consumers
  2001-11/2006
Thomas W. Elward
  59  
President, Chief Operating Officer of Enterprises
  2003-Present
       
President, CEO of CMS Generation
  2002-5/2007
       
Senior Vice President of Enterprises
  2002-2003
       
Director of Enterprises
  2003-Present
       
Director of CMS Generation
  2002-5/2007
John G. Russell
  50  
President and Chief Operating Officer of Consumers
  2004-Present
       
Executive Vice President and President — Electric & Gas of Consumers
  7/2004-10/2004
       
Executive Vice President, President and CEO — Electric of Consumers
  2001-2004
Glenn P. Barba
  42  
Vice President, Controller and Chief Accounting Officer of CMS Energy
  2003-Present
       
Vice President, Controller and Chief Accounting Officer of Consumers
  2003-Present
       
Vice President, Chief Accounting Officer and Controller of Enterprises
  11/2007-Present
       
Vice President and Chief Accounting Officer of Enterprises
  2003-11/2007
       
Vice President and Controller of Consumers
  2002-2003
 
 
* From 1993 until July 2004, Mr. Brunner was Assistant General Counsel of Consumers.
 
** From 2002 until 2004, Mr. Butler was Global Compensation and Benefits Resource Center Director at Dow and from 2004 until June 2006, Mr. Butler was Human Resources Director, Manufacturing and Engineering at Dow.
 
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 16, 2008).
 
CONSUMERS EXECUTIVE OFFICERS (as of February 1, 2008)
 
             
Name
 
Age
 
Position
 
Period
 
David W. Joos
  54  
President and CEO of CMS Energy
  2004-Present
       
CEO of Consumers
  2004-Present
       
Chairman of the Board, CEO of Enterprises
  2003-Present
       
President, Chief Operating Officer of CMS Energy
  2001-2004
       
President, Chief Operating Officer of Consumers
  2001-2004
       
President, Chief Operating Officer of Enterprises
  2001-2003
       
Director of CMS Energy
  2001-Present
       
Director of Consumers
  2001-Present
       
Director of Enterprises
  2000-Present

22


 

             
Name
 
Age
 
Position
 
Period
 
Thomas J. Webb
  55  
Executive Vice President, CFO of CMS Energy
  2002-Present
       
Executive Vice President, CFO of Consumers
  2002-Present
       
Executive Vice President, CFO of Enterprises
  2002-Present
       
Executive Vice President, CFO of CMS Generation
  2006-5/2007
       
Director of Enterprises
  2002-Present
       
Director of CMS Generation
  2003-5/2007
James E. Brunner*
  55  
Senior Vice President and General Counsel of CMS Energy
  11/2006-Present
       
Senior Vice President and General Counsel of Consumers
  11/2006-Present
       
Senior Vice President and General Counsel of Enterprises
  11/2007-Present
       
Senior Vice President of Enterprises
  2006-11/2007
       
Senior Vice President of CMS Generation
  2006-5/2007
       
Senior Vice President, General Counsel and Chief Compliance Officer of CMS Energy
  5/2006-11/2006
       
Senior Vice President, General Counsel and Chief Compliance Officer of Consumers
  5/2006-11/2006
       
Senior Vice President, General Counsel and Interim Chief Compliance Officer of Consumers
  2/2006-5/2006
       
Senior Vice President and General Counsel of CMS Energy
  2/2006-5/2006
       
Senior Vice President and General Counsel of Consumers
  2/2006-5/2006
       
Vice President and General Counsel of Consumers
  7/2004-2/2006
       
Vice President of Consumers
  2004
       
Director of Enterprises
  2006-Present
John M. Butler **
  43  
Senior Vice President of CMS Energy
  2006-Present
       
Senior Vice President of Consumers
  2006-Present
       
Senior Vice President of Enterprises
  2006-Present
       
Senior Vice President of CMS Generation
  2006-5/2007
David G. Mengebier
  50  
Senior Vice President and Chief Compliance Officer of CMS Energy
  11/2006-Present
       
Senior Vice President and Chief Compliance Officer of Consumers
  11/2006-Present
       
Senior Vice President of Enterprises
  2003-Present
       
Senior Vice President of CMS Energy
  2001-11/2006
       
Senior Vice President of Consumers
  2001-11/2006
John G. Russell
  50  
President and Chief Operating Officer of Consumers
  2004-Present
       
Executive Vice President and President — Electric & Gas of Consumers
  7/2004-10/2004
       
Executive Vice President, President and CEO — Electric of Consumers
  2001-2004
William E. Garrity
  59  
Senior Vice President of Consumers
  2005-Present
       
Vice President of Consumers
  1999-2005
Frank Johnson
  59  
Senior Vice President of Consumers
  2001-Present
Paul N. Preketes
  58  
Senior Vice President of Consumers
  1999-Present

23


 

             
Name
 
Age
 
Position
 
Period
 
Glenn P. Barba
  42  
Vice President, Controller and Chief Accounting Officer of CMS Energy
  2003-Present
       
Vice President, Controller and Chief Accounting Officer of Consumers
  2003-Present
       
Vice President, Chief Accounting Officer and Controller of Enterprises
  11/2007-Present
       
Vice President and Chief Accounting Officer of Enterprises
  2003-11/2007
       
Vice President and Controller of Consumers
  2002-2003
 
 
* From 1993 until July 2004, Mr. Brunner was Assistant General Counsel of Consumers.
 
** From 2002 until 2004, Mr. Butler was Global Compensation and Benefits Resource Center Director at Dow and from 2004 until June 2006, Mr. Butler was Human Resources Director, Manufacturing and Engineering at Dow.
 
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 16, 2008).
 
AVAILABLE INFORMATION
 
CMS Energy’s internet address is www.cmsenergy.com. 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. Such reports are available soon after they are electronically filed with the SEC. Also on our website are our:
 
  •  Corporate Governance Principles;
 
  •  Codes of Conduct (Code of Business Conduct and Statement of Ethics);
 
  •  Board committee charters (including the Audit Committee, the Compensation and Human Resources Committee, the Finance Committee and the Governance and Public Responsibility Committee); and
 
  •  Articles of Incorporation (and amendments) and Bylaws.
 
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 SEC’s 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.

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ITEM 1A. RISK FACTORS
 
Actual results in future periods for CMS Energy and consolidated Consumers could differ materially from historical results and the forward-looking statements contained in this report. Factors that might cause or contribute to such 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 carefully considered before making an investment in securities of CMS Energy and Consumers. Risk factors of Consumers are also risk factors for CMS Energy.
 
Risks Related to CMS Energy
 
CMS Energy depends on dividends from its subsidiaries to meet its debt service obligations.
 
Due to its holding company structure, CMS Energy depends on dividends from its subsidiaries to meet its debt obligations. Restrictions contained in Consumers’ preferred stock provisions and other legal restrictions, such as certain terms in its articles of incorporation, limit Consumers’ ability to pay dividends or acquire its own stock from CMS Energy. At December 31, 2007, Consumers had $269 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, 2007, CMS Energy had $1.891 billion aggregate principal amount of indebtedness, including $178 million of subordinated indebtedness relating to its convertible preferred securities. $4.374 billion of subsidiary debt is not included in the preceding total. In April 2007, CMS Energy entered into the Seventh Amended and Restated Credit Agreement providing revolving credit and commitments in the amount of $300 million, which was increased to $550 million in January 2008. As of December 31, 2007, there were $278 million of letters of credit outstanding under the Seventh Amended and Restated Credit Agreement. CMS Energy and its subsidiaries may incur additional indebtedness in the future.
 
The level of CMS Energy’s present and future indebtedness could have several important effects on its future operations, including, among others:
 
  •  a significant portion of its cash flow from operations will be dedicated to the payment of principal and interest on its indebtedness and will not be available for other purposes;
 
  •  covenants contained in its existing debt arrangements require it to meet certain financial tests, which may affect its flexibility in planning for, and reacting to, changes in its business;
 
  •  its ability to obtain additional financing for working capital, capital expenditures, acquisitions and general corporate and other purposes may be limited;
 
  •  it may be at a competitive disadvantage to its competitors that are less leveraged; and
 
  •  its vulnerability to adverse economic and industry conditions may increase.
 
CMS Energy’s ability to meet its debt service obligations and to reduce its total indebtedness will depend on its future performance, which will be subject to general economic conditions, industry cycles 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.


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CMS Energy cannot predict the outcome of claims regarding its participation in the development of Bay Harbor or other litigation in which substantial monetary claims are involved.
 
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 September 2004, the MDEQ issued a notice of noncompliance after finding high-pH leachate in Lake Michigan adjacent to the property. The MDEQ also alleged higher than acceptable levels of heavy metals, including mercury, in the leachate flow.
 
In 2005, the EPA along with CMS Land and CMS Capital executed an AOC and approved a Removal Action Work Plan to address problems at Bay Harbor. Among other things, the plan called for the installation of collection trenches to capture high-pH leachate flow to the lake. Collection systems required under the plan have been installed and shoreline monitoring is ongoing. CMS Land and CMS Capital are required to address observed exceedances in pH, including required enhancements of the collection system. In May 2006, the EPA approved a pilot carbon dioxide enhancement plan to improve pH results in a specific area of the collection system. The enhanced system was installed in June 2006. CMS Land and CMS Capital also engaged in other enhancements of the installed collection systems.
 
In November 2007, the EPA sent CMS Land and CMS Capital a letter identifying three separate areas representing approximately 700 feet of shoreline in which the EPA claimed pH levels were unacceptable. The letter also took the position that CMS Land and CMS Capital are required to remedy the claimed noncompliance. CMS Land and CMS Capital submitted a formal objection to the EPA’s conclusions. In their objections, CMS Land and CMS Capital noted that the AOC did not require perfection and that over 97 percent of the measured pH levels were in the correct range. Further, the limited number of exceedances were not much above the pH nine level set by the AOC and posed no threat to the public health and safety. In addition, CMS Land and CMS Capital noted in their objection that the actions they had already taken fully complied with the terms of the AOC. In January 2008, the EPA advised CMS Land and CMS Capital that it had rejected their objections, and that CMS Land and CMS Capital were obligated to submit a plan to augment measures to collect high pH leachate under the terms of the November 2007 EPA letter as modified in the January 2008 letter. CMS Land and CMS Capital submitted a proposed augmentation plan in February 2008.
 
In February 2006, CMS Land and CMS Capital submitted to the EPA a proposed Remedial Investigation and Feasibility Study (RIFS) for one of the CKD piles known as the East Park CKD pile. A similar RIFS is planned to be submitted for the remaining CKD piles in 2008. The EPA approved a schedule for near-term activities, which includes consolidating certain CKD materials and installing collection trenches in the East Park leachate release area. In June 2006, the EPA approved an East Park CKD Removal Action Work Plan and Final Engineering Design for Consolidation. However, the EPA has not approved the RIFS for the East Park.
 
As a result of the installation of collection systems at the Bay Harbor sites, CMS Land and CMS Capital are collecting and treating 135,000 gallons of liquid per day and shipping it by truck for disposal at a nearby well and at a municipal wastewater treatment plant located in Traverse City, Michigan. To address both short term and longer-term disposal of liquid, CMS Land has filed two permit applications with the MDEQ and the EPA, the first to treat the collected leachate at the Bay Harbor sites before releasing the water to Lake Michigan and the second to dispose of it in a deep injection well in Alba, Michigan, that CMS Land or its affiliate would own and operate. In February 2008, the MDEQ and the EPA granted permits for CMS Land or its affiliate to construct and operate a deep injection well near Alba, Michigan in eastern Antrim County. Certain environmental groups and a local township have indicated they may challenge these permits before the agencies or the courts.


26


 

 
CMS Land and CMS Capital, the MDEQ, and the EPA have ongoing discussions concerning the long-term remedy for the Bay Harbor sites. These negotiations are addressing, among other things, issues relating to the disposal of leachate, the location and design of collection lines and upstream diversion of water, potential flow of leachate below the collection system, applicable criteria for various substances such as mercury, and other matters that are likely to affect the scope of remedial work CMS Land and CMS Capital may be obliged to undertake. Negotiations have been ongoing for over a year, but CMS Land and CMS Capital have not been able to resolve these issues with the regulators and they remain pending.
 
CMS Land has entered into various access, purchase and settlement agreements with several of the affected landowners at Bay Harbor, and entered into a confidential settlement with one landowner to resolve a lawsuit filed by that landowner. We have received demands for indemnification relating to claims made by a property owner at Bay Harbor. CMS Land has purchased five unimproved lots and two lots with houses.
 
CMS Energy has recorded a cumulative charge of $140 million, which includes accretion expense, for its obligations. An adverse outcome of this matter could, depending on the size of any indemnification obligation or liability under environmental laws, have a potentially significant adverse effect on CMS Energy’s financial condition and liquidity and could negatively impact CMS Energy’s results of operations. CMS Energy cannot predict the financial impact or outcome of this matter.
 
CMS Energy retains contingent liabilities in connection with its asset sales.
 
The agreements CMS Energy enters into for the sale of assets customarily include provisions whereby it is required to:
 
  •  retain specified preexisting liabilities such as for taxes, pensions, or environmental conditions;
 
  •  indemnify the buyers against specified risks, including the inaccuracy of representations and warranties it makes; and
 
  •  make payments to the buyers depending on the outcome of post-closing adjustments, litigation, audits or other reviews.
 
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 CMS Energy may have concerning them, these liabilities could have a material adverse effect on its financial condition, liquidity and future results of operations.
 
Risks Related to CMS Energy and Consumers
 
CMS Energy and Consumers have financing needs and they may be unable to obtain bank financing or access the capital markets.
 
CMS Energy and Consumers may be subject to liquidity demands pursuant to commercial commitments under guarantees, indemnities and letters of credit.
 
CMS Energy continues to explore financing opportunities to supplement its financial plan. These potential opportunities include: entering into leasing arrangements and refinancing and/or issuing new capital markets debt, preferred stock and/or common equity. 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 upon its financial condition, liquidity or results of operations. Similarly, Consumers currently plans to seek funds through the capital markets and commercial lenders. 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 upon its liquidity and operations.


27


 

 
Certain of CMS Energy’s 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 Energy’s 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 may have to post collateral or make prepayments to certain of its suppliers pursuant to existing contracts with them. In addition, certain bonds of Consumers are supported by municipal bond insurance policies, and the interest rates on those bonds have been affected by ratings downgrades of bond insurers. 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 Energy’s 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.
 
Regulatory changes and other developments have resulted and could continue to result in increased competition in the domestic energy business. Generally, increased competition threatens market share in certain segments of CMS Energy’s business and can reduce its and Consumers’ profitability.
 
As of January 1, 2002, the Customer Choice Act allows all electric customers in Michigan the choice of buying electric generation service from Consumers or an alternative electric supplier. Consumers had experienced, and could experience in the future, a significant increase in competition for generation services due to ROA. At December 31, 2007, alternative electric suppliers were providing 315 MW of generation service to ROA customers. This amount represents 4 percent of Consumers’ total distribution load, which is down from a high of 12 percent in 2004. Consumers cannot predict the total amount of electric supply load that may be lost to competitor suppliers in the future.
 
Electric industry regulation could adversely affect CMS Energy’s 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 adversely affect CMS Energy’s and Consumers’ business, financial condition and profitability.
 
There are multiple proceedings pending before the FERC involving transmission rates, regional transmission organizations and electric bulk power markets and transmission. FERC is also reviewing the standards under which electric utilities are allowed to participate in wholesale power markets without price restrictions. CMS Energy and Consumers cannot predict the impact of these electric industry restructuring proceedings on their financial condition, liquidity or results of operations.
 
CMS Energy and Consumers could incur significant capital expenditures 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.
 
In March 2005, the EPA adopted the Clean Air Interstate Rule that requires additional coal-fired electric generating plant emission controls for nitrogen oxides and sulfur dioxide. Consumers plans to meet the nitrogen oxides requirements by installing equipment that reduces nitrogen oxides emissions and purchasing emissions allowances. Consumers also will meet the sulfur dioxide requirements by injecting a chemical that reduces sulfur dioxide emissions, installing scrubbers and purchasing emission allowances. Consumers plans to spend an additional $835 million for equipment installation through 2015.
 
In March 2005, the EPA issued the CAMR, which requires initial reductions of mercury emissions from coal-fired electric generating plants by 2010 and further reductions by 2018. Certain portions of the CAMR were appealed to the U.S. Court of Appeals for the District of Columbia by a number of states and other entities. The U.S. Court of Appeals for the District of Columbia decided the case on February 8, 2008, and determined that the


28


 

rules developed by the EPA were not consistent with the Clean Air Act. CMS Energy and Consumers continue to monitor the development of federal regulations in this area.
 
In April 2006, Michigan’s governor proposed a plan that would result in mercury emissions reductions of 90 percent by 2015. We are working with the MDEQ on the details of this plan; however, we have developed preliminary cost estimates and a mercury emissions reduction scenario based on our best knowledge of control technology options and initially proposed requirements. We estimate that costs associated with Phase I of the state’s mercury plan will be approximately $220 million by 2010 and an additional $200 million by 2015.
 
The EPA has alleged that some utilities have incorrectly classified plant modifications as “routine maintenance” 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 “routine maintenance.” If the EPA finds that its interpretation is incorrect, Consumers could be required to install additional pollution controls at some or all of its coal-fired electric generating plants and pay fines. Additionally, Consumers would need to assess the viability of continuing operations at certain plants.
 
Several legislative proposals have been introduced in the United States Congress that would require reductions in emissions of greenhouse gases, including carbon dioxide. These laws, or similar state laws or rules, if enacted, could require Consumers to replace equipment, install additional equipment for pollution controls, purchase allowances, curtail operations, or take other steps.
 
CMS Energy and Consumers expect to collect fully from its customers, through the ratemaking process, these and other required environmental expenditures. 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, which 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 any such 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 Energy’s pension and postretirement benefit plans. CMS Energy has significant obligations in this area and holds significant assets in these trusts. These assets are subject to market fluctuations and will yield uncertain returns, which may fall below CMS Energy’s forecasted return rates. A decline in the market value of the assets may increase the funding requirements of these obligations. Also, changes in demographics, including increased number of retirements or changes in life expectancy assumptions may also increase the funding requirements of the obligations related to the pension and postretirement benefit plans. If CMS Energy is unable to successfully manage its pension and postretirement plan assets, its results of operations and financial position could be affected negatively.
 
Periodic reviews of the values of CMS Energy’s 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, they 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 Energy and Consumers may be adversely affected by regulatory investigations regarding “round-trip” trading by CMS MST as well as civil lawsuits regarding pricing information that CMS MST and CMS Field Services provided to market publications.
 
As a result of round-trip trading transactions (simultaneous, prearranged commodity trading transactions in which energy commodities were sold and repurchased at the same price) at CMS MST, CMS Energy is under


29


 

investigation by the DOJ. CMS Energy received subpoenas in 2002 and 2003 from U.S. Attorneys’ Offices regarding investigations of those trades. CMS Energy responded to those subpoenas in 2003 and 2004.
 
In March 2004, the SEC approved a cease-and-desist order settling an administrative action against CMS Energy relating to round-trip trading. The order did not assess a fine and CMS Energy neither admitted nor denied the order’s findings.
 
CMS Energy and Consumers cannot predict the outcome of the investigations. It is possible that the outcome in one or more of the investigations could, affect adversely CMS Energy’s and Consumers’ financial condition, liquidity or results of operations.
 
CMS Energy and Consumers 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 has 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 are named as defendants in various lawsuits arising as a result of alleged false natural gas price reporting. Allegations include manipulation of NYMEX natural gas futures and options prices, price-fixing conspiracies, and artificial inflation of natural gas retail prices in Colorado, Kansas, Missouri, Tennessee, and Wyoming.
 
CMS Energy and Consumers cannot predict the outcome of the investigations. It is possible that the outcome in one or more of the investigations could affect adversely CMS Energy’s and Consumers’ financial condition, liquidity or results of operations.
 
CMS Energy’s 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 Energy’s 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 adversely impact their results of operations, financial condition and cash flows. 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 impact their results of operations and financial condition in unpredictable ways. These actions could also result in disruptions of power and fuel markets. In addition, their natural gas distribution system and pipelines could be directly or indirectly harmed by future terrorist activity.
 
Consumers may not prevail in the exercise of its regulatory-out rights under the MCV PPA.
 
The MCV Partnership, which leases and operates the MCV Facility, contracted to sell electricity to Consumers for a 35-year period beginning in 1990. The cost that Consumers incurred under the MCV PPA exceeded the recovery amount allowed by the MPSC, including $39 million in 2007, until it exercised the regulatory-out provision in the MCV PPA in September 2007. This action limited its capacity and fixed energy payments to the MCV Partnership to the amounts that it collects from its customers. However, it uses the direct savings from the RCP, after allocating a portion to customers, to offset a portion of its capacity and fixed energy underrecoveries expense. The MCV Partnership has notified Consumers that it disputes its right to exercise the regulatory-out provision. Consumers believes that the provision is valid and fully effective, but cannot assure that it will prevail in the event of a proceeding on this issue.
 
As a result of our exercise of the regulatory-out provision, the MCV Partnership may, under certain circumstances, have the right to terminate or reduce the amount of capacity sold under the MCV PPA. If the MCV Partnership terminates the MCV PPA or reduces the amount of capacity sold under the MCV PPA, Consumers would seek to replace the lost capacity to maintain an adequate electric Reserve Margin. This could involve entering


30


 

into a new power purchase agreement or entering into electric capacity contracts on the open market. Consumers cannot predict its ability to enter into such contracts at a reasonable price. Consumers also is unable to predict regulatory approval of the terms and conditions of such contracts, or that the MPSC would allow full recovery of its incurred costs.
 
CMS Energy and Consumers cannot predict the financial impact or outcome of these matters.
 
Consumers’ energy risk management strategies may not be effective in managing fuel and electricity pricing risks, which could result in unanticipated liabilities to Consumers 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 offset its positions, such as hedging exposure to the risks of demand, market effects of weather and changes in commodity prices associated with its gas distribution business. These positions are taken in conjunction with the GCR mechanism, which allows 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 open positions than preferred at a given time. To the extent that open positions exist, fluctuating commodity prices can improve or worsen CMS Energy’s and Consumers’ financial condition or results of operations.
 
Changes in taxation as well as inherent difficulty in quantifying potential tax effects of business decisions could negatively impact CMS Energy’s 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 IRS and/or other taxing authorities. Unfavorable settlements of any of the issues related to these reserves at CMS Energy or Consumers Energy could adversely affect their financial condition or results of operations.
 
Consumers is exposed to risks related to general economic conditions in its service territories.
 
Consumers’ electric and gas utility businesses are impacted by the economic cycles of the customers it serves. In its service territories in Michigan, the economy has been sluggish and hampered by negative developments in the manufacturing industry and limited growth in non-manufacturing sectors of the state’s economy. 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 impact its collections of accounts receivable and its financial results.
 
CMS Energy’s and Consumers’ energy sales and operations are impacted by seasonal factors and varying weather conditions from year to year.
 
Consumers’ electric and gas utility businesses are generally seasonal businesses. 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, its overall results in the future may fluctuate substantially on a seasonal


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basis. Mild temperatures during the summer cooling season and winter heating season will negatively impact CMS Energy’s and Consumers’ results of operations and cash flows.
 
Unplanned power plant outages may be costly for Consumers.
 
Unforeseen maintenance may be required to safely produce electricity. As a result of unforeseen maintenance, Consumers may be required to make spot market purchases of electricity that exceed its costs of generation. Its financial condition or results of operations may be negatively affected if it is unable to recover those increased costs.
 
Failure to implement successfully 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 are in the midst of 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.
 
ITEM 1B. UNRESOLVED STAFF COMMENTS
 
None.
 
ITEM 2. PROPERTIES
 
Descriptions of CMS Energy’s and Consumers’ properties are found in the following sections of Item 1, all of which are incorporated by reference in this Item 2:
 
  •  BUSINESS — GENERAL — Consumers — Consumers’ Properties — General;
 
  •  BUSINESS — BUSINESS SEGMENTS — Consumers Electric Utility — Electric Utility Properties;
 
  •  BUSINESS — BUSINESS SEGMENTS — Consumers Gas Utility — Gas Utility Properties;
 
  •  BUSINESS — BUSINESS SEGMENTS — Independent Power Production — Independent Power Production Properties; and
 
  •  BUSINESS — BUSINESS SEGMENTS — Natural Gas Transmission — Natural Gas Transmission Properties.
 
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 Energy’s and Consumers’ ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS and both CMS Energy’s and


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Consumers’ ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
 
CMS Energy
 
SEC REQUEST
 
On August 5, 2004, CMS Energy received a request from the SEC that CMS Energy voluntarily produce documents and data relating to the SEC’s inquiry into payments made to officials or relatives of officials of the government of Equatorial Guinea. On August 17, 2004, CMS Energy submitted its response, advising the SEC of the information and documentation it had available. On March 8, 2005, CMS Energy received a request from the SEC that CMS Energy voluntarily produce certain of such documents. The SEC subsequently issued a formal order of private investigation on this matter on August 1, 2005. CMS Energy and several other companies that have conducted business in Equatorial Guinea, received subpoenas from the SEC to provide documents regarding payments made to officials or relatives of officials of the government of Equatorial Guinea. CMS Energy is cooperating and will continue to produce documents responsive to the subpoena.
 
GAS INDEX PRICE REPORTING LITIGATION
 
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. These complaints make allegations similar to those in the Texas-Ohio case regarding price reporting. The court issued an order granting the defendants’ motion to dismiss on April 8, 2005 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 others 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 the ruling of the trial judge in the Texas-Ohio case and held that the “filed rate doctrine” is not applicable to the claims. The Ninth Circuit Court of Appeals then 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.
 
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


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of personal jurisdiction. CMS MST remains a defendant in all of these actions. 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.
 
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 August 10, 2005, certain defendants, including CMS MST, filed a motion to dismiss and CMS Energy and CMS Field Services filed a motion to dismiss for lack of personal jurisdiction. Defendants attempted to remove the case to federal court, but it was remanded to state court by a federal judge. 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.
 
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. A motion to remand the case back to Kansas state court was denied on April 21, 2006. The court issued an order granting the motion to dismiss on December 18, 2006, but later reversed the ruling on reconsideration and has now denied the defendants’ motion to dismiss. On September 7, 2007, the CMS Energy defendants filed an answer to the complaint.
 
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 that month a motion was filed to transfer the case to the MDL proceeding. On January 6, 2006, plaintiffs filed a motion to remand the case to Kansas state court. On January 23, 2006, a conditional transfer order transferring the case to the MDL proceeding was issued. On February 7, 2006, plaintiffs filed an opposition to the conditional transfer order, and on June 20, 2006, the MDL Panel issued an order transferring the case to the MDL proceeding. The court issued an order dated August 3, 2006 denying the motion to remand the case to Kansas state court. Defendants filed a motion to dismiss, which was denied on July 27, 2007. On September 7, 2007, the CMS Energy defendants filed an answer to the complaint.
 
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, a conditional transfer order transferring the case to the MDL proceeding was entered on June 27, 2006, and an order transferring the case to the MDL proceeding was entered on October 17, 2006. The court issued an order dated December 4, 2006 denying the motion to remand the case back to Colorado state court. Defendants have filed a motion to dismiss. On August 21, 2007, the court granted the motion to dismiss by CMS Energy on the basis of a lack of jurisdiction. The other defendants remain in the case, and they filed an answer to the complaint on


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September 7, 2007. The remaining CMS Energy defendants also filed a summary judgment motion which remains pending.
 
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 Anti-Trust 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 plaintiff’s motion to remand the case to state court in Missouri. The CMS Energy defendants will be filing an answer. A second action, Heartland Regional Medical Center, et al. v. Oneok Inc. et al., was filed in Missouri state court in March 2007 alleging violations of Missouri anti-trust laws. The second action is denoted as a class action. Defendants also removed this case to Missouri federal court, and it has been conditionally transferred to the Nevada MDL proceeding. Plaintiffs also filed a motion to remand this case back to state court but that motion has not yet been decided.
 
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 Wisconsin’s 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 CMS Energy entered a special appearance for purpose of filing a motion to dismiss all the CMS Energy defendants due to lack of personal jurisdiction. That motion was filed on September 10, 2007. The court has not yet ruled on the motion. The court denied plaintiffs’ motion to remand the case back to Wisconsin state court, and the case has been transferred to the Nevada MDL proceeding.
 
CMS Energy and the other CMS Energy defendants will defend themselves vigorously against these matters but cannot predict their outcome.
 
ROUND-TRIP TRADING INVESTIGATIONS
 
From May 2000 through January 2002, CMS MST engaged in simultaneous, prearranged commodity trading transactions in which energy commodities were sold and repurchased at the same price. These transactions, referred to as round-trip trades, had no impact on previously reported consolidated net income, EPS or cash flows, but had the effect of increasing operating revenues and operating expenses by equal amounts.
 
CMS Energy is cooperating with an investigation by the DOJ concerning round-trip trading, which the DOJ commenced in May 2002. CMS Energy is unable to predict the outcome of this matter and what effect, if any, this investigation will have on its business. In March 2004, the SEC approved a cease-and-desist order settling an administrative action against CMS Energy related to round-trip trading. The order did not assess a fine and CMS Energy neither admitted to nor denied the order’s findings. The settlement resolved the SEC investigation involving CMS Energy and CMS MST. Also in March 2004, the SEC filed an action against three former employees related to round-trip trading at CMS MST. One of the individuals has settled with the SEC. CMS Energy is currently advancing legal defense costs for the remaining two individuals in accordance with existing indemnification policies. The two individuals filed a motion to dismiss the SEC action, which was denied.
 
QUICKSILVER RESOURCES, INC.
 
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 Sale and Purchase of natural gas, pursuant to which Quicksilver agreed to sell, and CMS MST agreed to buy, natural gas. Quicksilver contended that a special provision in the contract requires CMS MST to pay Quicksilver 50 percent of the difference between $2.47/MMBtu and the index price each month. CMS MST disagrees with Quicksilver’s interpretation of the special provision and contends that it


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has paid all monies owed for delivery of gas according to the contract. Quicksilver was seeking damages of approximately $126 million, plus prejudgment interest and attorneys’ fees, which in CMS Energy’s judgment was unsupported by the facts.
 
The trial commenced on March 19, 2007. The jury verdict awarded Quicksilver zero 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 approximately $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.
 
Consumers
 
In February 2008, Consumers received a data request relating to an investigation FERC is conducting into possible violations of the FERC’s posting and competitive bidding regulations for pre-arranged released firm capacity on natural gas pipelines. Consumers will cooperate with the FERC in responding to the request. Consumers cannot predict the outcome of this matter.
 
CMS Energy and Consumers
 
SECURITIES CLASS ACTION SETTLEMENT
 
Beginning in May 2002, a number of complaints were filed against CMS Energy, Consumers and certain officers and directors of CMS Energy and its affiliates in the United States District Court for the Eastern District of Michigan. The cases were consolidated into a single lawsuit (the “Shareholder Action”), which generally sought unspecified damages based on allegations that the defendants violated United States securities laws and regulations by making allegedly false and misleading statements about CMS Energy’s business and financial condition, particularly with respect to revenues and expenses recorded in connection with round-trip trading by CMS MST. In January 2005, the court granted a motion to dismiss Consumers and three of the individual defendants, but denied the motions to dismiss CMS Energy and the 13 remaining individual defendants. In March 2006, the court conditionally certified a class consisting of “all persons who purchased CMS Common Stock during the period of October 25, 2000 through and including May 17, 2002 and who were damaged thereby.” The court excluded purchasers of CMS Energy’s 8.75 percent Adjustable Convertible Trust Securities (“ACTS”) from the class and, in response, a new class action lawsuit was filed on behalf of ACTS purchasers (the “ACTS Action”) against the same defendants named in the Shareholder Action. The settlement described in the following paragraph has resolved both the Shareholder and ACTS actions.
 
On January 3, 2007, CMS Energy and other parties entered into a Memorandum of Understanding (the “MOU”), subject to court approval, regarding settlement of the two class action lawsuits. The settlement was approved by a special committee of independent directors and by the full Board of Directors of CMS Energy. Both judged that it was in the best interests of shareholders to eliminate this business uncertainty. Under the terms of the MOU, the litigation was settled for a total of $200 million, including the cost of administering the settlement and any attorney fees the court awards. CMS Energy made a payment of approximately $123 million plus interest on the settlement amount on September 20, 2007. CMS Energy’s insurers paid $77 million, the balance of the settlement amount. In entering into the MOU, CMS Energy made no admission of liability under the Shareholder Action and the ACTS Action. The parties executed a Stipulation and Agreement of Settlement dated May 22, 2007 (“Stipulation”) incorporating the terms of the MOU. In accordance with the Stipulation, CMS Energy has paid approximately $1 million of the settlement amount to fund administrative expenses. On September 6, 2007, the court issued a final order approving the settlement. The remaining settlement amount was paid following the September 6, 2007 hearing.


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On October 5, 2007, two former officers of Consumers filed an appeal of the order approving the settlement of the shareholder litigation. Their principal complaint was with the exclusion of all present and former officers and their immediate families from participation in the settlement. The two former officers have resolved their objections to the terms of the settlement order. On December 12, 2007, their appeal was dismissed by the court.
 
ENVIRONMENTAL MATTERS
 
CMS Energy and Consumers, as well as their subsidiaries and affiliates, are subject to various federal, state and local laws and regulations relating to the environment. Several of these companies have been named parties to various actions involving environmental issues. Based on their present knowledge and subject to future legal and factual developments, they believe it is unlikely that these actions, individually or in total, will have a material adverse effect on their financial condition or future results of operations. For additional information, see both CMS Energy’s and Consumers’ ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS and both CMS Energy’s 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
 
CMS Energy
 
During the fourth quarter of 2007, CMS Energy did not submit any matters to a vote of security holders.
 
Consumers
 
During the fourth quarter of 2007, Consumers did not submit any matters to a vote of security holders.


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PART II
 
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
CMS Energy
 
Market prices for CMS Energy’s Common Stock and related security holder matters are contained in ITEM 7. CMS ENERGY’S MANAGEMENT’S DISCUSSION AND ANALYSIS and ITEM 8. CMS ENERGY’S FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA — NOTE 17 OF CMS ENERGY’S NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (QUARTERLY FINANCIAL AND COMMON STOCK INFORMATION (UNAUDITED) which is incorporated by reference herein. At February 19, 2008, the number of registered holders of CMS Energy Common Stock totaled 47,647, based upon the number of record holders. In January 2003, CMS Energy suspended dividends on its common stock. On January 26, 2007, CMS Energy’s Board of Directors reinstated a quarterly dividend on CMS Energy Common Stock of $0.05 per share. On January 25, 2008, CMS Energy’s Board of Directors increased the quarterly dividend on CMS Energy Common Stock to $0.09 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.
 
Consumers
 
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 $94 million in February 2007, $41 million in May 2007, $41 million in August 2007, and $75 million in November 2007. Consumers paid cash dividends on its common stock of $40 million in February 2006, $31 million in August 2006, and $76 million in November 2006.
 
Issuer Repurchases of Equity Securities
 
The table below shows our repurchases of equity securities for the three months ended December 31, 2007:
 
                                 
                Total Number of
    Maximum Number of
 
                Shares Purchased
    Shares That May Yet
 
    Total Number
          as Part of Publicly
    Be Purchased Under
 
    of Shares
    Average Price
    Announced
    Publicly Announced
 
Period
  Purchased*     Paid per Share     Plans or Programs     Plans or Programs  
 
October 1, 2007 to October 31, 2007
                       
November 1, 2007 to November 30, 2007
    1,062     $ 16.97              
December 1, 2007 to December 31, 2007
    1,233     $ 17.09              
 
 
* We repurchase certain restricted shares upon vesting under the Performance Incentive Stock Plan (“Plan”) from participants in the Plan, equal to our 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
 
CMS Energy
 
Selected financial information is contained in ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA — CMS ENERGY’S SELECTED FINANCIAL INFORMATION, which is incorporated by reference herein.
 
Consumers
 
Selected financial information is contained in ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA — CONSUMERS’ SELECTED FINANCIAL INFORMATION, which is incorporated by reference herein.


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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
CMS Energy
 
Management’s discussion and analysis of financial condition and results of operations is contained in ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA — CMS ENERGY’S MANAGEMENT’S DISCUSSION AND ANALYSIS, which is incorporated by reference herein.
 
Consumers
 
Management’s discussion and analysis of financial condition and results of operations is contained in ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA — CONSUMERS’ MANAGEMENT’S DISCUSSION AND ANALYSIS, which is incorporated by reference herein.
 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
CMS Energy
 
Quantitative and Qualitative Disclosures About Market Risk is contained in ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA — CMS ENERGY’S MANAGEMENT’S DISCUSSION AND ANALYSIS — CRITICAL ACCOUNTING POLICIES — ACCOUNTING FOR FINANCIAL AND DERIVATIVE INSTRUMENTS, TRADING ACTIVITIES, AND MARKET RISK INFORMATION, which is incorporated by reference herein.
 
Consumers
 
Quantitative and Qualitative Disclosures About Market Risk is contained in ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - CONSUMERS’ MANAGEMENT’S DISCUSSION AND ANALYSIS — CRITICAL ACCOUNTING POLICIES — ACCOUNTING FOR FINANCIAL AND DERIVATIVE INSTRUMENTS AND MARKET RISK INFORMATION, which is incorporated by reference herein.


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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
 
     
   
Page
 
Index to Financial Statements:
   
CMS Energy Corporation
   
Selected Financial Information
  CMS - 2
Management’s Discussion and Analysis Forward-Looking Statements and Information
  CMS - 3
Executive Overview
  CMS - 4
Results of Operations
  CMS - 6
Critical Accounting Policies
  CMS - 15
Capital Resources and Liquidity
  CMS - 21
Outlook
  CMS - 25
Implementation of New Accounting Standards
  CMS - 32
New Accounting Standards Not Yet Effective
  CMS - 33
Consolidated Financial Statements
   
Consolidated Statements of Income (Loss)
  CMS - 35
Consolidated Statements of Cash Flows
  CMS - 37
Consolidated Balance Sheets
  CMS - 39
Consolidated Statements of Common Stockholders’ Equity
  CMS - 41
Notes to Consolidated Financial Statements:
   
 1. Corporate Structure and Accounting Policies
  CMS - 44
 2. Asset Sales, Discontinued Operations and Impairment Charges
  CMS - 51
 3. Contingencies
  CMS - 56
 4. Financings and Capitalization
  CMS - 68
 5. Earnings Per Share
  CMS - 72
 6. Financial and Derivative Instruments
  CMS - 73
 7. Retirement Benefits
  CMS - 77
 8. Asset Retirement Obligations
  CMS - 83
 9. Income Taxes
  CMS - 85
10. Stock Based Compensation
  CMS - 88
11. Leases
  CMS - 90
12. Property, Plant, and Equipment
  CMS - 92
13. Equity Method Investments
  CMS - 93
14. Jointly Owned Regulated Utility Facilities
  CMS - 96
15. Reportable Segments
  CMS - 96
16. Consolidation of Variable Interest Entities
  CMS - 99
17. Quarterly Financial and Common Stock Information (Unaudited)
  CMS - 99
Reports of Independent Registered Public Accounting Firms
  CMS - 101


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Page
 
Consumers Energy Company
   
Selected Financial Information
  CE - 2
Management’s Discussion and Analysis
   
Forward-Looking Statements and Information
  CE - 3
Executive Overview
  CE - 4
Results of Operations
  CE - 6
Critical Accounting Policies
  CE - 12
Capital Resources and Liquidity
  CE - 16
Outlook
  CE - 20
Implementation of New Accounting Standards
  CE - 26
New Accounting Standards Not Yet Effective
  CE - 27
Consolidated Financial Statements
   
Consolidated Statements of Income (Loss)
  CE - 29
Consolidated Statements of Cash Flows
  CE - 30
Consolidated Balance Sheets
  CE - 32
Consolidated Statements of Common Stockholder’s Equity
  CE - 34
Notes to Consolidated Financial Statements:
   
 1. Corporate Structure and Accounting Policies
  CE - 37
 2. Asset Sales and Impairment Charges
  CE - 43
 3. Contingencies
  CE - 45
 4. Financings and Capitalization
  CE - 53
 5. Financial and Derivative Instruments
  CE - 55
 6. Retirement Benefits
  CE - 57
 7. Asset Retirement Obligations
  CE - 63
 8. Income Taxes
  CE - 65
 9. Stock Based Compensation
  CE - 68
10. Leases
  CE - 70
11. Property, Plant, and Equipment
  CE - 72
12. Jointly Owned Regulated Utility Facilities
  CE - 73
13. Reportable Segments
  CE - 73
14. Quarterly Financial and Common Stock Information (Unaudited)
  CE - 75
Reports of Independent Registered Public Accounting Firms
  CE - 76


41


 

(CMS ENERGY LOGO)
 
 
2007 Consolidated Financial Statements
 


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CMS Energy Corporation
 
 
                                                 
          2007     2006     2005     2004     2003  
 
Operating revenue (in millions)
  ($   )     6,464       6,126       5,879       5,154       5,232  
Earnings from equity method investees (in millions)
  ($   )     40       89       125       115       164  
Income (loss) from continuing operations (in millions)
  ($   )     (126 )     (133 )     (141 )     112        
Cumulative effect of change in accounting (in millions)
  ($   )                       (2 )     (24 )
Income (loss) from discontinued operations (in millions)(a)
  ($   )     (89 )     54       57       11       (19 )
Net income (loss) (in millions)
  ($   )     (215 )     (79 )     (84 )     121       (43 )
Net income (loss) available to common stockholders (in millions)
  ($   )     (227 )     (90 )     (94 )     110       (44 )
Average common shares outstanding (in thousands)
            222,644       219,857       211,819       168,553       150,434  
Net income (loss) from continuing operations per average common share
                                               
CMS Energy — Basic
  ($   )     (0.62 )     (0.66 )     (0.71 )     0.59       (0.01 )
           — Diluted
  ($   )     (0.62 )     (0.66 )     (0.71 )     0.58       (0.01 )
Cumulative effect of change in accounting per average common share
                                               
CMS Energy — Basic
  ($   )                       (0.01 )     (0.16 )
           — Diluted
  ($   )                       (0.01 )     (0.16 )
Net income (loss) per average common share
                                               
CMS Energy — Basic
  ($   )     (1.02 )     (0.41 )     (0.44 )     0.65       (0.30 )
           — Diluted
  ($   )     (1.02 )     (0.41 )     (0.44 )     0.64       (0.30 )
Cash provided by (used in) operations (in millions)
  ($   )     27       686       598       353       (250 )
Capital expenditures, excluding acquisitions and capital lease additions (in millions)
  ($   )     1,263       670       593       525       535  
Total assets (in millions)(b)
  ($   )     14,196       15,371       16,041       15,872       13,838  
Long-term debt, excluding current portion (in millions)(b)
  ($   )     5,385       6,200       6,778       6,414       5,981  
Long-term debt-related parties, excluding current portion (in millions)
  ($   )     178       178       178       504       684  
Non-current portion of capital leases and finance lease obligations (in millions)
  ($   )     225       42       308       315       58  
Total preferred stock (in millions)
  ($   )     294       305       305       305       305  
Cash dividends declared per common share
  ($   )     0.20                          
Market price of common stock at year-end
  ($   )     17.38       16.70       14.51       10.45       8.52  
Book value per common share at year-end
  ($   )     9.46       10.03       10.53       10.62       9.84  
Number of employees at year-end (full-time equivalents)
            7,898       8,640       8,713       8,660       8,411  
Electric Utility Statistics
                                               
Sales (billions of kWh)
            39       38       39       38       38  
Customers (in thousands)
            1,799       1,797       1,789       1,772       1,754  
Average sales rate per kWh
    (c )     8.65       8.46       6.73       6.88       6.91  
Gas Utility Statistics
                                               
Sales and transportation deliveries (bcf)
            340       309       350       385       380  
Customers (in thousands)(c)
            1,710       1,714       1,708       1,691       1,671  
Average sales rate per mcf
  ($   )     10.66       10.44       9.61       8.04       6.72  
 
 
(a) Prior year amounts have been reclassified to discontinued operations.
 
(b) Until their sale in November 2006, we were the primary beneficiary of the MCV Partnership and the FMLP. As a result, we consolidated their assets, liabilities and activities into our consolidated financial statements through the date of sale and for the years ended December 31, 2005 and 2004. These partnerships had third party obligations totaling $482 million at December 31, 2005 and $582 million at December 31, 2004. Property, plant and equipment serving as collateral for these obligations had a carrying value of $224 million at December 31, 2005 and $1.426 billion at December 31, 2004.
 
(c) Excludes off-system transportation customers.


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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.
 
FORWARD-LOOKING STATEMENTS AND INFORMATION
 
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. Such factors include our inability to predict or control:
 
  •  the price of CMS Energy Common Stock, capital and financial market conditions, and the effect of such market conditions on the Pension Plan, interest rates, and access to the capital markets, including availability of financing to CMS Energy, Consumers, or any of their affiliates, and the energy industry,
 
  •  market perception of the energy industry, CMS Energy, Consumers, or any of their affiliates,
 
  •  factors affecting utility and diversified energy operations, such as unusual weather conditions, catastrophic weather-related damage, unscheduled generation outages, maintenance or repairs, environmental incidents, or electric transmission or gas pipeline system constraints,
 
  •  the impact of any future regulations or laws regarding carbon dioxide and other greenhouse gas emissions,
 
  •  national, regional, and local economic, competitive, and regulatory policies, conditions and developments,
 
  •  adverse regulatory or legal decisions, including those related to environmental laws and regulations, and potential environmental remediation costs associated with such decisions, including but not limited to those that may affect Bay Harbor,
 
  •  potentially adverse regulatory treatment or failure to receive timely regulatory orders concerning a number of significant questions currently or potentially before the MPSC, including:
 
  •  recovery of Clean Air Act capital and operating costs and other environmental and safety-related expenditures,
 
  •  recovery of power supply and natural gas supply costs when fuel prices are fluctuating,
 
  •  timely recognition in rates of additional equity investments and additional operation and maintenance expenses at Consumers,
 
  •  adequate and timely recovery of additional electric and gas rate-based investments,
 
  •  adequate and timely recovery of higher MISO energy and transmission costs,
 
  •  recovery of Stranded Costs incurred due to customers choosing alternative energy suppliers,
 
  •  recovery of Palisades plant sale-related costs,
 
  •  timely recovery of costs associated with energy efficiency investments and any state or federally mandated renewables resource standards,
 
  •  approval of the Balanced Energy Initiative, and
 
  •  authorization of a new clean coal plant,


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  •  the effects on our ability to purchase capacity to serve our customers and fully recover the cost of these purchases, if the owners of the MCV Facility exercise their right to terminate the MCV PPA,
 
  •  the ability of Consumers to prevail in the exercise of its regulatory out rights under the MCV PPA,
 
  •  adverse consequences due to the assertion of indemnity or warranty claims or future assertion of such claims, with respect to previously owned assets and businesses, including claims related to attempts by the governments of Equatorial Guinea and Morocco to assess taxes on past operations or transactions,
 
  •  the ability of Consumers to recover Big Rock decommissioning funding shortfalls and nuclear fuel storage costs due to the DOE’s failure to accept spent nuclear fuel on schedule, including the outcome of pending litigation with the DOE,
 
  •  federal regulation of electric sales and transmission of electricity, including periodic re-examination by federal regulators of our market-based sales authorizations in wholesale power markets without price restrictions,
 
  •  energy markets, including availability of capacity and the timing and extent of changes in commodity prices for oil, coal, natural gas, natural gas liquids, electricity and certain related products due to lower or higher demand, shortages, transportation problems, or other developments,
 
  •  our ability to collect accounts receivable from our customers,
 
  •  earnings volatility resulting from the GAAP requirement that we apply mark-to-market accounting on certain energy commodity contracts and interest rate swaps,
 
  •  the effect on our utility and utility revenues of the direct and indirect impacts of the continued economic downturn in Michigan,
 
  •  potential disruption or interruption of facilities or operations due to accidents, war, or terrorism, and the ability to obtain or maintain insurance coverage for such events,
 
  •  technological developments in energy production, delivery, and usage,
 
  •  achievement of capital expenditure and operating expense goals,
 
  •  changes in financial or regulatory accounting principles or policies,
 
  •  changes in tax laws or new IRS interpretations of existing or past tax laws,
 
  •  changes in federal or state regulations or laws that could have an impact on our business,
 
  •  the outcome, cost, and other effects of legal or administrative proceedings, settlements, investigations, or claims resulting from the investigation by the DOJ regarding round-trip trading and price reporting,
 
  •  disruptions in the normal commercial insurance and surety bond markets that may increase costs or reduce traditional insurance coverage, particularly terrorism and sabotage insurance, performance bonds, and tax exempt debt insurance,
 
  •  credit ratings of CMS Energy or Consumers, and
 
  •  other business or investment considerations that may be disclosed from time to time in CMS Energy’s or Consumers’ SEC filings, or in other publicly issued written documents.
 
For additional information regarding these and other uncertainties, see the “Outlook” section included in this MD&A, Note 3, Contingencies, and Item 1A. Risk Factors.
 
EXECUTIVE OVERVIEW
 
CMS Energy is an energy company operating primarily in Michigan. We are the parent holding company of Consumers and Enterprises. Consumers is a combination electric and gas utility company serving in Michigan’s Lower Peninsula. Enterprises, through various subsidiaries and equity investments, is engaged primarily in


CMS-4


 

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, and gas distribution, transmission, and storage. Our businesses are affected primarily by:
 
  •  weather, especially during the normal heating and cooling seasons,
 
  •  economic conditions, primarily in Michigan,
 
  •  regulation and regulatory issues that affect our electric and gas utility operations,
 
  •  energy commodity prices,
 
  •  interest rates, and
 
  •  our debt credit rating.
 
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. Consistent with our commitment to our utility business, we invested $650 million in Consumers during 2007.
 
We completed the sale of our international Enterprises assets in 2007, resulting in gross cash proceeds of $1.491 billion. We used the proceeds to retire debt and to invest in our utility business.
 
We also made important progress at Consumers to reduce business risk and to meet the future needs of our customers. We sold Palisades to Entergy in April 2007 for $380 million, and received $363 million after various closing adjustments. The sale improved our cash flow, reduced our nuclear operating and decommissioning risk, and increased our financial flexibility to support other utility investments.
 
In September 2007, we exercised the regulatory-out provision in the MCV PPA, thus limiting the amount we pay the MCV Partnership for capacity and fixed energy to the amount recoverable from our customers. The MCV Partnership may, under certain circumstances, have the right to terminate or reduce the amount of capacity sold under the MCV PPA, which could affect our need to build or purchase additional generating capacity. The MCV Partnership has notified us that it disputes our right to exercise the regulatory-out provision.
 
In May 2007, we filed with the MPSC our Balanced Energy Initiative, which is a comprehensive plan to meet customer energy needs over the next 20 years. The plan is designed to meet the growing customer demand for electricity with energy efficiency, demand management, expanded use of renewable energy, and development of new power plants to complement existing generating sources. In September 2007, we filed with the MPSC the second phase of our Balanced Energy Initiative, which contains our plan for construction of a new 800 MW clean coal plant at an existing site located near Bay City, Michigan.
 
In December 2007, we purchased a 935 MW natural gas-fired power plant located in Zeeland, Michigan from Broadway Gen Funding LLC, an affiliate of LS Power Group, for $519 million. This plant fits in with our Balanced Energy Initiative as it will help provide the capacity we need to meet the growing needs of our customers.
 
We took an important step in our business plan in 2007 by reinstating a quarterly dividend of $0.05 per share on our common stock, after a four-year suspension. We paid $45 million in common stock dividends in 2007. In January 2008, we increased the quarterly dividend on our common stock to $0.09 per share.
 
In September 2007, we also resolved a long-outstanding litigation issue by settling two class action lawsuits related to round-trip trading by CMS MST. We believe that eliminating this business uncertainty was in the best interests of our shareholders.
 
We also restructured our investment in DIG. In November 2007, we negotiated the termination of certain electricity sales agreements in order to eliminate future losses under those agreements. We recorded a liability and recognized a loss of $279 million in 2007, representing the cost to terminate the agreements. In February 2008, we closed the transaction and paid $275 million. Resolving the issues associated with the unfavorable supply contracts allows us to maximize future benefits from our DIG investment.


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In the future, we will focus our strategy on:
 
  •  continuing investment in our utility business,
 
  •  growing earnings while controlling operating costs and parent debt, and
 
  •  maintaining principles of safe, efficient operations, customer value, fair and timely regulation, and consistent financial performance.
 
As we execute our strategy, we will need to overcome a sluggish Michigan economy that has been hampered by negative developments in Michigan’s automotive industry and limited growth in the non-manufaturing sectors of the state’s economy. While the recent sub-prime mortgage market weakness has disrupted financial markets and the U.S. economy, it has not impacted materially our financial condition. We will continue to monitor developments for potential impacts on our business.
 
RESULTS OF OPERATIONS
 
CMS Energy Consolidated Results of Operations
 
                         
Years Ended December 31
  2007     2006     2005  
    In Millions (Except for Per Share Amounts)  
 
Net Loss Available to Common Stockholders
  $ (227 )   $ (90 )   $ (94 )
Basic Loss Per Share
  $ (1.02 )   $ (0.41 )   $ (0.44 )
Diluted Loss Per Share
  $ (1.02 )   $ (0.41 )   $ (0.44 )
                         
 
                                                 
Years Ended December 31
  2007     2006     Change     2006     2005     Change  
    In Millions  
 
Electric Utility
  $ 196     $ 199     $ (3 )   $ 199     $ 153     $ 46  
Gas Utility
    87       37       50       37       48       (11 )
Enterprises
    (391 )     (227 )     (164 )     (227 )     (217 )     (10 )
Corporate Interest and Other
    (30 )     (153 )     123       (153 )     (135 )     (18 )
Discontinued Operations
    (89 )     54       (143 )     54       57       (3 )
                                                 
Net Loss Available to Common Stockholders
  $ (227 )   $ (90 )   $ (137 )   $ (90 )   $ (94 )   $ 4  
                                                 
 
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 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 additional Bay Harbor environmental remediation expenses. The increase in losses was partially offset by increased earnings at our utility primarily due to the positive effects of rate orders and increased sales. Further reducing the year-over-year change were the absence of the shareholder settlement liability recorded in 2006 and the absence of activities related to our former interest in the MCV Partnership.


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Specific changes to net loss available to common stockholders for 2007 versus 2006 are:
 
         
    In Millions  
 
• costs incurred by CMS ERM due to the rescission of a contract with Quicksilver and the termination of certain electricity sales agreements,
  $ (217 )
 impact from discontinued operations as losses recorded on the disposal of international businesses in 2007 replaced earnings recorded for these businesses in 2006,
    (143 )
 reduction in earnings from equity method investees primarily due to the absence of earnings from international businesses sold in 2007,
    (32 )
 additional environmental remediation expenses at Bay Harbor,
    (29 )
 additional taxes at our corporate and Enterprises segments as the absence of tax benefits associated with the resolution of an IRS income tax audit in 2006 more than offset the net tax benefits associated with the sale of international businesses recorded in 2007,
    (16 )
 absence of a 2006 net charge resulting from our agreement to settle shareholder class action lawsuits,
    80  
 absence of activities related to our former interest in the MCV Partnership including asset impairments and mark-to-market activities,
    60  
 earnings from non-MCV-related mark-to-market activity primarily at CMS ERM, as mark-to-market gains in 2007 replaced losses in 2006,
    49  
 increase in combined net earnings at our gas utility and electric utility, primarily due to the positive effects of MPSC gas rate orders and increased weather-related deliveries,
    47  
 decrease in non-MCV-related asset impairment charges, net of insurance reimbursement, and
    38  
 additional increase at Enterprises and corporate primarily due to gains on the sale of international businesses in 2007, a reduction in interest expense, and increased interest income.
    26  
         
Total change
  $ (137 )
         
 
For 2006, our net loss was $90 million compared with a net loss of $94 million for 2005. The improvement is primarily due to increased net income at our electric utility, as the positive effects of regulatory actions, the return of open access customers, and favorable tax adjustments more than offset the negative impacts of increased operating expenses and milder summer weather. The improvements at the electric utility were essentially negated by earnings reductions or increased losses at our other segments. At our Enterprises segment, the negative impacts of mark-to-market valuation losses and the net loss on the sale of our investment in the MCV Partnership more than offset the reduction in asset impairment charges. At our gas utility, net income decreased as the benefits derived from lower operating costs and a gas rate increase authorized by the MPSC in November 2006 were more than offset by lower, weather-driven sales. At our corporate interest and other segment, the cost of our agreement to settle the shareholder class action lawsuits more than offset reduced corporate expenditures.


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Specific changes to net loss available to common stockholders for 2006 versus 2005 are:
 
             
        In Millions  
 
  decrease in asset impairment charges as the $385 million impairment related to the MCV Partnership recorded in 2005 exceeded the $169 million impairment related to GasAtacama recorded in 2006,   $ 216  
  increase from Enterprises due to favorable arbitration and property tax awards,     48  
  increase in earnings from our electric utility primarily due to an increase in revenue from an electric rate order, the return to full service-rates of customers previously using alternative energy suppliers, and the expiration of rate caps in December 2005 partially offset by higher operating expense and lower deliveries due to milder weather,     46  
  decrease in Enterprise and corporate interest and other expenses primarily due to an insurance reimbursement received for previously incurred legal expenses, and a reduction in debt retirement charges and other expenses,     26  
  lower incremental environmental remediation expenses recorded in 2006 related to our involvement in Bay Harbor,     20  
  decrease in earnings from mark-to-market valuation adjustments primarily at the MCV Partnership and CMS ERM as losses recorded in 2006 replaced gains recorded in 2005,     (203 )
  net charge resulting from our agreement to settle shareholder class action lawsuits,     (80 )
  net loss on the sale of our investment in the MCV Partnership including the negative impact of the associated impairment charge recorded in 2006 and the positive impact of the recognition of certain derivative instruments,     (41 )
  decrease in various corporate and Enterprises tax benefits as the absence of tax benefits recorded in 2005 related to the American Jobs Creation Act more than offset benefits recorded in 2006, primarily related to the restoration and utilization of income tax credits due to the resolution of an IRS income tax audit,     (14 )
  decrease in earnings from our gas utility primarily due to a reduction in deliveries resulting from increased customer conservation efforts and warmer weather in 2006 partially offset by other gas revenue associated with pipeline capacity optimization and a reduction in operation and maintenance expenses, and     (11 )
  reduced earnings from discontinued operations as the positive impact of an arbitration award and a reduction of contingent liabilities recorded in 2005 exceeded income recorded in 2006 from the favorable resolution of certain accrued liabilities.     (3 )
             
Total change
  $ 4  
         


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Electric Utility Results of Operations
 
                                                 
Years Ended December 31
  2007     2006     Change     2006     2005     Change  
    In Millions  
 
Net income
  $ 196     $ 199     $ (3 )   $ 199     $ 153     $ 46  
                                                 
Reasons for the change:
                                               
Electric deliveries
                  $ 18                     $ 193  
Surcharge revenue
                    6                       61  
Palisades revenue to PSCR
                    (136 )                      
Power supply costs and related revenue
                    (17 )                     57  
Other operating expenses, other income, and non-commodity revenue
                    159                       (236 )
Regulatory return on capital expenditures
                    5                       22  
General taxes
                    (15 )                     (7 )
Interest charges
                    (18 )                     (34 )
Income taxes
                    (5 )                     (10 )
                                                 
Total change
                  $ (3 )                   $ 46  
                                                 
 
Electric deliveries: For 2007, electric delivery revenues increased $18 million versus 2006, 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, which resulted in an increase in electric delivery revenues of $14 million. The increase also reflects $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.
 
For 2006, electric delivery revenues increased by $193 million over 2005 despite the fact that electric deliveries to end-use customers were 38.5 billion kWh, a decrease of 0.4 billion kWh or 1.2 percent versus 2005. The decrease in deliveries was primarily due to milder summer weather compared with 2005, which resulted in a decrease in revenue of $16 million. However, despite these lower electric deliveries, electric delivery revenues increased $160 million due to an approved electric rate order in December 2005 and $49 million related to the return of additional former ROA customers.
 
Surcharge Revenue: For 2007, the $6 million increase in surcharge revenue was primarily due to a surcharge that we started collecting in the first quarter of 2006 that the MPSC authorized under Section 10d(4) of the Customer Choice Act. The surcharge factors increased in January 2007 pursuant to an MPSC order. This surcharge increased electric delivery revenue by $13 million in 2007 versus 2006. Partially offsetting this increase was a decrease in the collection of Customer Choice Act transition costs, due to the expiration of the surcharge period for our large commercial and industrial customers. The absence of this surcharge decreased electric delivery revenue by $7 million in 2007 versus 2006.
 
In the first quarter of 2006, we started collecting the surcharge that the MPSC authorized under Section 10d(4) of the Customer Choice Act. This surcharge increased electric delivery revenue by $51 million in 2006 versus 2005. In addition, in the first quarter of 2006, we started collecting customer choice transition costs from our residential customers that increased electric delivery revenue by $12 million in 2006 versus 2005. Reductions in other surcharges decreased electric delivery revenue by $2 million in 2006 versus 2005.
 
Palisades Revenue to PSCR: Consistent with the MPSC order related to the April 2007 sale of Palisades, $136 million of revenue related to Palisades was designated toward recovery of PSCR costs.
 
Power Supply Costs and Related Revenue: 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.
 
For 2006, PSCR revenue increased $57 million versus 2005. The increase was due to the absence, in 2006, of rate caps which allowed us to record power supply revenue to offset fully our power supply costs. Our ability to recover these power supply costs resulted in an $82 million increase in electric revenue in 2006 versus 2005. Additionally, electric revenue increased $9 million in 2006 versus 2005 primarily due to the return of former


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special-contract customers to full-service rates in 2006. Partially offsetting these increases was the absence, in 2006, of deferrals of transmission and nitrogen oxides allowance expenditures related to our capped customers recorded in 2005. These costs were not fully recoverable due to the application of rate caps, so we deferred them for recovery under Section 10d(4) of the Customer Choice Act. In December 2005, the MPSC approved the recovery of these costs. For 2005, deferrals of these costs were $34 million.
 
Other Operating Expenses, Other Income, and Non-Commodity Revenue: For 2007, other operating expenses decreased $150 million, other income increased $21 million, and non-commodity revenue decreased $12 million versus 2006.
 
The decrease in other operating expenses was primarily due to lower operating and maintenance expense. Operating and maintenance expense decreased primarily due to the sale of Palisades in April 2007. Also contributing to the decrease was the absence, in 2007, of costs incurred in 2006 related to a planned refueling outage at Palisades, and lower overhead line maintenance and storm restoration costs. These decreases were partially offset by increased depreciation and amortization expense due to higher plant in service and greater amortization of certain regulatory assets.
 
Other income increased in 2007 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. Non-commodity revenue decreased in 2007 versus 2006 primarily due to lower transmission services revenue.
 
For 2006, other operating expenses increased $236 million versus 2005. The increase in other operating expenses reflects higher operating and maintenance, customer service, depreciation and amortization, and pension and benefit expenses. Operating and maintenance expense increased primarily due to costs related to a planned refueling outage at Palisades, and higher tree trimming and storm restoration costs.
 
Regulatory Return on Capital Expenditures: For 2007, the return on capital expenditures in excess of our depreciation base increased income by $5 million versus 2006. The increase reflects the equity return on the regulatory asset authorized by the MPSC’s December 2005 order which provided for the recovery of $333 million of Section 10d(4) costs over five years.
 
For 2006, the return on capital expenditures in excess of our depreciation base increased income by $22 million versus 2005.
 
General Taxes: For 2007, the $15 million increase in general taxes versus 2006 was primarily due to higher property tax expense, reflecting higher millage rates and lower property tax refunds versus 2006.
 
For 2006, the $7 million increase in general taxes versus 2005 reflects higher MSBT expense, partially offset by property tax refunds.
 
Interest Charges: 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.
 
For 2006, interest charges increased $34 million versus 2005 primarily due to lower capitalized interest and interest expense related to an IRS income tax audit settlement. In 2005, we capitalized $33 million of interest in connection with the MPSC’s December 2005 order in our Section 10d(4) Regulatory Asset case. The IRS income tax settlement in 2006 recognized that our taxable income for prior years was higher than originally filed, resulting in interest on the tax liability for these prior years.
 
Income Taxes: 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.
 
For 2006, income taxes increased $10 million versus 2005 primarily due to higher earnings by the electric utility, partially offset by the resolution of an IRS income tax audit, which resulted in a $4 million income tax benefit caused by the restoration and utilization of income tax credits. Further reducing the increase in income taxes was $5 million of income tax benefits, primarily reflecting the tax treatment of items related to property, plant and equipment as required by past MPSC orders.


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Gas Utility Results of Operations
 
                                                 
Years Ended December 31
  2007     2006     Change     2006     2005     Change  
    In Millions  
 
Net income
  $ 87     $ 37     $ 50     $ 37     $ 48     $ (11 )
                                                 
Reasons for the change:
                                               
Gas deliveries
                  $ 10                     $ (61 )
Gas rate increase
                    81                       14  
Gas wholesale and retail services, other gas revenues, and other income
                    14                       24  
Other operating expenses
                    (19 )                     7  
General taxes and depreciation
                    (11 )                     (10 )
Interest charges
                    4                       (6 )
Income taxes
                    (29 )                     21  
                                                 
Total change
                  $ 50                     $ (11 )
                                                 
 
Gas Deliveries: For 2007, gas delivery revenues increased by $10 million versus 2006 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 lower system efficiency.
 
In 2006, gas delivery revenues decreased by $61 million versus 2005 as gas deliveries, including miscellaneous transportation to end-use customers, were 282 bcf, a decrease of 36 bcf or 11.3 percent. The decrease in gas deliveries was primarily due to warmer weather in 2006 versus 2005 and increased customer conservation efforts in response to higher gas prices.
 
Gas Rate Increase: In November 2006, the MPSC issued an order authorizing an annual rate increase of $81 million. In August 2007, the MPSC issued an order authorizing an annual rate increase of $50 million. As a result of these orders, gas revenues increased $81 million for 2007 versus 2006.
 
In May 2006, the MPSC issued an interim gas rate order authorizing an $18 million annual rate increase. In November 2006, the MPSC issued an order authorizing an annual increase of $81 million. As a result of these orders, gas revenues increased $14 million for 2006 versus 2005.
 
Gas Wholesale and Retail Services, Other Gas Revenues, and Other Income: For 2007, the $14 million increase in gas wholesale and retail services, other gas revenue and other income primarily reflects higher interest income on short-term cash investments. The increase in short-term cash investments was primarily due to proceeds from the Palisades sale.
 
For 2006, the $24 million increase in gas wholesale and retail services, other gas revenues, and other income primarily reflects higher pipeline revenues and higher pipeline capacity optimization in 2006 versus 2005.
 
Other Operating Expenses: 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.
 
For 2006, other operating expenses decreased $7 million versus 2005 primarily due to lower operating expenses, partially offset by higher customer service and pension and benefit expenses.
 
General Taxes and Depreciation: 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.
 
For 2006, general taxes and depreciation expense increased $10 million versus 2005. The increase in depreciation expense was primarily due to higher plant in service. The increase in general taxes reflects higher MSBT expense, partially offset by lower property tax expense.
 
Interest Charges: For 2007, interest charges decreased $4 million reflecting lower average debt levels and a lower average interest rate versus 2006.


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For 2006, interest charges increased $6 million primarily due to higher interest expense on our GCR overrecovery balance and an IRS income tax audit settlement. The settlement recognized that Consumers’ taxable income for prior years was higher than originally filed, resulting in interest on the tax liability for these prior years.
 
Income Taxes: For 2007, income taxes increased $29 million versus 2006 primarily due to higher earnings by the gas utility.
 
For 2006, income taxes decreased $21 million versus 2005 primarily due to lower earnings by the gas utility. Also contributing to the decrease was the absence, in 2006, of the write-off of general business credits of $2 million that expired in 2005, and the resolution, in 2006, of an IRS income tax audit, which resulted in a $3 million income tax benefit caused by the restoration and utilization of income tax credits. Further reducing the increase in income taxes was $5 million of income tax benefits, primarily reflecting the tax treatment of items related to property, plant and equipment as required by past MPSC orders.
 
Enterprises Results of Operations
 
                                                 
Years Ended December 31
 
2007
   
2006
   
Change
   
2006
   
2005
   
Change
 
    In Millions  
 
Net loss
  $ (391 )   $ (227 )   $ (164 )   $ (227 )   $ (217 )   $ (10 )
                                                 
Reasons for the change:
                                               
Operating revenues
                  $ (9 )                   $ (253 )
Cost of gas and purchased power
                    36                       128  
Earnings from equity method investees
                    (48 )                     (37 )
Gain (loss) on sale of assets, net
                    21                       (6 )
Operation and maintenance
                    (7 )                     19  
Electric sales contract termination
                    (279 )                      
General taxes, depreciation, and other income, net
                    20                       7  
Asset impairment charges, net of insurance reimbursement
                    29                       (216 )
Environmental remediation
                    (35 )                     31  
Fixed charges
                    14                       (9 )
Minority interest
                    (7 )                     (2 )
Income taxes
                    41                       103  
The MCV Partnership
                    60                       225  
                                                 
Total change
                  $ (164 )                   $ (10 )
                                                 
 
Operating Revenues: For 2007, operating revenues decreased $9 million versus 2006 primarily due to decreased third-party gas sales of $52 million, the write-off of $40 million of derivative assets associated with the Quicksilver contract that was voided by the trial judge in May 2007, $18 million in mark-to-market losses related to the amendment of an electricity sales agreement, and the absence of third-party financial settlements of $16 million in 2007 all at CMS ERM. Also contributing to the decrease in operating revenues was the absence of third-party tolling revenue of $17 million at DIG in 2007. These decreases were partially offset by an increase in mark-to-market gains of $89 million on power and gas contracts versus 2006 and increased power sales of $45 million at CMS ERM.
 
For 2006, operating revenues decreased $253 million versus 2005 primarily due to lower revenue of $102 million at CMS ERM related to mark-to-market losses on power and gas contracts, compared with gains on such items in 2005. In addition, CMS ERM had lower third-party power sales of $53 million, decreased sales to MISO of $22 million, and decreased financial revenue of $76 million resulting from the termination of prepaid gas contracts.


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Cost of Gas and Purchased Power: For 2007, cost of gas and purchased power decreased $36 million versus 2006. The decrease was primarily due to lower power purchases from MISO of $26 million at CMS ERM and a decrease in the cost of gas sold of $10 million due to lower gas prices.
 
For 2006, cost of gas and purchased power decreased by $128 million versus 2005. The decrease was primarily due to decreases in the cost of gas sold of $93 million resulting from lower gas prices partially offset by increased usage, and decreases in third-party wholesale purchased power of $61 million resulting from the implementation of the MISO market all at CMS ERM, and a decrease in transmission costs of $3 million at DIG. These decreases were partially offset by power purchases from MISO of $29 million at CMS ERM.
 
Earnings from Equity Method Investees: For 2007, equity earnings decreased $48 million versus 2006. The decrease was due to the absence of $61 million of earnings associated with our investments in Africa, the Middle East and India that were sold in May 2007 and $6 million of earnings associated with our investments in Argentina and Chile that were sold in March and August 2007. Also contributing to the decrease was a $5 million reduction in earnings from our former investment in GasAtacama due to the shortage of gas from Argentina. These decreases were partially offset by the absence, in 2007, of a $20 million provision for higher foreign taxes in Argentina and an increase of $4 million in earnings from our remaining assets in Argentina.
 
For 2006, equity earnings decreased $37 million versus 2005. The decrease was primarily due to the establishment of tax reserves totaling $23 million related to foreign investments, higher tax expense primarily at Jorf Lasfar of $5 million due to lower tax relief and lower earnings at Shuweihat of $1 million due to higher operating and maintenance costs.
 
Gain (Loss) on Sale of Assets, Net: For 2007, the net gain on asset sales was $21 million. The net gain consisted of a $34 million gain on the sale of our equity investment in El Chocon to Endesa S.A., and $5 million in gains on the sale of other assets, partially offset by a $13 million net loss on the sale of our equity investments in Africa, the Middle East and India to TAQA and a $5 million net loss on the sale of our Argentine and Michigan assets to Lucid Energy.
 
For 2006, there were no gains or losses on asset sales. In 2005, we had gains on the sale of GVK and SLAP totaling $6 million.
 
For a discussion of the 2006 sale of our interest in the MCV Partnership, see “The MCV Partnership” in this section. For additional information, see Note 2, Asset Sales, Discontinued Operations and Impairment Charges.
 
Operation and Maintenance: For 2007, operation and maintenance expenses increased $7 million versus 2006 due to the absence of a favorable 2006 arbitration settlement related to DIG of $20 million and increased maintenance expense of $2 million, partially offset by the reduction of $6 million in expenses associated with assets sold during 2007, the reimbursement of $3 million in arbitration costs at CMS Gas Transmission in 2007 and the absence of $6 million in losses on the termination of prepaid gas contracts in 2006.
 
For 2006, operation and maintenance expenses decreased $19 million versus 2005 due to a favorable arbitration settlement related to DIG of $20 million and a $3 million reduction in losses on the termination of prepaid gas contracts. These decreases were partially offset by increased expenditures related to prospecting initiatives in North America of $4 million.
 
Electric Sales Contract Termination: For 2007, CMS ERM recorded a charge of $279 million related to the termination of electricity sales agreements. For additional information, see the Enterprises Outlook section included in this MD&A.
 
General Taxes, Depreciation, and Other Income, Net: For 2007, the net of general tax expense, depreciation and other income contributed to a $20 million increase in operating income versus 2006. Other income increased due to gains of $8 million recognized on the rebalancing of SERP investments and the absence, in 2007, of $4 million of accretion expense related to prepaid gas contracts at CMS ERM recorded in 2006, and general tax expense and depreciation decreased $8 million due to the sale of assets in 2007.
 
For 2006, the net of general tax expense, depreciation, and other income contributed to a $7 million increase in operating income versus 2005. Other income increased due to a decrease in accretion expense of $13 million related


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to the prepaid gas contracts at CMS ERM, partially offset by an increase of $4 million in general tax expense and depreciation and the absence, in 2006, of a $2 million favorable settlement recorded at CMS Gas Transmission in 2005.
 
Asset Impairment Charges, Net of Insurance Reimbursement: For 2007, asset impairment charges decreased $29 million versus 2006. For 2007, we recorded net impairment charges of $187 million that included $262 million for the reduction in fair value of our investments in TGN, Jamaica, GasAtacama and PowerSmith, and a $75 million credit to recognize a prior insurance award associated with our ownership interest in TGN. For 2006, we recorded a $214 million charge for the reduction in the fair value of our former equity investment in GasAtacama and related notes receivable and other impairment charges of $2 million at Enterprises. For additional information, see Note 2, Asset Sales, Discontinued Operations and Impairment Charges.
 
For 2006, asset impairment charges increased $216 million versus 2005 primarily due to 2006 charges of $214 million recorded for the impairment of our former equity investment in GasAtacama and related notes receivable, and $2 million of other impairment charges.
 
For a discussion of asset impairment charges related to our former interest in the MCV Partnership, see “The MCV Partnership” in this section.
 
Environmental Remediation: Our environmental remediation charges relate to our projections of future costs associated with Bay Harbor. These charges were $44 million in 2007, $9 million in 2006, and $40 million in 2005. Total remediation charges including accretion expense were $140 million. For additional information, see Note 3, Contingencies.
 
Fixed Charges: For 2007, fixed charges decreased $14 million versus 2006 due to lower interest expense on subsidiary debt of $12 million resulting from asset sales in 2007. Also contributing to the decrease was the absence, in 2007, of $2 million of interest expense at DIG related to an arbitration settlement recorded in 2006.
 
For 2006, fixed charges increased $9 million versus 2005 due to higher interest expense of $7 million resulting from an increase in subsidiary debt and $2 million in higher interest expense at DIG related to an arbitration settlement.
 
Minority Interest: The allocation of profits to minority owners decreases our net income, and the allocation of losses to minority owners increases our net income. For 2007, minority owners shared in a portion of increased earnings at our subsidiaries versus 2006. This was primarily due to increased earnings and gains due to asset sales.
 
For 2006, minority owners shared in a portion of increased earnings at our subsidiaries versus 2005. This was primarily due to increased earnings, partially offset by losses from asset impairments.
 
Income Taxes: For 2007, income tax expense decreased $41 million versus 2006. The decrease reflects $93 million in lower tax expenses resulting from higher net losses in 2007 versus 2006 and $27 million of tax benefits primarily related to lower tax reserves in 2007. These benefits were partially offset by $79 million of tax expense on earnings associated with the recognition of previously deferred foreign earnings of subsidiaries.
 
For 2006, income tax expense decreased $103 million versus 2005. The decrease reflects $119 million in lower tax expenses resulting from higher net losses in 2006 versus 2005 and $23 million of tax benefit related to higher deferred foreign earnings of subsidiaries and resolution of an IRS income tax audit of $8 million, primarily for the restoration and utilization of income tax credits. These benefits were partially offset by the absence of $30 million of income tax benefit related to the American Jobs Creation Act recorded in 2005 and $17 million of tax expense primarily related to higher tax reserves in 2006.
 
The MCV Partnership: We sold our ownership interests in the MCV Partnership in November 2006. As a result, we have condensed its consolidated results of operations for the years 2005, 2006 and 2007 for discussion purposes.
 
In 2006, our share of the MCV Partnership’s loss was $60 million, net of tax and minority interest. This was primarily due 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 additional information, see Note 2, Asset Sales, Discontinued Operations and Impairment Charges.


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For 2006 versus 2005, our share of the MCV Partnership’s earnings increased by $225 million, net of tax, primarily due to the absence of a 2005 impairment charge to property, plant and equipment at the MCV Partnership. This increase was partially offset by the recognition of mark-to-market losses in 2006 versus mark-to-market gains in 2005.
 
Corporate Interest and Other Net Expenses
 
                                                 
Years Ended December 31
 
2007
 
2006
 
Change
 
2006
 
2005
 
Change
    In Millions
 
Net loss
  $ (30 )   $ (153 )   $ 123     $ (153 )   $ (135 )   $ (18 )
                                                 
 
For 2007, corporate interest and other net expenses were $30 million, a decrease of $123 million versus 2006. The $123 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 of tax expense in 2007 related to the sale of our international operations. Partially offsetting the decrease is the absence, in 2007, of a tax benefit due to the resolution of an IRS income tax audit.
 
For 2006, corporate interest and other net expenses were $153 million, an increase of $18 million versus 2005. The increase reflects an $80 million after tax net charge recorded in 2006 as a result of our agreement to settle shareholder class action lawsuits. Also contributing to the increase was the recognition of a portion of the reduction in fair value in our investment in GasAtacama. Partially offsetting the increase was the 2006 resolution of an IRS income tax audit, which resulted in an income tax benefit primarily for the restoration and utilization of income tax credits. Further offsetting the increase were lower early debt retirement premiums, and the receipt of insurance proceeds for previously incurred legal expenses.
 
Discontinued Operations: For 2007, the net loss from discontinued operations was $89 million versus $54 million of net income in 2006. The $143 million change is primarily due to the net loss on the disposal of international businesses in 2007, which replaced earnings recorded for these businesses in 2006.
 
For 2006, we recorded $54 million in net income versus $57 million in net income in 2005. The $3 million reduction in net income is primarily due to the absence of income from the favorable resolution of certain accrued contingent liabilities in 2006 associated with previously disposed businesses.
 
CRITICAL ACCOUNTING POLICIES
 
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.
 
Use of Estimates and Assumptions
 
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.
 
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


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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. On January 1, 2007, we adopted FIN 48, the FASB’s interpretation on the recognition and measurement of uncertain tax positions. For additional details, see the “Implementation of New Accounting Standards” section included in this MD&A.
 
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 $14.196 billion at December 31, 2007, 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 nature of the assets,
 
  •  projected future economic benefits,
 
  •  regulatory and political environments,
 
  •  historical and future cash flow and profitability measurements, and
 
  •  other external market conditions and factors.
 
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.”
 
Discontinued Operations
 
We determined that certain consolidated subsidiaries met the criteria of assets held for sale under SFAS No. 144. At December 31, 2006, these subsidiaries included certain Argentine businesses, a majority of our Michigan non-utility businesses, CMS Energy Brasil S.A., Takoradi, SENECA, and certain associated holding companies. There were no assets classified as held for sale at December 31, 2007. For additional details, see Note 2, Asset Sales, Discontinued Operations and Impairment Charges.
 
Accounting for the Effects of Industry Regulation
 
Our 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 our revenues and expenses. As a result, we may defer or recognize revenues and expenses differently than a non-regulated entity.
 
For example, we may record as regulatory assets items that a non-regulated entity normally would expense if the actions of the regulator indicate such expenses will be recovered in future rates. Conversely, we may record as regulatory liabilities items that non-regulated entities may normally recognize as revenues if the actions of the regulator indicate they will require that such revenues be refunded to customers. Judgment is required to determine the recoverability of items recorded as regulatory assets and liabilities. At December 31, 2007, we had $2.059 billion recorded as regulatory assets and $2.137 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, 2007, we had $45 million recorded as regulatory assets for underrecoveries of power supply costs and $19 million recorded as regulatory liabilities for overrecoveries of gas costs.
 
For additional details, see Note 1, Corporate Structure and Accounting Policies - “Utility Regulation.”


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Financial and Derivative Instruments, Trading Activities, 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, it is recorded 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 6, Financial and Derivative Instruments.
 
To determine the fair value of our derivatives, we 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. These models use various inputs and assumptions, including commodity market prices and volatilities, as well as interest rates and contract maturity dates. 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 results that we estimate using models. If necessary, our calculations of fair value include reserves to reflect the credit risk of our counterparties.
 
The types of contracts we typically classify as derivatives are interest rate swaps, forward contracts for electricity and gas, option contracts for electricity and gas, gas futures, and electric swaps. Most of our commodity purchase and sale contracts are not subject to derivative accounting under SFAS No. 133 because:
 
  •  they do not have a notional amount (that is, a number of units specified in a derivative instrument, such as MWh of electricity or bcf of natural gas),
 
  •  they qualify for the normal purchases and sales exception, or
 
  •  there is not an active market for the commodity.
 
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, the resulting mark-to-market impact on earnings could be material.
 
Derivative Contracts Associated with Equity Investments: In May 2007, we sold our ownership interest in businesses in the Middle East, Africa, and India. Certain of these businesses held interest rate contracts and foreign exchange contracts that were derivatives. Before the sale, we recorded our share of the change in fair value of these contracts in AOCL if the contracts qualified for cash flow hedge accounting; otherwise, we recorded our share in Earnings from Equity Method Investees.
 
At the date of the sale, we had accumulated a net loss of $13 million, net of tax, in AOCL representing our share of mark-to-market gains and losses from cash flow hedges held by the equity method investees. After the sale, we reclassified this amount and recognized it in earnings as a reduction of the gain on the sale. For additional details on the sale of our interest in these equity method investees, see Note 2, Asset Sales, Discontinued Operations and Impairment Charges.
 
CMS ERM Contracts: In order to support CMS Energy’s ongoing operations, CMS ERM enters into contracts to purchase and sell electricity and natural gas in the future. These forward contracts will result in physical delivery of the commodity at a contracted price. These contracts are generally long-term in nature and are classified as non-trading contracts.
 
To manage commodity price risks associated with these forward purchase and sale contracts, CMS ERM uses various financial instruments, such as swaps, options, and futures. CMS ERM also uses these types of instruments


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to manage commodity price risks associated with generation assets owned by CMS Energy and its subsidiaries. These financial contracts are classified as trading contracts.
 
Certain of CMS ERM’s non-trading and trading contracts qualify as derivatives. We include the fair value of these derivatives in either Price risk management assets or Price risk management liabilities on our Consolidated Balance Sheets. The following tables provide a summary of these contracts at December 31, 2007:
 
                         
    Non-
             
   
Trading
   
Trading
   
Total
 
    In Millions  
 
Fair value of contracts outstanding at December 31, 2006
  $ 31     $ (68 )   $ (37 )
Fair value of new contracts when entered into during the period(a)
          (1 )     (1 )
Contracts realized or otherwise settled during the period(b)
    (6 )     74       68  
Other changes in fair value(c)
    (43 )     (10 )     (53 )
                         
Fair value of contracts outstanding at December 31, 2007
  $ (18 )   $ (5 )   $ (23 )
                         
 
 
(a) Reflects premiums paid (received) for new contracts.
 
(b) CMS ERM terminated certain trading gas contracts during 2007. CMS ERM had recorded derivative liabilities, representing cumulative unrealized mark-to-market losses, associated with these contracts. Therefore, upon the termination of those contracts, the fair value of CMS ERM’s trading contracts increased significantly.
 
(c) Reflects changes in the fair value of contracts over the period, as well as increases or decreases to credit reserves. The fair value of CMS ERM’s non-trading electric and gas contracts decreased significantly during 2007 for two reasons. First, a natural gas contract with Quicksilver was prospectively rescinded by court action. CMS ERM had recorded a derivative asset for this contract, representing cumulative unrealized mark-to-market gains. See Note 3, Contingencies, “Other Contingencies — Quicksilver Resources, Inc.” for additional details. In addition, CMS ERM recorded a derivative liability of $18 million related to the amendment of an electricity sales agreement. For additional details of this amendment, see the “Outlook” section included in this MD&A.
 
                                         
          Fair Value of Non-Trading Contracts at December 31, 2007  
    Total
    Maturity (in years)  
Source of Fair Value
 
Fair Value
   
Less than 1
   
1 to 3
   
4 to 5
   
Greater than 5
 
    In Millions  
 
Prices actively quoted
  $     $     $     $     $  
Prices obtained from external sources or based on models and other valuation methods
    (18 )     (2 )     (6 )     (5 )     (5 )
                                         
Total
  $ (18 )   $ (2 )   $ (6 )   $ (5 )   $ (5 )
                                         
 
                                         
          Fair Value of Trading Contracts at
 
          December 31, 2007  
    Total
    Maturity (in years)  
Source of Fair Value
 
Fair Value
   
Less than 1
   
1 to 3
   
4 to 5
   
Greater than 5
 
    In Millions  
 
Prices actively quoted
  $ 1     $     $ 1     $     $  
Prices obtained from external sources or based on models and other valuation methods
    (6 )     (6 )                  
                                         
Total
  $ (5 )   $ (6 )   $ 1     $     $  
                                         
 
Market Risk Information: We are exposed to market risks including, but not limited to, changes in interest rates, commodity prices, and equity security prices. We may use various contracts to limit our exposure to these


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risks, including swaps, options, futures, and forward contracts. We enter into these risk management contracts using established policies and procedures, under the direction of two different committees: 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 through established credit policies, 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 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):
 
                 
December 31
 
2007
 
2006
    In Millions
 
Variable-rate financing — before-tax annual earnings exposure
  $ 2     $ 4  
Fixed-rate financing — potential reduction in fair value(a)
    172       193  
 
 
(a) Fair value reduction could only be realized if we transferred all of our fixed-rate financing to other creditors.
 
At December 31, 2007, Consumers had $131 million in variable auction rate tax exempt bonds, insured by monoline insurers, that are subject to rate reset every 35 days. The subprime mortgage problems have put monoline insurers’ credit ratings at risk of downgrade by rating agencies. This risk of downgrade could cause the interest rates on these bonds to rise. Consumers does not expect its interest rate risk exposure regarding these bonds to be material. Consumers is continuing to monitor the situation and its alternatives.
 
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 enter into non-trading derivative contracts, such as forward purchase and sale contracts for electricity and natural gas. We also enter into trading derivative contracts, including options and swaps for electricity and gas. For additional details on these contracts, see Note 6, Financial and Derivative Instruments.
 
Commodity Price Risk Sensitivity Analysis (assuming an adverse change in market prices of 10 percent):
 
                 
December 31
 
2007
   
2006
 
    In Millions  
 
Potential reduction in fair value:
               
Trading contracts
               
Electricity-related contracts
    4       2  
Gas-related contracts
    1        


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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):
 
                 
December 31
 
2007
 
2006
    In Millions
 
Potential reduction in fair value of available-for-sale equity securities (primarily SERP investments):
  $ 6     $ 6  
 
For additional details on market risk and derivative activities, see Note 6, Financial and Derivative Instruments.
 
Pension and OPEB
 
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 5 percent of base pay to the existing Employees’ Savings Plan. An employee contribution is not required to receive the plan’s 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 resumed the employer’s match in CMS Energy Common Stock in our 401(k) savings plan on January 1, 2005. On September 1, 2005, we increased the employer match from 50 percent to 60 percent on eligible contributions up to the first six percent of an employee’s wages.
 
Beginning May 1, 2007, the CMS Energy Common Stock Fund was no longer an investment option available for investments in the 401(k) savings plan and the employer match was no longer in CMS Energy Common Stock. Participants had an opportunity to reallocate investments in the CMS Energy Common Stock Fund to other plan investment alternatives prior to November 1, 2007. In November 2007, the remaining shares in the CMS Energy Common Stock Fund were sold and the sale proceeds were reallocated to other plan investment options.
 
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:
 
  •  life expectancies,
 
  •  present-value discount rates,
 
  •  expected long-term rate of return on plan assets,
 
  •  rate of compensation increases, and
 
  •  anticipated health care costs.
 
A change in these assumptions could change significantly our recorded liabilities and associated expenses.


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The following table provides an estimate of our pension cost, OPEB cost, and cash contributions for the next three years:
 
                         
Expected Costs
 
Pension Cost
   
OPEB Cost
   
Contributions
 
    In Millions  
 
2008
  $ 106     $ 27     $ 49  
2009
    112       25       49  
2010
    116       24       133  
 
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 2008 by $3 million. Lowering the discount rate by 0.25 percent (from 6.40 percent to 6.15 percent) would increase estimated pension cost for 2008 by $1 million.
 
For additional details on postretirement benefits, see Note 7, Retirement Benefits.
 
Accounting for Asset Retirement Obligations
 
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. No market risk premium was included in our ARO fair value estimate 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 8, Asset Retirement Obligations.
 
Capital Resources and Liquidity
 
Factors affecting our liquidity and capital requirements include:
 
  •  results of operations,
 
  •  capital expenditures,
 
  •  energy commodity and transportation costs,
 
  •  contractual obligations,
 
  •  regulatory decisions,
 
  •  debt maturities,
 
  •  credit ratings,
 
  •  working capital needs, and
 
  •  collateral requirements.
 
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.
 
Our cash management plan includes controlling operating expenses and capital expenditures and evaluation of market conditions for financing opportunities, if needed.


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We believe the following items will be sufficient to meet our liquidity needs:
 
  •  our current level of cash and revolving credit facilities,
 
  •  our anticipated cash flows from operating and investing activities, and
 
  •  our ability to access secured and unsecured borrowing capacity in the capital markets, if necessary.
 
In the second quarter of 2007, Moody’s and S&P upgraded the long-term credit ratings of CMS Energy and Consumers and revised the rating outlook to stable from positive.
 
Cash Position, Investing, and Financing
 
Our operating, investing, and financing activities meet consolidated cash needs. At December 31, 2007, we had $382 million of consolidated cash, which includes $34 million of restricted cash and $7 million from entities consolidated pursuant to FIN 46(R).
 
Our primary ongoing source of cash is dividends and other distributions from our subsidiaries. For the year ended December 31, 2007, Consumers paid $251 million in common stock dividends to CMS Energy. For details on dividend restrictions, see Note 4, Financings and Capitalization.
 
Our cash flow statements include amounts related to discontinued operations through the date of disposal. The sale of our discontinued operations and their related cash flows will have no material adverse effect on our liquidity, as we used the proceeds of these sales to invest in our utility business and to reduce debt. For additional details on discontinued operations, see Note 2, Asset Sales, Discontinued Operations and Impairment Charges.
 
Summary of Consolidated Statements of Cash Flows:
 
                         
   
2007
   
2006
   
2005
 
    In Millions  
 
Net cash provided by (used in):
                       
Operating activities
  $ 27     $ 686     $ 598  
Investing activities
    658       (749 )     (493 )
                         
Net cash provided by (used in) operating and investing activities
    685       (63 )     105  
Financing activities
    (690 )     (434 )     74  
Effect of exchange rates on cash
    2       1       (1 )
                         
Net Increase (Decrease) in Cash and Cash Equivalents
  $ (3 )   $ (496 )   $ 178  
                         
 
Operating Activities:
 
2007: Net cash provided by operating activities was $27 million, a decrease of $659 million versus 2006. In addition to a decrease in earnings, cash provided by operating activities decreased primarily as result of the following:
 
  •  absence, in 2007, of the sale of accounts receivable,
 
  •  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 and other timing differences.
 
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, and
 
  •  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.


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For additional details on excess Palisades decommissioning funds, see Note 2, Asset Sales, Discontinued Operations and Impairment Charges.
 
2006: Net cash provided by operating activities was $686 million, an increase of $88 million versus 2005. Cash provided by operating activities increased primarily as result of the following:
 
  •  decreases in accounts receivable primarily due to the collection of receivables in 2006 reflecting higher gas prices billed during the latter part of 2005 and reduced billings in the latter part of 2006 due to milder weather,
 
  •  reduced inventory purchases,
 
  •  cash proceeds from the sale of excess sulfur dioxide allowances, and
 
  •  a return of funds formerly held as collateral under certain gas hedging arrangements.
 
These increases were partially offset by decreases in the MCV Partnership gas supplier funds on deposit as a result of refunds to suppliers from decreased exposure due to declining gas prices in 2006.
 
Investing Activities:
 
2007: Net cash provided by investing activities was $658 million, an increase of $1.407 billion versus 2006. This increase was primarily due to proceeds from asset sales and the related dissolution of our nuclear decommissioning trust funds. These changes were partially offset by an increase in capital expenditures primarily due to the purchase of the Zeeland power plant.
 
2006: Net cash used in investing activities was $749 million, an increase of $256 million versus 2005. This was primarily due to cash relinquished from the sale of assets, the absence of short-term investment proceeds, an increase in capital expenditures and cost to retire property, and an increase in non-current notes receivable. This activity was offset by the release of restricted cash in February 2006, which we used to extinguish long-term debt - related parties.
 
For additional details on asset sales, see Note 2, Asset Sales, Discontinued Operations and Impairment Charges.
 
Financing Activities:
 
2007: Net cash used in financing activities was $690 million, an increase of $256 million versus 2006. This was primarily due to an increase in net debt retirements and the payment of common stock dividends.
 
2006: Net cash used in financing activities was $434 million, an increase of $508 million versus 2005. This was due to an increase in net retirement of long-term debt of $269 million combined with a decrease in proceeds from common stock issuances of $287 million.
 
For additional details on long-term debt activity, see Note 4, Financings and Capitalization.


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Obligations and Commitments
 
Contractual Obligations: The following table summarizes our contractual cash obligations for each of the periods presented. The table shows the timing of the obligations and their expected effect on our liquidity and cash flow in future periods. The table excludes all amounts classified as current liabilities on our Consolidated Balance Sheets, other than the current portion of long-term debt and capital and finance leases.
 
                                         
          Payments Due  
          Less Than
    One to
    Three to
    More Than
 
Contractual Obligations at December 31, 2007
 
Total
   
One Year
   
Three Years
   
Five Years
   
Five Years
 
    In Millions  
 
Long-term debt(a)
  $ 6,077     $ 542     $ 1,078     $ 1,146     $ 3,311  
Long-term debt — related parties(a)
    178                         178  
Interest payments on long-term debt(b)
    2,736       330       593       457       1,356  
Capital and finance leases(c)
    255       30       48       44       133  
Interest payments on capital and finance leases(d)
    139       14       27       24       74  
Operating leases(e)
    207       26       45       42       94  
Purchase obligations(f)
    21,286       2,502       2,897       2,275       13,612  
                                         
Total contractual obligations
  $ 30,878     $ 3,444     $ 4,688     $ 3,988     $ 18,758  
                                         
 
 
(a) Principal amounts due on outstanding debt obligations, current and long-term, at December 31, 2007. For additional details on long-term debt, see Note 4, Financings and Capitalization.
 
(b) Currently scheduled interest payments on both variable and fixed rate long-term debt and long-term debt — related parties, current and long-term. Variable interest payments are based on contractual rates in effect at December 31, 2007.
 
(c) Principal portion of lease payments under our capital and finance leases, comprised mainly of leased service vehicles, leased office furniture, and certain power purchase agreements.
 
(d) Imputed interest on the capital leases.
 
(e) Minimum noncancelable lease payments under our leases of railroad cars, certain vehicles, and miscellaneous office buildings and equipment, which are accounted for as operating leases.
 
(f) Long-term contracts for purchase of commodities and services. These obligations include operating contracts used to assure adequate supply with generating facilities that meet PURPA requirements. These commodities and services include:
 
  •  natural gas and associated transportation,
 
  •  electricity, and
 
  •  coal and associated transportation.
 
Our purchase obligations include long-term power purchase agreements with various generating plants, which require us to make monthly capacity payments based on the plants’ availability or deliverability. These payments will approximate $58 million per month during 2008. If a plant is not available to deliver electricity, we will not be obligated to make these payments for that period. For additional details on power supply costs, see “Electric Utility Results of Operations” within this MD&A and Note 3, Contingencies, “Consumers’ Electric Utility Rate Matters — Power Supply Costs.”
 
Revolving Credit Facilities: For details on our revolving credit facilities, see Note 4, Financings and Capitalization.
 
Off-Balance Sheet Arrangements: CMS Energy and certain of its subsidiaries enter into various arrangements in the normal course of business to facilitate commercial transactions with third parties. These arrangements include indemnifications, surety bonds, letters of credit, and financial and performance guarantees. Indemnifications are usually agreements to reimburse a counterparty that may incur losses due to outside claims or breach of contract terms. The maximum amount of potential payments we would be required to make under a


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number of these indemnities is not estimable. At December 31, 2007, we have an $88 million liability in connection with indemnities related to the sale of certain subsidiaries reflected on our Consolidated Balance Sheets.
 
We provide guarantees and surety bonds on behalf of certain non-consolidated entities, improving their ability to transact business. In addition, we have provided financial guarantees to certain property owners in connection with the Bay Harbor remediation effort. We monitor these obligations and believe it is unlikely that we will incur any material losses associated with these guarantees. For additional details on these and other guarantee arrangements, see Note 3, Contingencies, “Other Contingencies — Guarantees and Indemnifications.”
 
Sale of Accounts Receivable: Under a revolving accounts receivable sales program, Consumers may sell up to $325 million of certain accounts receivable. This program provides less expensive funding that unsecured debt. For additional details, see Note 4, Financings and Capitalization.
 
Capital Expenditures: For planning purposes, we forecast capital expenditures over a three-year period. We review these estimates and may revise them, periodically, due to a number of factors including environmental regulations, business opportunities, market volatility, economic trends, and the ability to access capital. The following is a summary of our estimated capital expenditures, including lease commitments, for 2008 through 2010:
 
                         
Years Ending December 31
 
2008
   
2009
   
2010
 
    In Millions  
 
Electric utility operations(a)(b)
  $ 684     $ 717     $ 783  
Gas utility operations(b)
    234       263       232  
Enterprises
    28       55       26  
                         
Total
  $ 946     $ 1,035     $ 1,041  
                         
 
 
(a) These amounts include estimates for capital expenditures that may be required by revisions to the Clean Air Act’s national air quality standards or potential renewable energy programs.
 
(b) These amounts include estimates for capital expenditures related to information technology projects, facility improvements, and vehicle leasing.
 
OUTLOOK
 
Corporate Outlook
 
Our business strategy will focus on making continued investment in our utility business, further reducing parent debt, and growing earnings while controlling operating costs.
 
Our primary focus with respect to our utility business will be to continue to invest in our utility system to enable us to meet our customer commitments, to comply with increasing environmental performance standards, and to maintain adequate supply and capacity. Our primary focus with respect to our non-utility businesses will be to optimize cash flow and to maximize the value of our remaining assets.
 
ELECTRIC UTILITY BUSINESS OUTLOOK
 
Growth: In 2007, electric deliveries grew about one percent over 2006 levels. In 2008, we project electric deliveries to decline one-quarter of a percent compared to 2007 levels. This outlook assumes a small decline in industrial economic activity, the cancellation of one wholesale customer contract, and normal weather conditions throughout the year.
 
We expect electric deliveries to grow one percent annually over the next five years. This outlook assumes a modestly growing customer base and a stabilizing Michigan economy after 2008. This growth rate, which reflects a long-range expected trend includes both full-service sales and delivery service to customers who choose to buy generation service from an alternative electric supplier, but excludes transactions with other wholesale market participants and other electric utilities. Growth from year to year may vary from this trend due to customer response to the following:
 
  •  energy conservation measures,


CMS-25


 

 
  •  fluctuations in weather conditions, and
 
  •  changes in economic conditions, including utilization and expansion or contraction of manufacturing facilities.
 
Electric Customer Revenue Outlook: Closures and restructuring of automotive manufacturing facilities and related suppliers and the sluggish housing market have hampered Michigan’s economy. The Michigan economy also has had facility closures in the non-manufacturing sector and limited growth. Although our electric utility results are not dependent upon a single customer, or even a few customers, those in the automotive sector represented five percent of our total 2007 electric revenue. We cannot predict the financial impact of the Michigan economy on our electric customer revenue.
 
Electric Reserve Margin: To reduce the risk of high power supply costs during peak demand periods and to achieve our Reserve Margin target, we purchase electric capacity and energy contracts for the physical delivery of electricity primarily in the summer months and to a lesser extent in the winter months. We have purchased capacity and energy contracts covering a portion of our Reserve Margin requirements for 2008 through 2010. We are currently planning for a Reserve Margin of 13.7 percent for summer 2008, or supply resources equal to 113.7 percent of projected firm summer peak load. Of the 2008 supply resources target, we expect 93 percent to come from our electric generating plants and long-term power purchase contracts, with other contractual arrangements making up the remainder. We expect capacity costs for these electric capacity and energy contracts to be $21 million for 2008.
 
In September 2007, we exercised the regulatory-out provision in the MCV PPA, thus limiting the amount we pay the MCV Partnership for capacity and fixed energy to the amount recoverable from our customers. The MCV Partnership may, under certain circumstances, have the right to terminate the MCV PPA, which could affect our Reserve Margin status. The MCV PPA represents approximately 13 percent of our 2008 expected supply resources. For additional details, see “The MCV PPA” within this MD&A.
 
Electric Transmission Expenses: In 2008, we expect transmission rates charged to us to increase by $42 million due primarily to a 33 percent increase in METC transmission rates. This increase was included in our 2008 PSCR plan filed with the MPSC in September 2007.
 
In September 2007, the FERC approved a proposal to include 100 percent of the costs of network upgrades associated with new generator interconnections in the rates of certain MISO transmission owners, including METC. Previously, those transmission owners shared interconnection network upgrade costs with generators. Consumers, Detroit Edison, the MPSC, and other parties filed a request for rehearing of the FERC order.
 
21st Century Electric Energy Plan: In January 2007, the then chairman of the MPSC proposed initiatives to the governor of Michigan for the use of more renewable energy resources by all load-serving entities such as Consumers, the creation of an energy efficiency program, and a procedure for reviewing proposals to construct new generation facilities. The January proposal indicated that Michigan will need new base-load capacity by 2015. The proposed initiatives will require changes to current legislation.
 
Balanced Energy Initiative: In response to the 21st Century Electric Energy Plan, we filed with the MPSC a “Balanced Energy Initiative” that provides a comprehensive energy resource plan to meet our projected short-term and long-term electric power requirements. The filing requests the MPSC to rule that the Balanced Energy Initiative represents a reasonable and prudent plan for the acquisition of necessary electric utility resources. Implementation of the Balanced Energy Initiative will require legislative repeal or significant reform of the Customer Choice Act.
 
In September 2007, we filed with the MPSC an updated Balanced Energy Initiative, which includes our plan to build an 800 MW advanced clean coal plant at our Karn/Weadock Generating complex near Bay City, Michigan. We expect to use 500 MW of the plant’s output to serve Consumers’ customers and to commit the remaining 300 MW to others. We expect the plant to begin operating in 2015. We estimate our share of the cost at $1.6 billion including financing costs. Construction of the proposed new clean coal plant is contingent upon obtaining environmental permits and MPSC approval.
 
The Michigan Attorney General filed a motion with the MPSC to dismiss the Balanced Energy Initiative case, claiming that the MPSC lacks jurisdiction over the matter, which the ALJ denied. The Michigan Attorney General and another intervenor have filed an appeal of that decision with the MPSC.


CMS-26


 

Proposed Energy Legislation: There are various bills introduced and being considered in the U.S. Congress and the Michigan legislature relating to mandatory renewable energy standards. If enacted, these bills generally would require electric utilities either to acquire a certain percentage of their power from renewable sources or pay fees, or purchase allowances in lieu of having the resources. Also in December 2007, several bills were introduced in the Michigan legislature that would reform the Customer Choice Act, introduce energy efficiency programs, modify the timing of rate increase requests, amend customer rate design and provide for other regulatory changes. We cannot predict whether any of these bills will be enacted or what form the final legislation might take.
 
Power Plant Purchase: In December 2007, we purchased a 935 MW gas-fired power plant located in Zeeland, Michigan for $519 million from Broadway Gen Funding LLC, an affiliate of LS Power Group. The power plant will help meet the growing energy needs of our customers.
 
ELECTRIC UTILITY BUSINESS UNCERTAINTIES
 
Several electric business trends and uncertainties may affect our financial condition and future results of operations. These trends and uncertainties have, had, or are reasonably expected to have, a material impact on revenues and income from continuing electric operations.
 
Electric Environmental Estimates: Our operations are subject to various state and federal environmental laws and regulations. We have been able to recover our costs to operate our facilities in compliance with these laws and regulations in customer rates.
 
Clean Air Act: Compliance with the federal Clean Air Act and resulting state and federal regulations continues to be a major focus for us. The State of Michigan’s Nitrogen Oxides Implementation Plan requires significant reductions in nitrogen oxides emissions. From 1998 to present, we have incurred $786 million in capital expenditures to comply with this plan, including installing selective catalytic reduction control technology on three of our coal-fired electric generating units. We have also installed low nitrogen oxides burners on a number of our coal-fired electric generating units.
 
Clean Air Interstate Rule: In March 2005, the EPA adopted the Clean Air Interstate Rule that requires additional coal-fired electric generating plant emission controls for nitrogen oxides and sulfur dioxide. We plan to meet the nitrogen oxides requirements by:
 
  •  operating our selective catalytic reduction control technology units throughout the year,
 
  •  completing the installation of a fourth selective catalytic reduction control unit,
 
  •  installing low nitrogen oxides burners, and
 
  •  purchasing emission allowances.
 
We plan to meet the sulfur dioxide requirements by injecting a chemical that reduces sulfur dioxide emissions, installing scrubbers and purchasing emission allowances. We plan to spend an additional $835 million for equipment installation through 2015, which we expect to recover in customer rates. The key assumptions in the capital expenditure estimate include:
 
  •  construction commodity prices, especially construction material and labor,
 
  •  project completion schedules and spending plans,
 
  •  cost escalation factor used to estimate future years’ costs of 3.2 percent, and
 
  •  an AFUDC capitalization rate of 7.9 percent.
 
We will need to purchase additional nitrogen oxides emission allowances through 2011 at an estimated cost of $3 million per year. We will also need to purchase additional sulfur dioxide emission allowances in 2012 and 2013 at an estimated cost of $10 million per year. We expect to recover emissions allowance costs from our customers through the PSCR process.


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The Clean Air Interstate Rule was appealed to the U.S. Court of Appeals for the District of Columbia by a number of utilities and other companies. A decision is expected in 2008. We cannot predict the outcome of these appeals.
 
State and Federal Mercury Air Rules: In March 2005, the EPA issued the CAMR, which requires initial reductions of mercury emissions from coal-fired electric generating plants by 2010 and further reductions by 2018. Certain portions of the CAMR were appealed to the U.S. Court of Appeals for the District of Columbia by a number of states and other entities. The U.S. Court of Appeals for the District of Columbia decided the case on February 8, 2008, and determined that the rates developed by the EPA were not consistent with the Clean Air Act. We continue to monitor the development of federal regulation in this area.
 
In April 2006, Michigan’s governor proposed a plan that would result in mercury emissions reductions of 90 percent by 2015. We are working with the MDEQ on the details of this plan; however, we have developed preliminary cost estimates and a mercury emissions reduction scenario based on our best knowledge of control technology options and initially proposed requirements. We estimate that costs associated with Phase I of the state’s mercury plan will be approximately $280 million by 2010 and an additional $200 million by 2015. The key assumptions in the capital expenditure estimate are the same as those stated for the Clean Air Interstate Rule.
 
The following table outlines the proposed state mercury plan:
 
         
    Phase I   Phase II
 
Proposed State Mercury Rule
  30% reduction by 2010   90% reduction by 2015
 
Routine Maintenance Classification: The EPA has alleged that some utilities have incorrectly classified plant modifications as “routine maintenance” rather than seeking permits from the EPA to modify their plants. We responded to information requests from the EPA on this subject in 2000, 2002, and 2006. We believe that we have properly interpreted the requirements of “routine maintenance.” If the EPA finds that our interpretation is incorrect, we could be required to install additional pollution controls at some or all of our coal-fired electric generating plants and pay fines. Additionally, we would need to assess the viability of continuing operations at certain plants. We cannot predict the financial impact or outcome of this issue.
 
Greenhouse Gases: Several legislative proposals have been introduced in the United States Congress that would require reductions in emissions of greenhouse gases, including carbon dioxide. These laws, or similar state laws or rules, if enacted could require us to replace equipment, install additional equipment for pollution controls, purchase allowances, curtail operations, or take other steps. Although associated capital or operating costs relating to greenhouse gas regulation or legislation could be material, and cost recovery cannot be assured, we expect to have an opportunity to recover these costs and capital expenditures in rates consistent with the recovery of other reasonable costs of complying with environmental laws and regulations.
 
To the extent that greenhouse gas emission reduction rules come into effect, the mandatory emissions reduction requirements could have far-reaching and significant implications for the energy sector. We cannot estimate the effect of federal or state greenhouse gas policy on our future consolidated results of operations, cash flows, or financial position due to the uncertain nature of the policies. However, we will continue to monitor greenhouse gas policy developments and assess and respond to their potential implications for our business operations.
 
Water: In March 2004, the EPA issued rules that govern electric generating plant cooling water intake systems. The rules require significant reduction in the number of fish harmed by operating equipment. EPA compliance options in the rule were challenged in court. In January 2007, the court rejected many of the compliance options favored by industry and remanded the bulk of the rule back to the EPA for reconsideration. The court’s ruling is expected to increase significantly the cost of complying with this rule. However, the cost to comply will not be known until the EPA’s reconsideration is complete. At this time, the EPA is developing rules to implement the court’s decision. The rules are expected to be released for public comment in late 2008.
 
For additional details on electric environmental matters, see Note 3, Contingencies, “Consumers’ Electric Utility Contingencies — Electric Environmental Matters.”


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Electric ROA: The Customer Choice Act allows all of our electric customers to buy electric generation service from us or from an alternative electric supplier. At December 31, 2007, alternative electric suppliers were providing 315 MW of generation service to ROA customers. This is 4 percent of our total distribution load and represents an increase of 5 percent of ROA load compared to December 31, 2006.
 
In November 2004, the MPSC issued an order allowing us to recover Stranded Costs incurred in 2002 and 2003 through a surcharge applied to ROA customers. Since the MPSC order, we have experienced a downward trend in ROA customers. If this trend continues, it may require legislative or regulatory assistance to recover fully our 2002 and 2003 Stranded Costs.
 
Electric Rate Case: During 2007, we filed applications with the MPSC seeking an 11.25 percent authorized return on equity and an annual increase in revenues of $269 million. The filings sought recovery of the costs associated with increased plant investment, including the purchase of the Zeeland power plant, increased equity investment, higher operation and maintenance expenses, recovery of transaction costs from the sale of Palisades, and the approval of an energy efficiency program.
 
In December 2007, the MPSC approved a rate increase of $70 million related to the purchase of the Zeeland power plant. For additional details and material changes relating to the restructuring of the electric utility industry and electric rate matters, see Note 3, Contingencies, “Consumers’ Electric Utility Rate Matters.”
 
The MCV PPA: The MCV Partnership, which leases and operates the MCV Facility, contracted to sell electricity to Consumers for a 35-year period beginning in 1990. In September 2007, we exercised the regulatory-out provision in the MCV PPA, thus limiting the amount we pay the MCV Partnership for capacity and fixed energy to the amount recoverable from our customers. The MCV Partnership has notified us that it disputes our right to exercise the regulatory-out provision. We believe that the provision is valid and fully effective and have not recorded any reserves, but we cannot predict whether we would prevail in the event of litigation on this issue.
 
As a result of our exercise of the regulatory-out provision, the MCV Partnership may, under certain circumstances, have the right to terminate the MCV PPA or reduce the amount of capacity sold under the MCV PPA. If the MCV Partnership terminates or reduces the amount of capacity sold under the MCV PPA, we will seek to replace the lost capacity to maintain an adequate electric Reserve Margin. This could involve entering into a new power purchase agreement and (or) entering into electric capacity contracts on the open market. We cannot predict whether we could enter into such contracts at a reasonable price. We are also unable to predict whether we would receive regulatory approval of the terms and conditions of such contracts, or whether the MPSC would allow full recovery of our incurred costs.
 
To comply with a prior MPSC order, we made a filing in May 2007 with the MPSC requesting a determination as to whether it wished to reconsider the amount of the MCV PPA payments that we recover from customers. In May 2007, the MCV Partnership also filed an application with the MPSC seeking approval to increase our recovery of costs incurred under the MCV PPA. We cannot predict the financial impact or outcome of these matters. For additional details on the MCV PPA, see Note 3, Contingencies, “Other Consumers’ Electric Utility Contingencies - The MCV PPA.”
 
Sale of Nuclear Assets: In April 2007, we sold Palisades to Entergy for $380 million and received $363 million after various closing adjustments. We also paid Entergy $30 million to assume ownership and responsibility for the Big Rock ISFSI. In addition, we paid the NMC, the former operator of Palisades, $7 million in exit fees and forfeited our $5 million investment in the NMC. The MPSC order approving the Palisades transaction allowed us to recover the book value of Palisades. As a result, we are crediting proceeds in excess of book value of $66 million to our customers through the end of 2008. After closing adjustments, which are subject to MPSC review, proceeds in excess of the book value were $77 million. Recovery of our transaction costs of $28 million, which includes the NMC exit fees and investment forfeiture, is presently under review by the MPSC in our current electric rate case.
 
Entergy assumed responsibility for the future decommissioning of Palisades and for storage and disposal of spent nuclear fuel at Palisades and the Big Rock ISFSI sites. We transferred $252 million in trust fund assets to Entergy. We are crediting excess decommissioning funds of $189 million to our retail customers through the end of


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2008. Modification to the terms of the transaction allowed us immediate access to additional excess decommissioning trust funds of $123 million. The distribution of these funds is currently under review by the


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MPSC in our electric rate case filing. For additional details on the sale of Palisades and the Big Rock ISFSI, see Note 2, Asset Sales, Discontinued Operations and Impairment Charges.
 
As part of the transaction, we entered into a 15-year power purchase agreement under which Entergy sells us all of the plant’s output up to its current annual average capacity of 798 MW. Because of the Palisades power purchase agreement and our continuing involvement with the Palisades assets, we accounted for the disposal of Palisades as a financing for accounting purposes and not a sale. For additional details on the Palisades financing, see Note 11, Leases.
 
GAS UTILITY BUSINESS OUTLOOK
 
Growth: In 2008, we project that gas deliveries will remain flat, on a weather-adjusted basis, relative to 2007 levels due to continuing conservation and overall economic conditions in Michigan. We expect gas deliveries to decline by less than one-half of one percent annually over the next five years. Actual gas deliveries in future periods may be affected by:
 
  •  fluctuations in weather conditions,
 
  •  use by independent power producers,
 
  •  availability of renewable energy sources,
 
  •  changes in gas commodity prices,
 
  •  Michigan economic conditions,
 
  •  the price of competing energy sources or fuels,
 
  •  gas consumption per customer, and
 
  •  improvements in gas appliance efficiency.
 
GAS UTILITY BUSINESS UNCERTAINTIES
 
Several gas business trends and uncertainties may affect our future financial results and financial condition. These trends and uncertainties could have a material impact on future revenues and income from gas operations.
 
Gas Environmental Estimates: We expect to incur investigation and remedial action costs at a number of sites, including 23 former manufactured gas plant sites. For additional details, see Note 3, Contingencies, “Consumers’ Gas Utility Contingencies — Gas Environmental Matters.”
 
Gas Cost Recovery: The GCR process is designed to allow us to recover all of our purchased natural gas costs if incurred under reasonable and prudent policies and practices. The MPSC reviews these costs, policies, and practices for prudency in annual plan and reconciliation proceedings. For additional details on GCR, see Note 3, Contingencies, “Consumers’ Gas Utility Rate Matters — Gas Cost Recovery.”
 
Gas Depreciation: In June 2007, the MPSC issued its final order in a generic ARO accounting case and modified the filing requirement for our next gas depreciation case. The original filing requirement date was changed from 90 days after the issuance of that order to no later than August 1, 2008. Additionally, we have been ordered to use 2007 data and prepare a cost-of-removal depreciation study with five alternatives using the MPSC’s prescribed methods. We cannot predict the outcome of the analysis.
 
If a final order in our next gas depreciation case is not issued concurrently with a final order in a general gas rate case, the MPSC may incorporate the results of the depreciation case into general gas rates through a surcharge, which may be either positive or negative.
 
2007 Gas Rate Case: In February 2007, we filed an application with the MPSC seeking an 11.25 percent authorized return on equity as part of an $88 million annual increase in our gas delivery and transportation rates. In August 2007, the MPSC approved a partial settlement agreement authorizing an annual rate increase of $50 million, including an authorized return on equity of 10.75 percent. On September 25, 2007, the MPSC reopened the record in the case to allow all interested parties to be heard concerning the approval of an energy efficiency program, which


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we proposed in our original filing. Hearings on this matter were held in February 2008. We expect the MPSC to issue a final order in the second quarter of 2008. If approved in total, this would result in an additional rate increase of $9 million for implementation of the energy efficiency program.
 
2008 Gas Rate Case: In February 2008, we filed an application with the MPSC for an annual gas rate increase of $91 million and an 11 percent authorized return on equity.
 
ENTERPRISES OUTLOOK
 
In 2007, we completed the sale of our international assets. Our primary focus with respect to our remaining non-utility businesses is to optimize cash flow and maximize the value of these assets.
 
In connection with the sale of our Argentine and Michigan assets to Lucid Energy in March 2007, we entered into agreements that grant Lucid Energy:
 
  •  an option to buy CMS Gas Transmission’s ownership interest in TGN, subject to the rights of other third parties,
 
  •  the rights to certain proceeds that may be awarded and received by CMS Gas Transmission in connection with certain legal proceedings, including an ICSID arbitration award, and
 
  •  the rights to proceeds that Enterprises will receive if it sells its interest in CMS Generation San Nicolas Company.
 
Under these agreements, we have assigned our rights to certain awards or proceeds that we may receive in the future. Of the total consideration received in the sale, we allocated $32 million to these agreements and recorded this amount as a deferred credit on our Consolidated Balance Sheets. Due to the settlement of certain legal proceedings in 2007, a portion of CMS Gas Transmission’s obligations under these agreements has been satisfied. Accordingly, we recognized $17 million of the deferred credit as a gain.
 
For details on the ICSID arbitration award, see Note 3, Contingencies.
 
Uncertainties: Trends and uncertainties that could have a material impact on our consolidated income, cash flows, or balance sheet and credit improvement include:
 
  •  the impact of indemnity and environmental remediation obligations at Bay Harbor,
 
  •  the outcome of certain legal proceedings,
 
  •  the impact of representations, warranties, and related indemnities in connection with the sales of our international assets, and
 
  •  changes in commodity prices and interest rates on certain derivative contracts that do not qualify for hedge accounting and must be marked to market through earnings.
 
CMS ERM Electricity Sales Agreements: CMS ERM was a party to three electricity sales agreements, under which it provided up to 300 MW of electricity at fixed prices. CMS ERM satisfied its obligations under these agreements by using electricity generated by DIG or by purchasing electricity from the market. Because the price of natural gas has increased substantially in recent years, the prices that were charged under these agreements did not reflect DIG’s cost to generate or CMS ERM’s cost to purchase electricity from the market. Therefore, these agreements negatively impacted DIG’s and CMS ERM’s financial performance.
 
In November 2007, CMS ERM, DIG, and CMS Energy reached an agreement to terminate two of these electricity sales agreements in order to eliminate future losses under those contracts. As consideration for agreeing to terminate the agreements, CMS ERM paid the customers $275 million upon closing the transaction in February 2008. We recorded a liability for the future payment and other termination costs and recognized a loss of $279 million in 2007, representing the cost to terminate the agreements. As a result of terminating these agreements, CMS ERM and DIG have reduced their long-term electric capacity supply obligations by 260 MW. CMS ERM will market the capacity and energy that was previously committed under these agreements into the merchant market either through third party agreements or directly with the MISO.


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Also in November 2007, CMS ERM executed an amendment of the remaining electricity sales agreement, which was effective upon the closing of the transaction. The purpose of the amendment is to optimize production planning and ensure optimal use of available resources. The amendment establishes a minimum amount of contract capacity to be provided under the agreement, and adds a minimum and maximum amount of electricity to be delivered to the customer. As amended, this electricity sales agreement is a derivative instrument. Upon signing the amendment in 2007, we recorded our minimum obligation under the contract on our Consolidated Balance Sheets at its fair value and recognized the resulting mark-to-market loss of $18 million in earnings. For additional details on accounting for this derivative, see Note 6, Financial and Derivative Instruments.
 
OTHER OUTLOOK
 
Advanced Metering Infrastructure: We are developing an advanced meter system that will provide more frequent information about our customer energy usage and notification of service interruptions. The system will allow customers to make decisions about energy efficiency and conservation, provide other customer benefits, and reduce costs. We anticipate developing integration software and piloting new technology over the next two years. We expect capital expenditures for this project over the next seven years to be approximately $800 million. Over the long-term, we do not expect this project to significantly impact rates.
 
Software Implementation: We are implementing an integrated business software system for finance, purchasing/supply chain, customer billing, human resources and payroll, and utility asset construction and maintenance work management. We expect the new business software, scheduled to be in production in the first half of 2008, to improve customer service, reduce risk, and increase flexibility. Including work done to date, we expect to incur $175 million in operating expenses and capital expenditures for the initial implementation.
 
Michigan Public Service Commission: During the third quarter of 2007, the Michigan governor appointed a new MPSC chairperson and a new MPSC commissioner. We have several significant cases pending MPSC review and approval. For additional detail on these cases, see Note 3, Contingencies, “Consumers’ Electric Utility Rate Matters” and “Consumers’ Gas Utility Rate Matters.”
 
Litigation and Regulatory Investigation: We are the subject of an investigation by the DOJ regarding round-trip trading transactions by CMS MST. Also, we are named as a party in various litigation matters including, but not limited to, several lawsuits regarding alleged false natural gas price reporting and price manipulation. Additionally, the SEC is investigating the actions of former CMS Energy subsidiaries in relation to Equatorial Guinea. For additional details regarding these and other matters, see Note 3, Contingencies and Item 3. Legal Proceedings.
 
Michigan Tax Legislation: In July 2007, the Michigan governor signed Senate Bill 94, the Michigan Business Tax Act, which imposed a business income tax of 4.95 percent and a modified gross receipts tax of 0.8 percent. The bill provided for a number of tax credits and incentives geared toward those companies investing and employing in Michigan. The Michigan Business Tax, which was effective January 1, 2008, replaced the state’s Single Business Tax that expired on December 31, 2007. In September 2007, the Michigan governor signed House Bill 5104, allowing additional deductions in future years against the business income portion of the tax. These future deductions are phased in over a 15-year period, beginning in 2015. As a result, our consolidated net deferred tax liability of $122 million, recorded due to the Michigan Business Tax enactment, was offset by a net deferred tax asset of $122 million. In December 2007, the Michigan governor signed House Bill 5408, replacing the expanded sales tax for certain services with a 21.99 percent surcharge on the business income tax and the modified gross receipts tax. Therefore, the total tax rates imposed under the Michigan Business Tax are 6.04 percent for the business income tax and 0.98 percent for the modified gross receipts tax. We expect to recover the taxes that we pay from our customers, but we cannot predict the timeliness of such recovery.
 
IMPLEMENTATION OF NEW ACCOUNTING STANDARDS
 
SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and 132(R): In September 2006, the FASB issued SFAS No. 158. Phase one of this standard, implemented in December 2006, required us to recognize the funded


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status of our defined benefit postretirement plans on our Consolidated Balance Sheets at December 31, 2006. Phase two requires that we change our plan measurement date from November 30 to December 31, effective for the year ending December 31, 2008. The implementation of phase two of this standard will not have a material effect on our consolidated financial statements.
 
FIN 48, Accounting for Uncertainty in Income Taxes: This interpretation, which we adopted on January 1, 2007, provides a two-step approach for the recognition and measurement of uncertain tax positions taken, or expected to be taken, by a company on its income tax returns. The first step is to evaluate the tax position to determine if, based on management’s best judgment, it is greater than 50 percent likely that we will sustain the tax position. The second step is to measure the appropriate amount of the benefit to recognize. This is done by estimating the potential outcomes and recognizing the greatest amount that has a cumulative probability of at least 50 percent. FIN 48 requires interest and penalties, if applicable, to be accrued on differences between tax positions recognized in our consolidated financial statements and the amount claimed, or expected to be claimed, on the tax return.
 
CMS Energy and its subsidiaries file a consolidated U.S. federal income tax return as well as unitary and combined income tax returns in several states. CMS Energy and its subsidiaries also file separate company income tax returns in several states. The only significant state tax paid by CMS Energy is in Michigan. However, since the Michigan Single Business Tax was not an income tax, it was not part of the FIN 48 analysis. For the U.S. federal income tax return, CMS Energy completed examinations by federal taxing authorities for its taxable years prior to 2002. The federal income tax returns for the years 2002 through 2006 are open under the statute of limitations, with 2002 through 2005 currently under examination.
 
As a result of the implementation of FIN 48, we recorded a charge for additional uncertain tax benefits of $11 million, which was accounted for as a reduction of our beginning retained earnings. Included in this amount was an increase in our valuation allowance of $100 million, decreases to tax reserves of $61 million and a decrease to deferred tax liabilities of $28 million. As of December 31, 2007, remaining uncertain tax benefits that would reduce our effective tax rate in future years are $8 million. We are not expecting any other material changes to our uncertain tax positions over the next twelve months.
 
We have reflected a net interest liability of $2 million related to our uncertain income tax positions on our Consolidated Balance Sheets as of December 31, 2007. We have not accrued any penalties with respect to uncertain tax benefits. We recognize accrued interest and penalties, where applicable, related to uncertain tax benefits as part of income tax expense.
 
NEW ACCOUNTING STANDARDS NOT YET EFFECTIVE
 
SFAS No. 157, Fair Value Measurements: In September 2006, the FASB issued SFAS No. 157, effective for us on January 1, 2008. The standard provides a revised definition of fair value and establishes a framework for measuring fair value. Under the standard, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly exchange between market participants. The standard does not expand the use of fair value, but it requires new disclosures about the impact and reliability of fair value measurements. The standard will also eliminate the existing prohibition against recognizing “day one” gains and losses on derivative instruments. We currently do not hold any derivatives that would involve day one gains or losses. The standard is to be applied prospectively, except that limited retrospective application is required for three types of financial instruments, none of which we currently hold. We do not believe that the implementation of this standard will have a material effect on our consolidated financial statements.
 
In February 2008, the FASB issued a one-year deferral of SFAS No. 157 for all nonfinancial assets and liabilities, except those that are recorded or disclosed at fair value on a recurring basis. Under this partial deferral, SFAS No. 157 will not be effective until January 1, 2009 for fair value measurements in the following areas:
 
  •  AROs,
 
  •  most of the nonfinancial assets and liabilities acquired in a business combination, and
 
  •  fair value measurements performed in conjunction with impairment analyses.


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SFAS No. 157 remains effective January 1, 2008 for our derivative instruments, available-for-sale investment securities, and long-term debt fair value disclosures.
 
SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, Including an amendment to FASB Statement No. 115: In February 2007, the FASB issued SFAS No. 159, effective for us on January 1, 2008. This standard gives us the option to measure certain financial instruments and other items at fair value, with changes in fair value recognized in earnings. We do not expect to elect the fair value option for any financial instruments or other items.
 
SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51: In December 2007, the FASB issued SFAS No. 160, effective for us January 1, 2009. Ownership interests in subsidiaries held by third parties, which are currently referred to as minority interests, will be presented as noncontrolling interests and shown separately on our Consolidated Balance Sheets within equity. Any changes in our ownership interests while control is retained will be treated as equity transactions. In addition, this standard requires presentation and disclosure of the allocation between controlling and noncontrolling interests’ income from continuing operations, discontinued operations, and comprehensive income and a reconciliation of changes in the consolidated statement of equity during the reporting period. The presentation and disclosure requirements of the standard will be applied retrospectively for all periods presented. All other requirements will be applied prospectively. We are evaluating the impact SFAS No. 160 will have on our consolidated financial statements.
 
FSP FIN 39-1, Amendment of FASB Interpretation No. 39: In April 2007, the FASB issued FSP FIN 39-1, effective for us on January 1, 2008. This standard will permit us to offset the fair value of derivative instruments with cash collateral received or paid for those derivative instruments executed with the same counterparty under a master netting arrangement. The decision to offset derivative positions under master netting arrangements remains an accounting policy choice. We have elected to offset our derivative fair values under master netting arrangements, but we currently record cash collateral amounts separately. As a result of offsetting the collateral amounts under this standard, we expect that both our total assets and total liabilities will be reduced by an immaterial amount. There will be no impact on earnings from adopting this standard. The standard is to be applied retrospectively for all periods presented in our consolidated financial statements.
 
EITF Issue 06-11, Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards: In June 2007, the FASB ratified EITF Issue 06-11, effective for us on a prospective basis beginning January 1, 2008. EITF Issue 06-11 requires companies to recognize, as an increase to additional paid-in capital, the income tax benefit realized from dividends or dividend equivalents that are charged to retained earnings and paid to employees for non-vested equity-classified employee share-based payment awards. We do not believe that implementation of this standard will have a material effect on our consolidated financial statements.


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CMS Energy Corporation
 
 
                         
    Years Ended December 31  
    2007     2006     2005  
    In Millions  
 
Operating Revenue
  $ 6,464     $ 6,126     $ 5,879  
Earnings from Equity Method Investees
    40       89       125  
Operating Expenses
                       
Fuel for electric generation
    422       711       644  
Fuel costs mark-to-market at the MCV Partnership
          204       (200 )
Purchased and interchange power
    1,407       709       441  
Cost of gas sold
    2,273       2,131       2,296  
Electric sales contract termination
    279              
Other operating expenses
    976       1,136       1,030  
Maintenance
    201       297       230  
Depreciation and amortization
    540       550       504  
General taxes
    222       151       226  
Asset impairment charges, net of insurance recoveries
    204       459       1,184  
Gain on asset sales, net
    (21 )     (79 )     (6 )
                         
      6,503       6,269       6,349  
                         
Operating Income (Loss)
    1       (54 )     (345 )
Other Income (Deductions)
                       
Interest and dividends
    96       76       60  
Regulatory return on capital expenditures
    31       26       4  
Foreign currency gain (loss), net
    1             (5 )
Other income
    40       31       33  
Other expense
    (39 )     (21 )     (45 )
                         
      129       112       47  
                         
Fixed Charges
                       
Interest on long-term debt
    382       448       458  
Interest on long-term debt — related parties
    14       15       29  
Other interest
    48       27       14  
Capitalized interest
    (6 )     (10 )     (38 )
Preferred dividends of subsidiaries
    2       5       5  
                         
      440       485       468  
                         
Loss Before Income Taxes
    (310 )     (427 )     (766 )
Income Tax Benefit
    (195 )     (188 )     (180 )
                         
Loss Before Minority Interests (Obligations), Net
    (115 )     (239 )     (586 )
Minority Interests (Obligations), Net
    11       (106 )     (445 )
                         
Loss From Continuing Operations
    (126 )     (133 )     (141 )
Income (Loss) From Discontinued Operations, Net of Tax (Tax Benefit) of $(1), $32, and $20
    (89 )     54       57  
                         
Net Loss
    (215 )     (79 )     (84 )
Preferred Dividends
    11       11       10  
Redemption Premium on Preferred Stock
    1              
                         
Net Loss Available to Common Stockholders
  $ (227 )   $ (90 )   $ (94 )
                         


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    Years Ended December 31  
    2007     2006     2005  
    In Millions, Except Per
 
    Share Amounts  
 
CMS Energy
                       
Net Loss
                       
Net Loss Available to Common Stockholders
  $ (227 )   $ (90 )   $ (94 )
                         
Basic Earnings (Loss) Per Average Common Share
                       
Loss from Continuing Operations
  $ (0.62 )   $ (0.66 )   $ (0.71 )
Gain (Loss) from Discontinued Operations
    (0.40 )     0.25       0.27  
                         
Net Loss Attributable to Common Stock
  $ (1.02 )   $ (0.41 )   $ (0.44 )
                         
Diluted Earnings (Loss) Per Average Common Share
                       
Loss from Continuing Operations
  $ (0.62 )   $ (0.66 )   $ (0.71 )
Gain (Loss) from Discontinued Operations
    (0.40 )     0.25       0.27  
                         
Net Loss Attributable to Common Stock
  $ (1.02 )   $ (0.41 )   $ (0.44 )
                         
Dividends Declared Per Common Share
  $ 0.20     $     $  
                         
 
The accompanying notes are an integral part of these statements.


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CMS Energy Corporation
 
 
                         
    Years Ended December 31  
   
2007
   
2006
   
2005
 
    In Millions  
 
Cash Flows from Operating Activities
                       
Net loss
  $ (215 )   $ (79 )   $ (84 )
Adjustments to reconcile net loss to net cash provided by operating activities Depreciation and amortization, net of nuclear decommissioning of $4, $6,  and $6
    545       576       525  
Deferred income taxes and investment tax credit
    (221 )     (271 )     (199 )
Minority obligations, net
    (10 )     (100 )     (440 )
Asset impairment charges, net of insurance recoveries
    204       459       1,184  
Postretirement benefits expense
    131       131       112  
Electric sales contract termination
    279              
Shareholder class action settlement expense
          125        
Fuel costs mark-to-market at the MCV Partnership
          204       (200 )
Regulatory return on capital expenditures
    (31 )     (26 )     (4 )
Capital lease and other amortization
    55       44       40  
Bad debt expense
    37       28       23  
Loss (gain) on the sale of assets
    112       (79 )     (20 )
Earnings from equity method investees
    (40 )     (89 )     (125 )
Cash distributions from equity method investees
    18       75       108  
Postretirement benefits contributions
    (184 )     (69 )     (63 )
Shareholder class action settlement payment
    (125 )            
Changes in other assets and liabilities:
                       
Decrease (increase) in accounts receivable and accrued revenues
    (451 )     75       (246 )
Decrease (increase) in accrued power supply and gas revenue
    99       (91 )     (65 )
Increase in inventories
    (10 )     (105 )     (245 )
Increase (decrease) in accounts payable
    (45 )     (43 )     170  
Increase (decrease) in accrued expenses
    (31 )     39       8  
Increase (decrease) in the MCV Partnership gas supplier funds on deposit
          (147 )     173  
Decrease (increase) in other current and non-current assets
    41       56       (38 )
Increase (decrease) in other current and non-current liabilities
    (131 )     (27 )     (16 )
                         
Net cash provided by operating activities
    27       686       598  
                         
Cash Flows from Investing Activities
                       
Capital expenditures (excludes assets placed under capital lease)
    (1,263 )     (670 )     (593 )
Cost to retire property
    (28 )     (78 )     (27 )
Restricted cash and restricted short-term investments
    49       124       (151 )
Investments in nuclear decommissioning trust funds
    (1 )     (21 )     (6 )
Proceeds from nuclear decommissioning trust funds
    333       22       39  
Purchases of available-for-sale SERP investments
    (68 )     (4 )     (2 )
Proceeds from available-for-sale SERP investments
    64       6       3  
Proceeds from short-term investments
                295  
Purchase of short-term investments
                (186 )
Maturity of the MCV Partnership restricted investment securities held-to-maturity
          130       318  
Purchase of the MCV Partnership restricted investment securities held-to-maturity
          (131 )     (270 )
Proceeds from sale of assets
    1,717       69       61  
Cash relinquished from sale of assets
    (113 )     (148 )      
Decrease (increase) in non-current notes receivable
    (32 )     (50 )     1  
Other investing
          2       25  
                         
Net cash provided by (used in) investing activities
    658       (749 )     (493 )
                         


CMS-37


 

                         
    Years Ended December 31  
   
2007
   
2006
   
2005
 
    In Millions  
 
Cash Flows from Financing Activities
                       
Proceeds from notes, bonds, and other long-term debt
  $ 515     $ 100     $ 1,385  
Issuance of common stock
    15       8       295  
Retirement of bonds and other long-term debt
    (1,095 )     (493 )     (1,509 )
Redemption of preferred stock
    (32 )            
Payment of common stock dividends
    (45 )            
Payment of preferred stock dividends
    (11 )     (11 )     (11 )
Payment of capital lease and financial lease obligations
    (20 )     (26 )     (29 )
Debt issuance costs, financing fees, and other
    (17 )     (12 )     (57 )
                         
Net cash provided by (used in) financing activities
    (690 )     (434 )     74  
                         
Effect of Exchange Rates on Cash
    2       1       (1 )
                         
Net Increase (Decrease) in Cash and Cash Equivalents
    (3 )     (496 )     178  
Cash and Cash Equivalents, Beginning of Period
    351       847       669  
                         
Cash and Cash Equivalents, End of Period
  $ 348     $ 351     $ 847  
                         
Other cash flow activities and non-cash investing and financing activities were:
                       
Cash transactions
                       
Interest paid (net of amounts capitalized)
  $ 432     $ 487     $ 454  
Income taxes paid (net of refunds of $- , $2, and $11)
    14       98       3  
Non-cash transactions
                       
Other assets placed under capital lease
  $ 229     $ 7     $ 12  
                         
 
The accompanying notes are an integral part of these statements.


CMS-38


 

CMS ENERGY CORPORATION
 
 
                 
    December 31  
    2007     2006  
    In Millions  
 
ASSETS
               
Plant and Property (At cost)
               
Electric utility
  $ 8,555     $ 8,504  
Gas utility
    3,467       3,273  
Enterprises
    391       453  
Other
    34       33  
                 
      12,447       12,263  
Less accumulated depreciation, depletion and amortization
    4,166       5,194  
                 
      8,281       7,069  
Construction work-in-progress
    447       639  
                 
      8,728       7,708  
                 
Investments
               
Enterprises
    6       556  
Other
    5       10  
                 
      11       566  
                 
Current Assets
               
Cash and cash equivalents at cost, which approximates market
    348       249  
Restricted cash at cost, which approximates market
    34       71  
Accounts receivable and accrued revenue, less allowances of $21 in 2007 and $25 in 2006
    837       502  
Notes receivable
    68       48  
Accrued power supply and gas revenue
    45       156  
Accounts receivable and notes receivable — related parties
    2       62  
Inventories at average cost
               
Gas in underground storage
    1,123       1,129  
Materials and supplies
    86       87  
Generating plant fuel stock
    125       126  
Regulatory assets — postretirement benefits
    19       19  
Deferred income taxes
          155  
Deferred property taxes
    158       150  
Assets held for sale
          239  
Price risk management assets
    1       45  
Prepayments and other
    38       105