CONSUMERS ENERGY CO - Annual Report: 2009 (Form 10-K)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

 

[X]

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2009

OR

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___ to ___

 

 

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:  None

 

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 

CMS Energy Corporation: Yes [X] No o Consumers Energy Company: Yes [X] No o

 

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

 

CMS Energy Corporation: Yes o No [X] Consumers Energy Company: Yes o No [X]

 

Indicate by check mark whether the Registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days.

 

CMS Energy Corporation: Yes [X] No o Consumers Energy Company: Yes [X] No o

 

Indicate by check mark whether the Registrants have submitted electronically and posted on their corporate Web sites, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrants were required to submit and post such files).

 

CMS Energy Corporation: Yes [X] No o Consumers Energy Company: Yes [X] No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  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.

 

CMS Energy Corporation:  Large accelerated filer  [X]Accelerated filer  o     Non-Accelerated filer  o Smaller reporting company o

 

Consumers Energy Company:  Large accelerated filer  o     Accelerated filer  o     Non-Accelerated filer [X] Smaller reporting company o

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

CMS Energy Corporation:  Yes [X] No [X]   Consumers Energy Company: Yes [X] No [X]

 

The aggregate market value of CMS Energy voting and non-voting common equity held by non-affiliates was $2.728 billion for the 225,799,094 CMS Energy Common Stock shares outstanding on June 30, 2009 based on the closing sale price of $12.08 for CMS Energy Common Stock, as reported by the New York Stock Exchange on such date.

 

There were 229,772,845 shares of CMS Energy Common Stock outstanding on February 25, 2010. On February 25, 2010, CMS Energy held all voting and non-voting common equity of Consumers. Documents incorporated by reference in Part III: CMS Energy’s proxy statement and Consumers’ information statement relating to the 2010 annual meeting of stockholders to be held May 21, 2010.

 

CMS Energy Corporation

Consumers Energy Company

 

Annual Reports on Form 10-K to the Securities and Exchange Commission for the Year Ended

December 31, 2009

 

TABLE OF CONTENTS

 

GLOSSARY

 

 

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

 

 

This combined Form 10-K is separately filed by CMS Energy Corporation and Consumers Energy Company. Information in this combined Form 10-K relating to each individual registrant is filed by such registrant on its own behalf. Consumers Energy Company makes no representation regarding information relating to any other companies affiliated with CMS Energy Corporation other than its own subsidiaries. None of CMS Energy Corporation, CMS Enterprises Company, nor any of CMS Energy Corporation’s other subsidiaries (other than Consumers Energy Company) has any obligation in respect of Consumers Energy Company’s 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 other 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, none of Consumers Energy Company nor any other subsidiary of CMS Energy Corporation has any obligation in respect of debt securities of CMS Energy Corporation.

 

This Form 10-K and other written and oral statements that CMS Energy and Consumers make contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. The use of “might,” “may,” “could,” “should,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “projects,” “forecasts,” “predicts,” “assumes,” and other similar words is intended to identify forward-looking statements that involve risk and uncertainty. This discussion of potential risks and uncertainties is designed to highlight important factors that may impact CMS Energy’s and Consumers’ businesses and financial outlook. CMS Energy and Consumers have no obligation to update or revise forward-looking statements regardless of whether new information, future events, or any other factors affect the information contained in the statements. These forward-looking statements are subject to various factors that could cause CMS Energy’s and Consumers’ actual results to differ materially from the results anticipated in these statements. These factors include CMS Energy’s and Consumers’ inability to predict or control the following, all of which are potentially significant:

 

 

 

 

 

 

 

 

 

 

 

 

For additional details regarding these and other uncertainties, see the “Outlook” section included in the MD&A, Note 6, Contingencies and Commitments, Note 7, Utility Rate Matters, and Item 1A. Risk Factors.

 

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GENERAL

 

CMS Energy

 

CMS Energy was formed in Michigan in 1987 and is an energy company operating primarily in Michigan. It is the parent holding company of several subsidiaries, including Consumers, an electric and gas utility, and CMS Enterprises, primarily a domestic IPP. Consumers serves individuals and businesses operating in the alternative energy, automotive, chemical, metal, and food products industries as well as a diversified group of other industries. CMS Enterprises, through its subsidiaries and equity investments, is engaged primarily in IPP and owns power generation facilities fueled mostly by natural gas and biomass.

 

CMS Energy manages its businesses by the nature of services each provides and operates, principally in three business segments: electric utility, gas utility, and enterprises, its non-utility operations and investments. Consumers’ consolidated operations account for substantially all of CMS Energy’s total assets, income, and operating revenue. CMS Energy’s consolidated operating revenue was $6.2 billion in 2009, $6.8 billion in 2008, and $6.5 billion in 2007.

 

For further information about operating revenue, net operating income, and identifiable assets and liabilities attributable to all of CMS Energy’s business segments and operations, see Item 8. Financial Statements and Supplementary Data, CMS Energy Corporation’s Selected Financial Information, Consolidated Financial Statements, and Notes to Consolidated Financial Statements.

 

Consumers

 

Consumers was formed in Michigan in 1968 and is the successor to a corporation organized in Maine in 1910 that conducted business in Michigan from 1915 to 1968. Consumers owns and operates electric distribution and generation facilities and gas transmission, storage, and distribution facilities. It provides electricity and/or natural gas to 6.5 million of Michigan’s 10 million residents. Consumers’ rates and certain other aspects of its business are subject to the jurisdiction of the MPSC and the FERC, as described in “CMS Energy and Consumers Regulation” in this Item 1.

 

Consumers’ consolidated operating revenue was $6.0 billion in 2009, $6.4 billion in 2008, and $6.1 billion in 2007. For further information about operating revenue, net operating income, and identifiable assets and liabilities attributable to Consumers’ electric and gas utility operations, see Item 8. Financial Statements and Supplementary Data, Consumers Energy Company’s Selected Financial Information, Consolidated Financial Statements, and Notes to Consolidated Financial Statements.

 

Consumers owns its principal properties in fee, except that most electric lines and gas mains are located below public roads or on land owned by others and are accessed by Consumers through easements and other rights. Almost all of Consumers’ properties are subject to the lien of its First Mortgage Bond Indenture. For additional information on Consumers’ properties, see the “Business Segments” section of Consumers Electric Utility, Electric Utility Properties, and “Business Segments” section of Consumers Gas Utility, Gas Utility Properties described later in this Item 1.

In 2009, Consumers served 1.8 million electric customers and 1.7 million gas customers in Michigan’s Lower Peninsula. The following is a map of Consumers’ service territory:

 

BUSINESS SEGMENTS

 

Consumers Electric Utility

 

Electric Utility Operations:  Consumers’ electric utility operations, which include the generation, purchase, distribution, and sale of electricity, generated operating revenue of $3.4 billion in 2009, $3.6 billion in 2008, and $3.4 billion in 2007. Consumers’ electric utility customer base consists of a mix of residential, commercial, and diversified industrial customers in Michigan’s Lower Peninsula. The automotive industry represented five percent of Consumers’ 2009 electric utility operating revenue. The following is an illustration of Consumers’ 2009 electric utility operating revenue by customer class:

 

 

Consumers’ electric utility operations are not dependent on a single customer, or even a few customers, and the loss of any one or even a few of its largest customers is not reasonably likely to have a material adverse effect on its financial condition.

 

In 2009, Consumers’ electric deliveries, excluding intersystem deliveries, were 36 million MWh, which included ROA deliveries of 2 million MWh. In 2008, Consumers’ electric deliveries, excluding intersystem deliveries, were 37 million MWh, which included ROA deliveries of 2 million MWh. Consumers’ electric utility operations are seasonal. The consumption of electric energy typically increases in the summer months, due primarily to the use of air conditioners and other cooling equipment.

The following is an illustration of Consumers’ monthly weather-adjusted electric deliveries to its customers, including ROA deliveries, during 2009 and 2008:

 

 

Consumers’ 2009 summer peak demand was 7,756 MW, which includes ROA loads of 335 MW. For the 2008-09 winter period, Consumers’ peak demand was 5,857 MW, which includes ROA loads of 244 MW. As required by MISO reserve margin requirements, Consumers owns or controls, through long-term contracts, capacity necessary to supply its projected firm peak load and necessary reserve margin for summer 2010.

Electric Utility Properties:  At December 31, 2009, Consumers’ electric generating system consisted of the following:

 

 

 

 

Consumers’ distribution system includes:

 

 

Consumers is interconnected to METC. METC owns an interstate high-voltage electric transmission system in Michigan and is interconnected with neighboring utilities as well as other transmission systems.

 

Fuel Supply:  As shown in the following illustration, Consumers’ 2009 generation capacity of 8,954 MW, including capacity of 2,600 MW purchased under PPAs, came from a variety of sources:

 

Consumers’ generation came from the following sources:

 

 

The cost of all fuels consumed, shown in the following table, fluctuates with the mix of fuel used.

 

 

 

 

Consumers’ electric generating system is heavily dependent upon the availability of coal. In 2009, Consumers’ four coal-fueled generating sites burned 9 million tons of coal and produced a combined total of 17,255 GWh of electricity, which represented 96 percent of the energy generated by Consumers.

 

In order to obtain its coal requirements, Consumers enters into long-term and short-term physical coal supply contracts. At December 31, 2009, Consumers had six long-term and three spot-price contracts to purchase low-sulfur western coal through 2012; these contracts total $233 million. Consumers also had four long-term and three spot-price contracts to purchase Appalachian coal through 2012; these contracts totaled $215 million. All of Consumers’ long-term contracts have fixed prices. Over the last ten years, Consumers has purchased 60 to 90 percent of its annual coal requirements through long-term contracts. At December 31, 2009, Consumers had 93 percent of its 2010 expected coal requirements under contract, as well as a 47-day supply of coal on-hand.

 

In conjunction with its coal supply contracts, Consumers leases a fleet of rail cars and has long-term transportation contracts with various companies to provide rail and vessel services for delivery of purchased coal to Consumers’ generating facilities. Consumers’ coal transportation contracts expire from 2010 through 2014.

 

Consumers participates in the Midwest Energy Market. Consumers offers its generation into the market on a day-ahead and real-time basis and bids for power in the market to serve its load. Consumers is a net purchaser of power and supplements its generation capability with purchases from the market to meet its customers needs during peak demand periods.

 

At December 31, 2009, Consumers had unrecognized future commitments to purchase capacity and energy under long-term PPAs with various generating plants. These contracts require monthly capacity payments based on the plants’ availability, whether or not power is delivered to Consumers, or deliverability. These payments for 2010 through 2030 total $13.2 billion and range from $780 million to $870 million annually for each of the next five

years. These amounts may vary depending on plant availability and fuel costs. For further information about Consumers’ future capacity and energy purchase obligations, see Item 7. MD&A, “Capital Resources and Liquidity — Obligations and Commitments — Contractual Obligations.”

 

Consumers Gas Utility

 

  Gas Utility Operations:

 

Consumers’ gas utility operations, which include the purchase, transmission, storage, distribution, and sale of natural gas, generated operating revenue of $2.6 billion in 2009, $2.8 billion in 2008, and $2.6 billion in 2007. Consumers’ gas utility customer base consists of a mix of residential, commercial, and diversified industrial customers in Michigan’s Lower Peninsula. The following is an illustration of Consumers’ 2009 gas utility operating revenue by customer class:

 

 

Consumers’ gas utility operations are not dependent on a single customer, or even a few customers, and the loss of any one or even a few of its largest customers is not reasonably likely to have a material adverse effect on its financial condition.

 

In 2009, deliveries of natural gas sold through Consumers’ pipeline and distribution network totaled 326 bcf, which included GCC deliveries of 27 bcf. In 2008, Consumers’ deliveries of natural gas sold through its pipeline and distribution network totaled 344 bcf, which included GCC deliveries of 25 bcf. Consumers’ gas utility operations are seasonal. Consumers injects natural gas into storage during the summer months for use during the winter months when the demand for natural gas is higher. During 2009, 43 percent of the natural gas supplied to all customers during the winter months was supplied from storage. Peak demand occurs in the winter due to colder temperatures

and the resulting use of heating fuels. The following is an illustration of Consumers’ monthly weather-adjusted gas deliveries to its customers, including GCC deliveries, during 2009 and 2008:

 

 

Gas Utility Properties: Consumers’ gas distribution and transmission system located in Michigan’s Lower Peninsula consists of:

 

 

Gas Supply: In 2009, Consumers purchased 69 percent of the gas it delivered from United States producers and 18 percent from Canadian producers. Authorized suppliers in the GCC program supplied the remaining 13 percent of the gas that Consumers delivered.

The following illustration shows the sources of Consumers’ gas supply during 2009:

 

 

Consumers’ firm gas transportation contracts are with ANR Pipeline Company, Great Lakes Gas Transmission, L.P., Panhandle, Trunkline, and Vector Pipeline L.P. Consumers uses these contracts to deliver gas to Michigan for ultimate delivery to its customers. Consumers’ firm gas transportation contracts expire through 2017 and are capable of delivering 80 percent of its total gas supply requirements.

 

Consumers purchases the balance of its required gas supply transportation under firm city-gate arrangements, incremental firm transportation contracts, and interruptible transportation contracts. The amount of interruptible transportation service and its use vary primarily with the price for this service and the availability and price of purchased and transported spot supplies. Consumers’ use of interruptible transportation is generally in off-peak summer months and after Consumers has fully utilized the services under the firm transportation agreements.

 

Enterprises — Non-Utility Operations and Investments

 

CMS Energy’s enterprises segment, through various subsidiaries and certain equity investments, is engaged primarily in domestic IPP and the marketing of IPP. In 2007, enterprises made a significant change in business strategy by exiting the international marketplace and refocusing to concentrate on its independent power business in the United States.

 

The enterprises segment’s operating revenue included in Income (Loss) From Continuing Operations in CMS Energy’s consolidated financial statements was $216 million in 2009, $365 million in 2008, and $370 million in 2007. The enterprises segment’s operating revenue included in Income (Loss) From Discontinued Operations in CMS Energy’s consolidated financial statements was $7 million in 2009, $14 million in 2008, and $248 million in 2007.

IPP: CMS Generation invested in and operated non-utility power generation plants in the United States and abroad. In 2007, CMS Enterprises sold CMS Generation and all of CMS Enterprises’ international assets to third parties and transferred its domestic independent power plant operations to its subsidiary, HYDRA-CO. For more information on the asset sales, see Item 8. Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 22, Asset Sales, Discontinued Operations, and Impairment Charges, “Asset Sales.”

 

The operating revenue from IPP included in Income (Loss) From Continuing Operations in CMS Energy’s consolidated financial statements was $18 million in 2009, $22 million in 2008, and $28 million in 2007. The operating revenue from IPP included in Income (Loss) From Discontinued Operations in CMS Energy’s consolidated financial statements was $7 million in 2009, $14 million in 2008, and $137 million in 2007.

 

IPP Properties: At December 31, 2009, CMS Energy had ownership interests in independent power plants totaling 1,202 gross MW or 1,079 net MW. (Net MW reflects that portion of the gross capacity relating to CMS Energy’s ownership interests.)

 

The following table details CMS Energy’s interests in independent power plants at December 31, 2009:

 

 

 

 

Energy Resource Management: CMS ERM purchases and sells energy commodities in support of CMS Energy’s generating facilities. In 2004, CMS ERM discontinued its natural gas retail program as customer contracts expired, and changed its name from CMS MST to CMS ERM.

 

In 2009, CMS ERM marketed 23 bcf of natural gas and 1,726 GWh of electricity. CMS ERM’s operating revenue included in Income (Loss) From Continuing Operations in CMS Energy’s consolidated financial statements was $198 million in 2009, $343 million in 2008, and $342 million in 2007.

 

Natural Gas Transmission: CMS Gas Transmission owned, developed, and managed domestic and international natural gas facilities. In March 2007, CMS Gas Transmission sold a portfolio of its businesses in Argentina and its northern Michigan non-utility natural gas assets to Lucid Energy. In August 2007, CMS Gas Transmission sold its investment in GasAtacama to Endesa S.A. In June 2008, CMS Gas Transmission completed the sale of its investment in TGN. For more information on these asset sales, see Item 8. Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 22, Asset Sales, Discontinued Operations, and Impairment Charges, “Asset Sales.”

 

CMS Gas Transmission’s operating revenue included in Income (Loss) From Continuing Operations in CMS Energy’s consolidated financial statements was less than $1 million in 2009, 2008, and 2007. CMS Gas Transmission’s operating revenue included in Income (Loss) From Discontinued Operations in CMS Energy’s consolidated financial statements was $3 million in 2007.

 

International Energy Distribution: In April 2007, CMS Energy sold its ownership interest in SENECA, and in June 2007, CMS Energy sold CMS Energy Brasil S.A. For more information on these asset sales, see Item 8.

Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 22, Asset Sales, Discontinued Operations, and Impairment Charges, “Asset Sales.”

 

The international energy distribution’s operating revenue, reflected in Income (Loss) From Discontinued Operations in CMS Energy’s consolidated financial statements, was $108 million in 2007.

 

CMS ENERGY AND CONSUMERS REGULATION

 

CMS Energy, Consumers, and their subsidiaries are subject to regulation by various federal, state, local, and foreign governmental agencies, including those described in the following sections.

 

MPSC

 

Consumers is subject to the jurisdiction of the MPSC, which regulates public utilities in Michigan with respect to retail utility rates, accounting, utility services, certain facilities, corporate mergers, and other matters.

 

The Michigan Attorney General, ABATE, the MPSC staff, and certain other parties typically participate in MPSC proceedings concerning Consumers. The Michigan Attorney General, ABATE, and others often appeal significant MPSC orders.

 

Rate Proceedings: For information regarding open rate proceedings, see Item 8. Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 7, Utility Rate Matters.

 

Michigan Energy Legislation

 

The 2008 Energy Legislation requires that at least ten percent of Consumers’ electric sales volume come from renewable energy sources by 2015, and includes requirements for specific capacity additions. The 2008 Energy Legislation also requires Consumers to prepare an energy optimization plan and achieve annual sales reduction targets beginning in 2009 through at least 2015. The targets are incremental with the goal of achieving a six percent reduction in customers’ electricity use and a four percent reduction in customers’ natural gas use by December 31, 2015. In 2009, Consumers filed, and the MPSC approved, its renewable energy and energy optimization plans. For additional information regarding Consumers’ renewable energy and energy optimization plans, see Item 7. MD&A, Outlook, “Consumers’ Electric Utility Business Outlook and Uncertainties.”

 

The 2008 Energy Legislation also reformed the Customer Choice Act to limit alternative energy suppliers to supplying no more than ten percent of Consumers’ weather-adjusted sales. In September 2009, the MPSC approved procedures for the administration and allocation of electric load allowed to be served by alternative electric suppliers under the 2008 Energy Legislation. The MPSC further clarified that electric choice customers that are served presently by an alternative electric supplier will not be returned automatically to utility service in the event that the ten percent of weather-adjusted sales cap is exceeded due to a reduction in utility sales during the year. The MPSC also required utilities to make available on their websites an electric choice cap tracking system that allows customers to check on the status of the program.

 

FERC

 

The FERC has exercised limited jurisdiction over several independent power plants and exempt wholesale generators in which CMS Enterprises has ownership interests, as well as over CMS ERM, CMS Gas Transmission, and DIG. Among other things, the FERC has jurisdiction over acquisitions, operations, and disposals of certain assets and facilities, services provided and rates charged, conduct among affiliates, and limited jurisdiction over holding company matters with respect to CMS Energy. The FERC, in connection with the NERC and with regional reliability organizations, also regulates generation owners and operators, load serving entities, purchase and sale entities, and others with regard to reliability of the bulk power system. Certain aspects of Consumers’ gas business are also subject to regulation by the FERC, including a blanket transportation tariff under which Consumers may transport gas in interstate commerce.

The FERC also regulates certain aspects of Consumers’ electric operations, including compliance with the FERC accounting rules, wholesale rates, operation of licensed hydro electric generating plants, transfers of certain facilities, corporate mergers, and issuances of securities.

 

Other Regulation

 

The Secretary of Energy regulates imports and exports of natural gas and has delegated various aspects of this jurisdiction to the FERC and the DOE’s Office of Fossil Fuels.

 

Consumers’ pipelines are subject to the Natural Gas Pipeline Safety Act of 1968 and the Pipeline Safety Improvement Act of 2002, which regulate the safety of gas pipelines.

 

EnerBank is regulated by the FDIC.

 

CMS ENERGY AND CONSUMERS ENVIRONMENTAL COMPLIANCE

 

CMS Energy, Consumers, and their subsidiaries are subject to various federal, state, and local regulations for environmental quality, including air and water quality, solid waste management, and other matters. For additional information concerning environmental matters, see Item 1A. Risk Factors and Item 8. Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 6, Contingencies and Commitments.

 

CMS Energy has recorded a significant liability for its affiliates’ obligations associated with Bay Harbor. For additional information, see Item 1A. Risk Factors and Item 8. Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 6, Contingencies and Commitments.

 

Air: Consumers continues to install state-of-the-art emissions control equipment at its electric generating plants and to convert electric generating units to burn cleaner fuels. Consumers estimates that it will incur expenditures of $1.4 billion from 2010 through 2017 to comply with current and future federal and state regulations that will require extensive reductions in nitrogen oxides, sulfur dioxides, particulate matter, and mercury emissions. Consumers’ estimate may increase if additional laws or regulations are adopted or implemented regarding greenhouse gases, including carbon dioxide. For additional information concerning estimated capital expenditures related to environmental compliance, see Item 7. MD&A, Outlook, “Consumers’ Electric Utility Business Outlook and Uncertainties — Electric Environmental Estimates.”

 

Solid Waste Disposal: Costs related to the construction, operation, and closure of a modern solid waste disposal facility for ash are significant. To achieve significant reductions in ash field closure costs, Consumers has worked with others to reuse 30 percent of ash produced. Consumers sells coal ash for use as a Portland cement replacement in concrete products, as feedstock for the manufacture of Portland cement, and for other environmentally compatible uses. Consumers’ solid waste disposal areas are regulated under Michigan’s solid waste rules. Consumers has converted all of its fly ash handling systems to dry systems, which substantially reduce landfill venting. All of Consumers’ ash facilities have programs designed to protect the environment and are subject to quarterly MDNRE inspections. Dike integrity and stability have been assessed by an independent consultant. The EPA has been considering the development of new federal regulations for ash disposal areas for several years.

 

Water: Consumers uses significant amounts of water to operate and cool its electric generating plants. Water discharge quality is regulated and administered by the MDNRE under the federal NPDES program. To comply with such regulation, Consumers’ facilities have discharge monitoring programs. The EPA is developing new regulations related to cooling water intake systems. Consumers estimates expenditures of $150 million from 2010 through 2017 to comply with current and future regulations relating to cooling water intake systems.

 

CMS ENERGY AND CONSUMERS COMPETITION

 

Electric Competition

 

Consumers’ electric utility business is subject to actual and potential competition from many sources, in both the wholesale and retail markets, as well as in electric generation, electric delivery, and retail services.

 

The Customer Choice Act allows all Consumers’ electric customers to buy electric generation service from Consumers or from an alternative electric supplier. The 2008 Energy Legislation revised the Customer Choice Act

and generally limits alternative electric supply to ten percent of Consumers’ weather-adjusted retail sales for the preceding calendar year. In August 2009, customer enrollment in the ROA program reached the ten-percent limit. Electric deliveries from alternative suppliers reached the ten-percent limit in early January 2010.

 

Consumers also has competition or potential competition from:

 

 

Consumers addresses this competition by monitoring activity in adjacent areas and monitoring compliance with the MPSC’s and the FERC’s rules, providing non-energy services, and providing tariff-based incentives that support economic development.

 

Consumers offers non-energy revenue-producing services to electric customers, municipalities, and other utilities in an effort to offset costs. These services include engineering and consulting, construction of customer-owned distribution facilities, sales of equipment (such as transformers), power quality analysis, energy management services, meter reading, and joint construction for phone and cable. In these activities, Consumers faces competition from many sources, including energy management services companies, other utilities, contractors, and retail merchandisers.

 

CMS ERM continues to focus on optimizing CMS Energy’s IPP portfolio. CMS Energy’s IPP business faces competition from generators, marketers and brokers, and other utilities marketing power in the wholesale market.

 

Gas Competition

 

Competition exists in various aspects of Consumers’ gas utility business. Competition comes from other gas suppliers taking advantage of direct access to Consumers’ customers and from alternative fuels and energy sources, such as propane, oil, and electricity.

 

INSURANCE

 

CMS Energy and its subsidiaries, including Consumers, maintain insurance coverage generally similar to comparable companies in the same lines of business. The insurance policies are subject to terms, conditions, limitations, and exclusions that might not fully compensate CMS Energy or Consumers for all losses. A portion of each loss is generally assumed by CMS Energy or Consumers in the form of deductibles and self-insured retentions that, in some cases, are substantial. As CMS Energy or Consumers renews its policies, it is possible that some of the current insurance coverage may not be renewed or obtainable on commercially reasonable terms due to restrictive insurance markets.

 

CMS Energy’s and Consumers’ current insurance program does not cover the risks of certain environmental cleanup costs and environmental damages, such as claims for air pollution, damage to sites owned by CMS Energy or Consumers, and some long-term storage or disposal of wastes.

 

EMPLOYEES

 

CMS Energy

 

At December 31, 2009, CMS Energy and its wholly owned subsidiaries, including Consumers, had 8,039 full-time equivalent employees. Included in the total are 3,433 full-time operating, maintenance, and construction employees and full-time and part-time call center employees who are represented by the Union.

Consumers

 

At December 31, 2009, Consumers and its subsidiaries had 7,755 full-time equivalent employees. Included in the total are 3,433 full-time operating, maintenance, and construction employees and full-time and part-time call center employees who are represented by the Union.

 

CMS ENERGY EXECUTIVE OFFICERS (as of February 1, 2010)

 

 

 

 

There are no family relationships among executive officers and directors of CMS Energy.

 

The term of office of each of the executive officers extends to the first meeting of the Board of Directors after the next annual election of Directors of CMS Energy (scheduled to be held on May 21, 2010).

 

CONSUMERS EXECUTIVE OFFICERS (as of February 1, 2010)

 

 

 

 

There are no family relationships among executive officers and directors of Consumers.

 

The term of office of each of the executive officers extends to the first meeting of the Board of Directors after the next annual election of Directors of Consumers (scheduled to be held on May 21, 2010).

 

AVAILABLE INFORMATION

 

CMS Energy’s internet address is www.cmsenergy.com. Information contained on CMS Energy’s website is not incorporated herein. All of CMS Energy’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed pursuant to Section 13(a) or 15(d) of the Exchange Act are accessible free of charge on CMS Energy’s website. These reports are available soon after they are filed electronically with the SEC. Also on CMS Energy’s website are its:

 

 

CMS Energy will provide this information in print to any stockholder who requests it.

 

Any materials CMS Energy files with the SEC may also be read and copied at the SEC’s Public Reference Room at 100 F Street, NE, Washington DC, 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address is http://www.sec.gov.

 

Actual results in future periods for CMS Energy and Consumers could differ materially from historical results and the forward-looking statements contained in this report. Factors that might cause or contribute to these differences include, but are not limited to, those discussed in the following sections. CMS Energy’s and Consumers’ businesses are influenced by many factors that are difficult to predict, and that involve uncertainties that may materially affect results and are often beyond their control. Additional risks and uncertainties not presently known or that the companies’ management believes to be immaterial may also adversely affect the companies. The risk factors described in the following sections, as well as the other information included in this report and in other documents filed with the SEC, should be considered carefully before making an investment in securities of CMS Energy or Consumers. Risk factors of Consumers are also risk factors of CMS Energy. All of these risk factors are potentially significant.

 

CMS Energy depends on dividends from its subsidiaries to meet its debt service obligations.

 

Due to its holding company structure, CMS Energy depends on dividends from its subsidiaries to meet its debt service and other payment obligations. Restrictions contained in Consumers’ preferred stock provisions and other legal restrictions, such as certain terms in its articles of incorporation and FERC requirements, limit Consumers’ ability to pay dividends or acquire its own stock from CMS Energy. At December 31, 2009, Consumers had $333 million of unrestricted retained earnings available to pay common stock dividends. If sufficient dividends are not paid to CMS Energy by its subsidiaries, CMS Energy may not be able to generate the funds necessary to fulfill its payment obligations, which could have a material adverse effect on CMS Energy’s liquidity and financial condition.

 

CMS Energy has substantial indebtedness that could limit its financial flexibility and hence its ability to meet its debt service obligations.

 

At December 31, 2009, CMS Energy, including Consumers, had $6.6 billion aggregate principal amount of indebtedness, including $34 million of subordinated indebtedness relating to its convertible preferred securities. CMS Energy had $1.9 billion aggregate principal amount of indebtedness at December 31, 2009. At December 31, 2009, there were $25 million of borrowings and $3 million of letters of credit outstanding under CMS Energy’s revolving credit agreement. CMS Energy and its subsidiaries may incur additional indebtedness in the future.

 

The level of CMS Energy’s present and future indebtedness could have several important effects on its future operations, including, among others:

 

 

CMS Energy’s ability to meet its debt service obligations and to reduce its total indebtedness will depend on its future performance, which will be subject to general economic conditions, industry cycles, changes in laws or regulatory decisions (including with respect to environmental matters), and financial, business, and other factors affecting its operations, many of which are beyond its control. CMS Energy cannot make assurances that its business will continue to generate sufficient cash flow from operations to service its indebtedness. If CMS Energy is unable to generate sufficient cash flows from operations, it may be required to sell assets or obtain additional

financing. CMS Energy cannot ensure that additional financing will be available on commercially acceptable terms or at all.

 

CMS Energy cannot predict the outcome of regulatory reviews and claims regarding its participation in the development of Bay Harbor.

 

The EPA and the MDNRE have not completed their review of proposals by CMS Land and CMS Capital to remedy the flow of leachate from buried CKD piles at the site to Lake Michigan and related environmental issues. In addition, CMS Land and CMS Capital have not arrived at a final and long-term solution to the disposal of leachate collected at the site. CMS Land and CMS Capital, the MDNRE, the EPA, and other parties are having ongoing negotiations concerning these subjects. These negotiations are focused on, among other things, issues related to:

 

 

Depending on the results of these negotiations, as well as any indemnification obligation or liability under an AOC signed by CMS Land and CMS Capital, or other liability under environmental laws, adverse outcomes of some or all of these matters could have a material adverse effect on CMS Energy’s liquidity and financial condition and could negatively affect CMS Energy’s financial results.

 

CMS Energy may be affected adversely by a regulatory investigation and civil lawsuits regarding pricing information that CMS MST and CMS Field Services provided to market publications.

 

In 2002, CMS Energy notified appropriate regulatory and governmental agencies that some employees at CMS MST and CMS Field Services appeared to have provided inaccurate information regarding natural gas trades to various energy industry publications which compile and report index prices. CMS Energy is cooperating with an ongoing investigation by the DOJ regarding this matter. CMS Energy is unable to predict the outcome of the DOJ investigation and what effect, if any, the investigation will have on CMS Energy.

 

CMS Energy, CMS MST, CMS Field Services, Cantera Natural Gas, Inc. (the company that purchased CMS Field Services) and Cantera Gas Company were named as defendants in various lawsuits arising as a result of alleged false natural gas price reporting. Allegations included manipulation of NYMEX natural gas futures and options prices, price-fixing conspiracies, and artificial inflation of natural gas retail prices in California, Colorado, Kansas, Missouri, Tennessee, and Wisconsin. CMS Energy cannot predict the outcome of the lawsuits. It is possible that the outcome in one or more of the lawsuits could have a material adverse effect on CMS Energy’s liquidity, financial condition, and results of operations.

 

CMS Energy and Consumers retain contingent liabilities in connection with their asset sales.

 

The agreements that CMS Energy and Consumers enter into for the sale of assets customarily include provisions whereby they are required to:

 

 

Many of these contingent liabilities can remain open for extended periods of time after the sales are closed. Depending on the extent to which the buyers may ultimately seek to enforce their rights under these contractual provisions, and the resolution of any disputes concerning them, there could be a material adverse effect on CMS Energy’s or Consumers’ liquidity, financial condition, and results of operations.

 

CMS Energy and Consumers have financing needs and could be unable to obtain bank financing or access the capital markets. Potential disruption in the capital and credit markets could have an adverse effect on CMS Energy’s and Consumers’ businesses, including the availability and cost of short-term funds for liquidity requirements and their ability to meet long-term commitments. These consequences could have an adverse effect on CMS Energy’s and Consumers’ liquidity, financial condition, and results of operations.

 

CMS Energy and Consumers may be subject to liquidity demands under commercial commitments, guarantees, indemnities, and letters of credit. Consumers’ capital requirements are expected to be substantial over the next several years as it implements generation and environmental projects, and such requirements may increase if additional laws or regulations are adopted or implemented regarding greenhouse gases, including carbon dioxide.

 

CMS Energy and Consumers rely on the capital markets, as well as on the banking syndications, to meet their financial commitments and short-term liquidity needs if internal funds are not available from CMS Energy’s and Consumers’ respective operations. CMS Energy and Consumers also use letters of credit issued under certain of their revolving credit facilities to support certain operations and investments.

 

Longer term disruptions in the capital and credit markets as a result of uncertainty, changing or increased regulation, reduced alternatives, or failures of significant financial institutions could adversely affect CMS Energy’s and Consumers’ access to liquidity needed for their respective businesses. Any disruption could require CMS Energy and Consumers to take measures to conserve cash until the markets stabilize or until alternative credit arrangements or other funding for their business needs can be arranged. These measures could include deferring capital expenditures, changing CMS Energy’s and Consumers’ commodity purchasing strategy to avoid collateral-posting requirements, and reducing or eliminating future share repurchases, dividend payments, or other discretionary uses of cash.

 

CMS Energy continues to explore financing opportunities to supplement its financial plan. These potential opportunities include refinancing and/or issuing new capital markets debt, preferred stock and/or common equity, and bank financing. Similarly, Consumers plans to seek funds through the capital markets, commercial lenders, and leasing arrangements. Entering into new financings is subject in part to capital market receptivity to utility industry securities in general and to Consumers’ securities issuances in particular. CMS Energy and Consumers cannot guarantee the capital markets’ acceptance of their securities or predict the impact of factors beyond their control, such as actions of rating agencies. If CMS Energy or Consumers is unable to obtain bank financing or access the capital markets to incur or refinance indebtedness, or is unable to obtain commercially reasonable terms for any such financing, there could be a material adverse effect on its liquidity, financial condition, and results of operations.

 

Certain of CMS Energy’s securities and those of its affiliates, including Consumers, are rated by various credit rating agencies. Any reduction or withdrawal of one or more of its credit ratings could have a material adverse impact on CMS Energy’s or Consumers’ ability to access capital on acceptable terms and maintain commodity lines of credit, could make its cost of borrowing higher, and could cause CMS Energy or Consumers to reduce its capital expenditures. If it is unable to maintain commodity lines of credit, CMS Energy or Consumers may have to post collateral or make prepayments to certain of its suppliers under existing contracts. Further, since Consumers provides dividends to CMS Energy, any adverse developments affecting Consumers that result in a lowering of its credit ratings could have an adverse effect on CMS Energy’s credit ratings. CMS Energy and Consumers cannot guarantee that any of their current ratings will remain in effect for any given period of time or that a rating will not be lowered or withdrawn entirely by a rating agency.

 

CMS Energy and Consumers could incur significant costs to comply with environmental requirements.

 

CMS Energy, Consumers, and their subsidiaries are subject to costly and increasingly stringent environmental regulations. They believe that environmental laws and regulations related to greenhouse gas emissions, ash disposal,

and cooling water use will continue to become more stringent and require them to make additional significant capital expenditures for emissions control equipment installation and upgrades.

 

In December 2009, the EPA issued an endangerment finding for greenhouse gases under the Clean Air Act. In this finding, which has been challenged in the U.S. Court of Appeals for the D. C. Circuit by numerous parties, the EPA determined that current and projected atmospheric concentrations of six greenhouse gases threaten the public health and welfare of current and future generations. The finding alone does not impose any standard or regulation on industry, but it is a precursor for finalizing proposed emissions standards. Presently, the EPA acknowledges that comprehensive federal legislation is the preferred method of addressing greenhouse gases. In June 2009, the United States House of Representatives passed the American Clean Energy and Security Act, which would require reductions in emissions of greenhouse gases, including carbon dioxide. This or similar legislation is considered likely to be enacted in some form and could have a significant impact on the operation and cost of existing and future fossil-fueled power plants.

 

In 2009, a significant percentage of the energy generated by Consumers came from fossil-fueled power plants. The emissions from fossil-fueled power plants would be subject to greenhouse gas regulations. CMS Enterprises also has interests in fossil-fueled power plants and other types of power plants that produce greenhouse gases. Federal laws and rules limiting the emission of greenhouse gases or similar state laws and rules, if enacted, as well as international accords and treaties, could require CMS Energy and Consumers to install additional equipment for emission controls, purchase carbon emissions allowances, curtail operations, invest in non-fossil-fuel generating capacity, or take other significant steps to manage or lower the emission of greenhouse gases. The following risks related to climate change could also have a material adverse impact on CMS Energy’s and Consumers’ results of operations and financial position:

 

 

The EPA is considering regulating coal combustion products, such as coal ash, as hazardous wastes under the Resource Conservation and Recovery Act. Michigan already regulates coal combustion products as low hazard industrial waste. If coal ash is regulated as a hazardous waste, Consumers would likely cease the beneficial re-use of this product, resulting in significantly more coal ash requiring costly disposal. Additionally, it is possible that existing landfills could be closed if the upgrades to hazardous waste landfill standards are economically prohibitive. Costs associated with this potential regulation could be substantial.

 

The EPA is revising regulations that govern cooling water intake structures aimed at protecting aquatic life. Costs associated with these revisions could be material to CMS Energy, Consumers, and CMS Enterprises and result in operational changes or the retirement of certain generating units.

 

CMS Energy and Consumers expect to collect fully from their customers, through the ratemaking process, expenditures incurred to comply with environmental regulations. If Consumers were unable to recover these expenditures from customers in rates, it could negatively affect CMS Energy’s and/or Consumers’ liquidity, results of operations, and financial condition and CMS Energy and/or Consumers could be required to seek significant additional financing to fund these expenditures.

 

Market performance and other changes may decrease the value of benefit plan assets, which then could require significant funding.

 

The performance of the capital markets affects the values of assets that are held in trust to satisfy future obligations under CMS Energy’s and Consumers’ pension and postretirement benefit plans. CMS Energy and Consumers have significant obligations under these plans and hold significant assets in these trusts. These assets are

subject to market fluctuations and will yield uncertain returns, which may fall below CMS Energy’s and Consumers’ forecasted return rates. A decline in the market value of the assets or a change in the level of interest rates used to measure the required minimum funding levels may increase the funding requirements of these obligations. Also, changes in demographics, including increased number of retirements or changes in life expectancy assumptions, may increase the funding requirements of the obligations related to the pension and postretirement benefit plans. If CMS Energy and Consumers were unable to manage their pension and postretirement plan assets successfully, it could have a material adverse effect on their liquidity, financial condition, and results of operations.

 

Periodic reviews of the values of CMS Energy’s and Consumers’ assets could result in accounting charges.

 

CMS Energy and Consumers are required by GAAP to review periodically the carrying value of their assets, including those that may be sold. Market conditions, the operational characteristics of their assets, and other factors could result in recording impairment charges for their assets, which could have an adverse effect on their stockholders’ equity and their access to additional financing. In addition, CMS Energy and Consumers may be required to record impairment charges at the time they sell assets, depending on the sale prices they are able to secure and other factors.

 

CMS Energy’s and Consumers’ businesses have safety risks.

 

Consumers’ gas and electric delivery systems, power plants, gas infrastructure, and energy products could be involved in accidents that result in injury or property loss to customers, employees, or the public. Although CMS Energy and Consumers have insurance coverage for many potential incidents, depending upon the nature or severity of any incident or accident, CMS Energy or Consumers could suffer financial loss, damage to their reputations, and negative repercussions from regulatory agencies or other public authorities.

 

CMS Energy’s and Consumers’ revenues and results of operations are subject to risks that are beyond their control, including but not limited to natural disasters, terrorist attacks or related acts of war, hostile cyber intrusions, or other catastrophic events.

 

The impact of natural disasters, wars, terrorist acts, cyber intrusions, and other catastrophic events on the facilities and operations of CMS Energy and Consumers could have an adverse affect on their liquidity, financial condition, and results of operations. A terrorist attack on physical infrastructure, or a major natural disaster, could result in severe damage to CMS Energy’s and Consumers’ assets beyond what could be recovered through insurance policies. Hostile cyber intrusions, including those targeting information systems as well as distributed electronic control systems, could severely disrupt business operations and result in loss of service to customers, as well as significant expense to repair security breaches or system damage. Terrorist attacks or acts of war could result in the disruption of power and fuel markets that could increase costs or disrupt service. Instability in the financial markets as a result of terrorism, war, natural disasters, credit crises, recessions, or other factors, could have a material adverse effect on CMS Energy’s and Consumers’ liquidity, financial condition, and results of operations.

 

CMS Energy and Consumers are exposed to significant reputational risks.

 

Consumers is actively engaged in multiple regulatory oversight processes and has a large electric and gas customer base. As a result, Consumers has a highly visible public profile in Michigan. Consumers and CMS Energy could suffer negative impacts to their reputations as a result of operational incidents, violations of corporate compliance policies, regulatory violations, or other events. This could have a material adverse effect on CMS Energy’s and Consumers’ liquidity, financial condition, and results of operations. It could also result in negative customer perception and increased regulatory oversight.

 

Energy risk management strategies may not be effective in managing fuel and electricity pricing risks, which could result in unanticipated liabilities to Consumers and CMS Energy or increased volatility of their earnings.

 

Consumers is exposed to changes in market prices for natural gas, coal, electricity, emission allowances, and RECs. Prices for natural gas, coal, electricity, emission allowances, and RECs may fluctuate substantially over

relatively short periods of time and expose Consumers to commodity price risk. A substantial portion of Consumers’ operating expenses for its plants consists of the costs of obtaining these commodities. Consumers manages these risks using established policies and procedures, and it may use various contracts to manage these risks, including swaps, options, futures and forward contracts. No assurance can be made that these strategies will be successful in managing Consumers’ pricing risk or that they will not result in net liabilities to Consumers as a result of future volatility in these markets.

 

Natural gas prices in particular have been historically volatile. Consumers routinely enters into contracts to mitigate exposure to the risks of demand, market effects of weather, and changes in commodity prices associated with its gas distribution business. These contracts are executed in conjunction with the GCR mechanism, which is designed to allow Consumers to recover prudently incurred costs associated with those positions. Consumers does not always hedge the entire exposure of its operations from commodity price volatility. Furthermore, the ability to hedge exposure to commodity price volatility depends on liquid commodity markets. As a result, to the extent the commodity markets are illiquid, Consumers may not be able to execute its risk management strategies, which could result in greater unhedged positions than preferred at a given time. To the extent that unhedged positions exist, fluctuating commodity prices could have a negative effect on CMS Energy’s and Consumers’ liquidity, financial condition, and results of operations.

 

Changes in taxation as well as the inherent difficulty in quantifying potential tax effects of business decisions could negatively impact CMS Energy’s and Consumers’ results of operations.

 

CMS Energy and Consumers are required to make judgments regarding the potential tax effects of various financial transactions and results of operations in order to estimate their obligations to taxing authorities. The tax obligations include income, real estate, sales and use taxes, employment-related taxes, and ongoing issues related to these tax matters. The judgments include reserves for potential adverse outcomes regarding tax positions that have been taken that may be subject to challenge by the IRS and/or other taxing authorities. Unfavorable settlements of any of the issues related to these reserves at CMS Energy or Consumers could have a material adverse effect on its liquidity, financial condition, and results of operations.

 

CMS Energy and Consumers are subject to changing tax laws. Increases in local, state, or federal tax rates or other changes in tax laws could have adverse impacts on their liquidity, financial condition, and results of operations.

 

Consumers is exposed to risks related to general economic conditions in its service territories.

 

Consumers’ electric and gas utility businesses are affected by the economic conditions of the customers they serve. In Consumers’ service territories in Michigan, the economy has been affected adversely by the continued downturn and uncertainty in the automotive industry and relatively high unemployment. Michigan’s economy has also been affected negatively by the uncertainty in the financial and credit markets. If economic conditions in Michigan or the region continue to decline, Consumers may experience reduced demand for electricity or natural gas that could result in decreased earnings and cash flow. In addition, economic conditions in Consumers’ service territory affect its collections of accounts receivable and levels of lost or stolen gas, which in turn impact its liquidity, financial condition, and results of operations.

 

CMS Energy’s and Consumers’ energy sales and operations are affected by seasonal factors and varying weather conditions from year to year.

 

CMS Energy’s and Consumers’ businesses are seasonal. Demand for electricity is greater in the summer and winter months associated with cooling and heating, and demand for natural gas peaks in the winter heating season. Accordingly, their overall results in the future may fluctuate substantially on a seasonal basis. Mild temperatures during the summer cooling season and winter heating season could have an adverse affect on CMS Energy’s and Consumers’ liquidity, financial condition, and results of operations. Consumers expects that the pilot decoupling mechanism adopted in the November 2009 MPSC electric rate order may mitigate partially somewhat the impacts of these seasonal factors.

Unplanned power plant outages may be costly for Consumers.

 

When unplanned maintenance work is required on power plants or other equipment, Consumers may be required to incur unplanned expenses and to make spot market purchases of electricity that exceed its costs of generation. If Consumers were unable to recover any of these increased costs in rates, it could have a material adverse effect on Consumers’ liquidity, financial condition, and results of operations.

 

Consumers may not be able to obtain an adequate supply of coal or natural gas, which could limit its ability to operate its electric generation facilities or serve its natural gas customers.

 

Consumers is dependent on coal for a portion of its electric generating capacity. While Consumers has coal supply and transportation contracts in place, there can be no assurance that the counterparties to these agreements will fulfill their obligations to supply coal to Consumers. The suppliers under the agreements may experience financial or operational problems that inhibit their ability to fulfill their obligations to Consumers. In addition, suppliers under these agreements may not be required to supply coal to Consumers under certain circumstances, such as in the event of a natural disaster. If Consumers were unable to obtain its coal requirements under existing or future coal supply and transportation contracts, it may be required to purchase coal at higher prices, or it may be forced to purchase electricity from higher cost generating resources in the Midwest Energy Market, which would increase Consumers’ working capital requirements.

 

Consumers has firm interstate transportation and supply agreements in place to facilitate deliveries of natural gas to its customers. There are financial penalties associated with the firm supply agreements that provide Consumers with monetary remedies in the event of supply disruptions. There are FERC-approved operational tariffs that cover the interstate natural gas delivery obligations of the interstate pipeline service providers. There are no additional assurances that the counterparties to these firm transportation and supply agreements will fulfill their obligations to provide natural gas to Consumers. In addition, suppliers under these agreements may not be required to deliver natural gas to Consumers in certain circumstances, such as in the event of a natural disaster. If Consumers were unable to obtain its natural gas supply requirements under existing or future natural gas supply and transportation contracts, it could be required to purchase natural gas at higher prices from other sources or implement its natural gas curtailment program filed with the MPSC, which would increase Consumers’ working capital requirements and decrease its natural gas revenues.

 

Electric industry regulation could have an adverse effect on CMS Energy’s and Consumers’ businesses.

 

Federal and state regulation of electric utilities has changed dramatically in the last two decades and could continue to change over the next several years. These changes could have a material adverse effect on CMS Energy’s and Consumers’ liquidity, financial condition, and results of operations.

 

CMS Energy and Consumers are subject to, or affected by, extensive federal and state utility regulation. In CMS Energy’s and Consumers’ business planning and management of operations, they must address the effects of existing and proposed regulation on their businesses and changes in the regulatory framework, including initiatives by federal and state legislatures, regional transmission organizations, utility regulators, and taxing authorities. Adoption of new regulations by federal or state agencies, or changes to current regulations and interpretations of these regulations, could have a material adverse effect on CMS Energy’s and Consumers’ liquidity, financial condition, and results of operations.

 

There are multiple proceedings pending before the FERC involving transmission rates, regional transmission organizations, and electric bulk power markets and transmission. CMS Energy and Consumers cannot predict the impact of these electric industry restructuring proceedings on their liquidity, financial condition, and results of operations.

 

The 2008 Energy Legislation, among other things, imposed a limit of ten percent on ROA. Proposals have been made to raise that limit, which, if enacted, could have an adverse effect on Consumers’ business. Proposals also have been made to increase the electric sales volume that will be required from renewable energy sources. Other new legislation, regulations, or interpretations could change how the businesses of CMS Energy and Consumers operate, impact the ability of Consumers to recover costs through rate increases, or require CMS Energy or Consumers to incur additional expenses.

CMS Energy and Consumers are subject to rate regulation.

 

CMS Energy and Consumers are subject to rate regulation. Electric and gas rates for their utilities are set by the MPSC and cannot be increased without regulatory authorization. While Consumers is permitted by the 2008 Energy Legislation to self-implement rate changes six months after a rate filing with the MPSC, subject to certain limitations, if a final rate order from the MPSC provides for lower rates than Consumers self-implemented, Consumers must refund the difference, with interest.

 

In addition, Consumers’ plans for making significant capital investments, including modifications to meet new environmental requirements and investment in new generation, could be affected adversely, or could have an adverse effect on Consumers, if rate regulators fail to provide timely rate relief. Regulators seeking to avoid or minimize rate increases could resist raising customer rates sufficiently to permit Consumers to recover the full cost of modifications to meet environmental requirements and other prudent investments. In addition, because certain costs are mandated by state requirements for cost recovery, such as resource additions to meet the state’s renewable resource standard, regulators could be more inclined to oppose rate increases for other required items and investments. Rate regulators could also face pressure to avoid or limit rate increases if Michigan’s economy fails to improve or if Consumers’ customer base diminishes. In addition to potentially affecting Consumers’ investment program, any limitation of cost recovery through rates would affect Consumers’ results of operations.

 

A further regulatory risk could arise from the MPSC’s recent adoption of a mechanism to decouple revenues from electricity sales, which Consumers also has requested for application to its gas business. The decoupling mechanism could create upward pressure on future rates, which could cause regulators to require Consumers to postpone revenue recovery. In its most recent general electric rate case, Consumers made use of the decoupling mechanism to limit its request for a revenue increase, which could result in deferral of revenue recovery.

 

The FERC authorizes certain subsidiaries of CMS Energy to sell electricity at market-based rates. Failure of CMS Energy and Consumers to obtain adequate rates or regulatory approvals in a timely manner could have a material adverse effect on CMS Energy’s and Consumers’ liquidity, financial condition, and results of operations.

 

The various risks associated with the MPSC and the FERC regulation of CMS Energy’s and Consumers’ businesses could have a substantial negative effect on the companies’ investment plans and results of operations.

 

CMS Energy and Consumers are exposed to credit risk of those with whom they do business.

 

CMS Energy and Consumers are exposed to credit risk of counterparties with whom they do business. Adverse economic conditions affecting counterparties with whom CMS Energy and Consumers do business, or financial difficulties experienced by these counterparties, could impair the ability of these counterparties to pay for CMS Energy’s and Consumers’ services or fulfill their contractual obligations, including performance and payment of damages. CMS Energy and Consumers depend on these counterparties to remit payments and perform services timely. Any delay or default in payment or performance of contractual obligations could have a material adverse effect on CMS Energy’s and Consumers’ liquidity, financial condition, and results of operations.

 

In recent years, the capital and credit markets have experienced unprecedented high levels of volatility and disruption. Market disruption and volatility could have a negative impact on CMS Energy’s and Consumers’ lenders, suppliers, and other counterparties, or Consumers’ customers, causing them to fail to meet their obligations. Adverse economic conditions could also have a negative impact on the loan portfolio of CMS Energy’s banking subsidiary, EnerBank.

 

CMS Energy could be required to pay cash to certain security holders in connection with the optional conversion of their convertible securities.

 

CMS Energy has issued four series of cash-convertible securities, of which an aggregate principal amount (or par value in the case of preferred stock) of $839 million was outstanding at December 31, 2009. If the trading price of CMS Energy’s common stock exceeds specified amounts at the end of a particular fiscal quarter, then holders of one or more series of these convertible securities will have the option to convert their securities in the following fiscal quarter, with the principal amount (or par value) payable in cash by CMS Energy. Accordingly, if these trading price minimums are satisfied and security holders exercise their conversion rights, CMS Energy may be required to

outlay a significant amount of cash to those security holders, which could have a material adverse effect on CMS Energy’s liquidity and financial condition.

 

Consumers has a significant capital investment program planned for the next five years.

 

Consumers’ planned investments include a new coal-fueled power generation plant, an advanced metering infrastructure program, renewable power generation, gas compression, environmental controls, and other electric and gas infrastructure to upgrade delivery systems. The success of these investments depends on or could be affected by a variety of factors including, but not limited to, effective cost and schedule management during implementation, changes in commodity and other prices, operational performance, changes in environmental, legislative and regulatory requirements and regulatory cost recovery. Consumers cannot predict the impact that any of these factors may have on the success of its capital investment program. It is possible that adverse events reflected in these factors could have a material adverse effect on Consumers’ liquidity, financial condition, and results of operations.

 

None.

 

Descriptions of CMS Energy’s and Consumers’ properties are found in the following sections of Item 1, all of which are incorporated by reference in this Item 2:

 

 

For information regarding CMS Energy’s, Consumers’ and their subsidiaries’ significant pending administrative and judicial proceedings involving regulatory, operating, transactional, environmental, and other matters, see Item 8. Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 6, Contingencies and Commitments and Note 7, Utility Rate Matters.

 

CMS Energy, Consumers, and certain of their subsidiaries and affiliates are also parties to routine lawsuits and administrative proceedings incidental to their businesses involving, for example, claims for personal injury and property damage, contractual matters, various taxes, and rates and licensing.

 

CMS Energy

 

Omitted.

 

Consumers

 

Omitted.

 

CMS Energy

 

CMS Energy’s Common Stock is traded on the New York Stock Exchange. Market prices for CMS Energy’s Common Stock and related security holder matters are contained in Item 7. MD&A and Item 8. Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 24, Quarterly Financial and Common Stock Information (Unaudited), which are incorporated by reference herein. At February 25, 2010, the number of registered holders of CMS Energy Common Stock totaled 44,599, based on the number of record holders. On January 25, 2008, the Board of Directors approved a quarterly dividend on CMS Energy Common Stock of $0.09 per share. On January 23, 2009, the Board of Directors increased the quarterly dividend on CMS Energy Common Stock to $0.125 per share. On January 29, 2010, the Board of Directors increased the quarterly dividend on CMS Energy Common Stock to $0.15 per share. Information regarding securities authorized for issuance under equity compensation plans is included in CMS Energy’s definitive proxy statement, which is incorporated by reference herein.

 

For additional information regarding dividends and dividend restrictions, see Item 8. Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements.

 

Consumers

 

Consumers’ common stock is privately held by its parent, CMS Energy, and does not trade in the public market. The following table summarizes Consumers’ cash dividends on its common stock.

 

		In millions
		February				May				August				November
2009		$	72			$	58			$	103			$	52
2008			113				55				70				59

 

For additional information regarding dividends and dividend restrictions, see Item 8. Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements.

 

Issuer Repurchases of Equity Securities

 

For the three months ended December 31, 2009, there were no repurchases of equity securities by CMS Energy. Periodically, CMS Energy repurchases certain restricted shares upon vesting under the PISP from participants in this plan, equal to CMS Energy’s minimum statutory income tax withholding obligation. Shares repurchased have a value based on the market price on the vesting date.

 

Unregistered Sales of Equity Securities

 

On November 3, 2009, CMS Energy issued 6,634 shares of its Common Stock and paid $250,000 in cash in exchange for $250,000 aggregate principal amount of its 3.375 percent Convertible Senior Notes Due 2023, Series B, tendered for conversion on October 14, 2009, in accordance with the terms and provisions of the Indenture of CMS Energy dated as of September 15, 1992, as supplemented by the Sixteenth Supplemental Indenture dated as of December 16, 2004. Such shares of Common Stock were issued based on the conversion rate of 99.5288 shares per $1,000 principal amount of convertible note. The foregoing issuance, an exchange of securities with an existing securities holder, was exempt from registration pursuant to Section 3(a)(9) of the Securities Act of 1933, as amended.

 

CMS Energy

 

Selected financial information is contained in Item 8. Financial Statements and Supplementary Data, CMS Energy Corporation’s Selected Financial Information, which is incorporated by reference herein.

 

Consumers

 

Selected financial information is contained in Item 8. Financial Statements and Supplementary Data, Consumers Energy Company’s Selected Financial Information, which is incorporated by reference herein.

 

CMS Energy

 

Management’s discussion and analysis of financial condition and results of operations is contained in Item 8. Financial Statements and Supplementary Data, MD&A, which is incorporated by reference herein.

 

Consumers

 

Management’s discussion and analysis of financial condition and results of operations is contained in Item 8. Financial Statements and Supplementary Data, MD&A, which is incorporated by reference herein.

 

CMS Energy

 

Quantitative and qualitative disclosures about market risk are contained in Item 8. Financial Statements and Supplementary Data, MD&A, Critical Accounting Policies, “Financial and Derivative Instruments and Market Risk Information,” which is incorporated by reference herein.

 

Consumers

 

Quantitative and qualitative disclosures about market risk are contained in Item 8. Financial Statements and Supplementary Data, MD&A, Critical Accounting Policies, “Financial and Derivative Instruments and Market Risk Information,” which is incorporated by reference herein.

 

 

 

2009 Consolidated Financial Statements

 

and

 

 

 

2009 Consolidated Financial Statements

 

 

 

 

 

 

 

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CMS Energy Corporation

 

Consumers Energy Company

 

MANAGEMENT’S DISCUSSION AND ANALYSIS

 

This MD&A is a combined report of CMS Energy and Consumers.

 

EXECUTIVE OVERVIEW

 

CMS Energy is an energy company operating primarily in Michigan. It is the parent holding company of several subsidiaries, including Consumers, an electric and gas utility, and CMS Enterprises, primarily a domestic IPP. Consumers’ electric utility operations include the generation, purchase, distribution, and sale of electricity and Consumers’ gas utility operations include the purchase, transmission, storage, distribution, and sale of natural gas. Consumers’ customer base consists of a mix of residential, commercial, and diversified industrial customers. CMS Enterprises, through its subsidiaries and equity investments, owns power generation facilities.

 

CMS Energy and Consumers manage their businesses by the nature of services each provides. CMS Energy operates principally in three business segments: electric utility; gas utility; and enterprises, its non-utility investments and operations. Consumers operates principally in two business segments: electric utility and gas utility.

 

CMS Energy and Consumers earn revenue and generate cash from operations by providing electric and natural gas utility services, electric distribution and generation, gas transmission, storage, and distribution, and other energy-related services. Their businesses are affected primarily by:

 

 

During the past several years, CMS Energy’s business strategy has emphasized improving its consolidated balance sheet and maintaining focus on its core strength, which is Consumers’ utility operations and service.

 

Consumers’ forecast calls for capital investments in excess of $7 billion from 2010 through 2014, with a key aspect of its strategy being the balanced energy initiative. The balanced energy initiative is a comprehensive energy resource plan to meet Consumers’ projected short-term and long-term electric power requirements with energy efficiency; demand management; expanded use of renewable energy; development of new power plants; pursuit of additional PPAs to complement existing generating sources; and potential retirement of older, less efficient generating units.

 

Among Consumers’ largest planned capital investments is its proposed new 830 MW coal-fueled power plant. In September 2009, the MPSC staff issued a report to the MDNRE on Consumers’ needs-and-alternatives analysis for the proposed coal-fueled plant, concluding that the long-term capacity need was unjustified without the retirement of certain existing coal-fueled power plants from its fleet and that the proposed coal-fueled plant is only one alternative out of a range of alternatives that Consumers may use to fill the projected capacity need. In December 2009, the MDNRE issued an air permit for the proposed coal-fueled plant, with the condition that Consumers retire 638 MW of its existing coal-fueled generation, and potentially an additional 320 MW, depending on customer needs. The MDNRE’s condition regarding plant retirements is consistent with Consumers’ balanced energy initiative.

 

Consumers’ planned capital investments also include renewable energy projects. The 2008 Energy Legislation requires that at least ten percent of Consumers’ electric sales volume come from renewable energy sources by 2015, and includes requirements for specific capacity additions. In compliance with this legislation, Consumers filed a

renewable energy plan with the MPSC in February 2009 outlining its plans to build or contract for additional renewable energy capacity. At the same time, Consumers filed an energy optimization plan, also called for by the 2008 Energy Legislation, under which Consumers will promote energy efficiency and provide incentives to reduce customer usage. In May 2009, the MPSC approved the energy optimization plan and, with minor exceptions, the renewable energy plan.

 

Another significant planned capital investment is Consumers’ advanced metering infrastructure system, which will provide enhanced controls over and information about energy usage, as well as timely notification of service interruptions. Consumers is using a phased implementation approach that will allow it to analyze, test, and pilot the new technology prior to widespread investment and deployment.

 

Regulatory matters are a key aspect of CMS Energy’s and Consumers’ businesses, particularly Consumers’ rate cases and regulatory proceedings with the MPSC. The MPSC issued its final order in Consumers’ 2008 electric rate case, authorizing Consumers to increase its rates by $134 million annually. The order also requires Consumers to refund the remaining $73 million of proceeds from the April 2007 sale of Palisades. The order adopts a “pilot” decoupling mechanism that went into effect December 1, 2009, and which, subject to certain conditions, will allow rates to be adjusted to collect or refund the change in marginal revenue arising from the difference between the level of average sales per customer adopted in the order and actual average sales per customer. The order also adopts an uncollectible expense tracking mechanism, effective January 1, 2009. Additionally, in November 2009, Consumers self-implemented a gas rate increase in the annual amount of $89 million, subject to refund with interest. Consumers expects to receive a final MPSC rate order in its gas rate case in May 2010. Further, in January 2010, Consumers filed an application with the MPSC seeking an annual increase in electric revenue of $178 million based on an 11 percent authorized return on equity.

 

In an order issued in February 2010, the MPSC concluded that Big Rock decommissioning surcharges collected during a statutory rate freeze from 2001 through 2003 should have been deposited in a decommissioning trust fund. Consumers had filed an application with the MPSC in 2008 for recovery of a $44 million Big Rock decommissioning shortfall from customers. In its February order, the MPSC agreed that Consumers was entitled to the $44 million decommissioning shortfall, but concluded that Consumers had collected this amount previously through the decommissioning surcharge in effect during the rate freeze. To reflect the impacts of this MPSC rate order, Consumers has recognized an $86 million regulatory liability on its Consolidated Balance Sheets at December 31, 2009, and a charge to income of $130 million.

 

Another significant area of regulation for CMS Energy and Consumers is environmental regulation. There is uncertainty associated with federal legislative and regulatory proposals related to the regulation of carbon dioxide emissions, particularly associated with fossil-fueled generation. Federal legislation is being considered to establish a cap and trade system, or alternatively, to tax carbon dioxide emissions. In addition, in December 2009, the EPA issued an endangerment finding that greenhouse gases, including carbon dioxide, contribute to air pollution that may endanger the public health and welfare, thus setting the stage for regulation of carbon dioxide emissions under the Clean Air Act. The EPA is considering regulating coal combustion products, such as coal ash, as hazardous wastes under the Resource Conservation and Recovery Act. CMS Energy and Consumers are monitoring these developments for potential effects on their plans and operations.

 

In the future, CMS Energy will focus its strategy on:

 

 

In executing this strategy, CMS Energy and Consumers will need to overcome a Michigan economy that has been impacted adversely by the continued downturn and uncertainty in Michigan’s automotive industry marked by the bankruptcies of GM and Chrysler as well as high unemployment rates. The financial market crisis, the effects of which became evident in a global economic downturn during the fourth quarter of 2008, continues to result in a negative economic outlook. A range of possible outcomes exists due to the uncertain financial market environment

and ongoing government policy responses. Consumers expects that the “pilot” decoupling mechanism and the uncollectible expense tracking mechanism adopted in the November 2009 MPSC electric rate order will mitigate partially the impacts of these economic conditions on the electric utility. While CMS Energy and Consumers believe that their sources of liquidity will be sufficient to meet their requirements, they will continue to monitor developments in the financial and credit markets and government policy responses to those developments for potential implications for CMS Energy’s and Consumers’ businesses and their future financial needs.

 

RESULTS OF OPERATIONS

 

CMS Energy’s Consolidated Results of Operations