10-K 1 k50057e10vk.htm FORM 10-K e10vk
Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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, 2010
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
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 Registrants (1) have 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 Registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days.
 
CMS Energy Corporation:  Yes x     No o          Consumers Energy Company:  Yes x     No o          
 
Indicate by check mark whether the Registrants have submitted electronically and posted on their corporate Web sites, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrants were required to submit and post such files).
 
CMS Energy Corporation:  Yes x     No o          Consumers Energy Company:  Yes x     No o
 
Indicate by check mark 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. [          ]
 
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.
 
CMS Energy Corporation:  Large accelerated filer  x          Accelerated filer  o     Non-Accelerated filer  o Smaller reporting company o
 
Consumers Energy Company:  Large accelerated filer  o          Accelerated filer  o     Non-Accelerated filer  x Smaller reporting company o
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
CMS Energy Corporation:  Yes o     No x          Consumers Energy Company: Yes o     No x
 
The aggregate market value of CMS Energy voting and non-voting common equity held by non-affiliates was $3.326 billion for the 227,027,288 CMS Energy Common Stock shares outstanding on June 30, 2010 based on the closing sale price of $14.65 for CMS Energy Common Stock, as reported by the New York Stock Exchange on such date.
 
There were 252,140,618 shares of CMS Energy Common Stock outstanding on February 10, 2011. On February 24, 2011, CMS Energy held all voting and non-voting common equity of Consumers. Documents incorporated by reference in Part III: CMS Energy’s proxy statement and Consumers’ information statement relating to the 2011 annual meeting of stockholders to be held May 20, 2011.
 


 

CMS Energy Corporation
Consumers Energy Company
 
Annual Reports on Form 10-K to the Securities and Exchange Commission for the Year Ended
December 31, 2010
 
TABLE OF CONTENTS
 
         
       
Page
  3
         
         
     
  10
         
         
     
  10
         
PART I:        
  Business   14
  Risk Factors   32
  Unresolved Staff Comments   41
  Properties   41
  Legal Proceedings   41
  Removed and Reserved   41
         
PART II:        
  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   42
  Selected Financial Data   43
  Management’s Discussion and Analysis of Financial Condition and Results of Operations   43
  Quantitative and Qualitative Disclosures About Market Risk   43
  Financial Statements and Supplementary Data   44
  Changes in and Disagreements With Accountants on Accounting and Financial Disclosure   174
  Controls and Procedures   174
  Other Information   175
         
PART III:        
  Directors, Executive Officers and Corporate Governance   176
  Executive Compensation   177
  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   177
  Certain Relationships and Related Transactions, and Director Independence   177
  Principal Accountant Fees and Services   177
         
PART IV:        
  Exhibits and Financial Statement Schedules   177
 EX-10.34
 EX-10.40
 EX-12.1
 EX-12.2
 EX-21.1
 EX-23.1
 EX-23.2
 EX-24.1
 EX-24.2
 EX-31.1
 EX-31.2
 EX-31.3
 EX-31.4
 EX-32.1
 EX-32.2
 EX-99.1
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT


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GLOSSARY
 
Certain terms used in the text and financial statements are defined below.
 
     
     
2008 Energy Legislation
  Comprehensive energy reform package enacted in October 2008 with the approval of Michigan Senate Bill 213 and Michigan House Bill 5524
     
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 PBO that is typically disclosed in that it does not reflect expected future salary increases.
     
AFUDC
  Allowance for borrowed and equity funds used during construction
     
AOCI
  Accumulated Other Comprehensive Income (Loss)
     
ARO
  Asset retirement obligation
     
ASU
  FASB Accounting Standards Update
     
Bay Harbor
  A residential/commercial real estate area located near Petoskey, Michigan. In 2002, CMS Energy sold its interest in Bay Harbor.
     
bcf
  Billion cubic feet of gas
     
Big Rock
  Big Rock Point nuclear power plant, formerly owned by Consumers
     
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
     
CAIR
  The Clean Air Interstate Rule
     
Cantera Gas Company
  Cantera Gas Company LLC, a non-affiliated company
     
Cantera Natural Gas, Inc. 
  Cantera Natural Gas, Inc., a non-affiliated company that purchased CMS Field Services
     
CAO
  Chief Accounting Officer
     
CATR
  The Clean Air Transport Rule
     
CCB
  Coal combustion by-product
     
CEO
  Chief Executive Officer
     
CFO
  Chief Financial Officer
     
C&HR Committees
  The Compensation and Human Resources Committees of the Boards of Directors of CMS Energy and Consumers
     
City-gate contract
  An 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
     
Clean Water Act
  Federal Water Pollution Control Act
     
CMS Capital
  CMS Capital, L.L.C., a wholly owned subsidiary of CMS Energy


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CMS Electric & Gas
  CMS Electric & Gas, L.L.C., a wholly owned subsidiary of CMS International Ventures
     
CMS Energy
  CMS Energy Corporation, the parent of Consumers and CMS Enterprises
     
CMS Energy Brasil S.A. 
  CMS Energy Brasil S.A., a former wholly owned subsidiary of CMS Electric & Gas
     
CMS Enterprises
  CMS Enterprises Company, a wholly owned subsidiary of CMS Energy
     
CMS ERM
  CMS Energy Resource Management Company, formerly CMS MST, a wholly owned subsidiary of CMS 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 CMS Enterprises
     
CMS Generation
  CMS Generation Co., a former wholly owned subsidiary of CMS Enterprises
     
CMS Generation San Nicolas Company
  CMS Generation San Nicolas Company, a company in which CMS Enterprises formerly owned a 0.1 percent interest
     
CMS International Ventures
  CMS International Ventures LLC, a subsidiary of CMS Enterprises in which CMS Enterprises owns a 61.49 percent interest and CMS Gas Transmission owns a 37.01 percent interest
     
CMS Land
  CMS Land Company, a wholly owned subsidiary of CMS Capital
     
CMS MST
  CMS Marketing, Services and Trading Company, a wholly owned subsidiary of CMS Enterprises, whose name was changed to CMS ERM effective January 2004
     
CMS Oil and Gas
  CMS Oil and Gas Company, a former wholly owned subsidiary of CMS Enterprises
     
CMS Viron
  CMS Viron Corporation, a wholly owned subsidiary of CMS ERM
     
Consumers
  Consumers Energy Company, a wholly owned subsidiary of CMS Energy
     
Consumers Funding
  Consumers Funding LLC, a wholly owned consolidated bankruptcy-remote subsidiary of Consumers and special-purpose entity organized for the sole purpose of purchasing and owning Securitization property, assuming Securitization bonds, and pledging its interest in Securitization property to a trustee to collateralize the Securitization bonds
     
Customer Choice Act
  Customer Choice and Electricity Reliability Act, a Michigan statute
     
D.C. 
  District of Columbia
     
DCCP
  Defined Company Contribution Plan
     
DC SERP
  Defined Contribution SERP
     
Detroit Edison
  The Detroit Edison Company, a non-affiliated company

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DIG
  Dearborn Industrial Generation, L.L.C., a wholly owned subsidiary of Dearborn Industrial Energy, L.L.C., a wholly owned subsidiary of CMS Energy
     
Dodd-Frank Act
  Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted in July 2010
     
DOE
  U.S. Department of Energy
     
DOJ
  U.S. Department of Justice
     
EBITDA
  Earnings Before Interest, Taxes, Depreciation, and Amortization
     
EISP
  Executive Incentive Separation Plan
     
EnerBank
  EnerBank USA, a wholly owned subsidiary of CMS Capital
     
Entergy
  Entergy Corporation, a non-affiliated company
     
EPA
  U.S. Environmental Protection Agency
     
EPS
  Earnings per share
     
Exchange Act
  Securities Exchange Act of 1934, as amended
     
Exeter
  Exeter Energy Limited Partnership, a limited partnership owned directly and indirectly by HYDRA-CO
     
FASB
  Financial Accounting Standards Board
     
FDIC
  Federal Deposit Insurance Corporation
     
FERC
  The Federal Energy Regulatory Commission
     
First Mortgage Bond Indenture
  The indenture dated as of September 1, 1945 between Consumers and The Bank of New York Mellon, as Trustee, as amended and supplemented
     
FLI Liquidating Trust
  Trust formed in Missouri bankruptcy court to accomplish the liquidation of Farmland Industries, Inc., a non-affiliated entity
     
FMB
  First mortgage bond
     
FOV
  Finding of Violation
     
GAAP
  U.S. Generally Accepted Accounting Principles
     
GasAtacama
  GasAtacama Holding Limited, a limited liability partnership that manages GasAtacama S.A., which includes Atacama Finance Company, an integrated natural gas pipeline and electric generating plant in Argentina and Chile, in which CMS International Ventures formerly owned a 50 percent interest
     
GCC
  Gas Customer Choice, which allows gas customers to purchase gas from alternative suppliers
     
GCR
  Gas cost recovery
     
Genesee
  Genesee Power Station Limited Partnership, a VIE in which HYDRA-CO has a 50 percent interest
     
Grayling
  Grayling Generating Station Limited Partnership, a VIE in which HYDRA-CO has a 50 percent interest
     
GWh
  Gigawatt-hour (a unit of energy equal to one million kWh)

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Health Care Acts
  Comprehensive health care reform enacted in March 2010, comprising the Patient Protection and Affordable Care Act and the related Health Care and Education Reconciliation Act
     
HYDRA-CO
  HYDRA-CO Enterprises, Inc., a wholly owned subsidiary of CMS Enterprises
     
IPP
  Independent power producer or independent power production
     
IRS
  Internal Revenue Service
     
ISFSI
  Independent spent fuel storage installation
     
kilovolts
  Thousand volts (unit used to measure the difference in electrical pressure along a current)
     
kVA
  Thousand volt-amperes (unit used to reflect the electrical power capacity rating of equipment or a system)
     
kWh
  Kilowatt-hour (a unit of energy equal to one thousand watt-hours)
     
LIBOR
  The London Interbank Offered Rate
     
Lucid Energy
  Lucid Energy LLC, a non-affiliated company
     
Ludington
  Ludington pumped storage plant, jointly owned by Consumers and Detroit Edison
     
Marathon
  Marathon Oil Company, Marathon E.G. Holding, Marathon E.G. Alba, Marathon E.G. LPG, Marathon Production LTD, and Alba Associates, LLC, each a non-affiliated company
     
MCV Facility
  A 1,500 MW natural gas-fueled, combined-cycle cogeneration facility operated by the MCV Partnership
     
MCV Partnership
  Midland Cogeneration Venture Limited Partnership
     
MCV PPA
  The PPA between Consumers and the MCV Partnership, with a 35-year term commencing in March 1990, as amended and restated in an agreement dated as of June 9, 2008 between Consumers and the MCV Partnership
     
MD&A
  Management’s Discussion and Analysis
     
MDL
  A pending multi-district litigation case in Nevada
     
MDNRE
  Michigan Department of Natural Resources and Environment, which, effective January 17, 2010, is the successor to the Michigan Department of Environmental Quality and the Michigan Department of Natural Resources
     
MEI
  Michigan Energy Investments LLC, an affiliate of Lucid Energy and a non-affiliated company
     
METC
  Michigan Electric Transmission Company, LLC, a non-affiliated company
     
MGP
  Manufactured gas plant
     
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
  The Midwest Independent Transmission System Operator, Inc.

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MPSC
  Michigan Public Service Commission
     
MRV
  Market-Related Value of Plan assets
     
MW
  Megawatt (a unit of power equal to one million watts)
     
MWh
  Megawatt-hour (a unit of energy equal to one million watt-hours)
     
NAV
  Net asset value
     
NERC
  The North American Electric Reliability Corporation, a non-affiliated company
     
NOMECO
  CMS NOMECO Oil & Gas Co., a former wholly owned subsidiary of CMS Enterprises
     
NOV
  Notice of Violation
     
NPDES
  National Pollutant Discharge Elimination System
     
NREPA
  Part 201 of Michigan Natural Resources and Environmental Protection Act, a statute that covers environmental activities including remediation
     
NSR
  New Source Review, a construction-permitting program under the Clean Air Act
     
NYMEX
  The New York Mercantile Exchange
     
OPEB
  Postretirement benefit plans other than pensions
     
Palisades
  Palisades nuclear power plant, sold by Consumers to Entergy in 2007
     
Panhandle
  Panhandle Eastern Pipe Line Company, including its wholly owned subsidiaries Trunkline, Pan Gas Storage Company, Panhandle Storage Company, and Panhandle Holding Company, a former wholly owned subsidiary of CMS Gas Transmission
     
PBO
  Projected benefit obligation
     
PCB
  Polychlorinated biphenyl
     
Pension Plan
  Trusteed, non-contributory, defined benefit pension plan of CMS Energy, Consumers, and Panhandle
     
PISP
  Performance Incentive Stock Plan
     
PPA
  Power purchase agreement
     
PSCR
  Power supply cost recovery
     
PSD
  Prevention of Significant Deterioration
     
PURPA
  Public Utility Regulatory Policies Act of 1978
     
RCP
  Resource Conservation Plan
     
REC
  Renewable energy credit established under the 2008 Energy Legislation
     
ReEnergy
  ReEnergy Sterling LLC, a non-affiliated company
     
RMRR
  Routine maintenance, repair, and replacement

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ROA
  Retail Open Access, which allows electric generation customers to choose alternative electric suppliers pursuant to the Customer Choice Act
     
S&P
  Standard and Poor’s Financial Services LLC, which includes Standard and Poor’s Ratings Services
     
SEC
  U.S. Securities and Exchange Commission
     
Securitization
  A financing method authorized by statute and approved by the MPSC which allows a utility to sell its right to receive a portion of the rate payments received from its customers for the repayment of securitization bonds issued by a special-purpose entity affiliated with such utility
     
SENECA
  Sistema Electrico del Estado Nueva Esparta C.A., a former wholly owned subsidiary of CMS International Ventures
     
SERP
  Supplemental Executive Retirement Plan
     
SFAS
  Statement of Financial Accounting Standards
     
Sherman Act
  Sherman Antitrust Act, enacted in 1890
     
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
     
Supplemental Environmental Projects
  Environmentally beneficial projects that a party agrees to undertake as part of the settlement of an enforcement action, but which the party is not otherwise legally required to perform
     
TAQA
  Abu Dhabi National Energy Company, a subsidiary of Abu Dhabi Water and Electricity Authority, a non-affiliated company
     
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
     
T.E.S. Filer City
  T.E.S. Filer City Station Limited Partnership, a VIE in which HYDRA-CO has a 50 percent interest
     
TGN
  A natural gas transportation and pipeline business located in Argentina, in which CMS Gas Transmission formerly owned a 23.54 percent interest
     
Title V
  A federal program under the Clean Air Act designed to standardize air quality permits and the permitting process for major sources of emissions across the U.S.
     
Trunkline
  Trunkline Gas Company, LLC, a former wholly owned subsidiary of CMS Panhandle Holding, LLC

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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
     
TSU
  Texas Southern University, a non-affiliated entity
     
Union
  Utility Workers Union of America, AFL-CIO
     
U.S. 
  United States
     
VEBA
  Voluntary employees’ beneficiary association trusts accounts established specifically to set aside employer-contributed assets to pay for future expenses of the OPEB plan
     
VIE
  Variable interest entity
     
Wolverine
  Wolverine Power Supply Cooperative, Inc., a non-affiliated company
     
XBRL
  eXtensible Business Reporting Language
     
Zeeland
  A 935 MW gas-fueled power plant located in Zeeland, Michigan

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FILING FORMAT
 
This combined Form 10-K is separately filed by CMS Energy and Consumers. Information in this combined Form 10-K relating to each individual registrant is filed by such registrant on its own behalf. Consumers makes no representation regarding information relating to any other companies affiliated with CMS Energy other than its own subsidiaries. None of CMS Energy, CMS Enterprises, nor any of CMS Energy’s other subsidiaries (other than Consumers) has any obligation in respect of Consumers’ debt securities and holders of such debt securities should not consider the financial resources or results of operations of CMS Energy, CMS Enterprises, nor any of CMS Energy’s other subsidiaries (other than Consumers and its own subsidiaries (in relevant circumstances)) in making a decision with respect to Consumers’ debt securities. Similarly, none of Consumers nor any other subsidiary of CMS Energy has any obligation in respect of debt securities of CMS Energy.
 
FORWARD-LOOKING STATEMENTS AND INFORMATION
 
This Form 10-K and other written and oral statements that CMS Energy and Consumers make may contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. The use of “might,” “may,” “could,” “should,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “projects,” “forecasts,” “predicts,” “assumes,” and other similar words is intended to identify forward-looking statements that involve risk and uncertainty. This discussion of potential risks and uncertainties is designed to highlight important factors that may impact CMS Energy’s and Consumers’ businesses and financial outlook. CMS Energy and Consumers have no obligation to update or revise forward-looking statements regardless of whether new information, future events, or any other factors affect the information contained in the statements. These forward-looking statements are subject to various factors that could cause CMS Energy’s and Consumers’ actual results to differ materially from the results anticipated in these statements. These factors include CMS Energy’s and Consumers’ inability to predict or control the following, all of which are potentially significant:
 
  •  the price of CMS Energy common stock, capital and financial market conditions, and the effect of these market conditions on CMS Energy’s and Consumers’ postretirement benefit plans, interest costs, and access to the capital markets, including availability of financing (including Consumers’ accounts receivable sales program and CMS Energy’s and Consumers’ revolving credit facilities) to CMS Energy, Consumers, or any of their affiliates, and the energy industry;
 
  •  the impact of the economy, particularly in Michigan, and potential future volatility in the financial and credit markets on CMS Energy’s, Consumers’, or any of their affiliates’:
 
  •  revenues;
 
  •  capital expenditure programs and related earnings growth;
 
  •  ability to collect accounts receivable from customers;
 
  •  cost of capital and availability of capital; and
 
  •  Pension Plan and postretirement benefit plans assets and required contributions;
 
  •  changes in the economic and financial viability of CMS Energy’s and Consumers’ suppliers, customers, and other counterparties and the continued ability of these third parties, including third parties in bankruptcy, to meet their obligations to CMS Energy and Consumers;
 
  •  population decline in the geographic areas where CMS Energy and Consumers conduct business;
 
  •  national, regional, and local economic, competitive, and regulatory policies, conditions, and developments;
 
  •  changes in applicable laws, rules, regulations, principles or practices, or in their interpretation, including those related to taxes, the environment, and accounting matters, that could have an impact on CMS Energy’s


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  and Consumers’ businesses or financial results, including the impact of any future regulations or lawsuits regarding:
 
  •  carbon dioxide and other greenhouse gas emissions, including potential future legislation to establish a cap and trade system;
 
  •  criteria pollutants, such as nitrogen oxide, sulfur dioxide, and particulate, and hazardous air pollutants, including impacts of the CAIR and CATR;
 
  •  CCBs;
 
  •  PCBs;
 
  •  cooling water intake or discharge from power plants or other industrial equipment;
 
  •  limitations on the use or construction of coal-fueled electric power plants;
 
  •  nuclear-related regulation;
 
  •  renewable portfolio standards and energy efficiency mandates;
 
  •  energy-related derivatives and hedges under the Dodd-Frank Act; and
 
  •  any other potential legislative changes, including changes to the ten-percent ROA limit;
 
  •  potentially adverse regulatory or legal interpretations or decisions, including those related to environmental laws and regulations, and potential environmental remediation costs associated with these interpretations or decisions, including those that may affect Bay Harbor or Consumers’ RMRR classification under NSR regulations;
 
  •  potentially adverse or delayed regulatory treatment or permitting decisions concerning significant matters affecting CMS Energy or Consumers that are presently or soon to be before the MDNRE and/or EPA, including Bay Harbor;
 
  •  potentially adverse regulatory treatment or failure to receive timely regulatory orders concerning a number of significant matters affecting Consumers that are presently or potentially before the MPSC, including:
 
  •  sufficient and timely recovery of:
 
  •  environmental and safety-related expenditures for coal-fueled plants and other utility properties;
 
  •  power supply and natural gas supply costs;
 
  •  operating and maintenance expenses;
 
  •  additional utility rate-based investments;
 
  •  costs associated with the proposed retirement and decommissioning of facilities;
 
  •  development costs of the proposed coal-fueled plant;
 
  •  MISO energy and transmission costs; and
 
  •  costs associated with energy efficiency investments and state or federally mandated renewable resource standards;
 
  •  actions of regulators with respect to expenditures subject to tracking mechanisms;
 
  •  actions of regulators to prevent or curtail shutoffs for non-paying customers;
 
  •  actions of regulators with respect to Consumers’ pilot electric and gas decoupling mechanisms;
 
  •  regulatory orders preventing or curtailing rights to self-implement rate requests;


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  •  regulatory orders potentially requiring a refund of previously self-implemented rates; and
 
  •  implementation of new energy legislation or revisions of existing regulations;
 
  •  potentially adverse regulatory treatment resulting from pressure on regulators to oppose annual rate increases or to lessen rate impacts upon customers, particularly in difficult economic times;
 
  •  loss of customer demand for electric generation supply to alternative energy suppliers;
 
  •  the ability of Consumers to recover its regulatory assets in full and in a timely manner;
 
  •  the effectiveness of the electric and gas decoupling mechanisms in moderating the impact of sales variability on net revenues;
 
  •  the ability of Consumers to recover nuclear fuel storage costs incurred as a result of the DOE’s failure to accept spent nuclear fuel on schedule or at all, and the outcome of pending litigation with the DOE;
 
  •  the impact of enforcement powers and investigation activities at FERC;
 
  •  federal regulation of electric sales and transmission of electricity, including periodic re-examination by federal regulators of CMS Energy’s and Consumers’ market-based sales authorizations in wholesale power markets without price restrictions;
 
  •  effects of weather conditions, such as unseasonably warm weather during the winter, on sales;
 
  •  the market perception of the energy industry or of CMS Energy, Consumers, or any of their affiliates;
 
  •  the credit ratings of CMS Energy or Consumers;
 
  •  the impact of credit markets, economic conditions, and any new banking regulations on EnerBank;
 
  •  potential effects of the Dodd-Frank Act and related regulations on CMS Energy and Consumers, including regulation of financial institutions such as EnerBank, and shareholder activity that is permitted or may be permitted under the Act;
 
  •  disruptions in the normal commercial insurance and surety bond markets that may increase costs or reduce traditional insurance coverage, particularly terrorism and sabotage insurance, performance bonds, and tax-exempt debt insurance, and stability of insurance providers, and the ability of Consumers to recover the costs of any such insurance from customers;
 
  •  energy markets, including availability of capacity and the timing and extent of changes in commodity prices for oil, coal, natural gas, natural gas liquids, electricity, and certain related products due to lower or higher demand, shortages, transportation problems, or other developments, and their impact on CMS Energy’s and Consumers’ cash flows and working capital;
 
  •  the effectiveness of CMS Energy’s and Consumers’ risk management policies, procedures, and strategies, including their strategies to hedge risk related to future prices of electricity, natural gas, and other energy-related commodities;
 
  •  changes in construction material prices and the availability of qualified construction personnel to implement Consumers’ construction program;
 
  •  factors affecting development of generation projects and distribution infrastructure replacement and expansion projects, including those related to project site identification, construction, permitting, and government approvals;
 
  •  costs and availability of personnel, equipment, and materials for operating and maintaining existing facilities;
 
  •  factors affecting operations, such as unusual weather conditions, catastrophic weather-related damage, unscheduled generation outages, maintenance or repairs, environmental incidents, or electric transmission and distribution or gas pipeline system constraints;


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  •  potential disruption or interruption of facilities or operations due to accidents, war, or terrorism, and the ability to obtain or maintain insurance coverage for these events;
 
  •  the impact of an accident, explosion, or other physical disaster involving Consumers’ high-or low-pressure gas pipelines, gas storage fields, overhead or underground electrical lines, or other utility infrastructure;
 
  •  CMS Energy’s and Consumers’ ability to achieve generation planning goals and the occurrence and duration of scheduled or unscheduled generation or gas compression outages;
 
  •  technological developments in energy production, delivery, usage, and storage;
 
  •  achievement of capital expenditure and operating expense goals, including the 2011 capital expenditures forecast;
 
  •  the impact of CMS Energy’s and Consumers’ integrated business software system on their operations, including utility customer billing and collections;
 
  •  potential effects of the Health Care Acts on existing or future health care costs;
 
  •  adverse outcomes regarding tax positions;
 
  •  adverse consequences resulting from any past or future assertion of indemnity or warranty claims associated with assets and businesses previously owned by CMS Energy or Consumers, including claims resulting from attempts by foreign or domestic governments to assess taxes on past operations or transactions;
 
  •  the outcome, cost, and other effects of legal or administrative proceedings, settlements, investigations, or claims;
 
  •  earnings volatility resulting from the application of fair value accounting to certain energy commodity contracts, such as electricity sales agreements and interest rate and foreign currency contracts;
 
  •  changes in financial or regulatory accounting principles or policies;
 
  •  a possible future requirement to comply with International Financial Reporting Standards, which differ from GAAP in various ways, including the present lack of special accounting treatment for regulated activities; and
 
  •  other business or investment matters that may be disclosed from time to time in CMS Energy’s and Consumers’ SEC filings, or in other publicly issued documents.
 
For additional details regarding these and other uncertainties, see Item 1A. Risk Factors; the “Outlook” section included in MD&A; Note 5, Contingencies and Commitments; and Note 6, Regulatory Matters.


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PART I
ITEM 1. BUSINESS
 
GENERAL
 
CMS Energy
 
CMS Energy was formed in Michigan in 1987 and is an energy company operating primarily in Michigan. It is the parent holding company of several subsidiaries, including Consumers, an electric and gas utility, and CMS Enterprises, primarily a domestic IPP. Consumers serves individuals and businesses operating in the alternative energy, automotive, chemical, metal, and food products industries, as well as a diversified group of other industries. CMS Enterprises, through its subsidiaries and equity investments, is engaged primarily in IPP and owns power generation facilities fueled mostly by natural gas and biomass.
 
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, its non-utility operations and investments. Consumers’ consolidated operations account for substantially all of CMS Energy’s total assets, income, and operating revenue. CMS Energy’s consolidated operating revenue was $6.4 billion in 2010, $6.2 billion in 2009, and $6.8 billion in 2008.
 
For further information about operating revenue, net operating income, and identifiable assets and liabilities attributable to all of CMS Energy’s business segments and operations, see Item 8. Financial Statements and Supplementary Data, CMS Energy’s Selected Financial Information, Consolidated Financial Statements, and Notes to Consolidated Financial Statements.
 
Consumers
 
Consumers has served Michigan customers since 1886. Consumers was incorporated in Maine in 1910 and became a Michigan corporation in 1968. Consumers owns and operates electric distribution and generation facilities and gas transmission, storage, and distribution facilities. It provides electricity and/or natural gas to 6.8 million of Michigan’s 10 million residents. Consumers’ rates and certain other aspects of its business are subject to the jurisdiction of the MPSC and FERC, as described in “CMS Energy and Consumers Regulation” in this Item 1.
 
Consumers’ consolidated operating revenue was $6.2 billion in 2010, $6.0 billion in 2009, and $6.4 billion in 2008. For further information about operating revenue, net operating income, and identifiable assets and liabilities attributable to Consumers’ electric and gas utility operations, see Item 8. Financial Statements and Supplementary Data, Consumers’ Selected Financial Information, Consolidated Financial Statements, and Notes to Consolidated Financial Statements.
 
Consumers owns its principal properties in fee, except that most electric lines and gas mains are located below public roads or on land owned by others and are accessed by Consumers through 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 Consumers Electric Utility — Electric Utility Properties and Consumers Gas Utility — Gas Utility Properties in the “Business Segments” section of this Item 1.


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In 2010, Consumers served 1.8 million electric customers and 1.7 million gas customers in Michigan’s Lower Peninsula. Presented in the following map is Consumers’ service territory:
 
(MAP)


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BUSINESS SEGMENTS
 
Consumers Electric Utility
 
Electric Utility Operations:  Consumers’ electric utility operations, which include the generation, purchase, distribution, and sale of electricity, generated operating revenue of $3.8 billion in 2010, $3.4 billion in 2009, and $3.6 billion in 2008. Consumers’ electric utility customer base consists of a mix of residential, commercial, and diversified industrial customers in Michigan’s Lower Peninsula. The automotive industry represented six percent of Consumers’ 2010 electric utility operating revenue. Presented in the following illustration is Consumers’ 2010 electric utility operating revenue of $3.8 billion by customer class:
 
(PIE CHART)
 
Consumers’ electric utility operations are not dependent on a single customer, or even a few customers, and the loss of any one or even a few of its largest customers is not reasonably likely to have a material adverse effect on Consumers’ financial condition.
 
In 2010, Consumers’ electric deliveries, excluding intersystem deliveries, were 38 million MWh, which included ROA deliveries of four million MWh, consistent with the ten-percent cap. Net bundled sales were 34 million MWh in 2010. In 2009, Consumers’ electric deliveries, excluding intersystem deliveries, were 36 million MWh, which included ROA deliveries of two million MWh, resulting in net bundled sales of 34 million MWh.
 
Consumers’ electric utility operations are seasonal. The consumption of electric energy typically increases in the summer months, due primarily to the use of air conditioners and other cooling equipment.


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Presented in the following illustration are Consumers’ monthly weather-adjusted electric deliveries (deliveries adjusted to reflect normal weather conditions) to its customers, including ROA deliveries, during 2010 and 2009:
 
(BAR GRAPH)
 
Consumers’ 2010 summer peak demand was 8,190 MW, which includes ROA demand of 555 MW. For the 2009-2010 winter period, Consumers’ peak demand was 6,093 MW, which includes ROA demand of 425 MW. As required by MISO reserve margin requirements, Consumers owns or controls, through long-term contracts, capacity necessary to supply its projected firm peak load and necessary reserve margin for summer 2011.


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Electric Utility Properties:  At December 31, 2010, Consumers’ electric generating system consisted of the following:
 
                     
        2010
       
        Summer Net
       
        Demonstrated
    2010 Net
 
    Number of Units and Year
  Capability(a)
    Generation
 
Name and Location (Michigan)
  Entered Service   (MW)     (GWh)  
 
Coal Generation
                   
J. H. Campbell 1 & 2 — West Olive
  2 Units, 1962-1967     615       4,015  
J. H. Campbell 3 — West Olive(b)
  1 Unit, 1980     770       5,419  
B. C. Cobb — Muskegon
  2 Units, 1956-1957     310       1,932  
D. E. Karn — Essexville
  2 Units, 1959-1961     515       2,810  
J. C. Weadock — Essexville
  2 Units, 1955-1958     290       1,739  
J. R. Whiting — Erie
  3 Units, 1952-1953     328       1,964  
                     
Total coal generation
        2,828       17,879  
                     
Oil/Gas Generation
                   
B. C. Cobb — Muskegon
  3 Units, 1999-2000(c)            
D. E. Karn — Essexville
  2 Units, 1975-1977     1,276       99  
Zeeland — Zeeland
  1 Unit, 2002     538       720  
                     
Total oil/gas generation
        1,814       819  
                     
Hydroelectric
                   
Conventional hydro generation
  13 Plants, 1906-1949     74       365  
Ludington — Ludington
  6 Units, 1973     955 (d)     (366 )(e)
                     
Total hydroelectric
        1,029       (1 )
                     
Gas/Oil Combustion Turbine
                   
Various plants
  7 Plants, 1966-1971     187       10  
Zeeland — Zeeland
  2 Units, 2001     330       235  
                     
Total gas/oil combustion turbine
        517       245  
                     
Total owned generation
        6,188       18,942  
Purchased and Interchange Power(f)
        3,058 (g)     18,048 (h)
                     
Total Supply
        9,246       36,990  
                     
Generation and transmission use/loss
                (3,373 )
                     
Total Net Bundled Sales
                33,617  
                     
 
 
(a) Represents each plant’s electric generating capacity during the critical summer months.
 
(b) 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.
 
(c) B. C. Cobb 1-3 are retired coal-fueled units that were converted to gas-fueled units. B. C. Cobb 1-3 were placed back into service in the years indicated, and subsequently taken out of service beginning in April 2009. Consumers plans to reevaluate the status of B. C. Cobb 1-3 in 2011 and may return the units to service in 2012.
 
(d) Represents Consumers’ 51 percent share of the capacity of Ludington. Detroit Edison owns the remaining 49 percent.
 
(e) Represents Consumers’ share of net pumped-storage generation. The pumped-storage facility consumes electricity to pump water during off-peak hours for storage in order to generate electricity later during peak-demand hours.
 
(f) Includes purchases from the Midwest Energy Market, long-term purchase contracts, and seasonal purchases.
 
(g) Includes 1,240 MW of purchased contract capacity from the MCV Facility and 778 MW of purchased contract capacity from Palisades.
 
(h) Includes 2,456 GWh of purchased energy from the MCV Facility and 6,241 GWh of purchased energy from Palisades.


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Consumers’ distribution system includes:
 
  •  413 miles of high-voltage distribution radial lines operating at 120 kilovolts or above;
 
  •  4,244 miles of high-voltage distribution overhead lines operating at 23 kilovolts and 46 kilovolts;
 
  •  17 miles of high-voltage distribution underground lines operating at 23 kilovolts and 46 kilovolts;
 
  •  55,933 miles of electric distribution overhead lines;
 
  •  10,058 miles of underground distribution lines; and
 
  •  substations with an aggregate transformer capacity of 24 million kVA.
 
Consumers is interconnected to the interstate high-voltage electric transmission system owned by METC and operated by MISO, to neighboring utilities, and to other transmission systems.
 
Generation and Power Purchase Capacity by Fuel Type:  As shown in the following illustration, Consumers’ 2010 generation capacity of 9,246 MW, including capacity of 3,058 MW purchased under PPAs, relied on a variety of fuel sources:
 
(PIE CHART)
 
Renewable generation capacity includes wind generation resources assumed to provide capacity at eight percent of nameplate rating.


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Consumers’ Electric Generating System Power Generation:  Consumers generated power from the following sources:
 
                                         
    GWh  
Power Generated
  2010     2009     2008     2007     2006  
 
Coal
    17,879       17,255       17,701       17,903       17,744  
Gas
    1,043       565       804       129       161  
Hydro(a)
    365       466       454       416       485  
Oil
    21       14       41       112       48  
Nuclear
                      1,781       5,904  
Net pumped storage(b)
    (366 )     (303 )     (382 )     (478 )     (426 )
                                         
Total owned generation
    18,942       17,997       18,618       19,863       23,916  
Purchased renewable energy(c)
    1,582       1,472       1,503       1,480       1,529  
Purchased generation-other(c)
    10,421       10,066       12,140       11,022       7,065  
Net interchange power(d)
    6,045       6,925       6,653       8,009       7,244  
                                         
Net purchased and interchange power
    18,048       18,463       20,296       20,511       15,838  
                                         
Total Net Power Supply
    36,990       36,460       38,914       40,374       39,754  
                                         
 
 
(a) Represents Consumers’ owned renewable generation.
 
(b) Represents Consumers’ share of net pumped-storage generation. The pumped-storage facility consumes electricity to pump water during off-peak hours for storage in order to generate electricity later during peak-demand hours.
 
(c) Includes purchases from long-term purchase contracts.
 
(d) Includes purchases from the Midwest Energy Market and seasonal purchases.
 
The cost of all fuels consumed, shown in the following table, fluctuates with the mix of fuel used.
 
                                         
    Cost per Million Btu  
Fuel Consumed
  2010     2009     2008     2007     2006  
 
Coal
  $ 2.51     $ 2.37     $ 2.01     $ 2.04     $ 2.09  
Gas
    5.57       6.57       10.94       10.29       8.92  
Oil
    10.98       9.59       11.54       8.21       8.68  
Nuclear
                      0.42       0.24  
                                         
All Fuels(a)
  $ 2.71     $ 2.56     $ 2.47     $ 2.07     $ 1.72  
                                         
 
 
(a) Weighted-average fuel costs
 
In 2010, Consumers’ four coal-fueled generating sites burned 10 million tons of coal and produced a combined total of 17,879 GWh of electricity, which represented 48 percent of the energy provided by Consumers to meet customer demand.
 
In order to obtain its coal requirements, Consumers enters into physical coal supply contracts. At December 31, 2010, Consumers had contracts to purchase coal through 2013; these contracts total $315 million. All of Consumers’ coal supply contracts have fixed prices. At December 31, 2010, Consumers had 85 percent of its 2011 expected coal requirements under contract, as well as a 41-day supply of coal on hand.
 
In conjunction with its coal supply contracts, Consumers leases a fleet of rail cars and has long-term transportation contracts with various companies to provide rail and vessel services for delivery of purchased coal to Consumers’ generating facilities. Consumers’ coal transportation contracts expire from 2011 through 2014; these contracts total $445 million.


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Consumers participates in the Midwest Energy Market. Consumers offers its generation into the market on a day-ahead and real-time basis and bids for power in the market to serve the demand of its customers. Consumers is a net purchaser of power and supplements its generation capability with purchases from the market to meet its customers’ needs during peak demand periods.
 
At December 31, 2010, Consumers had unrecognized future commitments (amounts for which liabilities, in accordance with GAAP, have not been recorded on its balance sheet) to purchase capacity and energy under long-term PPAs with various generating plants. These contracts require monthly capacity payments based on the plants’ availability or deliverability. These payments for 2011 through 2030 total $15.3 billion and range from $822 million to $1 billion annually for each of the next five years. These amounts may vary depending on plant availability and fuel costs. For further information about Consumers’ future capacity and energy purchase obligations, see Item 7. MD&A, “Capital Resources and Liquidity.”
 
Consumers Gas Utility
 
Gas Utility Operations:
 
Consumers’ gas utility operations, which include the purchase, transmission, storage, distribution, and sale of natural gas, generated operating revenue of $2.4 billion in 2010, $2.6 billion in 2009, and $2.8 billion in 2008. Consumers’ gas utility customer base consists of a mix of residential, commercial, and diversified industrial customers in Michigan’s Lower Peninsula. Presented in the following illustration is Consumers’ 2010 gas utility operating revenue by customer class:
 
(PIE CHART)
 
Consumers’ gas utility operations are not dependent on a single customer, or even a few customers, and the loss of any one or even a few of its largest customers is not reasonably likely to have a material adverse effect on Consumers’ financial condition.
 
In 2010, deliveries of natural gas, including off-system transportation deliveries, through Consumers’ pipeline and distribution network totaled 317 bcf, which included GCC deliveries of 36 bcf. In 2009, deliveries of natural gas, including off-system transportation deliveries, through Consumers’ pipeline and distribution network totaled 319 bcf, which included GCC deliveries of 27 bcf. 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 natural gas as a heating fuel. During 2010, 46 percent of the natural gas supplied to all customers during the winter months


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was supplied from storage. Presented in the following illustration are Consumers’ monthly weather-adjusted gas deliveries to its customers, including GCC deliveries, during 2010 and 2009:
 
(BAR GRAPH)
 
Gas Utility Properties: Consumers’ gas distribution and transmission system located in Michigan’s Lower Peninsula consists of:
 
  •  26,585 miles of distribution mains;
 
  •  1,664 miles of transmission lines;
 
  •  seven compressor stations with a total of 150,475 installed and available horsepower; and
 
  •  15 gas storage fields with an aggregate storage capacity of 307 bcf and a working storage capacity of 142 bcf.
 
Gas Supply: In 2010, Consumers purchased 61 percent of the gas it delivered from U.S. producers and 21 percent from Canadian producers. The remaining 18 percent was purchased from authorized GCC suppliers and


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delivered by Consumers to customers in the GCC program. Presented in the following illustration are the supply arrangements for the gas Consumers delivered to GCC and GCR customers during 2010:
 
(PIE CHART)
 
Firm transportation or firm city-gate contracts are those that define a fixed amount, price, and delivery time frame. Consumers’ firm gas transportation contracts are with ANR Pipeline Company, Great Lakes Gas Transmission, L.P., Panhandle, Trunkline, and Vector Pipeline L.P. Under these contracts, Consumers purchases and transports gas to Michigan for ultimate delivery to its customers. Consumers’ firm gas transportation contracts expire through 2017 and provide for the delivery of 71 percent of Consumers’ total gas supply requirements.
 
Consumers purchases the balance of its required gas supply under firm city-gate contracts and through authorized suppliers under the GCC program. Consumers may also utilize incremental firm transportation contracts and interruptible transportation contracts to purchase its gas supply. Under interruptible transportation contracts, the transportation provider is permitted to interrupt service. Consumers’ use of incremental firm transportation contracts and interruptible transportation contracts is generally during off-peak summer months and after Consumers has fully utilized the services under the firm transportation contracts. The amount of interruptible transportation service and its use vary primarily with the price for this service and the availability and price of purchased and transported spot supplies.
 
Enterprises Segment — Non-Utility Operations and Investments
 
CMS Energy’s enterprises segment, through various subsidiaries and certain equity investments, is engaged primarily in domestic IPP and the marketing of IPP. In 2007, the enterprises segment made a significant change in business strategy by exiting the international marketplace and refocusing on its independent power business in the U.S.
 
The enterprises segment’s operating revenue included in Income From Continuing Operations in CMS Energy’s Consolidated Financial Statements was $238 million in 2010, $216 million in 2009, and $365 million in 2008. The enterprises segment’s operating revenue included in Income (Loss) From Discontinued Operations in CMS Energy’s Consolidated Financial Statements was $10 million in 2010, $7 million in 2009, and $14 million in 2008.
 
IPP: While owned by CMS Enterprises, CMS Generation invested in and operated non-utility power generation plants in the U.S. and abroad. In 2007, CMS Enterprises sold CMS Generation and all of CMS


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Enterprises’ international assets to third parties and transferred its domestic independent power plant operations to its subsidiary, HYDRA-CO.
 
The operating revenue from IPP included in Income From Continuing Operations in CMS Energy’s Consolidated Financial Statements was $18 million in 2010, $18 million in 2009, and $22 million in 2008. The operating revenue from IPP included in Income (Loss) From Discontinued Operations in CMS Energy’s Consolidated Financial Statements was $10 million in 2010, $7 million in 2009, and $14 million in 2008.
 
IPP Properties: At December 31, 2010, CMS Energy had ownership interests in independent power plants totaling 1,166 gross MW or 1,066 net MW. (Net MW reflects that portion of the gross capacity relating to CMS Energy’s ownership interests.)
 
Presented in the following table are CMS Energy’s interests in independent power plants at December 31, 2010:
 
                             
                    Gross Capacity
 
                    Under Long-Term
 
    Primary
  Ownership Interest
    Gross Capacity
    Contract
 
Location
  Fuel Type   (%)     (MW)     (%)  
 
Connecticut(a)
  Scrap tire     100       31        
Michigan
  Natural gas     100       710       88  
Michigan
  Natural gas     100       224       89  
Michigan
  Coal     50       73       100  
Michigan
  Biomass     50       40       100  
Michigan
  Biomass     50       38       100  
North Carolina
  Biomass     50       50        
                             
Total
                1,166          
                             
 
 
(a) Represents Exeter. In January 2011, CMS Energy sold its ownership interest in Exeter to ReEnergy.
 
Energy Resource Management: CMS ERM purchases and sells energy commodities in support of CMS Energy’s generating facilities. In 2010, CMS ERM marketed 15 bcf of natural gas and 2,308 GWh of electricity. All marketed electricity was generated by IPPs of the enterprises segment. CMS ERM’s operating revenue included in Income From Continuing Operations in CMS Energy’s Consolidated Financial Statements was $220 million in 2010, $198 million in 2009, and $343 million in 2008.
 
Natural Gas Transmission: CMS Gas Transmission owned, developed, and managed domestic and international natural gas facilities. In 2007, CMS Gas Transmission sold a portfolio of its businesses in Argentina and its northern Michigan non-utility natural gas assets to Lucid Energy, and its investment in GasAtacama to Endesa S.A. In 2008, CMS Gas Transmission completed the sale of its investment in TGN. CMS Gas Transmission’s operating revenue included in Income From Continuing Operations in CMS Energy’s Consolidated Financial Statements was less than $1 million in each of 2010, 2009, and 2008.
 
International Energy Distribution: In 2007, CMS Energy exited this line of business when it sold its ownership interests in SENECA and CMS Energy Brasil S.A.
 
OTHER BUSINESSES
 
EnerBank: EnerBank, a wholly owned subsidiary of CMS Energy, is a Utah state-chartered, FDIC-insured industrial bank providing unsecured consumer installment loans for financing home improvements. EnerBank’s operating revenue included in Income From Continuing Operations in CMS Energy’s Consolidated Financial Statements was $38 million in 2010, $26 million in 2009, and $21 million in 2008.
 
CMS ENERGY AND CONSUMERS REGULATION
 
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.


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MPSC
 
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, corporate mergers, and other matters.
 
The Michigan Attorney General, ABATE, the MPSC staff, and certain other parties typically participate in MPSC proceedings concerning Consumers. The Michigan Attorney General, ABATE, and others often appeal significant MPSC orders.
 
Rate Proceedings: For information regarding open rate proceedings, see Item 8. Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 6, Regulatory Matters.
 
Michigan Energy Legislation
 
The 2008 Energy Legislation required that at least ten percent of Consumers’ electric sales volume come from renewable energy sources by 2015, and included requirements for specific capacity additions. The 2008 Energy Legislation also required Consumers to prepare an energy optimization plan and achieve annual sales reduction targets through at least 2015. The targets are incremental with the goal of achieving a six percent reduction in customers’ electricity use and a four percent reduction in customers’ natural gas use by December 31, 2015. For additional information regarding Consumers’ renewable energy and energy optimization plans, see Item 7. MD&A, Outlook, “Consumers’ Electric Utility Business Outlook and Uncertainties.”
 
The 2008 Energy Legislation also reformed the Customer Choice Act to limit alternative energy suppliers to supplying no more than ten percent of Consumers’ weather-adjusted sales. For additional information regarding the Customer Choice Act, see Item 7. MD&A, Outlook, “Consumers’ Electric Utility Business Outlook and Uncertainties.”
 
FERC
 
FERC has exercised limited jurisdiction over several independent power plants and exempt wholesale generators in which CMS Enterprises has ownership interests, as well as over CMS ERM, CMS Gas Transmission, and DIG. Among other things, FERC has jurisdiction over acquisitions, operations, and disposals of certain assets and facilities, services provided and rates charged, conduct among affiliates, and limited jurisdiction over holding company matters with respect to CMS Energy. FERC, in connection with NERC and with regional reliability organizations, also regulates generation owners and operators, load serving entities, purchase and sale entities, and others with regard to reliability of the bulk power system. Certain aspects of Consumers’ gas business are also subject to regulation by FERC, including a blanket transportation tariff under which Consumers may transport gas in interstate commerce.
 
FERC also regulates certain aspects of Consumers’ electric operations, including compliance with FERC accounting rules, wholesale rates, operation of licensed hydroelectric generating plants, transfers of certain facilities, corporate mergers, and issuances of securities.
 
Other Regulation
 
The Secretary of Energy regulates imports and exports of natural gas and has delegated various aspects of this jurisdiction to FERC and the DOE’s Office of Fossil Fuels.
 
Consumers’ pipelines are subject to the Natural Gas Pipeline Safety Act of 1968 and the Pipeline Safety Improvement Act of 2002, which regulate the safety of gas pipelines.
 
EnerBank is regulated by the FDIC.
 
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, solid waste management, and other matters. For additional


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information concerning environmental matters, see Item 1A. Risk Factors and Item 8. Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 5, Contingencies and Commitments.
 
CMS Energy has recorded a significant liability for its affiliates’ obligations associated with Bay Harbor. For additional information, see Item 1A. Risk Factors and Item 8. Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 5, Contingencies and Commitments.
 
Air: Consumers continues to install state-of-the-art emissions control equipment at its electric generating plants and to convert electric generating units to burn cleaner fuels. Consumers estimates that it will incur expenditures of $1.4 billion from 2011 through 2018 to comply with present and future federal and state regulations that will require extensive reductions in nitrogen oxides, sulfur dioxides, particulate matter, and mercury emissions. Consumers’ estimate may increase if additional laws or regulations are adopted or implemented regarding greenhouse gases, including carbon dioxide. For additional information concerning estimated capital expenditures related to emissions control, see Item 7. MD&A, Outlook, “Consumers’ Electric Utility Business Outlook and Uncertainties — Electric Environmental Estimates.”
 
Solid Waste Disposal: Costs related to the construction, operation, and closure of solid waste disposal facilities for coal ash are significant. Historically, Consumers has worked with others to reuse 30 to 40 percent of ash produced by its coal-fueled plants, and sells ash for use as a Portland cement replacement in concrete products, as feedstock for the manufacture of Portland cement, and for other environmentally-compatible uses. Consumers’ solid waste disposal areas are regulated under Michigan’s solid waste rules. Consumers has converted all of its fly ash handling systems to dry systems, which reduce landfill venting substantially. All of Consumers’ ash facilities have programs designed to protect the environment and are subject to quarterly MDNRE inspections. Furthermore, an independent consultant has assessed dike integrity and stability. No major deficiencies were identified that could immediately jeopardize continued safe and reliable operation of the project structures. The draft reports of three EPA contractors who have since inspected these facilities with regard to National Dam Safety Program Act requirements comport with this conclusion. The EPA has proposed new federal regulations for ash disposal areas. Consumers estimates that it will incur expenditures of $320 million from 2011 through 2018 to comply with future regulations relating to ash disposal. For additional information concerning estimated capital expenditures related to solid waste disposal, see Item 7. MD&A, Outlook, “Consumers’ Electric Utility Business Outlook and Uncertainties — Electric Environmental Estimates.”
 
Water: Consumers uses significant amounts of water to operate and cool its electric generating plants. Water discharge quality is regulated and administered by the MDNRE under the federal NPDES program. To comply with such regulation, Consumers’ facilities have discharge monitoring programs. The EPA is developing new regulations related to cooling water intake systems. Consumers estimates that it will incur expenditures of $180 million from 2011 through 2018 to comply with future regulations relating to cooling water intake systems. For additional information concerning estimated capital expenditures related to cooling water intake systems, see Item 7. MD&A, Outlook, “Consumers’ Electric Utility Business Outlook and Uncertainties — Electric Environmental Estimates.”
 
CMS ENERGY AND CONSUMERS COMPETITION
 
Electric Competition
 
Consumers’ electric utility business is subject to actual and potential competition from many sources, in both the wholesale and retail markets, as well as in electric generation, electric delivery, and retail services.
 
The Customer Choice Act allows all of Consumers’ electric customers to buy electric generation service from Consumers or from an alternative electric supplier. The 2008 Energy Legislation revised the Customer Choice Act by limiting alternative electric supply to ten percent of weather-adjusted retail sales for the preceding calendar year. At December 31, 2010, electric deliveries under the ROA program were at the ten percent limit. Alternative electric suppliers were providing 807 MW of generation service to ROA customers.
 
Consumers also has competition or potential competition from:
 
  •  industrial customers relocating all or a portion of their production capacity outside Consumers’ service territory for economic reasons;


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  •  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 monitoring compliance with the MPSC’s and FERC’s rules, providing non-energy services, and providing tariff-based incentives that support economic development.
 
CMS ERM continues to focus on optimizing CMS Energy’s IPP portfolio. CMS Energy’s IPP business faces competition from generators, marketers and brokers, and utilities marketing power in the wholesale market.
 
Gas Competition
 
Competition exists in various aspects of Consumers’ gas utility business. 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 generally 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 or Consumers for all losses. A portion of each loss is generally assumed by CMS Energy or Consumers in the form of deductibles and self-insured retentions that, in some cases, are substantial. As CMS Energy or Consumers renews its policies, it is possible that some of the present insurance coverage may not be renewed or obtainable on commercially reasonable terms due to restrictive insurance markets.
 
CMS Energy’s and Consumers’ present insurance program does not cover the risks of certain environmental cleanup costs and environmental damages, such as claims for air pollution, damage to sites owned by CMS Energy or Consumers, and some long-term storage or disposal of wastes.
 
EMPLOYEES
 
CMS Energy
 
At December 31, 2010, CMS Energy and its wholly owned subsidiaries, including Consumers, had 7,822 full-time equivalent employees. Included in the total are 3,310 full-time operating, maintenance, and construction employees and full-time and part-time call center employees who are represented by the Union.
 
Consumers
 
At December 31, 2010, Consumers and its subsidiaries had 7,522 full-time equivalent employees. Included in the total are 3,310 full-time operating, maintenance, and construction employees and full-time and part-time call center employees who are represented by the Union.


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CMS ENERGY EXECUTIVE OFFICERS (as of February 1, 2011)
 
             
Name
 
Age
 
Position
 
Period
 
             
John G. Russell
  53  
President and CEO of CMS Energy
  5/2010-Present
       
President and CEO of Consumers
  5/2010-Present
       
Director of CMS Energy
  5/2010-Present
       
Director of Consumers
  5/2010-Present
       
Director of CMS Enterprises
  5/2010-Present
       
Chairman of the Board, President and CEO of CMS Enterprises
  5/2010-Present
       
President and Chief Operating Officer of Consumers
  2004-5/2010
             
Thomas J. Webb
  58  
Executive Vice President, CFO of CMS Energy
  2002-Present
       
Executive Vice President, CFO of Consumers
  2002-Present
       
Executive Vice President, CFO of CMS Enterprises
  2002-Present
       
Director of CMS Enterprises
  2002-Present
             
James E. Brunner
  58  
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 CMS Enterprises
  11/2007-Present
       
Director of CMS Enterprises
  2006-Present
       
Senior Vice President of CMS Enterprises
  2006-11/2007
       
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 and General Counsel of CMS Energy
  2/2006-5/2006
       
Senior Vice President, General Counsel and Interim Chief Compliance Officer of Consumers
  2/2006-5/2006
       
Vice President and General Counsel of Consumers
  7/2004-2/2006
             
John M. Butler*
  46  
Senior Vice President of CMS Energy
  2006-Present
       
Senior Vice President of Consumers
  2006-Present
       
Senior Vice President of CMS Enterprises
  2006-Present


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Name
 
Age
 
Position
 
Period
 
David G. Mengebier
  53  
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 CMS Enterprises
  2003-Present
       
Senior Vice President of CMS Energy
  2001-11/2006
       
Senior Vice President of Consumers
  2001-11/2006
             
Glenn P. Barba
  45  
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 CMS Enterprises
  11/2007-Present
       
Vice President and Chief Accounting Officer of CMS Enterprises
  2003-11/2007
 
 
* From 2004 until June 2006, Mr. Butler was Human Resources Director, Manufacturing and Engineering at Dow Chemical Company, a non-affiliated company.
 
There are no family relationships among executive officers and directors of CMS Energy.
 
The term of office of each of the executive officers extends to the first meeting of the Board of Directors of CMS Energy after the next annual election of Directors of CMS Energy (scheduled to be held on May 20, 2011).
 
CONSUMERS EXECUTIVE OFFICERS (as of February 1, 2011)
 
             
Name
 
Age
 
Position
 
Period
 
John G. Russell
  53  
President and CEO of CMS Energy
  5/2010-Present
       
President and CEO of Consumers
  5/2010-Present
       
Director of CMS Energy
  5/2010-Present
       
Director of Consumers
  5/2010-Present
       
Director of CMS Enterprises
  5/2010-Present
       
Chairman of the Board, President and CEO of CMS Enterprises
  5/2010-Present
       
President and Chief Operating Officer of Consumers
  2004-5/2010
             
Thomas J. Webb
  58  
Executive Vice President, CFO of CMS Energy
  2002-Present
       
Executive Vice President, CFO of Consumers
  2002-Present
       
Executive Vice President, CFO of CMS Enterprises
  2002-Present
       
Director of CMS Enterprises
  2002-Present
             
James E. Brunner
  58  
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 CMS Enterprises
  11/2007-Present
       
Director of CMS Enterprises
  2006-Present
       
Senior Vice President of CMS Enterprises
  2006-11/2007

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Name
 
Age
 
Position
 
Period
 
       
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 and General Counsel of CMS Energy
  2/2006-5/2006
       
Senior Vice President, General Counsel and Interim Chief Compliance Officer of Consumers
  2/2006-5/2006
       
Vice President and General Counsel of Consumers
  7/2004-2/2006
             
John M. Butler*
  46  
Senior Vice President of CMS Energy
  2006-Present
       
Senior Vice President of Consumers
  2006-Present
       
Senior Vice President of CMS Enterprises
  2006-Present
             
David G. Mengebier
  53  
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 CMS Enterprises
  2003-Present
       
Senior Vice President of CMS Energy
  2001-11/2006
       
Senior Vice President of Consumers
  2001-11/2006
             
William E. Garrity
  62  
Senior Vice President of Consumers
  2005-Present
             
Jackson L. Hanson
  54  
Senior Vice President of Consumers
  5/2010-Present
       
Vice President of Consumers
  11/2006-5/2010
       
Plant and Site Business Manager of Consumers
  4/2006-11/2006
             
Daniel J. Malone
  50  
Senior Vice President of Consumers
  5/2010-Present
       
Vice President of Consumers
  6/2008-5/2010
       
Site Business Manager of Consumers
  12/2006-6/2008
       
Manager of Equipment Services of Consumers
  8/2006-12/2006
             
Glenn P. Barba
  45  
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, Controller and Chief Accounting Officer of CMS Enterprises
  11/2007-Present
       
Vice President and Chief Accounting Officer of CMS Enterprises
  2003-11/2007
 
 
* From 2004 until June 2006, Mr. Butler was Human Resources Director, Manufacturing and Engineering at Dow Chemical Company, a non-affiliated company.
 
There are no family relationships among executive officers and directors of Consumers.
 
The term of office of each of the executive officers extends to the first meeting of the Board of Directors of Consumers after the next annual election of Directors of Consumers (scheduled to be held on May 20, 2011).
 
AVAILABLE INFORMATION
 
CMS Energy’s internet address is www.cmsenergy.com. Information contained on CMS Energy’s website is not incorporated herein. All of CMS Energy’s 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

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are accessible free of charge on CMS Energy’s website. These reports are available soon after they are filed electronically with the SEC. Also on CMS Energy’s website are its:
 
  •  Corporate Governance Principles;
 
  •  Codes of Conduct (CMS Energy Corporation/Consumers Energy Company Board of Directors Code of Conduct — 2010 and Code of Conduct and Guide to Ethical Business Behavior 2010);
 
  •  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.
 
CMS Energy will provide this information in print to any stockholder who requests it.
 
Any materials CMS Energy files with the SEC may also be read and copied at the SEC’s Public Reference Room at 100 F Street, NE, Washington D.C., 20549. Information on the operation of the Public Reference Room may be obtained 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 www.sec.gov.


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ITEM 1A. RISK FACTORS
 
Actual results in future periods for CMS Energy and Consumers could differ materially from historical results and the forward-looking statements contained in this report. Factors that might cause or contribute to these differences include, but are not limited to, those discussed in the following sections. CMS Energy’s and Consumers’ businesses are influenced by many factors that are difficult to predict, that involve uncertainties that may materially affect results, and that are often beyond their control. Additional risks and uncertainties not presently known or that the companies’ management 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 report and in other documents filed with the SEC, should be considered carefully before making an investment in securities of CMS Energy or Consumers. Risk factors of Consumers are also risk factors of CMS Energy. All of these risk factors are potentially significant.
 
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 service and other payment obligations. Restrictions contained in Consumers’ preferred stock provisions and other legal restrictions, such as certain terms in its articles of incorporation and FERC requirements, limit Consumers’ ability to pay dividends or acquire its own stock from CMS Energy. At December 31, 2010, Consumers had $404 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 payment obligations, which could have a material adverse effect on CMS Energy’s liquidity and financial condition.
 
CMS Energy has indebtedness that could limit its financial flexibility and hence its ability to meet its debt service obligations.
 
At December 31, 2010, CMS Energy, including Consumers, had $7.2 billion aggregate principal amount of indebtedness, including $29 million of subordinated indebtedness relating to its convertible preferred securities. CMS Energy had $2.3 billion aggregate principal amount of indebtedness at December 31, 2010. At December 31, 2010, there were no borrowings and $3 million of letters of credit outstanding under CMS Energy’s revolving 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 CMS Energy’s cash flow from operations could be dedicated to the payment of principal and interest on its indebtedness and would not be available for other purposes;
 
  •  covenants contained in CMS Energy’s existing debt arrangements, which require it to meet certain financial tests, could affect its flexibility in planning for, and reacting to, changes in its business;
 
  •  CMS Energy’s ability to obtain additional financing for working capital, capital expenditures, acquisitions, and general corporate and other purposes could become limited;
 
  •  CMS Energy could be placed at a competitive disadvantage to its competitors that are less leveraged;
 
  •  CMS Energy’s vulnerability to adverse economic and industry conditions could increase; and
 
  •  CMS Energy’s future credit ratings could fluctuate.
 
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, changes in laws or regulatory decisions (including with respect to environmental matters), 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 CMS Energy is unable to generate sufficient cash flows from operations, it may be required to sell assets or obtain additional financing. CMS Energy cannot ensure that additional financing will be available on commercially acceptable terms or at all.


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CMS Energy cannot predict the outcome of regulatory reviews and claims regarding its participation in the development of Bay Harbor.
 
The EPA and the MDNRE have not completed their review of proposals by CMS Land and CMS Capital to remedy the flow of leachate from buried CKD piles at the Bay Harbor site to Lake Michigan and related environmental issues. One of the major issues to be resolved is determining a long-term solution to the disposal of leachate collected at the site. In December 2010, the MDNRE issued a five-year NPDES permit that authorizes CMS Land to discharge treated leachate into Little Traverse Bay. Costs to treat and discharge collected leachate under this permit could exceed those that are presently anticipated. Additionally, CMS Land and CMS Capital could be required to alter their present water disposal strategy upon expiration of this permit if the MDNRE or EPA identify a more suitable option, or if the permit itself is challenged before the MDNRE or the courts. CMS Land and CMS Capital, the MDNRE, the EPA, and other parties continue to negotiate the long-term remedy for the Bay Harbor site. These negotiations are focused on, among other things, issues related to:
 
  •  the disposal of leachate;
 
  •  the capping and excavation of CKD;
 
  •  the location and design of collection lines and upstream water diversion systems;
 
  •  application of criteria for various substances such as mercury; and
 
  •  other matters that are likely to affect the scope of remedial work that CMS Land and CMS Capital may be obligated to undertake.
 
Depending on the results of these negotiations, as well as the size of any indemnity obligation or liability under an Administrative Order on Consent signed by CMS Land and CMS Capital or other liability under environmental laws, adverse outcomes of some or all of these matters could have a material adverse effect on CMS Energy’s liquidity and financial condition and could negatively affect CMS Energy’s financial results.
 
CMS Energy could be affected adversely by a regulatory investigation and civil lawsuits regarding pricing information that CMS MST and CMS Field Services provided to market publications.
 
In 2002, CMS Energy notified appropriate regulatory and governmental agencies that some employees at CMS MST and CMS Field Services appeared to have provided inaccurate information regarding natural gas trades to various energy industry publications which compile and report index prices. 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 or the amount of any fines or penalties that may be imposed and what effect, if any, the investigation will have on CMS Energy.
 
CMS Energy, CMS MST, CMS Field Services, Cantera Natural Gas, Inc., and Cantera Gas Company were named as defendants in various lawsuits arising as a result of alleged false natural gas price reporting. Allegations included manipulation of NYMEX natural gas futures and options prices, price-fixing conspiracies, and artificial inflation of natural gas retail prices in Colorado, Kansas, Missouri, Tennessee, and Wisconsin. CMS Energy cannot predict the outcome of the lawsuits or the amount of damages for which CMS Energy may be liable. It is possible that the outcome in one or more of the lawsuits could have a material adverse effect on CMS Energy’s liquidity, financial condition, and results of operations.
 
CMS Energy and Consumers retain contingent liabilities in connection with their asset sales.
 
The agreements that CMS Energy and Consumers enter into for the sale of assets customarily include provisions whereby they are 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 they make; and


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  •  make payments to the buyers depending on the outcome of post-closing adjustments, litigation, audits, or other reviews, including claims resulting from attempts by foreign or domestic governments to assess taxes on past operations or transactions.
 
Many of these contingent liabilities can remain open for extended periods of time after the sales are closed. Depending on the extent to which the buyers may ultimately seek to enforce their rights under these contractual provisions, and the resolution of any disputes concerning them, there could be a material adverse effect on CMS Energy’s or Consumers’ liquidity, financial condition, and results of operations.
 
CMS Energy and Consumers have financing needs and could be unable to obtain bank financing or access the capital markets. Potential disruption in the capital and credit markets could have a material adverse effect on CMS Energy’s and Consumers’ businesses, including the availability and cost of short-term funds for liquidity requirements and their ability to meet long-term commitments. These consequences could have a material adverse effect on CMS Energy’s and Consumers’ liquidity, financial condition, and results of operations.
 
CMS Energy and Consumers may be subject to liquidity demands under commercial commitments, guarantees, indemnities, and letters of credit. Consumers’ capital requirements are expected to be substantial over the next several years as it implements generation and environmental projects, and those requirements may increase if additional laws or regulations are adopted or implemented regarding greenhouse gases, including carbon dioxide.
 
CMS Energy and Consumers rely on the capital markets, particularly for publicly offered debt, as well as on bank syndications, to meet their financial commitments and short-term liquidity needs if internal funds are not available from CMS Energy’s and Consumers’ respective operations. CMS Energy and Consumers also use letters of credit issued under certain of their revolving credit facilities to support certain operations and investments.
 
Longer term disruptions in the capital and credit markets as a result of uncertainty, changing or increased regulation, reduced alternatives, or failures of significant financial institutions could adversely affect CMS Energy’s and Consumers’ access to liquidity needed for their respective businesses. Any disruption could require CMS Energy and Consumers to take measures to conserve cash until the markets stabilize or until alternative credit arrangements or other funding for their business needs can be arranged. These measures could include deferring capital expenditures, changing CMS Energy’s and Consumers’ commodity purchasing strategy to avoid collateral-posting requirements, and reducing or eliminating future share repurchases, dividend payments, or other discretionary uses of cash.
 
CMS Energy continues to explore financing opportunities to supplement its financial plan. These potential opportunities include refinancing and/or issuing new capital markets debt, preferred stock and/or common equity, and bank financing. Similarly, Consumers plans to seek funds through the capital markets, commercial lenders, and leasing arrangements. Entering into new financings is subject in part to capital market receptivity to utility industry securities in general and to CMS Energy’s and Consumers’ securities issuances in particular. CMS Energy and Consumers cannot guarantee the capital markets’ acceptance of their securities or predict the impact of factors beyond their control, such as actions of rating agencies. If CMS Energy or Consumers is unable to obtain bank financing or access the capital markets to incur or refinance indebtedness, or is unable to obtain commercially reasonable terms for any financing, there could be a material adverse effect on its liquidity, financial condition, and results of operations.
 
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, could make its cost of borrowing higher, and could cause CMS Energy or Consumers to reduce its capital expenditures. If it is unable to maintain commodity lines of credit, CMS Energy or Consumers may have to post collateral or make prepayments to certain of its suppliers under existing contracts. Further, since Consumers provides dividends to CMS Energy, any adverse developments affecting Consumers that result in a lowering of its credit ratings could have an adverse effect on CMS Energy’s credit ratings. CMS Energy and Consumers cannot


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guarantee that any of their present 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.
 
CMS Energy and Consumers could incur additional significant costs to comply with environmental requirements.
 
CMS Energy, Consumers, and their subsidiaries are subject to costly and increasingly stringent environmental regulations. They believe that environmental laws and regulations related to flue gas emissions, ash disposal, and cooling water use will continue to become more stringent and require them to make additional significant capital expenditures for emissions control equipment installation and upgrades.
 
In 2009, the EPA issued an endangerment finding for greenhouse gases under the Clean Air Act. In this finding, which has been challenged in the U.S. Court of Appeals for the D.C. Circuit by numerous parties, the EPA determined that present and projected atmospheric concentrations of six greenhouse gases threaten the public health and welfare of present and future generations. In May 2010, the EPA issued a final rule that addresses greenhouse gas emissions from stationary sources under the Clean Air Act permitting programs. The “tailoring rule” sets thresholds for greenhouse gas emissions that define when permits under the NSR and Title V programs are required for new and existing industrial facilities. This regulation took effect in January 2011. Comprehensive federal legislation that addresses greenhouse gases has not advanced in the U.S. Congress. Federal legislation is considered likely to be enacted in some form in the future and could have a significant impact on the operation and cost of existing and future fossil-fueled power plants.
 
In 2010, a significant percentage of the energy generated by Consumers came from fossil-fueled power plants. The emissions from fossil-fueled power plants would be subject to greenhouse gas regulations. CMS Enterprises also has interests in fossil-fueled power plants and other types of power plants that produce greenhouse gases. Federal laws and rules limiting the emission of greenhouse gases or similar state laws and rules, if enacted, as well as international accords and treaties, could require CMS Energy and Consumers to install additional equipment for emission controls, purchase carbon emissions allowances, curtail operations, invest in non-fossil-fuel generating capacity, or take other significant steps to manage or lower the emission of greenhouse gases. The following risks related to climate change could also have a material adverse impact on CMS Energy’s and Consumers’ liquidity, financial condition, and results of operations:
 
  •  litigation originated by third parties against CMS Energy, Consumers, or their subsidiaries due to CMS Energy’s or Consumers’ greenhouse gas emissions;
 
  •  impairment of CMS Energy’s or Consumers’ reputation due to its greenhouse gas emissions and public perception of its response to potential greenhouse gas regulations, rules, and legislation; and
 
  •  extreme weather conditions, such as severe storms, that may affect customer demand, company operations, or assets.
 
The EPA is considering regulating CCBs, such as coal ash, as hazardous wastes under the Resource Conservation and Recovery Act. Michigan already regulates CCBs as low-hazard industrial waste. If coal ash is regulated as a hazardous waste, Consumers would likely cease the beneficial re-use of this product, resulting in significantly more coal ash requiring costly disposal. Additionally, it is possible that existing landfills could be closed if the upgrades to hazardous waste landfill standards are economically prohibitive. Costs associated with this potential regulation could be substantial.
 
The EPA is revising regulations that govern cooling water intake structures aimed at protecting aquatic life. Costs associated with these revisions could be material to CMS Energy, Consumers, and CMS Enterprises and result in operational changes or the retirement of certain generating units.
 
CMS Energy and Consumers expect to collect fully from their customers, through the ratemaking process, expenditures incurred to comply with environmental regulations. If Consumers were unable to recover these expenditures from customers in rates, it could negatively affect CMS Energy’s and/or Consumers’ liquidity, results of operations, and financial condition and CMS Energy and/or Consumers could be required to seek significant additional financing to fund these expenditures.


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CMS Energy’s and Consumers’ businesses could be affected adversely by any delay in meeting environmental requirements.
 
A delay or failure by CMS Energy or Consumers to obtain or maintain any necessary environmental permits or approvals to satisfy any applicable environmental regulatory requirements or install emission control equipment could:
 
  •  prevent the construction of new facilities;
 
  •  prevent the continued operation and sale of energy from existing facilities;
 
  •  prevent the modification of existing facilities; or
 
  •  result in significant additional costs that could have a material adverse effect on their liquidity, financial condition, or results of operations.
 
Market performance and other changes could 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 and Consumers’ pension and postretirement benefit plans. CMS Energy and Consumers have significant obligations under these plans and hold significant assets in these trusts. These assets are subject to market fluctuations and will yield uncertain returns, which may fall below CMS Energy’s and Consumers’ forecasted return rates. A decline in the market value of the assets or a change in the level of interest rates used to measure the required minimum funding levels may increase the funding requirements of these obligations. Also, changes in demographics, including increased number of retirements or changes in life expectancy assumptions, may increase the funding requirements of the obligations related to the pension and postretirement benefit plans. If CMS Energy and Consumers were unable to manage their pension and postretirement plan assets successfully, it could have a material adverse effect on their liquidity, financial condition, and results of operations.
 
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 impairment charges for their assets, which could have an adverse effect on their stockholders’ equity and their access to additional financing. In addition, CMS Energy and Consumers may be required to record impairment charges at the time they sell assets, depending on the sale prices they are able to secure and other factors.
 
CMS Energy’s and Consumers’ businesses have safety risks.
 
Consumers’ electric and gas delivery systems, power plants, gas infrastructure, and energy products could be involved in accidents that result in injury or property loss to customers, employees, or the public. Although CMS Energy and Consumers have insurance coverage for many potential incidents, depending upon the nature or severity of any incident or accident, CMS Energy or Consumers could suffer financial loss, damage to its reputation, and negative repercussions from regulatory agencies or other public authorities.
 
CMS Energy’s and Consumers’ revenues and results of operations are subject to risks that are beyond their control, including but not limited to natural disasters, terrorist attacks or related acts of war, hostile cyber intrusions, or other catastrophic events.
 
The impact of natural disasters, wars, terrorist acts, cyber intrusions, and other catastrophic events on the facilities and operations of CMS Energy and Consumers could have a material adverse affect on their liquidity, financial condition, and results of operations. A terrorist attack on physical infrastructure or a major natural disaster could result in severe damage to CMS Energy’s and Consumers’ assets beyond what could be recovered through insurance policies. Hostile cyber intrusions, including those targeting information systems as well as electronic control systems used at the generating plants and for the electric and gas distribution systems, could severely disrupt


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business operations and result in loss of service to customers, as well as significant expense to repair security breaches or system damage. Terrorist attacks or acts of war could result in the disruption of power and fuel markets that could increase costs or disrupt service. Instability in the financial markets as a result of terrorism, war, natural disasters, credit crises, recessions, or other factors, could have a material adverse effect on CMS Energy’s and Consumers’ liquidity, financial condition, and results of operations.
 
CMS Energy and Consumers are exposed to significant reputational risks.
 
Consumers is actively engaged in multiple regulatory oversight processes and has a large electric and gas customer base. As a result, Consumers has a highly visible public profile in Michigan. Consumers and CMS Energy could suffer negative impacts to their reputations as a result of operational incidents, violations of corporate compliance policies, regulatory violations, or other events. This could have a material adverse effect on CMS Energy’s and Consumers’ liquidity, financial condition, and results of operations. It could also result in negative customer perception and increased regulatory oversight.
 
Energy risk management strategies may not be effective in managing fuel and electricity pricing risks, which could result in unanticipated liabilities to Consumers and CMS Energy or increased volatility of their earnings.
 
Consumers is exposed to changes in market prices for natural gas, coal, electricity, emission allowances, and RECs. Prices for natural gas, coal, electricity, emission allowances, and RECs 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 been historically volatile. Consumers routinely enters into contracts to mitigate exposure to the risks of demand, market effects of weather, and changes in commodity prices associated with its gas distribution business. These contracts are executed in conjunction with the GCR mechanism, which is designed to allow Consumers to recover prudently incurred costs associated with those positions. Consumers does not always hedge the entire exposure of its operations from commodity price volatility. Furthermore, the ability to hedge exposure to commodity price volatility depends on liquid commodity markets. As a result, to the extent the commodity markets are illiquid, Consumers may not be able to execute its risk management strategies, which could result in greater unhedged positions than preferred at a given time. To the extent that unhedged positions exist, fluctuating commodity prices could have a negative effect on CMS Energy’s and Consumers’ liquidity, financial condition, and results of operations.
 
Changes in taxation as well as the 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 determining reserves for potential adverse outcomes regarding tax positions that have been taken and may be subject to challenge by the IRS and/or other taxing authorities. Unfavorable settlements of any of the issues related to these reserves at CMS Energy or Consumers could have a material adverse effect on its liquidity, financial condition, and results of operations.
 
CMS Energy and Consumers are subject to changing tax laws. Increases in local, state, or federal tax rates or other changes in tax laws could have adverse impacts on their liquidity, financial condition, and results of operations.


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Consumers is exposed to risks related to general economic conditions in its service territories.
 
Consumers’ electric and gas utility businesses are affected by the economic conditions of the customers they serve. In Consumers’ service territories in Michigan, the economy has been affected adversely by economic and financial instability in the automotive and real estate sectors and by relatively high unemployment. The Michigan economy also has been affected negatively by the uncertainty in the financial and credit markets. If economic conditions in Michigan decline further, Consumers may experience reduced demand for electricity or natural gas that could result in decreased earnings and cash flow. In addition, economic conditions in Consumers’ service territory affect its collections of accounts receivable and levels of lost or stolen gas, which in turn impact its liquidity, financial condition, and results of operations.
 
CMS Energy’s and Consumers’ energy sales and operations are affected by seasonal factors and varying weather conditions from year to year.
 
CMS Energy’s and Consumers’ businesses are seasonal. Demand for electricity is greater in the summer cooling season and the winter heating season. Demand for natural gas peaks in the winter heating season. Accordingly, their overall results in the future may fluctuate substantially on a seasonal basis. Mild temperatures during the summer cooling season and winter heating season could have a material adverse affect on CMS Energy’s and Consumers’ liquidity, financial condition, and results of operations.
 
Unplanned power plant outages could be costly for Consumers.
 
When unplanned maintenance work is required on power plants or other equipment, Consumers may be required to incur unplanned expenses and to make spot market purchases of electricity that exceed its costs of generation. If Consumers were unable to recover any of these increased costs in rates, it could have a material adverse effect on Consumers’ liquidity, financial condition, and results of operations.
 
A work interruption or other union actions could adversely affect CMS Energy and Consumers.
 
Over 40 percent of CMS Energy’s and Consumers’ employees are represented by a union. If these employees were to engage in a strike, work stoppage, or other slowdown, or if the terms and conditions in future labor agreements were renegotiated, CMS Energy and Consumers could experience a significant disruption in their operations and higher ongoing labor costs.
 
Failure to attract and retain an appropriately qualified workforce could harm CMS Energy’s and Consumers’ results of operations.
 
If CMS Energy and Consumers were unable to match skill sets to future needs, they could encounter operating challenges and increased costs. These challenges could include a lack of resources, loss of knowledge, and delays in skill development. Additionally, higher costs could result from the use of contractors to replace employees, loss of productivity, and safety incidents. Failing to train replacement employees adequately and to transfer internal knowledge and expertise could affect CMS Energy’s and Consumers’ ability to manage and operate their businesses. If CMS Energy and Consumers were unable to attract and retain an appropriately qualified workforce, their results of operations could be affected negatively.
 
Consumers may not be able to obtain an adequate supply of coal or natural gas, which could limit its ability to operate its electric generation facilities or serve its natural gas customers.
 
Consumers is dependent on coal for a significant portion 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 Consumers were unable to obtain its coal requirements under existing or future coal supply and transportation contracts, it may be required to purchase coal at higher


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prices, or it may be forced to purchase electricity from higher cost generating resources in the Midwest Energy Market, which would increase Consumers’ working capital requirements.
 
Consumers has firm interstate transportation and supply agreements in place to facilitate deliveries of natural gas to its customers. Apart from the contractual and monetary remedies available to Consumers in the event of a counterparty’s failure to perform, there can be no assurances that the counterparties to these firm interstate transportation and supply agreements will fulfill their obligations to provide natural gas to Consumers. In addition, suppliers under these agreements may not be required to deliver natural gas to Consumers in certain circumstances, such as in the event of a natural disaster. If Consumers were unable to obtain its natural gas supply requirements under existing or future natural gas supply and transportation contracts, it could be required to purchase natural gas at higher prices from other sources or implement its natural gas curtailment program filed with the MPSC, which would increase Consumers’ working capital requirements and decrease its natural gas revenues.
 
Electric industry regulation could have a material adverse effect on CMS Energy’s and Consumers’ businesses.
 
Federal and state regulation of electric utilities has changed dramatically in the last two decades and could continue to change over the next several years. These changes could have a material adverse effect on CMS Energy’s and Consumers’ liquidity, financial condition, and results of operations.
 
CMS Energy and Consumers are subject to, or affected by, extensive federal and state utility regulation. In CMS Energy’s and Consumers’ business planning and management of operations, they must address the effects of existing and proposed regulation on their businesses and changes in the regulatory framework, including initiatives by federal and state legislatures, regional transmission organizations, utility regulators, and taxing authorities. Adoption of new regulations by federal or state agencies, or changes to present regulations and interpretations of these regulations, could have a material adverse effect on CMS Energy’s and Consumers’ liquidity, financial condition, and results of operations.
 
There are multiple proceedings pending before FERC involving transmission rates, regional transmission organizations, and electric bulk power markets and transmission. CMS Energy and Consumers cannot predict the impact of these electric industry restructuring proceedings on their liquidity, financial condition, and results of operations.
 
Electric industry legislation could have a material adverse effect on CMS Energy’s and Consumers’ businesses.
 
The 2008 Energy Legislation, among other things, limits alternative electric supply to ten percent of weather-adjusted retail sales for the preceding calendar year for ROA. Proposals have been made to raise that limit, which, if enacted, could have a material adverse effect on Consumers’ business. Proposals also have been made to increase the electric sales volume that will be required from renewable energy sources. Other new legislation or interpretations could change how the businesses of CMS Energy and Consumers operate, impact the ability of Consumers to recover costs through rate increases, or require CMS Energy or Consumers to incur additional expenses.
 
The markets for alternative energy and distributed generation could impact financial results.
 
Advances in technology could reduce the cost of alternative methods of producing electricity, such as fuel cells, microturbines, windmills, and photovoltaic (solar) cells, to a level that is competitive with that of fossil-fuel technology utilized by CMS Energy and Consumers to produce a majority of their electricity. It is also possible that electric customers could reduce their electric consumption significantly through demand-side energy conservation programs. Changes in technology could also alter the channels through which electric customers buy electricity. Any of these changes could have a material adverse effect on CMS Energy’s and Consumers’ liquidity, financial condition, or results of operations.


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CMS Energy and Consumers are subject to rate regulation, which could have an adverse effect on financial results.
 
CMS Energy and Consumers are subject to rate regulation. Electric and gas rates for their utilities are set by the MPSC and cannot be increased without regulatory authorization. While Consumers is permitted by the 2008 Energy Legislation to self-implement rate changes six months after a rate filing with the MPSC, subject to certain limitations, if a final rate order from the MPSC provides for lower rates than Consumers self-implemented, Consumers must refund the difference, with interest. Also, the MPSC may delay or deny implementation of a rate increase upon showing of good cause.
 
In addition, Consumers’ plans for making significant capital investments, including modifications to meet new environmental requirements and investment in new generation, could be affected adversely or could have a material adverse effect on Consumers if rate regulators fail to provide timely rate relief. Regulators seeking to avoid or minimize rate increases could resist raising customer rates sufficiently to permit Consumers to recover the full cost of modifications to meet environmental requirements and other prudent investments. In addition, because certain costs are mandated by state requirements for cost recovery, such as resource additions to meet Michigan’s renewable resource standard, regulators could be more inclined to oppose rate increases for other required items and investments. Rate regulators could also face pressure to avoid or limit rate increases for a number of reasons, including failure of Michigan’s economy to improve or diminishment of Consumers’ customer base. In addition to potentially affecting Consumers’ investment program, any limitation of cost recovery through rates could have a material adverse effect on Consumers’ liquidity, financial condition, and results of operations.
 
A further regulatory risk could arise from the MPSC’s adoption of mechanisms to decouple revenues from electricity and gas sales. The MPSC’s adoption or future treatment of these mechanisms could impact future revenues.
 
FERC authorizes certain subsidiaries of CMS Energy to sell electricity at market-based rates. Failure of CMS Energy and Consumers to obtain adequate rates or regulatory approvals in a timely manner could have a material adverse effect on CMS Energy’s and Consumers’ liquidity, financial condition, and results of operations.
 
The various risks associated with the MPSC and FERC regulation of CMS Energy’s and Consumers’ businesses, which include the risk of adverse decisions in any number of rate or regulatory proceedings before either agency, could have a substantial negative effect on the companies’ investment plans and results of operations.
 
CMS Energy’s and Consumers’ financial statements, including their reported earnings, could be significantly impacted by convergence with International Financial Reporting Standards.
 
The FASB is expected to make broad changes to GAAP as part of an overall initiative to converge U.S. standards with International Financial Reporting Standards. These changes could have significant impacts on the financial statements of CMS Energy and Consumers. Also, the SEC is considering incorporating International Financial Reporting Standards into the financial reporting system for U.S. registrants. A transition to International Financial Reporting Standards could significantly impact CMS Energy’s and Consumers’ financial results, since these standards differ from GAAP in many ways. One of the major differences is the lack of special accounting treatment for regulated activities under International Financial Reporting Standards, which could result in greater earnings volatility for CMS Energy and Consumers.
 
CMS Energy and Consumers are exposed to credit risk of those with whom they do business.
 
CMS Energy and Consumers are exposed to credit risk of counterparties with whom they do business. Adverse economic conditions or financial difficulties experienced by these counterparties could impair the ability of these counterparties to pay for CMS Energy’s and Consumers’ services or fulfill their contractual obligations, including performance and payment of damages. CMS Energy and Consumers depend on these counterparties to remit payments and perform services timely. Any delay or default in payment or performance of contractual obligations could have a material adverse effect on CMS Energy’s and Consumers’ liquidity, financial condition, and results of operations.


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In recent years, the capital and credit markets have experienced unprecedented high levels of volatility and disruption. Market disruption and volatility could have a negative impact on CMS Energy’s and Consumers’ lenders, suppliers, customers, and other counterparties, causing them to fail to meet their obligations. Adverse economic conditions could also have a negative impact on the loan portfolio of CMS Energy’s banking subsidiary, EnerBank.
 
CMS Energy could be required to pay cash to certain security holders in connection with the optional conversion of their convertible securities.
 
CMS Energy has issued two series of cash-convertible securities, of which an aggregate principal amount of $460 million was outstanding at December 31, 2010. If the trading price of CMS Energy’s common stock exceeds specified amounts at the end of a particular fiscal quarter, then holders of one or more series of these convertible securities will have the option to convert their securities in the following fiscal quarter, with the principal amount payable in cash by CMS Energy. Accordingly, if these trading price minimums are satisfied and security holders exercise their conversion rights, CMS Energy may be required to outlay a significant amount of cash to those security holders, which could have a material adverse effect on CMS Energy’s liquidity and financial condition.
 
There are risks associated with Consumers’ significant capital investment program planned for the next five years.
 
Consumers’ planned investments include an advanced metering infrastructure program, renewable power generation, gas compression, environmental controls, other electric and gas infrastructure to upgrade delivery systems, and, potentially, new power plants. The success of these investments depends on or could be affected by a variety of factors including, but not limited to, effective cost and schedule management during implementation, changes in commodity and other prices, operational performance, changes in environmental, legislative and regulatory requirements, and regulatory cost recovery. Consumers cannot predict the impact that any of these factors could have on the success of its capital investment program. It is possible that adverse events associated with these factors could have a material adverse effect on Consumers’ liquidity, financial condition, and results of operations.
 
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, Business Segments, Consumers Electric Utility, Electric Utility Properties;
 
  •  Business, Business Segments, Consumers Gas Utility, Gas Utility Properties; and
 
  •  Business, Business Segments, Enterprises Segment — Non-Utility Operations and Investments, IPP Properties.
 
ITEM 3. LEGAL PROCEEDINGS
 
For information regarding CMS Energy’s, Consumers’, and their subsidiaries’ significant pending administrative and judicial proceedings involving regulatory, operating, transactional, environmental, and other matters, see Item 8. Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 5, Contingencies and Commitments and Note 6, Regulatory Matters.
 
CMS Energy, Consumers, and certain of their subsidiaries and affiliates are also parties to 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.
 
ITEM 4. REMOVED AND RESERVED


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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
 
CMS Energy’s common stock is traded on the New York Stock Exchange. Market prices for CMS Energy’s common stock and related security holder matters are contained in Item 7. MD&A and Item 8. Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 22, Quarterly Financial and Common Stock Information (Unaudited), which are incorporated by reference herein. At February 10, 2011, the number of registered holders of CMS Energy’s common stock totaled 42,360, based on the number of record holders. Presented in the following table are CMS Energy’s dividends on its common stock:
 
                                 
    Per Share  
    February     May     August     November  
 
2010
  $ 0.150     $ 0.150     $ 0.150     $ 0.210  
2009
  $ 0.125     $ 0.125     $ 0.125     $ 0.125  
 
Information regarding securities authorized for issuance under equity compensation plans is included in CMS Energy’s definitive proxy statement, which is incorporated by reference herein. For additional information regarding dividends and dividend restrictions, see Item 8. Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 7, Financings and Capitalization.
 
Consumers
 
Consumers’ common stock is privately held by its parent, CMS Energy, and does not trade in the public market. Presented in the following table are Consumers’ cash dividends on its common stock:
 
                                 
    In Millions  
    February     May     August     November  
 
2010
  $ 114     $ 54     $ 91     $ 99  
2009
  $ 72     $ 58     $ 103     $ 52  
 
For additional information regarding dividends and dividend restrictions, see Item 8. Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 7, Financings and Capitalization.
 
Issuer Repurchases of Equity Securities
 
Presented in the following table are CMS Energy’s repurchases of equity securities for the three months ended December 31, 2010:
                                 
                Total Number of
    Maximum Number of
 
                Shares Purchased as
    Shares that May Yet
 
    Total Number of
    Average
    Part of Publicly
    Be Purchased Under
 
    Shares Purchased
    Price Paid
    Announced Plans or
    Publicly Announced
 
Period
  (a)     per Share     Programs     Plans or Programs  
 
October 1, 2010 to October 31, 2010
    2,071     $ 18.54              
November 1, 2010 to November 30, 2010
                       
December 1, 2010 to December 31, 2010
    1,861       18.62              
                                 
Total
    3,932     $ 18.58              
                                 
 
 
(a) Common shares were purchased to satisfy CMS Energy’s minimum statutory income tax withholding obligation for common shares that have vested under the PISP. Shares repurchased have a value based on the market price on the vesting date.


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Unregistered Sales of Equity Securities
 
On December 30, 2010, CMS Energy issued 166,930 shares of its common stock and paid $3 million in cash in exchange for $3 million aggregate principal amount of its 3.375 percent Convertible Senior Notes Due 2023, Series B. These convertible notes were tendered for conversion on December 13, 2010 in accordance with the terms and provisions of the Indenture of CMS Energy dated as of September 15, 1992, as supplemented by the Sixteenth Supplemental Indenture dated as of December 16, 2004. Such shares of common stock were issued based on the conversion value of $2,006.88 per $1,000 principal amount of convertible note. The issuance of these shares of common stock was an exchange of securities with existing shareholders and was exempt from registration pursuant to Section 3(a)(9) of the Securities Act of 1933, as amended.
 
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.
 
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, MD&A, 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, MD&A, which is incorporated by reference herein.
 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
CMS Energy
 
Quantitative and qualitative disclosures about market risk are contained in Item 8. Financial Statements and Supplementary Data, MD&A, Critical Accounting Policies, “Financial and Derivative Instruments and Market Risk Information,” which is incorporated by reference herein.
 
Consumers
 
Quantitative and qualitative disclosures about market risk are contained in Item 8. Financial Statements and Supplementary Data, MD&A, Critical Accounting Policies, “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:
       
Selected Financial Information
       
    47  
    48  
    49  
Consolidated Financial Statements
       
    75  
    84  
    92  
Reports of Independent Registered Public Accounting Firms
       
    172  
    173  


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(CMS LOGO)
 
 
2010 Consolidated Financial Statements
 
and
 
(CONSUMERS ENERGY ENERGY LOGO)
 
 
2010 Consolidated Financial Statements
 


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Selected Financial Information CMS Energy Corporation
 
                                                         
          2010     2009     2008     2007     2006        
 
Operating revenue (in millions)
    ($)       6,432       6,205       6,807       6,451       6,117          
Income (loss) from equity method investees
(in millions)
    ($)       11       (2 )     5       40       89          
Income (loss) from continuing operations
(in millions)(a)
    ($)       366       220       301       (120 )     (242 )        
Income (loss) from discontinued operations
(in millions)
    ($)       (23 )     20       1       (110 )     60          
Net income (loss) available to common stockholders (in millions)
    ($)       324       218       284       (234 )     (96 )        
Average common shares outstanding
(in thousands)
            231,473       227,169       225,671       224,473       221,618          
Earnings (loss) from continuing operations per average common share
                                                       
CMS Energy — Basic
    ($)       1.50       0.87       1.25       (0.65 )     (0.67 )        
- Diluted
    ($)       1.36       0.83       1.20       (0.65 )     (0.67 )        
Earnings (loss) per average common share
                                                       
CMS Energy — Basic
    ($)       1.40       0.96       1.25       (1.04 )     (0.43 )        
- Diluted
    ($)       1.28       0.91       1.20       (1.04 )     (0.43 )        
Cash provided by operations (in millions)
    ($)       959       848       557       23       688          
Capital expenditures, excluding assets placed under capital lease (in millions)
    ($)       821       818       792       1,263       670          
Total assets (in millions)
    ($)       15,616       15,256       14,901       14,180       15,324          
Long-term debt, excluding current portion
(in millions)
    ($)       6,448       5,895       6,015       5,533       6,338          
Non-current portion of capital and finance lease obligations (in millions)
    ($)       188       197       206       225       42          
Total preferred stock (in millions)
    ($)             239       243       250       261          
Cash dividends declared per common share
    ($)       0.66       0.50       0.36       0.20                
Market price of common stock at year-end
    ($)       18.60       15.66       10.11       17.38       16.70          
Book value per common share at year-end
    ($)       11.19       11.42       10.93       9.54       10.14          
Number of employees at year-end (full-time equivalents)
            7,822       8,039       7,970       7,898       8,640          
Electric Utility Statistics
                                                       
Sales (billions of kWh)
            38       36       37       39       38          
Customers (in thousands)
            1,792       1,796       1,814       1,799       1,797          
Average sales rate per kWh
    (¢)       10.54       9.81       9.48       8.65       8.46          
Gas Utility Statistics
                                                       
Sales and transportation deliveries (bcf)
            317       319       338       340       309          
Customers (in thousands)(b)
            1,711       1,708       1,713       1,710       1,714          
Average sales rate per mcf
    ($)       10.60       10.73       11.25       10.66       10.44          
 
 
(a) Income (loss) from continuing operations includes income (loss) attributable to noncontrolling interests of $3 million at December 31, 2010, $11 million at December 31, 2009, $7 million at December 31, 2008, $(8) million at December 31, 2007, and $(97) million at December 31, 2006.
 
(b) Excludes off-system transportation customers.


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Selected Financial Information Consumers Energy Company
 
                                                 
          2010     2009     2008     2007     2006  
 
Operating revenue (in millions)
    ($)       6,156       5,963       6,421       6,064       5,721  
Income from equity method investees (in millions)
    ($)                               1  
Net income (in millions)
    ($)       434       293       364       312       186  
Net income available to common stockholder (in millions)
    ($)       432       291       362       310       184  
Cash provided by operations (in millions)
    ($)       910       922       873       440       474  
Capital expenditures, excluding assets placed under capital lease (in millions)
    ($)       815       811       789       1,258       646  
Total assets (in millions)
    ($)       14,839       14,622       14,246       13,401       12,845  
Long-term debt, excluding current portion (in millions)
    ($)       4,488       4,063       3,908       3,692       4,127  
Non-current portion of capital and finance lease obligations (in millions)
    ($)       188       197       206       225       42  
Total preferred stock (in millions)
    ($)       44       44       44       44       44  
Number of preferred stockholders at year-end
            1,496       1,531       1,584       1,641       1,728  
Number of employees at year-end (full-time equivalents)
            7,522       7,755       7,697       7,614       8,026  
Electric Utility Statistics
                                               
Sales (billions of kWh)
            38       36       37       39       38  
Customers (in thousands)
            1,792       1,796       1,814       1,799       1,797  
Average sales rate per kWh
    (¢)       10.54       9.81       9.48       8.65       8.46  
Gas Utility Statistics
                                               
Sales and transportation deliveries (bcf)
            317       319       338       340       309  
Customers (in thousands)(a)
            1,711       1,708       1,713       1,710       1,714  
Average sales rate per mcf
    ($)       10.60       10.73       11.25       10.66       10.44  
 
 
(a) Excludes off-system transportation customers.


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CMS Energy Corporation
 
Consumers Energy Company
 
 
This MD&A is a combined report of CMS Energy and Consumers.
 
EXECUTIVE OVERVIEW
 
CMS Energy is an energy company operating primarily in Michigan. It is the parent holding company of several subsidiaries, including Consumers, an electric and gas utility, and CMS Enterprises, primarily a domestic IPP. Consumers’ electric utility operations include the generation, purchase, distribution, and sale of electricity, and Consumers’ gas utility operations include the purchase, transmission, storage, distribution, and sale of natural gas. Consumers’ customer base consists of a mix of residential, commercial, and diversified industrial customers. CMS Enterprises, through its subsidiaries and equity investments, owns and operates power generation facilities.
 
CMS Energy and Consumers manage their businesses by the nature of services each provides. CMS Energy operates principally in three business segments: electric utility; gas utility; and enterprises, its non-utility investments and operations. Consumers operates principally in two business segments: electric utility and gas utility.
 
CMS Energy and Consumers earn revenue and generate cash from operations by providing electric and natural gas utility services; electric distribution and generation; gas transmission, storage, and distribution; and other energy-related services. Their businesses are affected primarily by:
 
  •  regulation and regulatory matters;
 
  •  economic conditions;
 
  •  weather;
 
  •  energy commodity prices;
 
  •  interest rates; and
 
  •  CMS Energy’s and Consumers’ securities’ credit ratings.
 
During the past several years, CMS Energy’s “Growing Forward” business strategy has emphasized the following key elements:
 
 
Utility Investment
 
Consumers expects to make capital investments of more than $6 billion over the next five years, with a key aspect of its strategy being the balanced energy initiative. The balanced energy initiative is a comprehensive energy resource plan to meet Consumers’ projected short-term and long-term electric power requirements with energy efficiency, demand management, expanded use of renewable energy, development of new power plants, pursuit of


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additional PPAs to complement existing generating sources, potential retirement or mothballing of older generating units, and continued operation of others.
 
Presented in the following illustration are CMS Energy’s and Consumers’ estimated capital expenditures, including lease commitments, for 2011 through 2015:
 
(PIE CHART)
 
Renewable energy projects are a major component of Consumers’ planned capital investments. Consumers expects to spend $650 million on renewable energy investments through 2015. The 2008 Energy Legislation requires that at least ten percent of Consumers’ electric sales volume come from renewable energy sources by 2015, and includes requirements for specific capacity additions. Consumers has historically included renewable resources as part of its portfolio, with about five percent of its present power supply coming from such renewable sources as hydroelectric, landfill gas, biomass, and wind. In 2010, Consumers filed with the MPSC its first annual reports and reconciliations for its renewable energy plan and its energy optimization plan, requesting approval of 2009 plan costs. As one of the conditions to the continuation of the electric and gas decoupling mechanisms that were adopted in general rate cases, Consumers must exceed the statutory savings targets specified in the 2008 Energy Legislation for 2011 through 2014. In December 2010, the MPSC approved Consumers’ amended energy optimization plan to recover the additional spending necessary to exceed these savings targets.
 
In February 2011, Consumers and Detroit Edison together announced an $800 million maintenance and upgrade project at their jointly owned Ludington pumped-storage plant. The project, scheduled to begin in 2013 and extend through 2019, will increase the capacity of Ludington from its present level of 1,872 MW to about 2,172 MW. Consumers expects its share of the project cost to total $400 million.
 
Consumers’ smart grid program will also represent a significant capital investment. The initial deployment will include advanced metering infrastructure and will follow a phased approach, beginning in early 2012. Consumers expects to spend $355 million on its smart grid program through 2015.
 
In May 2010, Consumers announced plans to defer the development of its proposed 830-MW coal-fueled plant at its Karn/Weadock generating complex. This decision reflects reduced customer demand for electricity resulting from the recession in Michigan, forecasted lower natural gas prices due to recent developments in shale gas recovery technology, and projected surplus generating capacity in the MISO market.


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Regulation
 
Regulatory matters are a key aspect of CMS Energy’s and Consumers’ businesses, particularly Consumers’ rate cases and regulatory proceedings before the MPSC. Recent significant regulatory events and developments are summarized below.
 
  •  Big Rock Decommissioning Refund: In February 2010, the MPSC issued an order requiring that Consumers refund to customers $85 million collected during a rate freeze from 2001 to 2003 plus interest. Consumers completed this refund in January 2011. Consumers has filed an appeal of this order.
 
  •  2009 Gas Rate Case: In May 2010, the MPSC issued a gas rate order authorizing Consumers to increase its gas rates in an annual amount of $66 million based on an authorized return on equity of 10.55 percent. This rate order also adopted a pilot revenue decoupling mechanism. In general, a decoupling mechanism allows a utility to adjust rates due to changes in sales volumes, in order to improve the match between the collection of revenues and the revenue level approved by the utility’s regulator. Consumers’ gas decoupling mechanism, subject to certain conditions, allows Consumers to adjust future gas rates to compensate for changes in sales volumes resulting from energy efficiency, conservation, and other non-weather factors. This mechanism is subject to review at the end of annual periods.
 
  •  2010 Gas Rate Case: In August 2010, Consumers filed an application with the MPSC seeking an annual gas rate increase of $55 million based on an 11 percent authorized return on equity. The filing requested recovery for investments made to enhance safety, system reliability, and operational efficiencies that improve service to customers. In January 2011, Consumers filed testimony and exhibits with the MPSC in support of a self-implemented annual gas rate increase of $48 million, subject to refund with interest. In February 2011, Consumers filed a letter with the MPSC revising the proposed self-implemented increase to $29 million. The MPSC issued an order in February 2011, delaying Consumers’ self-implementation in order to give other parties to the proceeding an opportunity to respond to Consumers’ revised self-implementation filing.
 
  •  2010 Electric Rate Case: In November 2010, the MPSC issued an electric rate order authorizing Consumers to increase its rates in an annual amount of $146 million based on an authorized return on equity of 10.7 percent. This electric rate order continues Consumers’ pilot electric decoupling mechanism, which, subject to certain conditions, was adopted in a November 2009 electric rate order. The electric decoupling mechanism is similar to the gas decoupling mechanism, but also permits rate adjustments to compensate for changes in sales volumes resulting from weather fluctuations. The mechanism is subject to review at the end of annual periods.
 
Environmental regulation is another area of importance for CMS Energy and Consumers. In 2009, the EPA issued an endangerment finding that greenhouse gases, including carbon dioxide, contribute to air pollution that may endanger the public health and welfare, thus setting the stage for regulation of carbon dioxide emissions under the Clean Air Act. The EPA also issued an Advance Notice of Proposed Rulemaking in April 2010, indicating that it is considering a variety of regulatory actions with respect to PCBs. In June 2010, the EPA proposed a range of alternatives for regulating CCBs, such as coal ash, under the Resource Conservation and Recovery Act. In July 2010, the EPA released CATR, a proposed rule that would replace CAIR. CMS Energy and Consumers are monitoring these developments for potential effects on their plans and operations.
 
Safety
 
The safety and security of employees, customers, and the general public remain a priority of CMS Energy and Consumers. Accordingly, CMS Energy and Consumers have worked to integrate a set of safety principles into their business operations and culture. These principles include complying with applicable safety, health, and security regulations and implementing programs and processes aimed at continually improving safety and security conditions.


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Financial Performance in 2010 and Beyond
 
In 2010, CMS Energy’s net income available to common stockholders was $324 million, and diluted earnings per share were $1.28. This compares with net income available to common stockholders of $218 million and diluted earnings per share of $0.91 in 2009.
 
Among the most significant factors contributing to CMS Energy’s improved performance in 2010 were benefits from electric and gas rate orders, the absence of a revenue reduction in 2009 associated with the Big Rock decommissioning refund order, increased deliveries of electricity, and an insurance settlement related to a previously sold investment.
 
Also in 2010, CMS Energy recognized a $40 million charge to increase the recorded liability for its affiliates’ environmental remediation obligation associated with Bay Harbor. This increase was due to several factors, including anticipated cost increases for the disposal of leachate under an NPDES permit issued by the MDNRE; additional costs for the increased scope of remediation to meet EPA and MDNRE requirements; and increased legal, management, and engineering costs due to delays in reaching an agreement with all involved parties. In addition, Consumers recorded charges of $22 million in 2010 to write off previously capitalized development costs associated with its proposed coal-fueled plant. These charges reflected Consumers’ decision to defer the development of the plant, and the reduced likelihood that the plant will be constructed.
 
A more detailed discussion of the factors affecting CMS Energy’s and Consumers’ performance in 2010 can be found in the “Results of Operations” section that follows this Executive Overview.
 
In 2010, Consumers’ weather-adjusted electric deliveries increased by 1.7 percent over 2009, while Consumers’ weather-adjusted gas deliveries were at similar levels to 2009. These trends support CMS Energy’s view that economic conditions in Michigan have stabilized. Although Michigan’s economy continues to be affected by the recession and its impact on the state’s automotive industry, by high unemployment rates, and by a modestly shrinking population, there are indications that the recession is easing in Michigan. Consumers expects its electric sales to increase by about 1.5 percent annually through 2016, driven largely by the continued rise in industrial production. Consumers is projecting that its gas sales will decline by about one percent annually through 2016, due largely to energy efficiency and conservation.
 
As Consumers continues to seek fair and timely regulatory treatment, delivering customer value will remain a key strategic priority. To keep costs down for its utility customers, Consumers has set aggressive goals for annual productivity improvements. Additionally, Consumers will strive to give priority to capital investments that increase customer value or lower costs.
 
Consumers expects to continue to have sufficient capacity to fund its investment-based growth plans. CMS Energy also expects its sources of liquidity to remain sufficient to meet its cash requirements. CMS Energy and Consumers will continue to monitor developments in the financial and credit markets, as well as government policy responses to those developments, for potential implications for their businesses and their future financial needs.
 
RESULTS OF OPERATIONS
 
CMS Energy’s Consolidated Results of Operations
 
                         
Years Ended December 31
  2010     2009     2008  
    In Millions (except for Per Share Amounts)  
 
Net Income Available to Common Stockholders
  $ 324     $ 218     $ 284  
Basic Earnings Per Share
  $ 1.40     $ 0.96     $ 1.25  
Diluted Earnings Per Share
  $ 1.28     $ 0.91     $ 1.20  
 


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Years Ended December 31
  2010     2009     Change     2009     2008     Change  
    In Millions  
 
Electric Utility
  $ 303     $ 194     $ 109     $ 194     $ 271     $ (77 )
Gas Utility
    127       96       31       96       89       7  
Enterprises
    36       (7 )     43       (7 )     13       (20 )
Corporate Interest and Other
    (119 )     (85 )     (34 )     (85 )     (90 )     5  
Discontinued Operations
    (23 )     20       (43 )     20       1       19  
                                                 
Net Income Available to Common Stockholders
  $ 324     $ 218     $ 106     $ 218     $ 284     $ (66 )
                                                 
 
Presented in the following table are specific after-tax changes to net income available to common stockholders for 2010 versus 2009:
 
                         
    2010 Over/(Under) 2009  
          (In Millions)        
 
Electric and gas rate orders
          $ 90          
Electric sales:
                       
Weather
  $ 52                  
Customer shift to energy-only rates and to ROA
    (36 )                
Decoupling benefit
    11       27          
                         
Gas sales, primarily weather
            (14 )        
2009 net benefits, primarily asset sale gain and tax credit
            (17 )        
Write-off of proposed coal-fueled plant cost
            (14 )        
Other, mainly depreciation
            (5 )   $ 67  
                         
Subsidiary earnings of enterprises segment
                    13  
Cost of debt retirements and preferred stock redemptions, net
            (20 )        
Interest expense
            (9 )        
Other, mainly tax adjustments
            (6 )     (35 )
                         
2009 Big Rock decommissioning refund
            79          
Insurance settlement recovery
            31          
2009 gain on indemnity expiration
            (31 )        
Other, including increase in Bay Harbor environmental liability
            (18 )     61  
                         
Total change
                  $ 106  
                         
 
Presented in the following table are specific after-tax changes to net income available to common stockholders for 2009 versus 2008:
 
                         
    2009 Over/(Under) 2008  
          (In Millions)        
 
Electric and gas rate orders
          $ 139          
Electric and gas sales:
                       
Weather
  $ (34 )                
Lower deliveries, mainly economic conditions
    (14 )     (48 )        
                         
2008 net benefits, primarily sulfur dioxide credits
            (23 )        
Plant maintenance expense
            (20 )        
Pension and OPEB expenses
            (19 )        
Forestry and tree trimming costs
            (12 )        
Other, mainly higher property tax and interest expense
            (19 )   $ (2 )
                         
Subsidiary earnings of enterprises segment
                    5  
Gain on early retirement of debt
            7          
Other, mainly tax adjustments
            3       10  
                         
Big Rock decommissioning refund
            (79 )        
Increase in Bay Harbor environmental liability
            (22 )        
Gain on indemnity expiration
            31          
Other
            (9 )     (79 )
                         
Total change
                  $ (66 )
                         

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Consumers’ Electric Utility Results of Operations
 
                                                 
Years Ended December 31
  2010     2009     Change     2009     2008     Change  
    In Millions  
 
Net Income Available to Common Stockholders
  $ 303     $ 194     $ 109     $ 194     $ 271     $ (77 )
Reasons for the change:
                                               
Electric deliveries and rate increases
                  $ 266                     $ (6 )
Power supply costs and related revenue
                    (7 )                     (1 )
Other income, net of expenses
                    (27 )                     14  
Maintenance and other operating expenses
                    (59 )                     (77 )
Depreciation and amortization
                    (9 )                     (2 )
General taxes
                    2                       (10 )
Interest charges
                    23                       (42 )
Income taxes
                    (80 )                     47  
                                                 
Total change
                  $ 109                     $ (77 )
                                                 
 
Electric deliveries and rate increases: For 2010, electric delivery revenues increased $266 million compared with 2009. This variance included $84 million associated with favorable weather in 2010, offset partially by $40 million of decreased demand revenues and $19 million from lower customer usage. Additionally, revenues increased $32 million due to surcharges from MPSC orders allowing recovery of retirement benefit expenses, and $100 million from authorized rate increases in November 2010 and November 2009. Revenues also increased $99 million due to the absence of a refund ordered in 2009 related to the Big Rock decommissioning case. For more details regarding the Big Rock decommissioning order, see Note 6, Regulatory Matters. Other miscellaneous revenue increases totaled $10 million. Overall, deliveries to end-use customers were 37.7 billion kWh in 2010, an increase of 1.9 billion kWh or 5.3 percent compared with 2009.
 
For 2009, electric delivery revenues decreased $6 million compared with 2008. This variance resulted from $43 million associated with unfavorable weather in 2009, $10 million from lower customer usage, and $99 million from a refund order related to the Big Rock decommissioning case, offset largely by $146 million of additional revenues from authorized rate increases in June 2008 and November 2009. Overall, deliveries to end-use customers were 35.8 billion kWh in 2009, a decrease of 1.7 billion kWh or 4.5 percent compared with 2008.
 
Other income, net of expenses: For 2010, other income decreased $27 million compared with 2009, due primarily to a reduction of $8 million in interest income recorded on regulatory assets and the absence, in 2010, of $9 million of gains recognized on land sales in 2009.
 
For 2009, other income increased $14 million compared with 2008, due primarily to $9 million of gains recognized on land sales in 2009 and an $11 million impairment charge recorded on Consumers’ SERP investments in 2008.
 
Maintenance and other operating expenses: For 2010, maintenance and other operating expenses increased $59 million compared with 2009. The increase was due primarily to higher retirement benefit expenses of $32 million and a $22 million impairment charge related to Consumers’ decision to defer the development of its proposed coal-fueled plant.
 
For 2009, maintenance and other operating expenses increased $77 million compared with 2008. The increase was due primarily to $24 million of higher plant maintenance expenses, $23 million related to energy optimization program costs, and higher benefit expenses of $7 million. In addition, expenses increased $35 million in 2009 due to sulfur dioxide credits and RCP savings on Consumers’ MCV PPA contract recorded in 2008.
 
Interest charges: For 2010, interest charges decreased $23 million compared with 2009. The decrease was due to the absence, in 2010, of $31 million of interest expense associated with the 2009 Big Rock decommissioning order, offset partially by an $8 million increase in other interest charges in 2010.
 
For 2009, interest charges increased $42 million compared with 2008, due to higher interest expense of $31 million associated with the Big Rock decommissioning order and an $11 million increase in other interest charges.


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Income taxes: For 2010, income taxes increased $80 million compared with 2009, due to higher electric utility earnings. For 2009, income taxes decreased $47 million compared with 2008, due to lower electric utility earnings.
 
Consumers’ Gas Utility Results of Operations
 
                                                 
Years Ended December 31
  2010     2009     Change     2009     2008     Change  
    In Millions  
 
Net Income Available to Common Stockholders
  $ 127     $ 96     $ 31     $ 96     $ 89     $ 7  
Reasons for the change:
                                               
Gas deliveries and rate increases
                  $ 60                     $ 29  
Other income, net of expenses
                    (2 )                     13  
Maintenance and other operating expenses
                    (7 )                     (32 )
Depreciation and amortization
                    (4 )                     18  
General taxes
                    2                       (4 )
Interest charges
                    (7 )                     (5 )
Income taxes
                    (11 )                     (12 )
                                                 
Total change
                  $ 31                     $ 7  
                                                 
 
Gas deliveries and rate increases: For 2010, gas delivery revenues increased $60 million compared with 2009, due primarily to additional revenues of $54 million from an authorized rate increase in May 2010. In addition, surcharge and other miscellaneous revenues increased $30 million. These increases were offset partially by a $24 million reduction due to unfavorable weather in 2010. Gas deliveries, including miscellaneous transportation to end-use customers, were 273.1 bcf in 2010, a decrease of 11.2 bcf or 3.9 percent compared with 2009.
 
For 2009, gas delivery revenues increased $29 million compared with 2008, due to additional revenues of $32 million from an authorized rate increase in December 2008 and a self-implemented rate increase in November 2009. In addition, surcharge and other miscellaneous revenues increased $28 million. These increases were offset by $10 million associated with unfavorable weather in 2009 and $21 million due to lower customer usage. Gas deliveries, including miscellaneous transportation to end-use customers, were 284.3 bcf in 2009, a decrease of 19.4 bcf or 6.4 percent compared with 2008.
 
Other income, net of expenses: Other income in 2010 was not materially different from other income in 2009.
 
For 2009, other income increased $13 million compared with 2008 due to $8 million of higher interest income on secured borrowing agreements and a $5 million impairment charge recorded on Consumers’ SERP investments in 2008.
 
Maintenance and other operating expenses: For 2010, maintenance and other operating expenses increased $7 million compared with 2009 due primarily to energy optimization program costs.
 
For 2009, maintenance and other operating expenses increased $32 million compared with 2008, due primarily to $14 million related to energy optimization program costs and higher benefit expenses of $12 million.
 
Depreciation and amortization: For 2010, depreciation and amortization expense increased $4 million compared with 2009, due primarily to increased plant in service. For 2009, depreciation and amortization expense decreased $18 million compared with 2008 due to the December 2008 gas rate order, which reduced depreciation expense.
 
Income taxes: For 2010, income taxes increased $11 million compared with 2009, and for 2009, income taxes increased $12 million compared with 2008. Both increases were due to higher gas utility earnings.
 
Enterprises Results of Operations
 
                                                 
Years Ended December 31
  2010     2009     Change     2009     2008     Change  
    In Millions  
 
Net Income (Loss) Available to Common Stockholders
  $ 36     $ (7 )   $ 43     $ (7 )   $ 13     $ (20 )


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For 2010, the enterprises segment reported net income of $36 million, compared with a net loss of $7 million for 2009. The $43 million change reflected income of $31 million from the settlement of an insurance claim related to a previously sold asset and a $9 million tax benefit related to the Michigan Business Tax. Additionally, income increased $6 million due to higher gas and power sales offset partially by increased maintenance and other operating expenses. These increases were offset by a $3 million decrease associated with Bay Harbor; in 2010, the enterprises segment recorded a $25 million after-tax increase in the environmental remediation liability associated with Bay Harbor, compared with a $22 million after-tax increase in 2009. For more details regarding Bay Harbor, see Note 5, Contingencies and Commitments.
 
For 2009, the enterprises segment reported a net loss of $7 million compared with net income of $13 million for 2008. The $20 million change was due primarily to a $22 million after-tax increase in the environmental remediation liability associated with Bay Harbor.
 
Corporate Interest and Other Results of Operations
 
                                                 
Years Ended December 31
  2010     2009     Change     2009     2008     Change  
    In Millions  
 
Net Loss Available to Common Stockholders
  $ (119 )   $ (85 )   $ (34 )   $ (85 )   $ (90 )   $ 5  
 
For 2010, corporate interest and other net expenses increased $34 million compared with 2009, reflecting an $18 million gain recognized in 2009 on the early retirement of long-term debt — related parties and $15 million due primarily to higher tax expense in 2010 related to the Michigan Business Tax. Additionally, interest expense increased $10 million due to higher debt levels at higher average interest rates. These items were offset partially by $9 million of higher net earnings at EnerBank and lower legal fees.
 
For 2009, corporate interest and other net expenses decreased $5 million, reflecting an $18 million gain on the early retirement of long-term debt — related parties, offset partially by $11 million in premiums paid on the early retirement of senior notes.
 
Discontinued Operations
 
For 2010, a loss of $23 million was recorded from discontinued operations, compared with income of $20 million for 2009. The $43 million change was due primarily to a $28 million gain recognized in 2009 on the expiration of an indemnity for a 2007 asset sale and $10 million of additional tax expense in 2010 resulting from an IRS audit adjustment related to a 2003 asset sale.
 
For 2009, income of $20 million was recorded from discontinued operations, compared with income of $1 million for 2008. The $19 million change was due primarily to a $28 million gain on the expiration of an indemnity for a 2007 asset sale, offset partially by a loss of $8 million, reflecting operating results at Exeter.
 
Cash Position, Investing, and Financing
 
At December 31, 2010, CMS Energy had $270 million of consolidated cash and cash equivalents, which included $23 million of restricted cash and cash equivalents. At December 31, 2010, Consumers had $94 million of consolidated cash and cash equivalents, which included $23 million of restricted cash and cash equivalents.


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Operating Activities
 
Presented in the following table are specific components of net cash provided by operating activities for the years ended December 31, 2010 and 2009:
 
                         
Years Ended December 31
  2010     2009     Change  
    In Millions  
 
CMS Energy, including Consumers
                       
•   Net income
  $ 343     $ 240     $ 103  
•   Non-cash transactions(a)
    1,112       877       235  
                         
    $ 1,455     $ 1,117     $ 338  
•   Sale of gas purchased in the prior year
    756       845       (89 )
•   Purchase of gas in the current year
    (663 )     (718 )     55  
•   Accounts receivable sales, net
    (50 )     (120 )     70  
•   Postretirement benefits contributions
    (463 )     (262 )     (201 )
•   Change in other core working capital(b)
    (22 )     (62 )     40  
•   Other changes in assets and liabilities, net
    (54 )     48       (102 )
                         
Net cash provided by operating activities
  $ 959     $ 848     $ 111  
                         
Consumers
                       
•   Net income
  $ 434     $ 293     $ 141  
•   Non-cash transactions(a)
    1,103       841       262  
                         
    $ 1,537     $ 1,134     $ 403  
•   Sale of gas purchased in the prior year
    756       845       (89 )
•   Purchase of gas in the current year
    (663 )     (718 )     55  
•   Accounts receivable sales, net
    (50 )     (120 )     70  
•   Postretirement benefits contributions
    (447 )     (254 )     (193 )
•   Change in other core working capital(b)
    (19 )     (58 )     39  
•   Other changes in assets and liabilities, net
    (204 )     93       (297 )
                         
Net cash provided by operating activities
  $ 910     $ 922     $ (12 )
                         
 
 
(a) Non-cash transactions comprise depreciation and amortization, changes in deferred income taxes, postretirement benefits expense, and other non-cash items.
 
(b) Other core working capital comprises other changes in accounts receivable and accrued revenues, inventories, and accounts payable.
 
For the year ended December 31, 2010, net cash provided by operating activities at CMS Energy increased $111 million compared with 2009. The increase was due primarily to higher net income, net of non-cash transactions, offset partially by higher pension contributions.
 
For the year ended December 31, 2010, net cash provided by operating activities at Consumers decreased $12 million compared with 2009. The decrease was due primarily to higher pension contributions and refunds to customers. These changes were offset largely by increased billings due to recent regulatory actions.


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Presented in the following table are specific components of net cash provided by operating activities for the years ended December 31, 2009 and 2008:
 
                         
Years Ended December 31
  2009     2008     Change  
    In Millions  
 
CMS Energy, including Consumers
                       
•   Net income
  $ 240     $ 302     $ (62 )
•   Non-cash transactions(a)
    877       911       (34 )
                         
    $ 1,117     $ 1,213     $ (96 )
•   Sale of gas purchased in the prior year
    845       915       (70 )
•   Purchase of gas in the current year
    (718 )     (963 )     245  
•   Electric sales contract termination payment
          (275 )     275  
•   Accounts receivable sales, net
    (120 )     170       (290 )
•   Postretirement benefits contributions
    (262 )     (51 )     (211 )
•   Change in other core working capital(b)
    (62 )     (278 )     216  
•   Other changes in assets and liabilities, net
    48       (174 )     222  
                         
Net cash provided by operating activities
  $ 848     $ 557     $ 291  
                         
Consumers
                       
•   Net income
  $ 293     $ 364     $ (71 )
•   Non-cash transactions(a)
    841       956       (115 )
                         
    $ 1,134     $ 1,320     $ (186 )
•   Sale of gas purchased in the prior year
    845       915       (70 )
•   Purchase of gas in the current year
    (718 )     (963 )     245  
•   Accounts receivable sales, net
    (120 )     170       (290 )
•   Postretirement benefits contributions
    (254 )     (50 )     (204 )
•   Change in other core working capital(b)
    (58 )     (289 )     231  
•   Other changes in assets and liabilities, net
    93       (230 )     323  
                         
Net cash provided by operating activities
  $ 922     $ 873     $ 49  
                         
 
 
(a) Non-cash transactions comprise depreciation and amortization, changes in deferred income taxes, postretirement benefits expense, and other non-cash items.
 
(b) Other core working capital comprises other changes in accounts receivable and accrued revenues, inventories, and accounts payable.
 
For the year ended December 31, 2009, net cash provided by operating activities at CMS Energy increased $291 million compared with 2008. This increase was due primarily to the absence in 2009 of a payment made by CMS ERM in 2008 to terminate electricity sales agreements and the changes affecting Consumers’ cash provided by operating activities described in the following paragraph.
 
For the year ended December 31, 2009, net cash provided by operating activities at Consumers increased $49 million compared with 2008. This increase was due primarily to the impact of lower gas prices on inventory purchased in 2009, increased billings due to recent regulatory actions, the absence, in 2009, of refunds to customers of excess Palisades decommissioning funds, and other timing differences. These changes were offset partially by the pension contribution of $199 million and lower sales of accounts receivable in 2009.


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Investing Activities
 
Presented in the following table are specific components of cash used in investing activities for the years ended December 31, 2010 and 2009:
 
                         
Years Ended December 31
  2010     2009     Change  
    In Millions  
 
CMS Energy, including Consumers
                       
•   Capital expenditures
  $ (821 )   $ (818 )   $ (3 )
•   Cash effect of deconsolidation of partnerships
    (10 )           (10 )
•   Increase in loans and notes receivable
    (131 )     (83 )     (48 )
•   Costs to retire property and other
    (41 )     (34 )     (7 )
                         
Net cash used in investing activities
  $ (1,003 )   $ (935 )   $ (68 )
                         
Consumers
                       
•   Capital expenditures
  $ (815 )   $ (811 )   $ (4 )
•   Costs to retire property and other
    (44 )     (39 )     (5 )
                         
Net cash used in investing activities
  $ (859 )   $ (850 )   $ (9 )
                         
 
For the year ended December 31, 2010, net cash used in investing activities at CMS Energy increased $68 million compared with 2009. The change was due primarily to an increase in EnerBank consumer lending. For the year ended December 31, 2010, net cash used in investing activities at Consumers increased $9 million compared with 2009, due to increases in capital expenditures and costs to retire property.
 
Presented in the following table are specific components of cash used in investing activities for the years ended December 31, 2009 and 2008:
 
                         
Years Ended December 31
  2009     2008     Change  
    In Millions  
 
CMS Energy, including Consumers
                       
•   Capital expenditures
  $ (818 )   $ (792 )   $ (26 )
•   Increase in non-current notes receivable
    (83 )     (19 )     (64 )
•   Costs to retire property and other
    (34 )     (28 )     (6 )
                         
Net cash used in investing activities
  $ (935 )   $ (839 )   $ (96 )
                         
Consumers
                       
•   Capital expenditures
  $ (811 )   $ (789 )   $ (22 )
•   Costs to retire property and other
    (39 )     (34 )     (5 )
                         
Net cash used in investing activities
  $ (850 )   $ (823 )   $ (27 )
                         
 
For the year ended December 31, 2009, net cash used in investing activities at CMS Energy increased $96 million compared with 2008. For the year ended December 31, 2009, net cash used in investing activities at Consumers increased $27 million compared with 2008. The increases at CMS Energy were due primarily to increases in EnerBank consumer lending and in Consumers’ capital expenditures.


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Financing Activities
 
Presented in the following table are specific components of net cash provided by (used in) financing activities for the years ended December 31, 2010 and 2009:
 
                         
Years Ended December 31
  2010     2009     Change  
    In Millions  
 
CMS Energy, including Consumers
                       
•   Issuance of FMBs, convertible senior notes, senior notes, and other debt
  $ 1,704     $ 1,374     $ 330  
•   Retirement of debt and other debt maturity payments
    (1,033 )     (1,271 )     238  
•   Payments of common and preferred stock dividends
    (162 )     (125 )     (37 )
•   Redemption of preferred stock
    (239 )     (4 )     (235 )
•   Changes in EnerBank notes payable
    (40 )     40       (80 )
•   Other financing activities
    (28 )     (49 )     21  
                         
Net cash provided by (used in) financing activities
  $ 202     $ (35 )   $ 237  
                         
Consumers
                       
•   Issuance of FMBs
  $ 600     $ 500     $ 100  
•   Retirement of debt and other debt maturity payments
    (482 )     (387 )     (95 )
•   Payments of common and preferred stock dividends
    (360 )     (287 )     (73 )
•   Stockholder’s contribution from CMS Energy
    250       100       150  
•   Other financing activities
    (27 )     (28 )     1  
                         
Net cash used in financing activities
  $ (19 )   $ (102 )   $ 83  
                         
 
For the year ended December 31, 2010, net cash provided by financing activities at CMS Energy increased $237 million compared to 2009. The change was due primarily to an increase in net proceeds from borrowings by CMS Energy, offset partially by a decrease in borrowings by EnerBank.
 
For the year ended December 31, 2010, net cash used in financing activities at Consumers decreased $83 million compared with 2009. The change was due primarily to a stockholder’s contribution from CMS Energy, offset partially by an increase in common dividend payments.
 
Presented in the following table are specific components of net cash provided by (used in) financing activities for the years ended December 31, 2009 and 2008:
 
                         
Years Ended December 31
  2009     2008     Change  
    In Millions  
 
CMS Energy, including Consumers
                       
•   Issuance of FMBs, convertible senior notes, senior notes, and other debt
  $ 1,374     $ 1,396     $ (22 )
•   Retirement of debt and other debt maturity payments
    (1,271 )     (1,130 )     (141 )
•   Payments of common and preferred stock dividends
    (125 )     (93 )     (32 )
•   Changes in EnerBank notes payable
    40             40  
•   Other financing activities
    (53 )     (26 )     (27 )
                         
Net cash provided by (used in) financing activities
  $ (35 )   $ 147     $ (182 )
                         
Consumers
                       
•   Issuance of FMBs
  $ 500     $ 600     $ (100 )
•   Retirement of debt and other debt maturity payments
    (387 )     (444 )     57  
•   Payments of common and preferred stock dividends
    (287 )     (299 )     12  
•   Stockholder’s contribution from CMS Energy
    100             100  
•   Other financing activities
    (28 )     (33 )     5  
                         
Net cash used in financing activities
  $ (102 )   $ (176 )   $ 74  
                         
 
For the year ended December 31, 2009, net cash used in financing activities at CMS Energy increased by $182 million compared with 2008. The increase in net cash used in financing activities was due primarily to an increase in net debt retirements.


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For the year ended December 31, 2009, net cash used in financing activities at Consumers decreased $74 million compared with 2008. This decrease was due primarily to a stockholder’s contribution from CMS Energy, offset partially by a decrease in net proceeds from borrowings.
 
For additional details on long-term debt activity, see Note 7, Financings and Capitalization.
 
CAPITAL RESOURCES AND LIQUIDITY
 
CMS Energy uses dividends from its subsidiaries and external financing and capital transactions to invest in its utility and non-utility businesses, retire debt, pay dividends, and fund its other obligations. The ability of CMS Energy’s subsidiaries, including Consumers, to pay dividends to CMS Energy depends upon each subsidiary’s revenues, earnings, cash needs, and other factors. In addition, Consumers’ ability to pay dividends is restricted by certain terms included in its articles of incorporation, as well as by FERC requirements. For the year ended December 31, 2010, Consumers paid $358 million in common stock dividends to CMS Energy.
 
Consumers uses cash flows generated from operations and external financing transactions, as well as stockholder’s contributions from CMS Energy, to fund capital expenditures, retire debt, pay dividends, contribute to its employee benefit plans, and fund its other obligations.
 
CMS Energy’s and Consumers’ access to the financial and capital markets depends on their credit ratings and on market conditions. As evidenced by past financing transactions, CMS Energy and Consumers have had ready access to these markets and, barring major market dislocations or disruptions, they expect to continue to have such access. If access to these markets were to become diminished or otherwise restricted, however, CMS Energy and Consumers would implement contingency plans to address debt maturities, which could include reduced capital spending. CMS Energy and Consumers also have the following secured revolving credit facilities available:
 
                         
At December 31, 2010
  Amount of Facility     Amount Available     Expiration Date  
    In Millions  
 
CMS Energy
                       
Revolving credit facility
  $ 550     $ 547       April 2012  
Consumers
                       
Revolving credit facility
    500       200       March 2012  
Revolving credit facility
    150       150       August 2013  
 
CMS Energy and Consumers presently use these credit facilities to issue letters of credit, and they intend to renew these facilities at reasonable terms before their expiration. An additional source of liquidity is Consumers’ revolving accounts receivable sales program, which allows it to transfer up to $250 million of accounts receivable as a secured borrowing. At December 31, 2010, $250 million of account receivable were eligible for transfer under this program.
 
Certain of CMS Energy’s and Consumers’ credit agreements and debt indentures contain covenants that require CMS Energy and Consumers to maintain certain financial ratios. CMS Energy’s $550 million revolving credit agreement specifies a maximum debt to EBITDA ratio, as defined therein, and a minimum interest coverage ratio, as defined therein. Also, certain of CMS Energy’s senior notes indenture supplements specify a minimum interest coverage ratio, as defined therein. Consumers’ revolving credit agreements specify a maximum debt to capital ratio, as defined therein. At December 31, 2010, no events of default had occurred with respect to any debt covenants contained in CMS Energy and Consumers’ credit agreements or debt indentures. CMS Energy and Consumers were each in compliance with these limits as of December 31, 2010, as presented in the following table:
 
                     
        (1)Minimum
       
        (2)Maximum
    Ratio at
 
Credit agreement or facility
 
Description
 
Limit
   
December 31, 2010
 
 
CMS Energy’s revolving credit agreement
  Debt to EBITDA     (2)7.0 to 1.0       4.70 to 1.0  
CMS Energy’s revolving credit agreement
  Interest Coverage     (1)1.2 to 1.0       3.62 to 1.0  
CMS Energy’s senior notes indenture
  Interest Coverage     (1)1.7 to 1.0       3.70 to 1.0  
Consumers’ revolving credit agreements
  Debt to Capital     (2)0.7 to 1.0       0.51 to 1.0  


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Components of CMS Energy’s and Consumers’ cash management plan include controlling operating expenses and capital expenditures and evaluating market conditions for financing and refinancing opportunities. CMS Energy and Consumers believe that their present level of cash and their expected cash flows from operating activities, together with their access to sources of liquidity, will be sufficient to fund their contractual obligations for 2011 and beyond.
 
Contractual Obligations: Presented in the following table are CMS Energy’s and Consumers’ contractual cash obligations for each of the periods presented. The table excludes all amounts classified as current liabilities on CMS Energy’s and Consumers’ 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
 
At December 31, 2010
  Total     One Year     Three Years     Five Years     Five Years  
    In Millions  
 
CMS Energy, including Consumers
                                       
Long-term debt(a)
  $ 7,206     $ 439     $ 1,019     $ 976     $ 4,772  
Interest payments on long-term debt(b)
    2,909       357       662       587       1,303  
Capital and finance leases(c)
    212       23       50       42       97  
Interest payments on capital and finance leases(d)
    98       14       22       18       44  
Operating leases(e)
    260       29       57       51       123  
Purchase obligations(f)
    15,794       1,996       2,613       1,751       9,434  
Purchase obligations — related parties(f)
    1,735       87       180       193       1,275  
                                         
Total contractual obligations
  $ 28,214     $ 2,945     $ 4,603     $ 3,618     $ 17,048  
                                         
Consumers
                                       
Long-term debt(a)
  $ 4,529     $ 37     $ 755     $ 567     $ 3,170  
Interest payments on long-term debt(b)
    1,899       238       436       365       860  
Capital and finance leases(c)
    212       23       50       42       97  
Interest payments on capital and finance leases(d)
    98       14       22       18       44  
Operating leases(e)
    260       29       57       51       123  
Purchase obligations(f)
    15,794       1,996       2,613       1,751       9,434  
Purchase obligations — related parties(f)
    1,735       87       180       193       1,275  
                                         
Total contractual obligations
  $ 24,527     $ 2,424     $ 4,113     $ 2,987     $ 15,003  
                                         
 
 
(a) Principal amounts due on outstanding debt obligations, current and long-term, at December 31, 2010. For additional details on long-term debt, see Note 7, Financings and Capitalization.
 
(b) Scheduled interest payments on both variable-rate and fixed-rate long-term debt, current and long-term. Variable interest payments are based on contractual rates in effect at December 31, 2010.
 
(c) Principal portion of lease payments under capital and finance leases, comprising mainly leased service vehicles and certain PPAs.
 
(d) Imputed interest on capital and finance leases.
 
(e) Minimum noncancelable lease payments under leases of railroad cars 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 for the purchase of capacity and energy from PURPA qualifying facilities. These commodities and services include natural gas and associated transportation, electricity, and coal and associated transportation.
 
For details related to benefit payments, see Note 11, Retirement Benefits.


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Off-Balance-Sheet Arrangements: CMS Energy, Consumers, and certain of their subsidiaries also enter into various arrangements in the normal course of business to facilitate commercial transactions with third parties. These arrangements include indemnities, surety bonds, letters of credit, and financial and performance guarantees. Indemnities are usually agreements to reimburse a counterparty that may incur losses due to outside claims or breach of contract terms. The maximum payment that could be required under a number of these indemnity obligations is not estimable. While CMS Energy and Consumers believe it is unlikely that they will incur any material losses related to indemnities they have not recorded as liabilities, they cannot predict the impact of these contingent obligations on their liquidity and financial condition. For additional details on these and other guarantee arrangements, see Note 5, Contingencies and Commitments, “Guarantees.”
 
Capital Expenditures: Over the next five years, CMS Energy and Consumers expect to make capital investments of more than $6 billion. CMS Energy and Consumers may revise their forecasts of capital expenditures periodically due to a number of factors, including environmental regulations, business opportunities, market volatility, economic trends, and the ability to access capital. Presented in the following table are CMS Energy’s and Consumers’ estimated capital expenditures, including lease commitments, for 2011 through 2015:
 
                                                 
                                  Five Years
 
    2011     2012     2013     2014     2015     Total  
                In Millions        
 
CMS Energy, including Consumers
                                               
Consumers
  $ 1,070     $ 1,290     $ 1,280     $ 1,530     $ 1,260     $ 6,430  
Enterprises
    6       8       1       1       1       17  
                                                 
Total CMS Energy
  $ 1,076     $ 1,298     $ 1,281     $ 1,531     $ 1,261     $ 6,447  
                                                 
Consumers
                                               
Electric utility operations(a)(b)
  $ 790     $ 1,060     $ 1,060     $ 1,310     $ 1,030     $ 5,250  
Gas utility operations(b)
    280       230       220       220       230       1,180  
                                                 
Total Consumers
  $ 1,070     $ 1,290     $ 1,280     $ 1,530     $ 1,260     $ 6,430  
                                                 
 
 
(a) These amounts include estimates for capital expenditures that may be required by environmental laws, regulations, or potential consent decrees.
 
(b) These amounts include estimates for capital expenditures related to information technology projects, facility improvements, and vehicle leasing.


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Presented in the following illustration are the components of CMS Energy’s (including Consumers’) planned capital spending for 2011 through 2015:
 
(PIE CHART)
 
OUTLOOK
 
Several business trends and uncertainties may affect CMS Energy’s and Consumers’ financial condition and results of operations. These trends and uncertainties could have a material impact on CMS Energy’s and Consumers’ consolidated income, cash flows, or financial position. For additional details regarding these and other uncertainties, see “Forward-Looking Statements and Information;” Note 5, Contingencies and Commitments; and Part I, Item 1A. Risk Factors.
 
Consumers’ Electric Utility Business Outlook and Uncertainties
 
Balanced Energy Initiative: Consumers’ balanced energy initiative is a comprehensive energy resource plan designed to meet its projected short-term and long-term electric power requirements through:
 
  •  energy efficiency;
 
  •  demand management;
 
  •  expanded use of renewable energy;
 
  •  development of new power plants;
 
  •  pursuit of additional PPAs to complement existing generating sources;
 
  •  continued operation of existing units; and
 
  •  potential retirement or mothballing of older generating units.
 
In May 2010, Consumers announced plans to defer the development of its proposed 830 MW coal-fueled plant at its Karn/Weadock generating complex. This decision reflects reduced customer demand for electricity due to the recession, forecasted lower natural gas prices due to recent developments in shale gas recovery technology, and projected surplus generating capacity in the MISO market. Consumers has been monitoring customer demand, fuel and power prices, and other market conditions, and has not set a timetable for a future decision about the project; however, the likelihood that the plant will be constructed has diminished significantly. Consumers’ alternatives to


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constructing the proposed coal-fueled plant include constructing new gas-fueled generation, relying on additional market purchases, as well as continued operation of several existing generating units.
 
Renewable Energy Plan: Consumers’ renewable energy plan details how Consumers will meet REC and capacity standards prescribed by the 2008 Energy Legislation. This legislation requires Consumers to obtain RECs in an amount equal to at least ten percent of its electric sales volume (estimated to be 3.6 million RECs annually) by 2015. RECs represent proof that the associated electricity was generated from a renewable energy resource. The legislation also requires Consumers to obtain 500 MW of capacity from renewable energy resources by 2015, either through generation resources owned by Consumers or through agreements to purchase capacity from other parties.
 
Under its renewable energy plan, Consumers expects to secure its required RECs each year with a combination of newly generated RECs and previously generated RECs carried over from prior years. Presently, Consumers generates or purchases 1.6 million RECs per year, which represents 44 percent of the 2015 renewable energy requirement. In 2010, Consumers contracted for the purchase of 900,000 RECs per year, which represents an additional 25 percent of the 2015 renewable energy requirement. In addition, at December 2010, Consumers held three million RECs in inventory for use over the next 15 years beginning in 2015. This inventory will provide 200,000 RECs per year, or 5.5 percent of the 2015 renewable energy requirement.
 
To meet its renewable capacity requirements, Consumers expects to add more than 500 MW of owned or contracted renewable capacity by 2015. Through December 2010, Consumers has contracted for the purchase of 296 MW of nameplate capacity from renewable energy suppliers, which represents 59 percent of the 2015 renewable capacity requirement.
 
Consumers has secured more than 79,000 acres of land easements in Michigan’s Huron, Mason, and Tuscola Counties for the potential development of wind generation, and is presently collecting wind speed and other meteorological data at those sites. Consumers has entered into construction and supply contracts as well as a contract to purchase wind turbine generators for the construction of a 100-MW wind farm in Mason County, the Lake Winds Energy Park, which Consumers expects to be operational in late 2012. Consumers will continue to seek opportunities for wind generation development in support of the renewable capacity standards.
 
Electric Customer Deliveries and Revenue: Consumers’ electric customer deliveries are largely dependent on Michigan’s economy, which has suffered from economic and financial instability in the automotive and real estate sectors.
 
Consumers expects weather-adjusted electric deliveries to increase in 2011 by two percent compared with 2010. Consumers’ outlook for 2011 includes continuing growth in deliveries to its largest customer, which produces energy-related and computer components. Consumers has a long-term contract with this customer to provide electricity at a discounted rate for economic development purposes. Excluding this customer’s growth, Consumers expects weather-adjusted electric deliveries in 2011 to be at a similar level to 2010. Consumers’ outlook reflects the impact of reduced deliveries associated with its investment in energy efficiency programs prescribed by the 2008 Energy Legislation, as well as recent projections of Michigan’s economic conditions.
 
Consumers believes economic conditions have stabilized. Consumers’ present outlook for electric delivery growth is about 1.5 percent annually on average through 2016. This reflects growth in electric deliveries offset by the predicted effects of energy efficiency programs and appliance efficiency standards. Actual deliveries will depend on:
 
  •  energy conservation measures and results of energy efficiency programs;
 
  •  fluctuations in weather; and
 
  •  changes in economic conditions, including utilization and expansion or contraction of manufacturing facilities, population trends, and housing activity.
 
A decoupling mechanism, authorized by the MPSC in Consumers’ 2009 electric rate case order and extended in the 2010 electric rate case order, allows Consumers to adjust future electric rates to compensate for changes in sales volumes resulting from weather fluctuations, energy efficiency, and conservation. Consumers expects this mechanism to reduce volatility of electric utility revenue.


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Electric ROA: The Customer Choice Act allows all of Consumers’ electric customers to buy electric generation service from Consumers or from an alternative electric supplier. The 2008 Energy Legislation revised the Customer Choice Act by limiting alternative electric supply to ten percent of Consumers’ weather-adjusted retail sales of the preceding calendar year. At December 31, 2010, electric deliveries under the ROA program were at the ten percent limit and alternative electric suppliers were providing 807 MW of generation service to ROA customers. Based on 2010 weather-adjusted retail sales, Consumers expects 2011 electric deliveries under the ROA program to be at a similar level to 2010.
 
In May 2010, a bill was introduced to the Michigan Senate and House of Representatives that would increase from ten percent to 25 percent the proportion of an electric utility’s sales for which service may be provided by an alternative electric supplier. The 2010 legislative session ended without any definitive action being taken on this bill.
 
Electric Environmental Estimates: Consumers’ operations are subject to various state and federal environmental laws and regulations. Consumers continues to focus on complying with the Clean Air Act, Clean Water Act, and numerous state and federal environmental regulations. Consumers estimates that it will incur expenditures of $1.9 billion from 2011 through 2018 to comply with these regulations. Consumers expects to recover these costs in customer rates, but cannot guarantee this result. Consumers’ primary environmental compliance focus includes, but is not limited to, the following matters:
 
Clean Air Interstate Rule/Clean Air Transport Rule: Due to a December 2008 court decision that remanded CAIR back to the EPA, CAIR remains in effect at this time, pending the EPA’s finalization of a new rule. In July 2010, the EPA released CATR, a proposed rule that would replace CAIR. Consumers is evaluating this proposed rule. If adopted in its present form, CATR could result in additional or accelerated environmental compliance costs related to Consumers’ fossil-fueled power plants and retirement of some or all of the older, smaller generating units in Consumers’ fleet. Presently, Consumers’ strategy to comply with CAIR involves the installation of state-of-the-art emission control equipment.
 
Federal Hazardous Air Pollutant Regulation: The EPA is developing Maximum Achievable Control Technology emission standards for electric generating units, based on Section 112 of the Clean Air Act. Consumers is unable to predict the impact of this proposed regulation, but expects to have a better understanding of the potential impact upon the release a proposed rule, which is expected in March 2011. Existing sources must meet the standards generally within three years of issuance of the final rule. The final rule is expected to be issued in November 2011.
 
Greenhouse Gases: There are numerous legislative and regulatory initiatives at the state, regional, and national levels that involve the regulation of greenhouse gases. Consumers monitors and comments on these initiatives and also follows litigation involving greenhouse gases. Consumers believes Congress may eventually pass greenhouse gas legislation, but is unable to predict the form and timing of any final legislation.
 
In May 2010, the EPA released its Prevention of Significant Deterioration and Title V Greenhouse Gas Tailoring Rule. The final rule, which numerous parties have challenged in the U.S. Court of Appeals for the D.C. Circuit, sets limits for greenhouse gas emissions that define when permits are required for new and existing industrial facilities under NSR PSD and Title V Operating Permit programs. Consumers does not expect that this regulation will require it to incur significant expenditures for efficiency upgrades for modified or new facilities at this time.
 
Litigation, as well as federal laws, EPA regulations regarding greenhouse gases, or similar treaties, state laws, or rules, if enacted, could require Consumers to replace equipment, install additional equipment for emission controls, purchase emission allowances, curtail operations, arrange for alternative sources of supply, or take other steps to manage or lower the emission of greenhouse gases. Although associated capital or operating costs relating to greenhouse gas regulation or legislation could be material and cost recovery cannot be assured, Consumers expects to recover these costs and capital expenditures in rates consistent with the recovery of other reasonable costs of complying with environmental laws and regulations.
 
In 2010, carbon dioxide emissions from fossil-fueled power plants owned by Consumers, excluding the portion of Campbell Unit 3 that is owned by others, exceeded 18 million metric tons. During the same period, coal-fueled plants owned by the enterprises segment emitted about 700,000 metric tons of carbon dioxide.


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Coal Combustion By-Products: In June 2010, the EPA proposed rules regulating CCBs, such as coal ash, under the Resource Conservation and Recovery Act. Michigan already regulates CCBs as low-hazard industrial waste. The EPA proposed a range of alternatives for regulating CCBs, including regulation as either a non-hazardous waste or a hazardous waste. If coal ash were regulated as a hazardous waste, Consumers would likely cease the beneficial re-use of this product, resulting in significantly more coal ash requiring costly disposal. Additionally, it is possible that existing coal ash disposal areas could be closed and costly alternative arrangements for coal ash disposal could be required if the upgrades to hazardous waste landfill standards are economically prohibitive. Consumers is unable to predict accurately the full impacts from this wide range of possible outcomes, but significant expenditures are likely.
 
Water: In 2004, the EPA issued rules that govern existing electric generating plant cooling water intake systems. These rules require a significant reduction in the number of fish harmed by cooling water intake structures at existing power plants. The EPA compliance options in the rule were challenged before the U.S. Court of Appeals for the Second Circuit, which remanded the bulk of the rule back to the EPA for reconsideration in 2007. In April 2009, the U.S. Supreme Court ruled in favor of the utility industry’s position that the EPA can rely on a cost-benefit analysis in setting the national performance standards for fish protection. The EPA is scheduled to issue a draft rule in the first half of 2011 and a final rule in 2012.
 
Advance Notice of Proposed Rulemaking on PCBs: In April 2010, the EPA issued an Advance Notice of Proposed Rulemaking, indicating that it is considering a variety of regulatory actions with respect to PCBs. One proposal aims to phase out equipment containing PCBs by 2025. Another proposal eliminates an exemption for small equipment containing PCBs. Consumers could incur substantial costs associated with the regulation of PCBs due to prior installation of electrical equipment potentially containing PCBs.
 
Other electric environmental matters could have a major impact on Consumers’ outlook. For additional details on other electric environmental matters, see Note 5, Contingencies and Commitments, “Consumers’ Electric Utility Contingencies — Electric Environmental Matters.”
 
Electric Transmission: In June 2010, FERC issued a Notice of Proposed Rulemaking to establish a closer link between regional electric transmission planning and cost allocations to ensure the construction of required transmission facilities. In a related matter, MISO filed a tariff revision with FERC in July 2010, proposing a cost allocation methodology for a new category of transmission projects. In December 2010, FERC approved MISO’s cost allocation proposal. Under this tariff revision, the cost of these new transmission projects will be spread proportionally across the Midwest Energy Market. Consumers believes that Michigan customers will bear additional costs under MISO’s tariff without receiving comparable benefits from these projects. In January 2011, Consumers, along with the Michigan Attorney General, ABATE, Detroit Edison, the Michigan Municipal Electric Association, and the Michigan Public Power Agency, filed a protest and request for rehearing with FERC, opposing the allocation methodology in the MISO tariff revision. Consumers expects to continue to recover transmission expenses, including those associated with the MISO tariff revision, through the PSCR process.
 
Electric Rate Matters: Rate matters are critical to Consumers’ electric utility business. For details on Consumers’ electric rate cases, PSCR, electric operation and maintenance expenditures show-cause order, electric depreciation cases, renewable energy plan, and energy optimization plan, see Note 6, Regulatory Matters, “Consumers’ Electric Utility.”
 
Consumers’ Gas Utility Business Outlook and Uncertainties
 
Gas Deliveries: Consumers expects 2011 weather-adjusted gas deliveries to decline by one percent compared with 2010, due to continuing conservation and overall economic conditions in Michigan. In addition, Consumers expects weather-adjusted gas deliveries to decline an average of one percent annually from 2012 through 2016, which includes expected effects of energy efficiency programs and continued conservation. Actual delivery levels from year to year may vary from this trend due to:
 
  •  fluctuations in weather;
 
  •  use by IPPs;


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  •  availability and development of renewable energy sources;
 
  •  changes in gas prices;
 
  •  Michigan economic conditions, including population trends and housing activity;
 
  •  the price of competing energy sources or fuels; and
 
  •  energy efficiency and conservation.
 
A decoupling mechanism, authorized by the MPSC in Consumers’ 2009 gas rate case order, allows Consumers to adjust future gas rates to compensate for changes in sales volumes by class arising from the difference between the level of average sales per customer adopted in the order and actual average weather-adjusted sales per customer. The mechanism will not provide rate adjustments for changes in sales volumes arising from weather fluctuations. Consumers expects this mechanism to mitigate the impacts of energy efficiency programs, conservation, and changes in economic conditions on its gas revenue.
 
Gas Pipeline Safety: In September 2010, the U.S. House of Representatives passed the Corporate Liability and Emergency Accident Notification Act, which would require oil and natural gas pipeline operators to notify regulators within one hour following the discovery of certain oil spills or natural gas leaks. The bill also would increase civil fines for delayed reporting of oil spills and natural gas leaks and would establish an online database of safety violations searchable by pipeline owner or operator.
 
In response to the natural gas pipeline explosion that occurred in San Bruno, California in September 2010, the U.S. House of Representatives and the U.S. Senate have proposed bills stipulating stricter regulation of natural gas pipelines nationwide. These proposed bills affect primarily transmission pipelines and contain provisions mandating:
 
  •  the use of internal inspection devices or comparable methods effective in detecting pipeline deterioration;
 
  •  the installation of automatic shutoff equipment in high-consequence areas; and
 
  •  certain disclosures to homeowners and regulatory agencies.
 
Consumers continues to comply with laws and regulations governing natural gas pipeline safety. If these proposed laws are put into effect, Consumers could incur significant additional costs related to its natural gas pipeline safety programs. Consumers expects that it would be able to recover the costs in rates, consistent with the recovery of other reasonable costs of complying with laws and regulations.
 
Gas Environmental Estimates: Consumers expects to incur response activity costs at a number of sites, including 23 former MGP sites. For additional details, see Note 5, Contingencies and Commitments, “Consumers’ Gas Utility Contingencies — Gas Environmental Matters.”
 
The Mandatory Reporting of Greenhouse Gases Rule requires facilities engaging in the distribution of natural gas to collect data on greenhouse gas emissions resulting from the combustion of natural gas. In 2010, Consumers estimated that carbon dioxide emissions from its customers were 15 million metric tons.
 
Gas Rate Matters: Rate matters are critical to Consumers’ gas utility business. For details on Consumers’ gas rate cases and GCR, see Note 6, Regulatory Matters, “Consumers’ Gas Utility.”
 
Consumers’ Other Outlook and Uncertainties
 
Smart Grid: Consumers’ grid modernization effort continues to move forward. The foundation of this effort is the installation of advanced metering and the infrastructure to support it. The installation will include smart meters that are capable of transmitting and receiving data, a two-way communications network, and modifications to Consumers’ existing information technology systems to manage the data and enable changes to key business processes. It is intended to allow customers to monitor and manage their energy usage and help reduce demand during critical peak times, resulting in lower peak capacity requirements. Due to this system’s complexity and relative market immaturity, Consumers intends to continue its phased implementation approach. Consumers has concluded the testing and assessment phase of the project and will begin full deployment of meters in early 2012.


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Enterprises Outlook and Uncertainties
 
The primary focus with respect to CMS Energy’s remaining non-utility businesses is to optimize cash flow and maximize the value of their assets.
 
Trends, uncertainties, and other matters that could have a material impact on CMS Energy’s consolidated income, cash flows, or financial position include:
 
  •  indemnity and environmental remediation obligations at Bay Harbor;
 
  •  the outcome of certain legal proceedings;
 
  •  impacts of declines in electricity prices on the profitability of the enterprises segment’s generating units;
 
  •  representations, warranties, and indemnities provided by CMS Energy or its subsidiaries in connection with previous sales of assets;
 
  •  changes in commodity prices and interest rates on certain derivative contracts that do not qualify for hedge accounting and must be marked to market through earnings;
 
  •  changes in various environmental laws, regulations, principles, practices, or in their interpretation; and
 
  •  economic conditions in Michigan, including population trends and housing activity.
 
For additional details regarding the enterprises segment’s uncertainties, see Note 5, Contingencies and Commitments.
 
Other Outlook and Uncertainties
 
Litigation: CMS Energy, Consumers, and certain of their subsidiaries are named as parties in various litigation matters, as well as in administrative proceedings before various courts and governmental agencies, arising in the ordinary course of business. For additional details regarding these and other legal matters, see Note 5, Contingencies and Commitments and Note 6, Regulatory Matters.
 
EnerBank: EnerBank, a wholly owned subsidiary of CMS Capital that represents one percent of CMS Energy’s net assets and three percent of CMS Energy’s Net Income Available to Common Stockholders, is a Utah state-chartered, FDIC-insured industrial bank providing unsecured home improvement loans. The carrying value of EnerBank’s loan portfolio was $385 million at December 31, 2010. Its loan portfolio was funded primarily by deposit liabilities of $363 million. Twelve-month rolling average default rates on loans held by EnerBank have declined from 2.1 percent at December 31, 2009 to 1.4 percent at December 31, 2010. EnerBank expects the rate of loan defaults to decline further, and to level out at about 1.0 percent. CMS Energy is required to ensure that EnerBank remains well capitalized.
 
CRITICAL ACCOUNTING POLICIES
 
The following accounting policies and related information are important to an understanding of CMS Energy’s and Consumers’ results of operations and financial condition and should be considered an integral part of their MD&A. For additional accounting policies, see Note 1, Significant Accounting Policies.
 
Use of Estimates and Assumptions
 
In the preparation of CMS Energy’s and Consumers’ Consolidated Financial Statements, estimates and assumptions are used that may affect reported amounts and disclosures. CMS Energy and Consumers use accounting estimates for asset valuations, unbilled revenue, depreciation, amortization, financial and derivative instruments, employee benefits, the effects of regulation, indemnities, and contingencies. Actual results may differ from estimated results due to changes in the regulatory environment, regulatory decisions, lawsuits, competition, and other factors. CMS Energy and Consumers consider all relevant factors in making these assessments.
 
Fair Value Measurements: CMS Energy and Consumers have assets and liabilities that are accounted for or disclosed at fair value. Fair value measurements incorporate assumptions that market participants would use in


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pricing an asset or liability, including assumptions about risk. Development of these assumptions may require significant judgment. For a detailed discussion of the valuation techniques and inputs used to calculate fair value measurements, see Note 4, Fair Value Measurements. Details about the fair value measurements for the Pension Plan and OPEB plan assets are included in Note 11, Retirement Benefits.
 
Income Taxes: The amount of income taxes paid by CMS Energy is subject to ongoing audits by federal, state, and foreign tax authorities, which can result in proposed assessments. An estimate of the potential outcome of any uncertain tax issue is highly judgmental. CMS Energy believes adequate reserves have been provided for these exposures; however, future results may include favorable or unfavorable adjustments to the estimated tax liabilities in the period the assessments are made or resolved or when statutes of limitation on potential assessments expire. Additionally, CMS Energy’s judgment as to the ability to recover its deferred tax assets may change. CMS Energy believes the valuation allowances related to its deferred tax assets are adequate, but future results may include favorable or unfavorable adjustments. As a result, CMS Energy’s effective tax rate may fluctuate significantly over time.
 
Long-Lived Assets and Equity Method Investments: CMS Energy and Consumers assess the recoverability of their long-lived assets and equity method investments by performing impairment tests if certain triggering events occur or if there has been a decline in value that may be other than temporary. CMS Energy and Consumers base their 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 CMS Energy and Consumers use may change over time, which could have a material impact on their Consolidated Financial Statements. For additional details, see Note 20, Asset Sales, Discontinued Operations, and Impairment Charges.
 
Unbilled Revenues: CMS Energy’s and Consumers’ customers are billed monthly in cycles having billing dates that do not generally coincide with the end of a calendar month. This results in customers having received electricity or gas that they have not been billed for as of the month-end. Consumers estimates its unbilled revenues by applying an average billed rate to total unbilled deliveries for each customer class. Unbilled revenues, which are recorded as Accounts receivable on CMS Energy’s and Consumers’ Consolidated Balance Sheets, were $439 million at December 31, 2010 and $477 million at December 31, 2009.
 
Accounting for the Effects of Industry Regulation
 
Because Consumers has regulated operations, it uses regulatory accounting to recognize the effects of the regulators’ decisions on its financial statements. Consumers continually assesses whether future recovery of its regulatory assets is probable by considering communications and experience with its regulators and changes in the regulatory environment. If Consumers determined that recovery of a regulatory asset were not probable, Consumers would be required to write off the asset and immediately recognize the expense to earnings.
 
Under electric and gas rate orders issued by the MPSC in 2009 and 2010, Consumers was granted authority to implement revenue decoupling mechanisms. The electric decoupling mechanism adjusts customer rates to collect or refund the change in marginal revenue arising from the difference between the level of average sales per customer adopted in the electric rate order and actual average sales per customer. The gas decoupling mechanism is similar, but does not adjust customer rates for changes in sales volumes resulting from weather fluctuations. Consumers accounts for these programs as alternative-revenue programs that meet the criteria for recognizing the effects of decoupling adjustments on revenue as electricity and gas are delivered.
 
Unless prohibited by the MPSC upon a showing of good cause, Consumers is allowed to self-implement new energy rates six months after a new rate case filing; however, the rates that Consumers self-implements may be


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subject to refund, with interest. Consumers recognizes revenue associated with self-implemented rates. If Consumers considers it probable that it will be required to refund a portion of its self-implemented rates, it records a provision for revenue subject to refund. A final rate order could differ materially from Consumers’ estimates underlying its self-implemented rates, giving rise to accounting adjustments. Under accounting rules for prior period adjustments, CMS Energy and Consumers may need to record such differences, if they are specifically identifiable to prior interim periods, as revisions to those periods.
 
For additional details, see Note 6, Regulatory Matters.
 
Financial and Derivative Instruments and Market Risk Information
 
Financial Instruments: Debt and equity securities classified as available for sale are reported at fair value as determined from quoted market prices or other observable, market-based inputs. Unrealized gains and losses resulting from changes in fair value of the equity securities are reported, net of tax, in equity as part of AOCI, except that unrealized losses determined to be other than temporary are reported in earnings. Unrealized gains resulting from changes in fair value of the debt securities are reported, net of tax, in equity as part of AOCI. Unrealized losses on the debt securities, if significant, are considered other than temporary and reported in earnings since these securities are managed by an independent investment manager that can sell the securities at its own discretion.
 
Derivative Instruments: CMS Energy and Consumers account for certain contracts as derivative instruments. The criteria used to determine if an instrument qualifies for derivative accounting are complex and often require significant judgment in application. If a contract is a derivative and does not qualify for the normal purchases and sales exception, it is recorded on the consolidated balance sheet at its fair value. Each quarter, the resulting asset or liability is adjusted to reflect any change in the fair value of the contract. For additional details on CMS Energy’s and Consumers’ derivatives, see Note 10, Derivative Instruments.
 
CMS Energy and Consumers generally use information from external sources, such as quoted market prices and other valuation information to determine the fair value of their derivatives. For certain contracts, this information is not available and mathematical models are used to value the derivatives. The most material of CMS Energy’s derivative liabilities, an electricity sales agreement held by CMS ERM, extends beyond the term for which quoted electricity prices are available. Thus, to value this derivative, CMS Energy uses a valuation model that incorporates a proprietary forward pricing curve for electricity based on forward natural gas prices and an implied heat rate. The model incorporates discounting, credit, and modeling risks. The model is sensitive to electricity and natural gas forward prices, and the fair value of this derivative liability will increase as these forward prices increase. The model is adjusted each quarter to incorporate market data as it becomes available.
 
The fair values calculated for CMS Energy’s and Consumers’ derivatives may change significantly as commodity prices and volatilities change. The cash returns actually realized on derivatives may be different from their estimated fair values. For derivatives in an asset position, calculations of fair value include reserves of less than $1 million to reflect the credit risk of CMS Energy’s and Consumers’ counterparties. For derivatives in a liability position, calculations include reserves of less than $1 million to reflect CMS Energy’s and Consumers’ own credit risk. For additional details on how the fair values of derivatives are determined, see Note 4, Fair Value Measurements.
 
The types of contracts typically classified as derivatives are interest rate swaps, financial transmission rights, fixed price fuel contracts, natural gas futures, electricity swaps, and forward and option contracts for electricity, natural gas, and foreign currencies. Most of CMS Energy’s and Consumers’ commodity purchase and sale contracts are not subject to derivative accounting 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.
 
CMS Energy’s and Consumers’ coal purchase contracts are not derivatives because there is not an active market for the coal they purchase. If an active market for coal develops in the future, some of these contracts may


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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 subsidiaries, CMS Energy does not believe the resulting mark-to-market impact on earnings would be material.
 
Market Risk Information: CMS Energy and Consumers are exposed to market risks including, but not limited to, changes in interest rates, commodity prices, and investment security prices. They may enter into various risk management contracts to limit exposure to these risks, including swaps, options, futures, and forward contracts. CMS Energy and Consumers enter into these contracts using established policies and procedures, under the direction of an executive oversight committee consisting of senior management representatives and a risk committee consisting of business unit managers.
 
These contracts contain credit risk, which is the risk that the counterparties will fail to meet their contractual obligations. CMS Energy and Consumers reduce this risk using established policies and procedures, such as evaluating counterparties’ credit quality and setting collateral requirements as necessary. If terms permit, standard agreements are used that allow for the netting of positive and negative exposures associated with the same counterparty. Given these policies, present exposures, and credit reserves, CMS Energy and Consumers do not expect a material adverse effect on their 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 financial instruments, including derivative contracts, assuming a hypothetical adverse change in market rates or prices of ten percent. Potential losses could exceed the amounts shown in the sensitivity analyses if changes in market rates or prices were to exceed ten percent.
 
Interest-Rate Risk: CMS Energy and Consumers are exposed to interest-rate risk resulting from issuing fixed-rate and variable-rate financing instruments. CMS Energy and Consumers use a combination of these instruments, and may also enter into interest-rate swap agreements, in order to manage this risk and to achieve a reasonable cost of capital.
 
Interest-Rate Risk Sensitivity Analysis (assuming an adverse change in market interest rates of ten percent):
 
                 
December 31
  2010     2009  
    In Millions  
 
Fixed-rate financing — potential loss in fair value
CMS Energy, including Consumers
  $ 187     $ 183  
Consumers
    113       122  
 
The fair value losses in the above table could be realized only if CMS Energy and Consumers transferred all of their fixed-rate financing to other creditors. The annual earnings exposure related to variable-rate financing was insignificant for both CMS Energy and Consumers at December 31, 2010 and 2009, assuming an adverse change in market interest rates of ten percent.
 
Commodity Price Risk: CMS Energy and Consumers 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, they may enter into various non-trading derivative contracts, such as forward purchase and sale contracts, options, and swaps.
 
An adverse change in market prices of ten percent would result in a potential reduction in fair value of less than $1 million for CMS Energy’s and Consumers’ derivative contracts.
 
Investment Securities Price Risk: Through investments in debt and equity securities, CMS Energy and Consumers 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 CMS Energy’s and Consumers’ available-for-sale investments.


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Investment Securities Price Risk Sensitivity Analysis (assuming an adverse change in market interest rates or prices of ten percent):
 
                 
December 31
  2010     2009  
    In Millions  
 
CMS Energy, including Consumers
               
Potential reduction in fair value of available-for-sale:
               
SERP:
               
Mutual fund
  $ 6     $  
State & municipal bonds
          1  
Consumers
               
Potential reduction in fair value of available-for-sale:
               
SERP:
               
Mutual fund
  $ 4     $  
CMS Energy common stock
    3       3  
 
Shares in the mutual fund were acquired during the year ended December 31, 2010.
 
Notes Receivable Risk: CMS Energy is exposed to interest-rate risk resulting from EnerBank’s fixed-rate installment loans. EnerBank provides these loans to homeowners to finance home improvements.
 
Notes Receivable Sensitivity Analysis (assuming an adverse change in market interest rates of ten percent):
 
                 
December 31
  2010     2009  
    In Millions  
 
CMS Energy, including Consumers
               
Potential reduction in fair value:
               
Notes receivable
  $ 6     $ 5  
 
The fair value losses in the above table could be realized only if EnerBank sold its loans to other parties. For additional details on market risk, financial instruments, and derivatives, see Note 9, Financial Instruments and Note 10, Derivative Instruments.
 
Retirement Benefits
 
Pension: CMS Energy and Consumers have external trust funds to provide retirement pension benefits to their employees under a non-contributory, defined benefit Pension Plan. On September 1, 2005, the defined benefit Pension Plan was closed to new participants and CMS Energy and Consumers implemented the qualified DCCP, which provides an employer contribution of six percent of base pay to the existing 401(k) 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): CMS Energy and Consumers provide an employer match in their 401(k) plan equal to 60 percent on eligible contributions up to the first six percent of an employee’s wages.
 
OPEB: CMS Energy and Consumers provide postretirement health and life benefits under their OPEB plan to qualifying retired employees.
 
CMS Energy and Consumers record liabilities for pension and OPEB on their Consolidated Balance Sheets at the present value of the future obligations, net of any plan assets. The calculation of the liabilities and associated expenses requires the expertise of actuaries, and requires many assumptions, including:
 
  •  life expectancies;
 
  •  discount rates;


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  •  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 CMS Energy’s and Consumers’ recorded liabilities and associated expenses.
 
Presented in the following table are estimates of CMS Energy’s and Consumers’ pension cost, OPEB cost, and cash contributions through 2013:
 
                                 
    Pension Cost     OPEB Cost     Pension Contribution     OPEB Contribution  
    In Millions  
 
CMS Energy, including Consumers
                               
2011
  $ 104     $ 49     $     $ 65  
2012
    106       57             49  
2013
    102       53       154       57  
Consumers
                               
2011
  $ 101     $ 51     $     $ 64  
2012
    103       59             48  
2013
    99       55       149       56  
 
Contribution estimates include amounts required and discretionary contributions. Consumers’ pension and OPEB costs are recoverable through its general ratemaking process. Actual future pension cost and contributions will depend on future investment performance, changes in future discount rates, and various other factors related to the populations participating in the Pension Plan.
 
Lowering the expected long-term rate of return on the Pension Plan assets by 0.25 percentage point (from 8.0 percent to 7.75 percent) would increase estimated pension cost for 2011 by $4 million for both CMS Energy and Consumers. Lowering the discount rate by 0.25 percentage point (from 5.40 percent to 5.15 percent) would increase estimated pension cost for 2011 by $5 million for both CMS Energy and Consumers.
 
For additional details on postretirement benefits, see Note 11, Retirement Benefits.
 
Asset Retirement Obligations
 
CMS Energy and Consumers 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. CMS Energy and Consumers have legal obligations to remove some of their assets at the end of their useful lives. CMS Energy and Consumers 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 require to assume the obligation. CMS Energy and Consumers did not include market risk premiums in their ARO fair value estimates since reasonable estimates 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. CMS Energy and Consumers have not recorded liabilities for assets that have insignificant cumulative disposal costs, such as substation batteries. For additional details, see Note 16, Asset Retirement Obligations.
 
NEW ACCOUNTING STANDARDS
 
For details regarding the implementation of new accounting standards and new accounting standards issued that are not yet effective, see Note 2, New Accounting Standards.


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CMS Energy Corporation
CONSOLIDATED STATEMENTS OF INCOME
 
                         
    Years Ended December 31  
    2010     2009     2008  
    In Millions  
 
Operating Revenue
  $ 6,432     $ 6,205     $ 6,807  
Operating Expenses
                       
Fuel for electric generation
    604       541       600  
Purchased and interchange power
    1,239       1,163       1,335  
Purchased power — related parties
    85              
Cost of gas sold
    1,590       1,866       2,277  
Maintenance and other operating expenses
    1,206       1,163       1,019  
Depreciation and amortization
    576       570       588  
General taxes
    210       217       203  
Insurance settlement
    (50 )            
Gain on asset sales, net
    (6 )     (13 )     (9 )
                         
Total operating expenses
    5,454       5,507       6,013  
                         
Operating Income
    978       698       794  
Other Income (Expense)
                       
Interest and dividends
    19       18       24  
Allowance for equity funds used during construction
    5       6       6  
Income (loss) from equity method investees
    11       (2 )     5  
Other income
    32       80       48  
Other expense
    (24 )     (30 )     (37 )
                         
Total other income
    43       72       46  
                         
Interest Charges
                       
Interest on long-term debt
    394       383       371  
Other interest
    40       56       33  
Allowance for borrowed funds used during construction
    (3 )     (4 )     (4 )
                         
Total interest charges
    431       435       400  
                         
Income Before Income Taxes
    590       335       440  
Income Tax Expense
    224       115       139  
                         
Income From Continuing Operations
    366       220       301  
Income (Loss) From Discontinued Operations, Net of Tax
Expense of $2, $13, and $1
    (23 )     20       1  
                         
Net Income
    343       240       302  
Income Attributable to Noncontrolling Interests
    3       11       7  
                         
Net Income Attributable to CMS Energy
    340       229       295  
Charge for Deferred Issuance Costs on Preferred Stock
    8              
Preferred Stock Dividends
    8       11       11  
                         
Net Income Available to Common Stockholders
  $ 324     $ 218     $ 284  
                         


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    Years Ended December 31  
    2010     2009     2008  
    In Millions, Except Per
 
    Share Amounts  
 
Net Income Attributable to Common Stockholders
                       
Amounts Attributable to Continuing Operations
  $ 347     $ 198     $ 283  
Amounts Attributable to Discontinued Operations
    (23 )     20       1  
                         
Net Income Available to Common Stockholders
  $ 324     $ 218     $ 284  
                         
Income Attributable to Noncontrolling Interests
                       
Amounts Attributable to Continuing Operations
  $ 3     $ 11     $ 7  
Amounts Attributable to Discontinued Operations
                 
                         
Income Attributable to Noncontrolling Interests
  $ 3     $ 11     $ 7  
                         
Basic Earnings Per Average Common Share
                       
Basic Earnings from Continuing Operations
  $ 1.50     $ 0.87     $ 1.25  
Basic Earnings (Loss) from Discontinued Operations
    (0.10 )     0.09        
                         
Basic Earnings Attributable to Common Stock
  $ 1.40     $ 0.96     $ 1.25  
                         
Diluted Earnings Per Average Common Share
                       
Diluted Earnings from Continuing Operations
  $ 1.36     $ 0.83     $ 1.20  
Diluted Earnings (Loss) from Discontinued Operations
    (0.08 )     0.08        
                         
Diluted Earnings Attributable to Common Stock
  $ 1.28     $ 0.91     $ 1.20  
                         
Dividends Declared Per Common Share
  $ 0.66     $ 0.50     $ 0.36  
 
The accompanying notes are an integral part of these statements.


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CMS Energy Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                         
    Years Ended December 31  
    2010     2009     2008  
    In Millions  
 
Cash Flows from Operating Activities