CONSUMERS ENERGY CO - Quarter Report: 2008 September (Form 10-Q)

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2008

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		38-2726431
		(A Michigan Corporation)
		One Energy Plaza, Jackson, Michigan 49201
		(517) 788-0550
1-5611		CONSUMERS ENERGY COMPANY		38-0442310
		(A Michigan Corporation)
		One Energy Plaza, Jackson, Michigan 49201
		(517) 788-0550

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. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

CMS Energy Corporation:

Consumers Energy Company:

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 þ Consumers Energy Company: Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock at October 31, 2008:

CMS Energy Corporation:

CMS Energy Common Stock, $.01 par value		226,207,584
Consumers Energy Company, $10 par value, privately held by CMS Energy Corporation			84,108,789

 

 

CMS Energy Corporation
Consumers Energy Company
Quarterly reports on Form 10-Q to the
United States Securities and Exchange Commission
for the Quarter Ended September 30, 2008

This combined Form 10-Q is separately filed by CMS Energy Corporation and Consumers Energy Company. Information in this combined Form 10-Q relating to each individual registrant is filed by such registrant on its own behalf. Consumers Energy Company makes no representation regarding information relating to any other companies affiliated with CMS Energy Corporation other than its own subsidiaries. None of CMS Energy Corporation, CMS Enterprises Company nor any of CMS Energy Corporation’s other subsidiaries (other than Consumers Energy Company) has any obligation in respect of Consumers Energy Company’s debt securities and holders of such securities should not consider the financial resources or results of operations of CMS Energy Corporation, CMS Enterprises Company nor any of CMS Energy Corporation’s subsidiaries (other than Consumers Energy Company and its own subsidiaries (in relevant circumstances)) in making a decision with respect to Consumers Energy Company’s debt securities. Similarly, Consumers Energy Company has no obligation in respect of debt securities of CMS Energy Corporation.

This report should be read in its entirety. No one section of this report deals with all aspects of the subject matter of this report. This report should be read in conjunction with the consolidated financial statements and related notes and with Management’s Discussion and Analysis included in the 2007 Form 10-K for CMS Energy Corporation and Consumers Energy Company.

TABLE OF CONTENTS

		Page
Glossary			3
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
CMS Energy Corporation
Consolidated Statements of Income (Loss) (unaudited)		CMS-28
Consolidated Statements of Cash Flows (unaudited)		CMS-31
Consolidated Balance Sheets (unaudited)		CMS-32
Consolidated Statements of Common Stockholders’ Equity (unaudited)		CMS-34
Notes to Consolidated Financial Statements (Unaudited):
1. Corporate Structure and Accounting Policies		CMS-37
2. Fair Value Measurements		CMS-40
3. Asset Sales, Discontinued Operations and Impairment Charges		CMS-43
4. Contingencies		CMS-46
5. Financings and Capitalization		CMS-58
6. Earnings Per Share		CMS-60
7. Financial and Derivative Instruments		CMS-62
8. Retirement Benefits		CMS-64
9. Income Taxes		CMS-65
10. Reportable Segments		CMS-66
Consumers Energy Company
Consolidated Statements of Income (unaudited)		CE-22
Consolidated Statements of Cash Flows (unaudited)		CE-23
Consolidated Balance Sheets (unaudited)		CE-24
Consolidated Statements of Common Stockholder’s Equity (unaudited)		CE-26

TABLE OF CONTENTS
(Continued)

		Page
Notes to Consolidated Financial Statements (Unaudited):
1. Corporate Structure and Accounting Policies		CE-29
2. Fair Value Measurements		CE-31
3. Asset Sales		CE-34
4. Contingencies		CE-34
5. Financings and Capitalization		CE-42
6. Financial and Derivative Instruments		CE-43
7. Retirement Benefits		CE-44
8. Reportable Segments		CE-46
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
CMS Energy Corporation
Forward-looking Statements and Information		CMS-1
Executive Overview		CMS-4
Results of Operations		CMS-5
Critical Accounting Policies		CMS-13
Capital Resources and Liquidity		CMS-15
Outlook		CMS-17
Implementation of New Accounting Standards		CMS-25
New Accounting Standards Not Yet Effective		CMS-26
Consumers Energy Company
Forward-looking Statements and Information		CE-1
Executive Overview		CE-3
Results of Operations		CE-5
Critical Accounting Policies		CE-10
Capital Resources and Liquidity		CE-11
Outlook		CE-13
Implementation of New Accounting Standards		CE-19
New Accounting Standards Not Yet Effective		CE-20
Item 3. Quantitative and Qualitative Disclosures about Market Risk		CO-1
Item 4. Controls and Procedures		CO-1
Item 4T. Controls and Procedures		CO-1
PART II — OTHER INFORMATION
Item 1. Legal Proceedings		CO-2
Item 1A. Risk Factors		CO-6
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		CO-9
Item 3. Defaults Upon Senior Securities		CO-9
Item 4. Submission of Matters to a Vote of Security Holders		CO-9
Item 5. Other Information		CO-10
Item 6. Exhibits		CO-10
Signatures		CO-11
EX-12(a)
EX-12(b)
EX-31(a)
EX-31(b)
EX-31(c)
EX-31(d)
EX-32(a)
EX-32(b)

GLOSSARY

Certain terms used in the text and financial statements are defined below

ALJ		Administrative Law Judge
AOC		Administrative Order on Consent
AOCI		Accumulated Other Comprehensive Income
AOCL		Accumulated Other Comprehensive Loss
APB		Accounting Principles Board
ARB		Accounting Research Bulletin
ARO		Asset retirement obligation
Bay Harbor		A residential/commercial real estate area located near Petoskey, Michigan. In 2002, CMS Energy sold its interest in Bay Harbor.
bcf		One billion cubic feet of gas
Big Rock		Big Rock Point nuclear power plant
Big Rock ISFSI		Big Rock Independent Spent Fuel Storage Installation
CAIR		Clean Air Interstate Rule
CAMR		Clean Air Mercury Rule
CEO		Chief Executive Officer
CFO		Chief Financial Officer
CKD		Cement kiln dust
Clean Air Act		Federal Clean Air Act, as amended
CMS Capital		CMS Capital, L.L.C., a wholly owned subsidiary of CMS Energy
CMS Energy		CMS Energy Corporation, the parent of Consumers and Enterprises
CMS Energy Common Stock or common stock		Common stock of CMS Energy, par value $.01 per share
CMS ERM		CMS Energy Resource Management Company, formerly CMS MST, a subsidiary of Enterprises
CMS Field Services		CMS Field Services, Inc., a former wholly owned subsidiary of CMS Gas Transmission
CMS Gas Transmission		CMS Gas Transmission Company, a wholly owned subsidiary of Enterprises
CMS Generation		CMS Generation Co., a former wholly owned subsidiary of Enterprises
CMS Land		CMS Land Company, a wholly owned subsidiary of CMS Energy
CMS MST		CMS Marketing, Services and Trading Company, a wholly owned subsidiary of Enterprises, whose name was changed to CMS ERM effective January 2004
CMS Oil and Gas		CMS Oil and Gas Company, formerly a subsidiary of Enterprises
Consumers		Consumers Energy Company, a subsidiary of CMS Energy
Customer Choice Act		Customer Choice and Electricity Reliability Act, a Michigan statute
DCCP		Defined Company Contribution Plan
DC SERP		Defined Contribution Supplemental Executive Retirement Plan
Detroit Edison		The Detroit Edison Company, a non-affiliated company
DIG		Dearborn Industrial Generation, LLC, a wholly owned subsidiary of CMS Energy
DOE		U.S. Department of Energy

DOJ		U.S. Department of Justice
Dow		The Dow Chemical Company, a non-affiliated company
DSSP		Deferred Salary Savings Plan
EISP		Executive Incentive Separation Plan
EITF		Emerging Issues Task Force
EITF Issue 06-11		EITF Issue No. 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards”
EITF Issue 07-5		EITF Issue No. 07-5, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock”
EITF Issue 08-5		EITF Issue No. 08-5, “Issuer’s Accounting for Liabilities Measured at Fair Value with a Third-Party Credit Enhancement”
El Chocon		A 1,200 MW hydro power plant located in Argentina, in which CMS Generation formerly held a 17.2 percent ownership interest
EnerBank		EnerBank USA, a wholly owned subsidiary of CMS Energy
Entergy		Entergy Corporation, a non-affiliated company
Enterprises		CMS Enterprises Company, a subsidiary of CMS Energy
EPA		U.S. Environmental Protection Agency
EPS		Earnings per share
Exchange Act		Securities Exchange Act of 1934, as amended
FASB		Financial Accounting Standards Board
FERC		Federal Energy Regulatory Commission
FIN 14		FASB Interpretation No. 14, Reasonable Estimation of Amount of a Loss
FIN 45		FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others
FIN 46(R)		Revised FASB Interpretation No. 46, Consolidation of Variable Interest Entities
FIN 48		FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109
FMB		First Mortgage Bonds
FMLP		First Midland Limited Partnership, a partnership that holds a lessor interest in the MCV Facility
FOV		Finding of Violation
FSP		FASB Staff Position
FSP APB 14-1		FASB Staff Position on APB No. 14, Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants
FSP EITF 03-6-1		FASB Staff Position on EITF No. 03-6, Participating Securities and the Two-Class method under FASB Statement No. 128
FSP FAS 133-1 and FIN 45-4		FASB Staff Position on FASB No. 133, “Accounting for Derivative Instruments and Hedging Activities” and FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”
FSP FAS 142-3		FASB Staff Position on FASB No. 142, Determination of the Useful Life of Intangible Assets
FSP FAS 157-3		FASB Staff Position on FASB No. 157, “Fair Value Measurements”
FSP FIN 39-1		FASB Staff Position on FASB Interpretation No. 39, “Offsetting of Amounts Related to Certain Contracts”

GAAP		U.S. Generally Accepted Accounting Principles
GasAtacama		GasAtacama Holding Limited, a limited liability partnership that manages GasAtacama S.A., which includes an integrated natural gas pipeline and electric generating plant in Argentina and Chile and Atacama Finance Company, in which CMS International Ventures formerly owned a 50 percent interest
GCR		Gas cost recovery
ICSID		International Centre for the Settlement of Investment Disputes
IRS		Internal Revenue Service
ISFSI		Independent spent fuel storage installation
Jamaica		Jamaica Private Power Company, Limited, a 63 MW diesel-fueled power plant in Jamaica, in which CMS Generation formerly owned a 42 percent interest
Jorf Lasfar		A 1,356 MW coal-fueled power plant in Morocco, in which CMS Generation formerly owned a 50 percent interest
kWh		Kilowatt-hour (a unit of energy equal to one thousand watt hours)
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
mcf		One thousand cubic feet of gas
MCV Facility		A natural gas-fueled, combined-cycle cogeneration facility operated by the MCV Partnership
MCV Partnership		Midland Cogeneration Venture Limited Partnership
MCV PPA		The Power Purchase Agreement 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 the MCV Partnership and Consumers
MD&A		Management’s Discussion and Analysis
MDEQ		Michigan Department of Environmental Quality
MDL		Multidistrict Litigation
MEI		Michigan Energy Investments LLC, an affiliate of Lucid Energy
METC		Michigan Electric Transmission Company, LLC, a non-affiliated company owned by ITC Holdings Corporation and a member of MISO
MGP		Manufactured Gas Plant
MISO		Midwest Independent Transmission System Operator, Inc.
MPSC		Michigan Public Service Commission
MSBT		Michigan Single Business Tax
MW		Megawatt (a unit of power equal to one million watts)
MWh		Megawatt hour (a unit of energy equal to one million watt hours)
NAV		Net Asset Values
NMC		Nuclear Management Company LLC, a non-affiliated company
NOV		Notice of Violation
NREPA		Michigan Natural Resources and Environmental Protection Act
NSR		New Source Review
NYMEX		New York Mercantile Exchange
OPEB		Postretirement benefit plans other than pensions

Palisades		Palisades nuclear power plant, formerly owned by Consumers
Panhandle		Panhandle Eastern Pipe Line Company, including its subsidiaries Trunkline, Pan Gas Storage, Panhandle Storage, and Panhandle Holdings, a former wholly owned subsidiary of CMS Gas Transmission
PCB		Polychlorinated biphenyl
PDVSA		Petroleos de Venezuela S.A., a non-affiliated company
Peabody Energy		Peabody Energy, a non-affiliated company
Pension Plan		The trusteed, non-contributory, defined benefit pension plan of Panhandle, Consumers and CMS Energy
PowerSmith		A 124 MW natural gas power plant located in Oklahoma, in which CMS Generation formerly held a 6.25% limited partner ownership interest
Prairie State		Prairie State Energy Campus, a planned 1,600 MW power plant and coal mine in southern Illinois
PSCR		Power supply cost recovery
PSD		Prevention of Significant Deterioration
PURPA		Public Utility Regulatory Policies Act of 1978
Quicksilver		Quicksilver Resources, Inc., a non-affiliated company
RAKTL		Ronald A. Katz Technology Licensing L.P., a non-affiliated company
RCP		Resource Conservation Plan
Reserve Margin		The amount of unused available electric capacity at peak demand as a percentage of total electric peak demand
ROA		Retail Open Access, which allows electric generation customers to choose alternative electric suppliers pursuant to the Customer Choice Act.
SEC		U.S. Securities and Exchange Commission
SENECA		Sistema Electrico del Estado Nueva Esparta C.A., a former subsidiary of CMS International Ventures
SERP		Supplemental Executive Retirement Plan
SFAS		Statement of Financial Accounting Standards
SFAS No. 87		SFAS No. 87, “Employers’ Accounting for Pensions”
SFAS No. 106		SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions”
SFAS No. 133		SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities, as amended and interpreted”
SFAS No. 141(R)		SFAS No. 141 (revised 2007), “Business Combinations”
SFAS No. 142		SFAS No. 142, “Goodwill and Other Intangible Assets”
SFAS No. 157		SFAS No. 157, “Fair Value Measurements”
SFAS No. 158		SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and 132(R)”
SFAS No. 159		SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, Including an Amendment to FASB Statement No. 115”
SFAS No. 160		SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51”
SFAS No. 161		SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133”

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
TAQA		Abu Dhabi National Energy Company, a subsidiary of Abu Dhabi Water and Electricity Authority, a non-affiliated company
TGN		A natural gas transportation and pipeline business located in Argentina, in which CMS Gas Transmission formerly owned a 23.54 percent interest
Trunkline		CMS Trunkline Gas Company, LLC, formerly a subsidiary of CMS Panhandle Holdings, LLC
TTT		Gas title transfer tracking fees and services
Wolverine		Wolverine Power Supply Cooperative, Inc., a non-affiliated company
Zeeland		A 935 MW gas-fired power plant located in Zeeland, Michigan

CMS Energy Corporation

CMS Energy Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS

This MD&A is a consolidated report of CMS Energy. The terms “we” and “our” as used in this report refer to CMS Energy and its subsidiaries as a consolidated entity, except where it is clear that such term means only CMS Energy. This MD&A has been prepared in accordance with the instructions to Form 10-Q and Item 303 of Regulation S-K. This MD&A should be read in conjunction with the MD&A contained in CMS Energy’s Form 10-K for the year ended December 31, 2007.

FORWARD-LOOKING STATEMENTS AND INFORMATION

This Form 10-Q and other written and oral statements that we make contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Our intention with the use of words such as “may,” “could,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” and other similar words is to identify forward-looking statements that involve risk and uncertainty. We designed this discussion of potential risks and uncertainties to highlight important factors that may impact our business and financial outlook. We have no obligation to update or revise forward-looking statements regardless of whether new information, future events, or any other factors affect the information contained in the statements. These forward-looking statements are subject to various factors that could cause our actual results to differ materially from the results anticipated in these statements. Such factors include our inability to predict or control:

	•		the price of CMS Energy Common Stock, capital and financial market conditions and the effect of such market conditions on our postretirement benefit plans, interest rates, and access to the capital markets including availability of financing (including our accounts receivable sales program and revolving credit facilities) to CMS Energy, Consumers, or any of their affiliates, and the energy industry,
	•		the impact of the continued downturn in the economy and the sharp downturn and extreme volatility in the financial and credit markets on CMS Energy including its:

	•		revenues,
	•		capital expenditure program and related earnings growth,
	•		ability to collect accounts receivable from our customers,
	•		access to capital, and
	•		contributions to the Pension Plan,

	•		market perception of the energy industry or of CMS Energy, Consumers, or any of their affiliates,
	•		credit ratings of CMS Energy or Consumers,
	•		factors affecting operations, such as unusual weather conditions, catastrophic weather-related damage, unscheduled generation outages, maintenance or repairs, environmental incidents, or electric transmission or gas pipeline system constraints,
	•		changes in federal or state laws or regulations or in the interpretation of existing laws and regulations that could have an impact on our business,
	•		the impact of any future regulations or laws regarding carbon dioxide and other greenhouse gas emissions,
	•		national, regional, and local economic, competitive, and regulatory policies, conditions and developments,

	•		adverse regulatory or legal interpretations or decisions, including those related to environmental laws and regulations, and potential environmental remediation costs associated with such interpretations or decisions, including but not limited to those that may affect Bay Harbor,
	•		potentially adverse regulatory treatment or failure to receive timely regulatory orders concerning a number of significant questions currently or potentially before the MPSC, including:

	•		recovery of Clean Air Act capital and operating costs and other environmental and safety-related expenditures,
	•		recovery of power supply and natural gas supply costs,
	•		timely recognition in rates of additional equity investments and additional operation and maintenance expenses at Consumers,
	•		adequate and timely recovery of additional utility rate-based investments,
	•		adequate and timely recovery of higher MISO energy and transmission costs,
	•		timely recovery of costs associated with energy efficiency investments and any state or federally mandated renewables resource standards,
	•		recovery of Big Rock decommissioning funding shortfalls,
	•		authorization of a new clean coal plant, and
	•		implementation of new energy legislation,

	•		adverse consequences resulting from a past or future assertion of indemnity or warranty claims associated with previously owned assets and businesses, including claims resulting from attempts by the governments of Equatorial Guinea and Morocco to assess taxes on past operations or transactions,
	•		the ability of Consumers to recover nuclear fuel storage costs due to the DOE’s failure to accept spent nuclear fuel on schedule, including the outcome of pending litigation with the DOE,
	•		the impact of expanded enforcement powers and investigation activities at the FERC,
	•		federal regulation of electric sales and transmission of electricity, including periodic re-examination by federal regulators of our market-based sales authorizations in wholesale power markets without price restrictions,
	•		energy markets, including availability of capacity and the timing and extent of changes in commodity prices for oil, coal, natural gas, natural gas liquids, electricity and certain related products due to lower or higher demand, shortages, transportation problems, or other developments,
	•		the impact of natural gas prices and coal prices on our cash flow and working capital,
	•		the impact of construction material prices,
	•		the availability of qualified construction personnel to implement our construction program,
	•		earnings volatility resulting from the GAAP requirement that we apply mark-to-market accounting to certain energy commodity contracts, including electricity sales agreements, and interest rate swaps,
	•		potential disruption or interruption of facilities or operations due to accidents, war, or terrorism, and the ability to obtain or maintain insurance coverage for such events,

	•		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,
	•		technological developments in energy production, delivery, usage, and gas storage,
	•		achievement of capital expenditure and operating expense goals,
	•		changes in financial or regulatory accounting principles or policies, including a possible future requirement to comply with International Financial Reporting Standards,
	•		changes in tax laws or new IRS interpretations of existing or past tax laws,
	•		the impact of our new integrated business software system on our operations, including customer billing, finance, purchasing, human resources and payroll processes, and utility asset construction and maintenance work management systems,
	•		the impact of credit market and economic conditions on EnerBank,
	•		the outcome, cost, and other effects of legal or administrative proceedings, settlements, investigations or claims, including those resulting from the investigation by the DOJ regarding round-trip trading and price reporting, and the pending appeal of the Quicksilver litigation, and
	•		other business or investment considerations that may be disclosed from time to time in CMS Energy’s or Consumers’ SEC filings, or in other publicly issued written documents.

For additional information regarding these and other uncertainties, see the “Outlook” section included in this MD&A, Note 4, Contingencies, and Part II, Item 1A. Risk Factors.

EXECUTIVE OVERVIEW

CMS Energy is an energy company operating primarily in Michigan. We are the parent holding company of several subsidiaries, including Consumers and Enterprises. Consumers is a combination electric and gas utility company serving Michigan’s Lower Peninsula. Enterprises, through its subsidiaries and equity investments, is engaged primarily in domestic independent power production. We manage our businesses by the nature of services each provides and operate principally in three business segments: electric utility, gas utility, and enterprises.

We earn our revenue and generate cash from operations by providing electric and natural gas utility services, electric power generation, gas distribution, transmission, and storage, and other energy-related services. Our businesses are affected primarily by:

	•		weather, especially during the normal heating and cooling seasons,
	•		economic conditions, primarily in Michigan,
	•		regulation and regulatory issues that affect our electric and gas utility operations,
	•		energy commodity prices,
	•		interest rates, and
	•		our debt credit rating.

During the past several years, our business strategy has emphasized improving our consolidated balance sheet and maintaining focus on our core strength: utility operations and service.

Our forecast calls for investing about $6.7 billion in the utility over the period from 2009 through 2013, with a key aspect of our strategy being our Balanced Energy Initiative. Our Balanced Energy Initiative is a comprehensive energy resource plan to meet our projected short-term and long-term electric power requirements with energy efficiency, demand management, expanded use of renewable energy, development of new power plants, and pursuit of additional power purchase agreements to complement existing generating sources.

In October 2008, the Michigan governor signed into law a comprehensive energy reform package. We plan to file an updated Balanced Energy Initiative with the MPSC in order to conform it to various aspects of this new legislation. Significant features of the new legislation include:

	•		a provision to streamline the regulatory process by generally allowing utilities to self-implement rates six months after filing and requiring the MPSC to issue an order 12 months after filing or the rates as-filed become permanent,
	•		reform of the Customer Choice Act to limit generally alternative energy suppliers to 10 percent of our weather-adjusted sales,
	•		establishment of a certificate-of-necessity process at the MPSC for proposed power plants, power purchase agreements, and projects costing more than $500 million,
	•		a requirement that 10 percent of power come from renewable sources by 2015 with specific interim targets, and
	•		new programs and incentives to encourage greater energy efficiency among customers, along with the requirement of the utility to prepare energy cost savings optimization plans.

In June 2008, the MPSC approved a settlement agreement that provides for an amended and restated MCV PPA and resolves the issues concerning our September 2007 exercise of the regulatory-out provision. The revised MCV PPA also provides more certainty of our access to 1,240 MW of the MCV Facility capacity through March 2025. The amended and restated MCV PPA took effect in October 2008.

As we work to implement plans to serve our customers in the future, the cost of energy and managing cash flow continue to challenge us. Natural gas prices and eastern coal prices have been fluctuating substantially. These costs are recoverable from our utility customers; however, as prices increase, the amount we pay for these commodities will require additional liquidity due to the lag in cost recoveries.

In July 2008, we implemented an integrated business software system for customer billing, finance, work management, and other systems. We are also developing an advanced metering infrastructure system that will provide enhanced controls and information about our customer energy usage and notification of service interruptions. We expect to develop integration software and pilot this new technology over approximately the next two to three years.

In the future, we will focus our strategy on:

	•		continuing investment in our utility business,
	•		growing earnings while controlling operating and fuel costs and parent debt,
	•		managing cash flow, and
	•		maintaining principles of safe, efficient operations, customer value, fair and timely regulation, and consistent financial performance.

As we execute our strategy, we will need to overcome a Michigan economy that has been hampered by the continued downturn in Michigan’s automotive industry and limited growth in the non-manufacturing sectors of the state’s economy. There also has been a sharp downturn, uncertainty, and extreme volatility in the financial and credit markets resulting from the subprime mortgage crisis, bank failures and consolidation, and other market weaknesses. While we believe that our sources of liquidity will be sufficient to meet our requirements, we continue to monitor closely developments in the financial and credit markets and government response to those developments for potential implications for our business.

RESULTS OF OPERATIONS

CMS ENERGY CONSOLIDATED RESULTS OF OPERATIONS

In Millions (except for per share amounts)
Three months ended September 30		2008				2007				Change
Net Income Available to Common Stockholders		$	79			$	82			$	(3	)
Basic Earnings Per Share		$	0.36			$	0.37			$	(0.01	)
Diluted Earnings Per Share		$	0.34			$	0.34			$	—
Electric Utility		$	108			$	67			$	41
Gas Utility			(18	)			(8	)			(10	)
Enterprises			5				58				(53	)
Corporate Interest and Other			(17	)			(35	)			18
Discontinued Operations			1				—				1
Net Income Available to Common Stockholders		$	79			$	82			$	(3	)

For the three months ended September 30, 2008, our net income was $79 million, a $3 million decrease versus 2007. Compared with the third quarter of 2007, combined net income from our electric and gas utility segments increased, reflecting the positive impact of the MPSC rate orders and the elimination of certain costs from the power purchase agreement with the MCV Partnership, partially offset by lower deliveries and increased depreciation and other expenses. Further increasing net income were lower corporate interest expense and financing costs. These increases were more than offset by the absence of an insurance reimbursement recognized at Enterprises in 2007.

Specific changes to net income available to common stockholders for the three months ended September 30, 2008 versus 2007 are:

				In Millions
•		increase in net earnings at our electric utility segment primarily due to favorable MPSC rate orders,		$	63
•		lower corporate interest expense and the absence, in 2008, of premiums paid on the early retirement of CMS Energy debt in 2007,			18
•		the elimination of certain costs at our electric utility from the power purchase agreement with the MCV Partnership,			9
•		decrease in net income from Enterprises and discontinued operations primarily due to the absence, in 2008, of an insurance reimbursement recognized in 2007, related to the non-payment by the Argentine government of our ICSID award,			(52	)
•		other combined net decrease at our electric and gas utility segments due primarily to reduced interest income and higher depreciation and other expenses, and			(31	)
•		decreased deliveries at our electric utility segment.			(10	)
Total change				$	(3	)

In Millions (except for per share amounts)
Nine months ended September 30		2008				2007				Change
Net Income (Loss) Available to Common Stockholders		$	228			$	(100	)		$	328
Basic Earnings (Loss) Per Share		$	1.02			$	(0.45	)		$	1.47
Diluted Earnings (Loss) Per Share		$	0.96			$	(0.45	)		$	1.41
Electric Utility		$	232			$	158			$	74
Gas Utility			46				53				(7	)
Enterprises			13				(194	)			207
Corporate Interest and Other			(63	)			(30	)			(33	)
Discontinued Operations			—				(87	)			87
Net Income (Loss) Available to Common Stockholders		$	228			$	(100	)		$	328

For the nine months ended September 30, 2008, our net income was $228 million, a $328 million increase versus 2007. Compared with the first three quarters of 2007, combined net income from our electric and gas utility segments increased, reflecting the positive impact of the MPSC rate orders and the elimination of certain costs from the power purchase agreement with the MCV Partnership, partially offset by lower deliveries, increased depreciation expense and lower interest income. Further increasing net income was the absence of the net impact of activities associated with assets sold in 2007, lower corporate debt costs, and the rescission of a contract with Quicksilver.

Specific changes to net income (loss) available to common stockholders for the nine months ended September 30, 2008 versus 2007 are:

				In Millions
•		absence of impairment charges related to international businesses sold in 2007 partially offset by the 2008 impairment charge recorded on our SERP investments,		$	133
•		increase in combined net earnings at our electric and gas utility segments primarily due to favorable MPSC rate orders,			114
•		absence in 2008, of a net loss on the disposal of discontinued operations in 2007,			87
•		lower corporate interest expense and the absence, in 2008, of premiums paid on the early retirement of CMS Energy debt in 2007,			37
•		the elimination of certain costs at our electric utility from the power purchase agreement with the MCV Partnership,			29
•		absence of charges associated with the rescission of a contract with Quicksilver,			24
•		decreased deliveries at our electric utility segment,			(52	)
•		other combined net decrease at our electric and gas utility segments due primarily to reduced interest income and higher depreciation expense, and			(24	)
•		absence of tax benefits and earnings related to international assets sold, which more than offset the benefit from reduced operating and maintenance expense.			(20	)
Total change				$	328

ELECTRIC UTILITY RESULTS OF OPERATIONS

In Millions
September 30		2008				2007				Change
Three months ended		$	108			$	67			$	41
Nine months ended		$	232			$	158			$	74

		Three Months Ended				Nine Months Ended
		September 30, 2008				September 30, 2008
Reasons for the change:		vs. 2007				vs. 2007
Electric deliveries and rate increase		$	80			$	65
Surcharge revenue			—				10
Power supply costs and related revenue			5				12
Non-commodity revenue			(1	)			(13	)
Depreciation and other operating expenses			(11	)			62
Other income			(20	)			(36	)
General taxes			6				14
Interest charges			6				11
Income taxes			(24	)			(51	)
Total change		$	41			$	74

Electric deliveries and rate increase: For the three months ended September 30, 2008, electric delivery revenues increased by $80 million versus 2007 primarily due to additional revenue of $97 million from the inclusion of the Zeeland power plant in rates and from the June 2008 rate order. The increase was partially offset by decreased electric revenue of $17 million primarily due to lower deliveries reflecting milder weather. Deliveries to end-use customers were 9.9 billion kWh, a decrease of 0.5 billion kWh or 5 percent versus 2007. For additional details on the June 2008 rate order, see Note 4, Contingencies, “Consumers’ Electric Utility Rate Matters.”

For the nine months ended September 30, 2008, electric delivery revenues increased by $65 million versus 2007 primarily due to additional revenue of $145 million from the inclusion of the Zeeland power plant in rates and from the June 2008 rate order. The increase was partially offset by decreased electric revenue of $80 million primarily due to lower deliveries. Deliveries to end-use customers were 28.4 billion kWh, a decrease of 1.0 billion kWh or 3 percent versus 2007.

Surcharge revenue: For the nine months ended September 30, 2008, surcharge revenue increased by $10 million versus 2007. The increase was primarily due to the April 2008 MPSC order allowing recovery of certain retirement benefits through a surcharge. Consistent with the recovery of these costs, we recognized a similar amount of benefit expense. For additional details, see “Depreciation and other operating expenses” within this section and Note 8, Retirement Benefits.

Power supply costs and related revenue: PSCR revenue increased $5 million for the three months ended September 30, 2008, and $12 million for the nine months ended September 30, 2008. These increases primarily reflect the 2007 reduction to revenue made in response to the MPSC’s position that PSCR discounts given to our Transitional Primary Rate customers could not be recovered under the PSCR mechanism. The decrease also reflects the absence, in 2008, of a decrease in power supply revenue associated with the 2006 PSCR reconciliation case.

Non-commodity revenue: Non-commodity revenue decreased $1 million for the three months ended September 30, 2008, and $13 million for the nine months ended September 30, 2008. The decreases were primarily due to the absence, in 2008, of METC transmission services revenue.

Depreciation and other operating expenses: For the three months ended September 30, 2008, the increase of $11 million in depreciation and other operating expenses was primarily due to higher costs associated with the implementation of our integrated business software system on July 1, 2008, higher uncollectible accounts expense and higher depreciation expense. The increase was partially offset by the absence, in 2008, of certain costs that are no longer incurred under our power purchase agreement with the MCV Partnership.

For the nine months ended September 30, 2008, the decrease of $62 million in depreciation and other operating expenses was primarily due to the absence of operating expenses associated with the sale of Palisades in April 2007, and certain costs that are no longer incurred under our power purchase agreement with the MCV Partnership. Also contributing to the decrease in expenses was the April 2008 MPSC order allowing us to retain a portion of the proceeds from the 2006 sale of certain sulfur dioxide allowances. The decrease was partially offset by higher retirement benefit expense due to the April 2008 MPSC order allowing recovery of certain costs through a surcharge and higher depreciation expense. For additional details on our power purchase agreement with the MCV Partnership, see Note 4, Contingencies, “Other Consumers’ Electric Utility Contingencies.”

Other income: Other income decreased $20 million for the three months ended September 30, 2008, and $36 million for the nine months ended September 30, 2008. The decreases were primarily due to reduced interest income and the MPSC’s June 2008 order, which did not allow us to recover all of our costs associated with the sale of Palisades. Also contributing to the decrease was an impairment charge that recognized an other than temporary decline in the fair value of our SERP investments, reflecting the continuing decline in the stock market.

General taxes: General tax expense decreased $6 million for the three months ended September 30, 2008 and $14 million for the nine months ended September 30, 2008. The decreases were primarily due to the absence, in 2008, of MSBT, which was replaced with the Michigan Business Tax effective January 1, 2008. The Michigan Business Tax is now recorded in income taxes. The decreases were partially offset by higher property tax expense.

Interest charges: Interest charges decreased $6 million for the three months ended September 30, 2008 and $11 million for the nine months ended September 30, 2008. These decreases were primarily due to lower interest associated with amounts to be refunded to customers as a result of the sale of Palisades. The MPSC order approving the Palisades power purchase agreement with Entergy directed us to record interest on the unrefunded balances. Also contributing to the decrease was the absence, in 2008, of interest charges related to an IRS settlement.

Income taxes: For the three months ended September 30, 2008, income taxes increased $24 million versus 2007. The increase reflects $23 million due to higher earnings, $2 million due to the inclusion of the Michigan Business Tax, which replaced the MSBT effective January 1, 2008, and a $1 million benefit due to increased quarterly Medicare subsidy.

For the nine months ended September 30, 2008, income taxes increased $51 million versus 2007. The increase reflects $45 million due to higher earnings and $6 million due to the inclusion of the Michigan Business Tax, which replaced the MSBT effective January 1, 2008.

GAS UTILITY RESULTS OF OPERATIONS

In Millions
September 30		2008				2007				Change
Three months ended		$	(18	)		$	(8	)		$	(10	)
Nine months ended			46			$	53			$	(7	)

		Three Months Ended				Nine Months Ended
		September 30, 2008				September 30, 2008
Reasons for the change:		vs. 2007				vs. 2007
Gas deliveries and rate increase		$	2			$	20
Gas wholesale and retail services, other gas revenues and other income, net			(12	)			(23	)
Operation and maintenance			(6	)			(15	)
General taxes and depreciation			1				—
Interest charges			1				7
Income taxes			4				4
Total change		$	(10	)		$	(7	)

Gas deliveries and rate increase: For the three months ended September 30, 2008, gas delivery revenues increased $2 million versus 2007 primarily due to additional revenue of $3 million from the MPSC’s August 2007 gas rate order. The increase was partially offset by a $1 million increase in system losses. Gas deliveries, including miscellaneous transportation to end-use customers, totaled 24 bcf, a decrease of 1 bcf or 4 percent versus 2007.

For the nine months ended September 30, 2008, gas delivery revenues increased $20 million versus 2007 primarily due to additional revenue of $31 million from the MPSC’s August 2007 gas rate order. The increase was partially offset by higher system losses and lower gas deliveries, including miscellaneous transportation to end-use customers, totaling 204 bcf, a decrease of 4 bcf or 2 percent versus 2007, which resulted in a decrease in gas delivery revenue of $11 million.

Gas wholesale and retail services, other gas revenues and other income, net: Gas wholesale and retail services, other gas revenues and other income decreased $12 million for the three months ended September 30, 2008, and $23 million for the nine months ended September 30, 2008. These decreases were primarily due to lower interest income and lower pipeline capacity optimization revenue. Also contributing to the decrease was an impairment charge that recognized an other than temporary decline in the fair value of our SERP investments, reflecting the continuing decline in the stock market.

Operation and maintenance: Operation and maintenance expenses increased $6 million for the three months ended September 30, 2008 and $15 million for the nine months ended September 30, 2008. These increases were primarily due to higher uncollectible accounts expense and higher operating expense across our storage, transmission and distribution systems.

General taxes and depreciation: For the three months ended September 30, 2008, general taxes and depreciation decreased $1 million versus 2007 due to the absence, in 2008, of MSBT, which was replaced by the Michigan Business Tax effective January 1, 2008. The Michigan Business Tax is now recorded in income taxes.

For the nine months ended September 30, 2008, general taxes and depreciation did not change versus 2007, as the absence in 2008 of $8 million of MSBT was offset by increases of $6 million in depreciation expense and $2 million in property tax expenses.

Interest charges: Interest charges decreased $1 million for the three months ended September 30, 2008 and $7 million for the nine months ended September 30, 2008. These decreases were primarily due to lower average debt levels and a lower average interest rate.

Income taxes: For the three months ended September 30, 2008, income taxes decreased $4 million versus 2007. The decrease reflects $5 million due to lower quarterly earnings and $1 million related to the treatment of property, plant and equipment, as required by MPSC orders. These decreases were partially offset by a $1 million increase due to lower annual Medicare subsidy and a $1 million increase related to the forfeiture of restricted stock.

For the nine months ended September 30, 2008, income taxes decreased $4 million versus 2007. The decrease reflects $4 million due to lower earnings and $3 million related to the treatment of property, plant and equipment, as required by MPSC orders. These decreases were partially offset by a $1 million increase due to the inclusion of the Michigan Business Tax, which replaced the MSBT effective January 1, 2008, a $1 million increase due to lower annual Medicare subsidy and a $1 million increase related to the forfeiture of restricted stock.

ENTERPRISES RESULTS OF OPERATIONS

In Millions
September 30		2008				2007				Change
Three months ended		$	5			$	58			$	(53	)
Nine months ended		$	13			$	(194	)		$	207

		Three Months Ended				Nine months ended
		September 30, 2008				September 30, 2008
Reasons for the change:		vs. 2007				vs. 2007
Operating revenues		$	8			$	(7	)
Fuel for electric generation, cost of gas and purchased power			(2	)			67
Earnings from equity method investees			5				(33	)
Gain (loss) on sale of assets			(18	)			(8	)
Operation and maintenance			3				36
General taxes, depreciation, and other income, net			(1	)			(1	)
Asset impairment charges, net of insurance reimbursement in 2007			(76	)			187
Fixed charges			1				4
Minority interests			1				3
Income taxes			26				(41	)
Total change		$	(53	)		$	207

Operating revenues: For the three months ended September 30, 2008, operating revenues increased $8 million versus 2007. The increase was due to higher net mark-to-market gains on power and gas contracts of $6 million and lower financial settlements losses of $4 million. Also contributing to the increase was higher power sales of $4 million. These increases were partially offset by lower gas sales of $4 million and the absence, in 2008, of operating revenue of $2 million from assets sold in 2007.

For the nine months ended September 30, 2008, operating revenues decreased $7 million versus 2007. The decrease was due to the absence, in 2008, of gas sales of $44 million resulting primarily from the termination of a gas sales contract, lower net mark-to-market gains on power and gas contracts of $12 million, and the absence, in 2008, of revenue of $5 million from assets sold in 2007. These decreases were partially offset by the absence, in 2008, of the write-off of $40 million of derivative assets associated with the Quicksilver contract that was voided by the trial judge in May 2007, and the absence, in 2008, of net financial settlements losses of $14 million.

Fuel for electric generation, cost of gas and purchased power: For the three months ended September 30, 2008, fuel for electric generation, cost of gas and purchased power increased $2 million versus 2007. The increase was due to higher net mark-to-market losses on gas and power supply contracts of $9 million, partially offset by decreased power purchase costs of $3 million and reduced cost of gas of $4 million resulting from decreased usage offset by higher average prices.

For the nine months ended September 30, 2008, fuel for electric generation, cost of gas and purchased power decreased $67 million versus 2007. The decrease was due to the absence, in 2008, of gas purchases of $42 million resulting primarily from the termination of a gas supply contract, reduced fuel for electric generation of $11 million, a decrease in purchased power costs of $10 million and mark-to-market gains on gas and power supply contracts of $4 million.

Earnings from equity method investees: For the three months ended September 30, 2008, earnings from equity method investees were $5 million. The earnings included $3 million from our investment in North Carolina, primarily related to a mark-to-market derivative gain on a power contract, and a $2 million liquidating distribution from an energy fund investment.

For the nine months ended September 30, 2008, earnings from equity method investees decreased $33 million versus 2007. The decrease was due to the absence, in 2008, of $32 million of earnings from our investments in Africa, the Middle East, and India that were sold in May 2007 and our investment in Jamaica that was sold in October 2007. Also contributing to the decrease was the absence, in 2008, of $3 million of earnings associated with our remaining asset in Argentina. These decreases were partially offset by a $2 million liquidating distribution from an energy fund investment in 2008.

Gain (loss) on sale of assets: For the three months ended September 30, 2008, we recognized a gain of less than $1 million on the sale of real estate in Chile. For the three months ended September 30, 2007, the net gain on asset sales was $18 million.

For the nine months ended September 30, 2008, we recognized a gain on asset sales of $8 million related to our interests in TGN granted to MEI, an affiliate of Lucid Energy, in connection with the sale in 2007 of our Argentine and Michigan assets. For the nine months ended September 30, 2007, the net gain on asset sales was $16 million. For additional information, see Note 3, Asset Sales, Discontinued Operations and Impairment Charges.

Operation and maintenance: For the three months ended September 30, 2008, operation and maintenance expenses decreased $3 million versus 2007. The decrease was due to the absence, in 2008, of $6 million of expenses associated with assets sold during 2007 which had been partially offset by the reimbursement in 2007 of $3 million of arbitration costs at CMS Gas Transmission.

For the nine months ended September 30, 2008, operation and maintenance expenses decreased $36 million versus 2007. The decrease was due to the absence, in 2008, of $33 million of expenses associated with assets sold during 2007 and $3 million of arbitration costs at CMS Gas Transmission.

General taxes, depreciation, and other income, net: For the three months and the nine months ended September 30, 2008, the net of general taxes, depreciation, and other income decreased operating income by $1 million versus 2007. The decrease was primarily due to an impairment charge of $3 million to recognize an other than temporary decline in the fair value of our SERP assets partially offset by the recognition of a foreign currency gain of $2 million on a liability associated with a 2007 asset sale.

Asset impairment charges, net of insurance reimbursement in 2007: For the three months ended September 30, 2007, we recorded an insurance reimbursement of $75 million to recognize a prior award associated with our ownership interest in TGN. For additional information, see Note 3, Asset Sales, Discontinued Operations and Impairment Charges.

For the nine months ended September 30, 2007, we recorded asset impairment charges net of insurance reimbursements of $187 million, that included $262 million of charges for the reduction in fair value of our investments in TGN, GasAtacama, Jamaica and PowerSmith, and a $75 million credit to recognize a prior insurance award associated with our ownership interest in TGN. For additional information, see Note 3, Asset Sales, Discontinued Operations and Impairment Charges.

Fixed charges: Fixed charges decreased $1 million for the three months ended September 30, 2008 and $4 million for the nine months ended September 30, 2008 due to lower interest expense from subsidiary debt.

Minority interests: The allocation of profits to minority owners decreases our net income, and the allocation of losses to minority owners increases net income. For 2008, minority owners shared in a portion of decreased earnings at our subsidiaries versus 2007.

Income taxes: For the three months ended September 30, 2008, income tax expense decreased $26 million versus 2007 due to lower earnings.

For the nine months ended September 30, 2008, income tax expense increased $41 million versus 2007. The increase reflects $86 million of additional tax expense on higher earnings. These increases were offset by the absence of $45 million of tax expense recorded in 2007, primarily on earnings associated with the recognition of previously unremitted foreign earnings of subsidiaries sold.

CORPORATE INTEREST AND OTHER RESULTS OF OPERATIONS

In Millions
September 30		2008				2007				Change
Three months ended		$	(17	)		$	(35	)		$	18
Nine months ended		$	(63	)		$	(30	)		$	(33	)

For the three months ended September 30, 2008, corporate interest and other net expenses were $17 million, a decrease of $18 million versus 2007. The decrease in net expenses of $18 million primarily reflects the reduction of certain tax valuation allowances that were no longer required and reduced interest expense due to lower debt levels in 2008. Also contributing to the decrease in expense was the absence, in 2008, of premiums paid on the early retirement of CMS Energy debt in 2007.

For the nine months ended September 30, 2008, corporate interest and other net expenses were $63 million, an increase of $33 million versus 2007. The increase in net expenses of $33 million primarily reflects the absence, in 2008, of the recognition of certain tax benefits related to the sale of our international operations. Partially offsetting the increase was the absence, in 2008, of the reduction in fair value of notes receivable from GasAtacama, and premiums paid on the early retirement of CMS Energy debt in 2007. Also contributing to the decrease was reduced interest expense due to lower debt levels in 2008.

DISCONTINUED OPERATIONS

For the three months ended September 30, 2008, net income from discontinued operations was $1 million, primarily due to a reduction to a legal reserve related to previously sold assets.

For the nine months ended September 30, 2007, net loss from discontinued operations was $87 million, primarily due to the net loss on the disposal of international businesses sold in 2007.

CRITICAL ACCOUNTING POLICIES

The following accounting policies and related information are important to an understanding of our results of operations and financial condition and should be considered an integral part of our MD&A. These policies are an update of the policies disclosed in CMS Energy’s Form 10-K for the year ended December 31, 2007.

Use of Estimates and Assumptions

Fair Value Measurements: We have a number of assets and liabilities that must be accounted for or disclosed at fair value in accordance with SFAS No. 157. Fair value measurements require the incorporation of all assumptions that market participants would use in pricing an asset or liability, including assumptions about risk. Development of these assumptions requires significant judgment.

The most material of our fair value measurements are for our SERP assets and our derivative instruments. For a detailed discussion of the methods used to calculate these fair value measurements, see Note 2, Fair Value Measurements.

Derivative Instruments

We account for derivative instruments in accordance with SFAS No. 133. If a contract is a derivative and does not qualify for the normal purchases and sales exception under SFAS No. 133, we record it on our consolidated balance sheet at its fair value.

We use a modeling method to value the most material of our derivative liabilities, an electricity sales agreement held by CMS ERM. Because this electricity sales agreement extends beyond the term for which quoted electricity prices are available, our valuation model incorporates a proprietary forward pricing curve for power based on forward gas prices and an implied heat rate. Our model incorporates discounting, credit, and modeling risks. The model is sensitive to power and gas forward prices, and the fair value of this derivative liability will increase as these forward prices increase. We adjust our model each quarter to incorporate market data as it becomes available. There has been no material change in the fair value of the derivative liability since December 31, 2007. For additional details on how we determine the fair values of our derivatives, see Note 2, Fair Value Measurements. Except as noted in the following paragraph, there have been no significant changes since December 31, 2007 in the amount or types of derivatives that we hold or to how we account for derivatives.

CMS ERM Contracts: In the past, CMS ERM has generally classified all of its derivatives that result in physical delivery of commodities as non-trading contracts and all of its derivatives that financially settle as trading contracts. Following the restructuring of our DIG investment and the resulting streamlining of CMS ERM’s risk management activities in the first quarter of 2008, we reevaluated the classification of CMS ERM’s derivatives as trading versus non-trading. We determined that all of CMS ERM’s derivatives are held for purposes other than trading. Therefore, during 2008, we have accounted for all of CMS ERM’s derivatives as non-trading derivatives.

For additional details on our derivative activities, see Note 7, Financial and Derivative Instruments.

Retirement Benefits

In accordance with SFAS No. 158, we record liabilities for pension and OPEB on our consolidated balance sheet at the present value of the future obligations, net of any plan assets. We use SFAS No. 87 to account for pension expense and SFAS No. 106 to account for other postretirement benefit expense. The calculation of the liabilities and associated expenses requires the expertise of actuaries, and requires many assumptions, including:

	•		life expectancies,
	•		discount rates,
	•		expected long-term rate of return on plan assets,
	•		rate of compensation increases, and
	•		anticipated health care costs.

A change in these assumptions could change significantly our recorded liabilities and associated expenses.

The following table provides estimates as of September 30, 2008 of our pension cost, OPEB cost, and cash contributions:

In Millions
Expected Costs		Pension Cost				OPEB Cost				Contributions
2008		$	103			$	27			$	51
2009			93				61				263
2010			88				58				180

Contribution estimates include amounts required and discretionary contributions. Consumers’ pension and OPEB costs are recoverable through our general ratemaking process. Actual future pension cost and contributions will depend on future investment performance, changes in future discount rates, and various other factors related to the populations participating in the Pension Plan. As a result of additional losses experienced since September 30, 2008 in global equity markets, our Pension Plan contributions may be substantially larger in 2009 and assets are likely to have a negative return for 2008.

For additional details on retirement benefits, see Note 8, Retirement Benefits.

CAPITAL RESOURCES AND LIQUIDITY

Factors affecting our liquidity and capital requirements include:

	•		results of operations,
	•		capital expenditures,
	•		energy commodity and transportation costs,
	•		contractual obligations,
	•		regulatory decisions,
	•		debt maturities,
	•		credit ratings,
	•		pension plan funding requirements,
	•		tendering of our convertible securities for conversion,
	•		working capital needs,
	•		collateral requirements, and
	•		access to credit markets.

During the summer months, we buy natural gas and store it for resale during the winter heating season. Although our prudent natural gas costs are recoverable from our customers, the storage of natural gas as inventory requires additional liquidity due to the lag in cost recovery.

Components of our cash management plan include controlling operating expenses and capital expenditures and evaluating market conditions for financing opportunities, if needed. We have taken the following actions to strengthen our liquidity:

	•		in September 2008, Consumers issued $350 million FMB,
	•		in September 2008, Consumers entered into a $150 million revolving credit agreement, and
	•		in October 2008, CMS Energy drew $420 million, of the remaining $421 million balance, on its $550 million revolving credit facility.

In April 2008, we redeemed two of our tax-exempt debt issues with $96 million of refinancing proceeds and converted $35 million of tax-exempt debt previously backed by municipal bond insurers to variable rate demand bonds, effectively eliminating our variable rate debt backed by municipal bond insurers.

Despite the current market volatility, we expect to be able to continue to have access to the capital markets, including funds available under our revolving credit facilities and our accounts receivable sales program. Our revolving credit facilities of $350 million are subject to renewal in 2009 and $1.050 billion are subject to renewal in 2012. Our accounts receivable sales program is subject to renewal in February 2009. We believe that our current level of cash and our anticipated cash flows from operating activities, together with access to sources of liquidity, will be sufficient to meet cash requirements. For additional details, see Note 5, Financings and Capitalization.

Cash Position, Investing, and Financing

Our operating, investing, and financing activities meet consolidated cash needs. At September 30, 2008, we had $193 million of consolidated cash, which includes $31 million of restricted cash and $8 million held by entities consolidated under FIN 46(R).

Our primary ongoing source of cash is dividends and other distributions from our subsidiaries. Consumers paid $238 million in common stock dividends and Enterprises paid $950 million in common stock dividends, resulting from 2007 asset sales, to CMS Energy for the nine months ended September 30, 2008. For details on dividend restrictions, see Note 5, Financings and Capitalization.

Our Consolidated Statements of Cash Flows include amounts related to discontinued operations through the date of disposal. The sale of our discontinued operations had no material adverse effect on our liquidity, as we used the sales proceeds to invest in our utility business and to reduce debt. For additional details on discontinued operations, see Note 3, Asset Sales, Discontinued Operations and Impairment Charges.

Summary of Consolidated Statements of Cash Flows:

In Millions
Nine months ended September 30		2008				2007
Net cash provided by (used in):
Operating activities		$	183			$	(115	)
Investing activities			(538	)			1,394
Net cash provided by (used in) operating and investing activities			(355	)			1,279
Net cash provided by (used in) financing activities			169				(387	)
Effect of exchange rates on cash			—				2
Net Increase (Decrease) in Cash and Cash Equivalents		$	(186	)		$	894

Operating Activities:

For the nine months ended September 30, 2008, net cash provided by operating activities was $183 million, an increase of $298 million versus 2007. The increase was primarily due to an increase in earnings and the timing of cash receipts from accounts receivable. We accelerate our collections from customer billings through the sale of accounts receivable. The sale of accounts receivable at the end of 2006 reduced our collections from customers during 2007. At the end of 2007, we did not rely on sales of accounts receivable and collected customer billings for the nine months ended September 30, 2008. These increases were partially offset by the impact of higher gas prices on inventory purchases and the timing of postretirement benefit contributions and other settlement payments.

Investing Activities:

For the nine months ended September 30, 2008, net cash used in investing activities was $538 million, an increase of $1.932 billion versus 2007. This increase reflects the absence of asset sale proceeds and proceeds from our nuclear decommissioning trust funds in 2008.

Financing Activities:

For the nine months ended September 30, 2008, net cash provided by financing activities was $169 million, an increase of $556 million versus 2007. This was primarily due to an increase in net proceeds from the issuance of long-term debt. For additional details on long-term debt, see Note 5, Financings and Capitalization.

Obligations and Commitments

Revolving Credit Facilities: For details on our revolving credit facilities, see Note 5, Financings and Capitalization.

Sale of Accounts Receivable: Under its revolving accounts receivable sales program, Consumers may sell up to $250 million of certain accounts receivable.

Capital Expenditures: For reporting purposes, we identify annual capital expenditures for the next three years. We review these estimates and may revise them periodically, due to a number of factors including environmental regulations, business opportunities, market volatility, economic trends, and the ability to access capital. In response to recent economic conditions, we reviewed our capital expenditures plan. For 2009, we have reduced our capital expenditures plan by $180 million to $855 million. We will continue to monitor our forecasted capital expenditures for 2009 and beyond.

Off-Balance sheet Arrangements

CMS Energy and certain of its subsidiaries enter into various arrangements in the normal course of business to facilitate commercial transactions with third parties. These arrangements include indemnification provisions within certain agreements, surety bonds, letters of credit, and financial and performance guarantees. For additional details on these and other guarantee arrangements, see Note 4, Contingencies, “Other Contingencies.”

OUTLOOK

Corporate Outlook

In the future, we will focus our strategy on continuing investment in our utility business, growing earnings while controlling operating costs and parent debt, and maintaining principles of safe, efficient operations, customer value, fair and timely regulation, and consistent financial performance.

Our primary focus will be to continue to invest in our utility system to enable us to meet our customer commitments, to comply with increasingly demanding environmental performance standards, to improve system performance, and to maintain adequate supply and capacity. Our primary focus with respect to our non-utility businesses will be to optimize cash flow and to maximize the value of our assets.

Electric Utility Business Outlook

Michigan Energy Legislation: In October 2008, the Michigan governor signed into law a comprehensive energy reform package. Significant features of the new legislation include:

	•		a provision to streamline the regulatory process by generally allowing utilities to self-implement rates six months after filing and requiring the MPSC to issue an order 12 months after filing or the rates as-filed become permanent,
	•		reform of the Customer Choice Act to limit generally alternative energy suppliers to 10 percent of our weather-adjusted sales,
	•		establishment of a certificate-of-necessity process at the MPSC for proposed power plants, power purchase agreements, and projects costing more than $500 million,
	•		a requirement that 10 percent of power come from renewable sources by 2015 with specific interim targets, and
	•		new programs and incentives to encourage greater energy efficiency among customers, along with the requirement of the utility to prepare energy cost savings optimization plans.

Balanced Energy Initiative: Our Balanced Energy Initiative is a comprehensive energy resource plan to meet our projected short-term and long-term electric power requirements with energy efficiency, demand management, expanded use of renewable energy, and development of new power plants and pursuit of additional power purchase agreements to complement existing generating sources. Our Balanced Energy Initiative includes our plan to build an 800 MW advanced clean coal plant at our Karn/Weadock Generating complex near Bay City, Michigan.

The new energy legislation in Michigan provides guidelines with respect to the MPSC review and approval of energy resource plans and proposed power plants. We plan to file an updated Balanced Energy Initiative with the MPSC in conjunction with a certificate-of-necessity that conforms to the requirements of the new legislation and the rules that the MPSC will develop for the certificate-of-necessity filings.

Electric Deliveries: We are anticipating a decrease in electric deliveries of approximately 3 percent in 2008 compared with 2007 or 1 percent excluding weather conditions. This decline reflects a decline in industrial economic activity, and the cancellation of one wholesale customer contract. For 2009 compared with 2008, a decline, excluding weather conditions, of 1 percent is expected. Our outlook for 2009 includes continuing growth in deliveries to our largest growing customer that produces semiconductor and solar energy components. Without this customer’s growth our electric deliveries in 2009 are expected to decline 3 percent compared with 2008. Our outlook also reflects reduced deliveries associated with our investment in energy efficiency programs included in the recently enacted legislation, as well as recent projections of Michigan economic conditions.

After 2009, we anticipate economic conditions to stabilize, resulting in modestly growing deliveries of electricity. We expect deliveries to grow on average about 0.5 percent annually over the period from 2009 to 2014. This growth rate also includes expected results of energy efficiency programs and both full-service sales and delivery service to customers who choose to buy generation service from an alternative electric supplier, but transactions with other wholesale market participants are not included. Actual growth may vary from this trend due to the following:

	•		energy conservation measures and results of energy efficiency programs,
	•		fluctuations in weather conditions, and
	•		changes in economic conditions, including utilization and expansion or contraction of manufacturing facilities, population trends, and housing activity.

Electric Customer Revenue Outlook: Michigan’s economy has suffered from closures and restructuring of automotive manufacturing facilities and those of related suppliers and from the depressed housing market. The Michigan economy also has been harmed by facility closures in the non-manufacturing sectors and limited growth. Although our electric utility results are not dependent upon a single customer, or even a few customers, those in the automotive sector represented five percent of our total 2007 electric revenue and three percent of our 2007 electric operating income. We cannot predict the financial impact of the Michigan economy on our electric customer revenue.

Electric Reserve Margin: To reduce the risk of high power supply costs during peak demand periods and to achieve our Reserve Margin target, we purchase electric capacity and energy for the physical delivery of electricity primarily in the summer months. We are currently planning for a Reserve Margin of 13.7 percent for summer 2009, or supply resources equal to 113.7 percent of projected firm summer peak load. We have purchased capacity and energy covering partially our Reserve Margin requirements for 2009 through 2010. Of the 2009 supply resources target, we expect 93 percent to come from our electric generating plants and long-term power purchase contracts, with other contractual arrangements making up the remainder. We expect capacity costs for these electric capacity and energy contractual arrangements to be $15 million for 2009.

Electric Transmission Expenses: We expect the transmission charges we incur to increase by $32 million in 2008 compared with 2007 primarily due to a 33 percent increase in METC transmission rates. This increase was included in our 2008 PSCR plan filed with the MPSC in September 2007, which we self-implemented in January 2008.

We expect the transmission charges we incur to increase by $55 million in 2009 compared with 2008 primarily due to a 25 percent increase in METC and Wolverine transmission rates. This increase was included in our 2009 PSCR plan filed with the MPSC in September 2008.

The MPSC issued an order that allowed transmission expenses to be included in the PSCR process. The Attorney General appealed the MPSC order to the Michigan Court of Appeals, which affirmed the MPSC order. The Attorney General filed an application for leave to appeal with the Michigan Supreme Court, which was granted in September 2008. We cannot predict the financial impact or outcome of this matter.

For additional details on the electric transmission expense litigation, see Note 4, Contingencies, “Consumers’ Electric Utility Contingencies — Litigation.”

Electric Utility Business Uncertainties

Several electric business trends and uncertainties may affect our financial condition and future results of operations. These trends and uncertainties could have a material impact on revenues and income from continuing electric operations.

Electric Environmental Estimates: Our operations are subject to various state and federal environmental laws and regulations. Generally, we have been able to recover in customer rates our costs to operate our facilities in compliance with these laws and regulations.

Clean Air Act: We continue to focus on complying with the federal Clean Air Act and numerous state and federal regulations. We plan to spend $795 million for equipment installation through 2015 to comply with a number of environmental regulations, including regulations limiting nitrogen oxides and sulfur dioxide emissions. We expect to recover these costs in customer rates.

Clean Air Interstate Rule: In March 2005, the EPA adopted the CAIR, which required additional coal-fired electric generating plant emission controls for nitrogen oxides and sulfur dioxide. The CAIR was

appealed to the U.S. Court of Appeals for the District of Columbia and, in July 2008, the court vacated the CAIR and the CAIR federal implementation plan in their entirety. If upheld, the decision would remand the CAIR back to the EPA to form a new rule, which will likely take considerable time. Several parties have petitioned the court for hearing by the full court. This keeps the CAIR in effect at least until the court decides whether to grant the rehearing. At the same time, Congress is considering legislative options to reinstate all or part of the CAIR.

State and Federal Mercury Air Rules: In March 2005, the EPA issued the CAMR, which required initial reductions of mercury emissions from coal-fired electric generating plants by 2010 and further reductions by 2018. A number of states and other entities appealed certain portions of the CAMR to the U.S. Court of Appeals for the District of Columbia. The U.S. Court of Appeals for the District of Columbia decided the case in February 2008, and determined that the rules developed by the EPA were not consistent with the Clean Air Act. The U.S. Supreme Court has been petitioned to review this decision.

In April 2006, Michigan’s governor proposed a plan that would result in mercury emissions reductions of 90 percent by 2015. If this plan becomes effective, we estimate the associated costs will be approximately $400 million by 2015.

Routine Maintenance Classification: The EPA has alleged that some utilities have incorrectly classified major plant modifications as “routine maintenance, repair and replacement” rather than seeking permits from the EPA to modify their plants. We responded to information requests from the EPA on this subject in 2000, 2002, and 2006. We believe that we have properly interpreted the requirements of “routine maintenance, repair and replacement.” In October 2008, we received another information request from the EPA pursuant to Section 114 of the Clean Air Act. In addition, in October 2008, we received a NOV for three of our coal-fired facilities relating to violations of NSR and PSD regulations, alleging ten projects from 1986 to 1998 were subject to PSD review. We are currently preparing our response to this NOV and the information request. If the EPA does not accept our interpretation, we could be required to install additional pollution control equipment at some or all of our coal-fired electric generating plants and pay fines. Additionally, we would need to assess the viability of continuing operations at certain plants. We cannot predict the financial impact or outcome of this matter.

Greenhouse Gases: The United States Congress has introduced proposals that would require reductions in emissions of greenhouse gases, including carbon dioxide. These laws, or similar state laws or rules, if enacted, could require us to replace equipment, install additional equipment for emission controls, purchase allowances, curtail operations, 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, we expect to have an opportunity to recover these costs and capital expenditures in rates consistent with the recovery of other reasonable costs of complying with environmental laws and regulations.

The EPA has published an Advance Notice of Proposed Rulemaking to present possible options for regulating greenhouse gases under the Clean Air Act, as well as to solicit comments and additional ideas. The comment period closes in November 2008. In addition to the potential for federal actions related to greenhouse gas regulation, the State of Michigan has convened a climate change stakeholder process under the name Michigan Climate Action Council. Michigan is also a signatory participant in the Midwest Governors Greenhouse Gas Reduction Accord process. We cannot predict the extent or the likelihood of any actions that could result from these state and regional processes.

Water: In July 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 intake structures at large existing power plants. The EPA compliance options in the rule were challenged before the United States Court of Appeals for the Second Circuit. In January 2007, the court rejected many of the compliance options favored by industry and remanded the bulk of the rule back to the EPA for reconsideration. The United States Court of Appeals for the Second Circuit’s ruling is expected to

increase significantly the cost of complying with this rule, but we will not know the cost to comply until the EPA’s reconsideration is complete. In April 2008, the U.S. Supreme Court agreed to hear this case, thereby extending the time before this issue is finally resolved.

We cannot estimate the effect of federal or state environmental policies on our future consolidated results of operations, cash flows, or financial position due to the uncertain nature of the policies. We will continue to monitor these developments and respond to their potential implications for our business operations.

For additional details on electric environmental matters, see Note 4, Contingencies, “Consumers’ Electric Utility Contingencies — Electric Environmental Matters.”

Electric ROA: The Customer Choice Act allows all of our electric customers to buy electric generation service from us or from an alternative electric supplier. However, the energy legislation enacted in Michigan in October 2008 generally limits alternative electric supply to 10 percent of our weather-adjusted retail sales for the preceding calendar year. At September 2008, alternative electric suppliers were providing 339 MW of generation service to ROA customers, which is equivalent to 4 percent of our weather-adjusted retail sales from the preceding calendar year.

In November 2004, the MPSC issued an order allowing us to recover Stranded Costs incurred in 2002 and 2003 through a surcharge applied to ROA customers. The new energy legislation directs the MPSC to approve rates that will allow us to recover our Stranded Costs within five years.

Electric Rate Case: During 2007, we filed applications with the MPSC, as revised, seeking an annual increase in revenue of $265 million, which incorporated a requested 11.25 percent authorized return on equity. The filings sought recovery of the costs associated with increased plant investment, including the purchase of the Zeeland power plant, increased equity investment, higher operation and maintenance expenses, recovery of transaction costs from the sale of Palisades, and the approval of an energy efficiency program.

In June 2008, the MPSC issued an order authorizing us to increase revenue by $221 million. This was lower than our revised position primarily due to the MPSC’s authorized return on equity of 10.7 percent and the final determination of our Zeeland plant revenue requirement.

We plan to file a new electric rate case by late November 2008.

Palisades Regulatory Proceedings: We sold Palisades to Entergy in April 2007. The MPSC order approving the transaction requires that we credit $255 million of excess sale proceeds and decommissioning amounts to our retail customers by December 2008. There are additional excess sales proceeds and decommissioning fund balances of $135 million above the amount in the MPSC order. The MPSC order in our electric rate case instructed us to offset the excess sales proceeds and decommissioning fund balances with $26 million of transaction costs from the Palisades sale and credit the remaining balance to customers. The distribution of these funds is still pending with the MPSC.

For additional details and material changes relating to the restructuring of the electric utility industry and electric rate matters, see Note 4, Contingencies, “Consumers’ Electric Utility Rate Matters.”

The MCV PPA: The MCV Partnership, which leases and operates the MCV Facility, contracted to sell 1,240 MW of electricity to Consumers for 35 years beginning in 1990. In June 2008, the MPSC approved an amended and restated MCV PPA, which took effect in October 2008. The amended and restated MCV PPA provides for:

	•		a capacity charge of $10.14 per MWh of available capacity,
	•		a fixed energy charge based on our annual average base load coal generating plant operating and maintenance cost,
	•		a variable energy charge for all delivered energy that reflects the MCV Partnership’s cost of production,
	•		the elimination of the RCP, but continues the $5 million annual contribution by the MCV Partnership to a renewable resources program, and
	•		an option for us to extend the MCV PPA for five years or purchase the MCV Facility at the conclusion of the MCV PPA’s term in March 2025.

This resolves the issues concerning our September 2007 exercise of the regulatory-out provision in the MCV PPA.

For additional details on the MCV PPA, see Note 4, Contingencies, “Other Consumers’ Electric Utility Contingencies — The MCV PPA.”

Gas Utility Business Outlook

Gas Deliveries: We expect that gas deliveries in 2008 will decline approximately two percent, on a weather-adjusted basis, relative to 2007 due to continuing conservation and overall economic conditions in Michigan. We expect gas deliveries to average a decline of one percent annually over the next five years. Actual delivery levels from year to year may vary from this trend due to the following:

	•		fluctuations in weather conditions,
	•		use by independent power producers,
	•		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.

Gas Utility Business Uncertainties

Several gas business trends and uncertainties may affect our future financial results and financial condition. These trends and uncertainties could have a material impact on future revenues and income from gas operations.

Gas Environmental Estimates: We expect to incur investigation and remedial action costs at a number of sites, including 23 former manufactured gas plant sites. For additional details, see Note 4, Contingencies, “Consumers’ Gas Utility Contingencies — Gas Environmental Matters.”

Gas Cost Recovery: The GCR process is designed to allow us to recover all of our purchased natural gas costs if incurred under reasonable and prudent policies and practices. The MPSC reviews these costs, policies, and practices for prudence in annual plan and reconciliation proceedings. For additional details on GCR, see Note 4, Contingencies, “Consumers’ Gas Utility Rate Matters — Gas Cost Recovery.”

Gas Depreciation: On August 1, 2008, we filed a gas depreciation case using 2007 data with the MPSC-ordered variations on traditional cost-of-removal methodologies. We cannot predict the outcome of this matter. If a final order in our gas depreciation case is not issued concurrently with a final order in a general gas rate case, the MPSC may incorporate the results of the depreciation case into general gas rates through a surcharge, which may be either positive or negative.

2007 Gas Rate Case: In August 2007, the MPSC approved a partial settlement agreement authorizing an annual rate increase of $50 million, including an authorized return on equity of 10.75 percent. In September 2007, the MPSC reopened the record in the case to allow all interested parties to be heard concerning the approval of an energy efficiency program, which we proposed in our original filing. In April 2008, the MPSC approved a settlement agreement withdrawing the proposed energy efficiency program and closed the case.

2008 Gas Rate Case: In February 2008, we filed an application with the MPSC for an annual gas rate increase of $91 million based on an 11 percent authorized return on equity. The MPSC staff and intervenors filed testimony in September 2008. The MPSC staff recommended an increase of $36 million based on a 10.45 percent authorized return on equity.

Lost and Unaccounted for Gas: Gas utilities typically lose a portion of gas as it is injected into and withdrawn from storage and sent through transmission and distribution systems. We recover the cost of lost and unaccounted for gas through general rate cases, which have traditionally provided for recovery based on an average of the previous five years of actual losses. To the extent that we experience lost and unaccounted for gas that exceeds the previous five-year average, we may be unable to recover these amounts in rates.

Enterprises Outlook

Our primary focus with respect to our remaining non-utility businesses is to optimize cash flow and maximize the value of our assets.

In connection with the sale of our Argentine and Michigan assets to Lucid Energy in March 2007, we entered into agreements that granted MEI, an affiliate of Lucid Energy, rights to certain awards or proceeds that we may receive in the future. These included the right to any proceeds from an assignment of the ICSID award associated with TGN, as well as an option to purchase CMS Gas Transmission’s ownership interests in TGN.

As of May 2008, the Republic of Argentina had not paid the ICSID award as due, causing its option to purchase our interests in TGN to expire. In June 2008, we executed an agreement with MEI and a third-party to assign the ICSID award and to sell our interests in TGN directly to the third-party. In accordance with the agreements executed in March 2007, the proceeds from the assignment of the ICSID award and the sale of TGN were passed on to MEI. In light of these events, during the second quarter of 2008 we recognized in earnings an $8 million deferred gain on the assignment of the ICSID award. For additional details, see Note 3, Asset Sales, Discontinued Operations and Impairment Charges.

At September 30, 2008, $7 million remains as a deferred credit on our Consolidated Balance Sheets related to MEI’s right to proceeds that Enterprises will receive if it sells its stock interest in CMS Generation San Nicolas Company.

Enterprises Uncertainties: Trends and uncertainties that could have a material impact on our consolidated income, cash flows, or balance sheet include:

	•		the impact of indemnity and environmental remediation obligations at Bay Harbor,
	•		the outcome of certain legal proceedings,
	•		the impact of representations, warranties, and indemnities we provided in connection with the sales of our international assets, and
	•		changes in commodity prices and interest rates on certain derivative contracts that do not qualify for hedge accounting and must be marked to market through earnings.

Other Outlook

Software Implementation: In July 2008, we implemented an integrated business software system for customer billing, finance, purchasing/supply chain, human resources and payroll, and utility asset construction and maintenance work management. We expect the new business software to improve customer service, reduce operating system risk and result in efficiencies. The project cost for the implementation was $174 million in capital expenditures.

Advanced Metering Infrastructure: We are developing an advanced metering system that will provide enhanced controls and information about our customer energy usage and notification of service interruptions. The system also will allow customers to make decisions about energy efficiency and conservation, provide other customer benefits, and reduce costs. We expect to develop integration software and pilot new technology over approximately the next two to three years, and incur capital expenditures of approximately $800 million over the next seven years.

Litigation and Regulatory Investigation: We are the subject of an investigation by the DOJ regarding round-trip trading transactions by CMS MST. Also, we are named as a party in various litigation matters including, but not limited to, several lawsuits regarding alleged false natural gas price reporting and price manipulation and the appeal initiated by Quicksilver in the Texas Court of Appeals. Additionally, the SEC is investigating the actions of former CMS Energy subsidiaries in relation to Equatorial Guinea. For additional details regarding these and other matters, see Note 4, Contingencies and Part II, Item 1. Legal Proceedings.

Emergency Economic Stabilization Act of 2008 — Mark-to-Market Accounting: In October 2008, President Bush signed into law a $700 billion economic recovery plan. The plan includes a provision authorizing the SEC to suspend the application of SFAS No. 157 for any issuer with respect to any class or category of transaction as deemed necessary. In addition, the SEC is required to conduct a study on mark-to-market accounting (fair value accounting), including its possible impacts on recent bank failures, along with a consideration of alternative accounting treatments. The SEC must submit a report to Congress within 90 days. We apply this accounting primarily to our commodity derivative instruments and our SERP investments. We will continue to monitor developments in this area.

EnerBank: EnerBank, a wholly owned subsidiary representing one percent of CMS Energy’s net assets, is a state-chartered, FDIC-insured industrial bank providing unsecured home improvement loans. The value of EnerBank’s loan portfolio was $180 million at September 30, 2008, with a corresponding liability recorded on our Consolidated Balance Sheets. Twelve-month rolling average default rates on loans held by EnerBank have risen from 1.0 percent at December 31, 2007 to 1.3 percent at September 30, 2008. Due to recent economic events, EnerBank expects the level of loan defaults to continue to increase throughout 2009 and into 2010, returning to historically lower levels thereafter.

IMPLEMENTATION OF NEW ACCOUNTING STANDARDS

SFAS No. 157, Fair Value Measurements: This standard, which was effective for us January 1, 2008, defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The implementation of this standard did not have a material effect on our consolidated financial statements. For additional details on our fair value measurements, see Note 2, Fair Value Measurements.

SEC / FASB Guidance on Fair Value Measurements: In September 2008, in response to concerns about fair value accounting and its possible role in the recent declines in the financial markets, the SEC Office of the Chief Accountant and the FASB staff jointly released additional guidance on fair value measurements. The guidance, which is effective for us immediately, did not change or conflict with the fair value principles in SFAS No. 157, but rather provided further clarification on how to value a financial asset in an illiquid market. This guidance had no impact on our fair value measurements.

FSP FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active: In October 2008, the FASB issued this standard, effective for us as of the quarter ended September 30, 2008. The standard clarifies the application of SFAS No. 157 in measuring financial assets in illiquid markets and is consistent with the guidance issued by the SEC and the FASB as discussed in the preceding paragraph, but an example is provided to further illustrate the concepts. The standard is to be applied prospectively. The guidance in this standard did not impact our fair value measurements.

SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and 132(R): In September 2006, the FASB issued SFAS No. 158. Phase one of this standard, implemented in December 2006, required us to recognize the funded status of our defined benefit postretirement plans on our Consolidated Balance Sheets at December 31, 2006. Phase two, implemented in January 2008, required us to change our plan measurement date from November 30 to December 31, effective for the year ending December 31, 2008. For additional details, see Note 8, Retirement Benefits.

SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, Including an amendment to FASB Statement No. 115: This standard, which was effective for us January 1, 2008, gives us the option to measure certain financial instruments and other items at fair value, with changes in fair value recognized in earnings. We have not elected the fair value option for any financial instruments or other items.

FSP FIN 39-1, Amendment of FASB Interpretation No. 39: This standard, which was effective for us January 1, 2008, permits us to offset the fair value of derivative instruments held under master netting arrangements with cash collateral received or paid for those derivatives. Adopting this standard resulted in an immaterial reduction to both our total assets and total liabilities. There was no impact on earnings from adopting this standard. We applied the standard retrospectively for all periods presented in our consolidated financial statements. For additional details, see Note 7, Financial and Derivative Instruments, “CMS ERM Contracts.”

EITF Issue 06-11, Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards: This standard was effective for us January 1, 2008. The standard requires companies to recognize, as an increase to additional paid-in capital, the income tax benefit realized from dividends or dividend equivalents that are charged to retained earnings and paid to employees for non-vested equity-classified employee share-based payment awards. This standard did not have a material effect on our consolidated financial statements.

NEW ACCOUNTING STANDARDS NOT YET EFFECTIVE

SFAS No. 141(R), Business Combinations: In December 2007, the FASB issued SFAS No. 141(R), which replaces SFAS No. 141, Business Combinations. SFAS No. 141(R) establishes how an acquiring entity should measure and recognize assets acquired, liabilities assumed, and noncontrolling interests acquired through a business combination. The standard also establishes how goodwill or gains from bargain purchases should be measured and recognized, and what information the acquirer should disclose to enable users of the financial statements to evaluate the nature and financial effects of a business combination. Costs of an acquisition are to be recognized separately from the business combination. We will apply SFAS No. 141(R) prospectively to any business combination for which the date of acquisition is on or after January 1, 2009.

SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment to ARB No. 51: In December 2007, the FASB issued SFAS No. 160, effective for us January 1, 2009. Under this standard, ownership interests in subsidiaries held by third parties, which are currently referred to as minority interests, will be presented as noncontrolling interests and shown separately on our Consolidated Balance Sheets within equity. We are evaluating the impact SFAS No. 160 will have on our consolidated financial statements.

SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133: In March 2008, the FASB issued SFAS No. 161, effective for us January 1, 2009. This standard will require entities to provide enhanced disclosures about how and why derivatives are used, how derivatives and related hedged items are accounted for under SFAS No. 133, and how derivatives and related hedged items affect financial position, financial performance, and cash flows. This standard will have no effect on our consolidated financial statements.

FSP FAS 142-3, Determination of the Useful Life of Intangible Assets: In April 2008, the FASB issued FSP FAS 142-3, effective for us January 1, 2009. This standard amends SFAS No. 142 to require expanded consideration of expected future renewals or extensions of intangible assets when determining their useful lives. This standard will be applied prospectively for intangible assets acquired after the effective date. We are evaluating the impact this standard will have on our consolidated financial statements.

FSP FAS 133-1 and FIN 45-4, Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161: In September 2008, the FASB issued this standard, effective for us December 31, 2008. This standard will amend SFAS No. 133 and FIN 45 to enhance the disclosure requirements for issuers of credit derivatives and financial guarantees. As we have not issued any credit derivatives, this standard will apply only to our disclosures about guarantees we have issued. It will have no effect on our consolidated financial statements.

FSP APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled In Cash Upon Conversion (Including Partial Cash Settlement): In April 2008, the FASB issued FSP APB 14-1, effective for us January 1, 2009. This standard will apply retroactively to our convertible debt securities, and will require us to account for the liability and equity components separately and in a manner that will reflect our borrowing rate for nonconvertible debt. We are evaluating the impact this standard will have on our consolidated financial statements. For additional details on our convertible debt instruments, see Note 5, Financings and Capitalization.

FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities: In June 2008, the FASB issued FSP EITF 03-6-1, effective for us January 1, 2009. Under this standard, awards that accrue cash dividends when common shareholders receive dividends are considered participating securities if the dividends do not need to be returned to the company when the employee forfeits the award. We have unvested restricted stock awards outstanding that will be considered participating securities and thus will be included in the computation of basic EPS. We are evaluating the impact this standard will have on our consolidated financial statements.

EITF Issue 07-5, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock: In June 2008, the FASB ratified EITF Issue 07-5, effective for us January 1, 2009. This standard establishes criteria for determining whether freestanding instruments or embedded features are considered “indexed to an entity’s own stock.” This guidance must be applied in assessing the equity conversion features in our contingently convertible senior notes and preferred stock. These conversion features have been exempted from derivative accounting because they are indexed to our own stock and would be classified in stockholders’ equity. We will have to assess whether they are still considered indexed to our own stock under this new guidance. The standard applies to all outstanding instruments at January 1, 2009, with any transition impacts recognized as a cumulative effect adjustment to the opening balance of retained earnings. We are evaluating the impact, if any, this standard will have on our consolidated financial statements.

EITF Issue 08-5, Issuer’s Accounting for Liabilities Measured at Fair Value with a Third-Party Credit Enhancement: In September 2008, the FASB ratified EITF Issue 08-5, effective for us January 1, 2009. This guidance concludes that the fair value measurement of a liability should not consider the effect of a third-party credit enhancement or guarantee supporting the liability. The fair value of the liability should thus reflect the credit standing of the issuer and should not be adjusted to reflect the credit standing of a third-party guarantor. The standard is to be applied prospectively. This standard will not have a material impact on our consolidated financial statements.

CMS Energy Corporation
Consolidated Statements of Income (Loss)
(Unaudited)

														In Millions
		Three Months Ended								Nine Months Ended
September 30		2008				2007				2008				2007
Operating Revenue		$	1,428			$	1,282			$	4,977			$	4,790
Earnings from Equity Method Investees			5				—				3				36
Operating Expenses
Fuel for electric generation			173				158				470				408
Purchased and interchange power			406				390				1,026				1,079
Cost of gas sold			191				171				1,526				1,509
Other operating expenses			218				226				615				714
Maintenance			51				45				140				155
Depreciation and amortization			135				121				436				402
General taxes			47				53				155				176
Asset impairment charges, net of insurance recoveries			—				(76	)			—				204
Gain on asset sales, net			—				(18	)			(8	)			(16	)
			1,221				1,070				4,360				4,631
Operating Income			212				212				620				195
Other Income (Deductions)
Interest and dividends			5				33				23				78
Regulatory return on capital expenditures			9				9				25				24
Foreign currency gain, net			1				—				1				1
Other income			3				4				9				15
Other expense			(15	)			(12	)			(21	)			(29	)
			3				34				37				89
Fixed Charges
Interest on long-term debt			86				96				257				295
Interest on long-term debt — related parties			3				3				10				10
Other interest			8				14				26				36
Capitalized interest			(1	)			(1	)			(4	)			(5	)
			96				112				289				336
Income (Loss) Before Income Taxes			119				134				368				(52	)
Income Tax Expense (Benefit)			37				46				126				(58	)
Income Before Minority Interests, Net			82				88				242				6
Minority Interests, Net			2				4				6				10
Income (Loss) From Continuing Operations			80				84				236				(4	)
Income (Loss) From Discontinued Operations, Net of Tax (Tax Benefit) of $1, $-, $- and $(1)			1				—				—				(87	)
Net Income (Loss)			81				84				236				(91	)
Preferred Dividends			2				2				8				8
Redemption Premium on Preferred Stock			—				—				—				1
Net Income (Loss) Available to Common Stockholders		$	79			$	82			$	228			$	(100	)

The accompanying notes are an integral part of these statements.

In Millions, Except Per Share Amounts
		Three Months Ended								Nine Months Ended
September 30		2008				2007				2008				2007
		(Unaudited)
CMS Energy
Net Income (Loss)
Net Income (Loss) Available to Common Stockholders		$	79			$	82			$	228			$	(100	)
Basic Earnings (Loss) Per Average Common Share
Income (Loss) from Continuing Operations		$	0.35			$	0.37			$	1.02			$	(0.06	)
Income (Loss) from Discontinued Operations			0.01				—				—				(0.39	)
Net Income (Loss) Available to Common Stock		$	0.36			$	0.37			$	1.02			$	(0.45	)
Diluted Earnings (Loss) Per Average Common Share
Income (Loss) from Continuing Operations		$	0.33			$	0.34			$	0.96			$	(0.06	)
Income (Loss) from Discontinued Operations			0.01				—				—				(0.39	)
Net Income (Loss) Available to Common Stock		$	0.34			$	0.34			$	0.96			$	(0.45	)
Dividends Declared Per Common Share		$	0.09			$	0.05			$	0.27			$	0.15

The accompanying notes are an integral part of these statements.

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CMS Energy Corporation
Consolidated Statements of Cash Flows
(Unaudited)

						In Millions
Nine Months Ended September 30		2008				2007
Cash Flows from Operating Activities
Net income (loss)		$	236			$	(91	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Depreciation and amortization, net of nuclear decomissioning of $- and $4			436				407
Deferred income taxes and investment tax credit			117				(79	)
Minority interests (obligations), net			6				(12	)
Asset impairment charges, net of insurance recoveries			—				204
Postretirement benefits costs			110				102
Regulatory return on capital expenditures			(25	)			(24	)
Capital lease and other amortization			28				41
Loss (gain) on the sale of assets			(8	)			117
Earnings from equity method investees			(3	)			(36	)
Cash distributions from equity method investees			2				15
Postretirement benefits contributions			(38	)			(147	)
Shareholder class action settlement			—				(125	)
Electric sales contract termination payment			(275	)			—
Changes in other assets and liabilities:
Decrease (increase) in accounts receivable and accrued revenues			178				(148	)
Decrease in accrued power supply and gas revenue			39				52
Increase in inventories			(393	)			(186	)
Decrease in deferred property taxes			118				111
Decrease in accounts payable			(21	)			(91	)
Decrease in accrued taxes			(189	)			(144	)
Decrease in accrued expenses			(42	)			(37	)
Decrease in other current and non-current assets			47				53
Decrease in other current and non-current liabilities			(140	)			(97	)
Net cash provided by (used in) operating activities			183				(115	)
Cash Flows from Investing Activities
Capital expenditures (excludes assets placed under capital lease)			(511	)			(523	)
Cost to retire property			(22	)			(18	)
Restricted cash			4				34
Investments in nuclear decommissioning trust funds			—				(1	)
Proceeds from nuclear decommissioning trust funds			—				333
Proceeds from sale of assets			1				1,696
Cash relinquished from sale of assets			—				(113	)
Other investing			(10	)			(14	)
Net cash provided by (used in) investing activities			(538	)			1,394
Cash Flows from Financing Activities
Proceeds from notes, bonds, and other long-term debt			930				476
Issuance of common stock			6				13
Retirement of bonds and other long-term debt			(668	)			(769	)
Redemption of preferred stock			—				(32	)
Payment of common stock dividends			(61	)			(34	)
Payment of preferred stock dividends			(10	)			(9	)
Payment of capital lease and financial lease obligations			(18	)			(14	)
Debt issuance costs, financing fees, and other			(10	)			(18	)
Net cash provided by (used in) financing activities			169				(387	)
Effect of Exchange Rates on Cash			—				2
Net Increase (Decrease) in Cash and Cash Equivalents			(186	)			894
Cash and Cash Equivalents, Beginning of Period			348				351
Cash and Cash Equivalents, End of Period		$	162			$	1,245

The accompanying notes are an integral part of these statements.

CMS Energy Corporation
Consolidated Balance Sheets

ASSETS		In Millions
		September 30				December 31
		2008				2007
		(Unaudited)
Plant and Property (at cost)
Electric utility		$	8,885			$	8,555
Gas utility			3,598				3,467
Enterprises			392				391
Other			34				34
			12,909				12,447
Less accumulated depreciation, depletion and amortization			4,360				4,166
			8,549				8,281
Construction work-in-progress			446				447
			8,995				8,728
Investments
Enterprises			6				6
Other			5				5
			11				11
Current Assets
Cash and cash equivalents at cost, which approximates market			162				348
Restricted cash at cost, which approximates market			31				34
Notes receivable			99				68
Accounts receivable and accrued revenue, less allowances of $20 in 2008 and $21 in 2007			638				837
Accrued power supply revenue			4				45
Accounts receivable — related parties			1				2
Inventories at average cost
Gas in underground storage			1,476				1,123
Materials and supplies			110				86
Generating plant fuel stock			140				125
Deferred property taxes			111				158
Regulatory assets — postretirement benefits			19				19
Prepayments and other			39				35
			2,830				2,880
Non-current Assets
Regulatory Assets
Securitized costs			429				466
Postretirement benefits			849				921
Customer Choice Act			104				149
Other			462				504
Deferred income taxes			48				99
Notes receivable, less allowances of $30 in 2008 and $31 in 2007			180				170
Other			169				264
			2,241				2,573
Total Assets		$	14,077			$	14,192

The accompanying notes are an integral part of these statements.

STOCKHOLDERS’ INVESTMENT AND LIABILITIES		In Millions
		September 30				December 31
		2008				2007
		(Unaudited)
Capitalization
Common stockholders’ equity
Common stock, authorized 350.0 shares; outstanding 226.1 shares in 2008 and 225.1 shares in 2007		$	2			$	2
Other paid-in capital			4,491				4,480
Accumulated other comprehensive loss			(17	)			(144	)
Accumulated deficit			(2,047	)			(2,208	)
			2,429				2,130
Preferred stock of subsidiary			44				44
Preferred stock			249				250
Long-term debt			5,718				5,385
Long-term debt — related parties			178				178
Non-current portion of capital lease obligations			212				225
			8,830				8,212
Minority Interests			53				53
Current Liabilities
Current portion of long-term debt, capital and finance lease obligations			649				722
Notes payable			—				1
Accounts payable			417				430
Accrued rate refunds			11				19
Accounts payable — related parties			—				1
Accrued interest			78				103
Accrued taxes			119				308
Deferred income taxes			147				41
Regulatory liabilities			159				164
Electric sales contract termination liability			2				279
Argentine currency impairment reserve			—				197
Other			293				208
			1,875				2,473
Non-current Liabilities
Regulatory Liabilities
Regulatory liabilities for cost of removal			1,184				1,127
Income taxes, net			561				533
Other regulatory liabilities			147				313
Postretirement benefits			876				858
Asset retirement obligation			204				198
Deferred investment tax credit			56				58
Other			291				367
			3,319				3,454
Commitments and Contingencies (Notes 4, 5 and 7)
Total Stockholders’ Investment and Liabilities		$	14,077			$	14,192

The accompanying notes are an integral part of these statements.

CMS Energy Corporation
Consolidated Statements of Common Stockholders’ Equity
(Unaudited)

		In Millions
		Three Months Ended								Nine Months Ended
September 30		2008				2007				2008				2007
Common Stock
At beginning and end of period		$	2			$	2			$	2			$	2
Other Paid-in Capital
At beginning of period			4,488				4,477				4,480				4,468
Common stock issued			4				4				12				26
Common stock repurchased			(1	)			(5	)			(1	)			(5	)
Common stock reissued			—				—				—				6
Redemption of preferred stock			—				—				—				(19	)
At end of period			4,491				4,476				4,491				4,476
Accumulated Other Comprehensive Loss
Retirement Benefits Liability
At beginning of period			(16	)			(23	)			(15	)			(23	)
Retirement benefits liability adjustments (a)			—				1				(1	)			1
At end of period			(16	)			(22	)			(16	)			(22	)
Investments
At beginning of period			(5	)			16				—				14
Unrealized gain (loss) on investments (a)			(3	)			—				(8	)			2
Reclassification adjustments included in net income (loss) (a)			8				—				8				—
At end of period			—				16				—				16
Derivative Instruments
At beginning of period			(1	)			(1	)			(1	)			(12	)
Unrealized loss on derivative instruments (a)			—				—				—				(3	)
Reclassification adjustments included in net income (loss) (a)			—				—				—				14
At end of period			(1	)			(1	)			(1	)			(1	)
Foreign Currency Translation
At beginning of period			—				(129	)			(128	)			(297	)
Sale of interests in TGN (a)			—				—				128				—
Sale of Argentine assets (a)			—				—				—				128
Sale of Brazilian assets (a)			—				—				—				36
Other foreign currency translations (a)			—				—				—				4
At end of period			—				(129	)			—				(129	)
Total Accumulated Other Comprehensive Loss			(17	)			(136	)			(17	)			(136	)
Accumulated Deficit
At beginning of period			(2,106	)			(2,140	)			(2,208	)			(1,918	)
Effects of changing the retirement plans measurement date pursuant to SFAS No. 158
Service cost, interest cost, and expected return on plan assets for December 1 through December 31, 2007, net of tax			—				—				(4	)			—
Additional loss from December 1 through December 31, 2007, net of tax			—				—				(2	)			—
Adjustment to initially apply FIN 48, net of tax			—				—				—				(18	)
Net income (loss) (a)			81				84				236				(91	)
Preferred stock dividends declared			(2	)			(2	)			(8	)			(8	)
Common stock dividends declared			(20	)			(12	)			(61	)			(34	)
Redemption of preferred stock			—				—				—				(1	)
At end of period			(2,047	)			(2,070	)			(2,047	)			(2,070	)
Total Common Stockholders’ Equity		$	2,429			$	2,272			$	2,429			$	2,272