CONSUMERS ENERGY CO - Quarter Report: 2011 June (Form 10-Q)

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

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

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

CMS Energy Corporation: Yes þ No o Consumers Energy Company: Yes þ No o

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, 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 Registrant was required to submit and post such files).

CMS Energy Corporation: Yes þ No o Consumers Energy Company: 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.

CMS Energy Corporation:

Large accelerated filer þ		Accelerated filer o		Non-Accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Consumers Energy Company:

Large accelerated filer o		Accelerated filer o		Non-Accelerated filer þ		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the Registrant is a shell company (as defined in 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 July 14, 2011:

CMS Energy Corporation:
CMS Energy Common Stock, $0.01 par value
(including 1,568,145 shares owned by Consumers Energy Company)			253,356,241
Consumers Energy Company:
Consumers Energy Common Stock, $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 Securities and Exchange Commission for the Period Ended June 30, 2011

TABLE OF CONTENTS

		Page
Glossary			3
Filing Format			8
Forward-Looking Statements and Information			8
PART I — FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited)
CMS Energy			32
Consumers			40
Notes to the Consolidated Financial Statements			47
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			12
Item 3. Quantitative and Qualitative Disclosures about Market Risk			78
Item 4. Controls and Procedures			78
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			79
Item 1A. Risk Factors			79
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			79
Item 3. Defaults Upon Senior Securities			80
Item 4. Removed and Reserved			80
Item 5. Other Information			80
Item 6. Exhibits			81
Signatures			82
EX-10.1
EX-12.1
EX-12.2
EX-31.1
EX-31.2
EX-31.3
EX-31.4
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

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GLOSSARY

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

2008 Energy Law		Comprehensive energy reform package enacted in October 2008 with the approval of Michigan Senate Bill 213 and Michigan House Bill 5524
2010 Form 10-K		Each of CMS Energy’s and Consumers’ Annual Report on Form 10-K for the year ended December 31, 2010
ABATE		Association of Businesses Advocating Tariff Equity
Bay Harbor		A residential/commercial real estate area located near Petoskey, Michigan. In 2002, CMS Energy sold its interest in Bay Harbor.
bcf		Billion cubic feet of gas
Big Rock		Big Rock Point nuclear power plant, formerly owned by Consumers
CAIR		The Clean Air Interstate Rule
Cantera Gas Company		Cantera Gas Company LLC, a non-affiliated company (formerly known as CMS Field Services)
Cantera Natural Gas, Inc.		Cantera Natural Gas, Inc., a non-affiliated company that purchased CMS Field Services
CCB		Coal combustion by-product
CEO		Chief Executive Officer
CFO		Chief Financial Officer
CKD		Cement kiln dust
Clean Air Act		Federal Clean Air Act, as amended
Clean Water Act		Federal Water Pollution Control 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 CMS Enterprises
CMS Enterprises		CMS Enterprises Company, a wholly owned subsidiary of CMS Energy
CMS ERM		CMS Energy Resource Management Company, formerly CMS MST, a wholly owned subsidiary of CMS Enterprises

CMS Field Services		CMS Field Services, Inc., a former wholly owned subsidiary of CMS Gas Transmission
CMS Gas Transmission		CMS Gas Transmission Company, a wholly owned subsidiary of CMS Enterprises
CMS Land		CMS Land Company, a wholly owned subsidiary of CMS Capital
CMS MST		CMS Marketing, Services and Trading Company, a wholly owned subsidiary of CMS Enterprises, whose name was changed to CMS ERM effective January 2004
CMS Oil and Gas		CMS Oil and Gas Company, a former wholly owned subsidiary of CMS Enterprises
Consumers		Consumers Energy Company, a wholly owned subsidiary of CMS Energy
CSAPR		Cross-State Air Pollution Rule, finalized in July 2011, which supersedes the EPA’s proposed Clean Air Transport Rule and replaces CAIR
Customer Choice Act		Customer Choice and Electricity Reliability Act, a Michigan statute
D.C.		District of Columbia
Detroit Edison		The Detroit Edison Company, a non-affiliated company
Dodd-Frank Act		Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted in July 2010
DOE		U.S. Department of Energy
DOJ		U.S. Department of Justice
EBITDA		Earnings Before Interest, Taxes, Depreciation, and Amortization
EnerBank		EnerBank USA, a wholly owned subsidiary of CMS Capital
Entergy		Entergy Corporation, a non-affiliated company
EPA		U.S. Environmental Protection Agency
EPS		Earnings per share

Exchange Act		Securities Exchange Act of 1934, as amended
FDIC		Federal Deposit Insurance Corporation
FERC		The Federal Energy Regulatory Commission
FLI Liquidating Trust		Trust formed in Missouri bankruptcy court to accomplish the liquidation of Farmland Industries, Inc., a non-affiliated entity
FMB		First mortgage bond
FOV		Finding of Violation
FTR		Financial transmission right
GAAP		U.S. Generally Accepted Accounting Principles
GCR		Gas cost recovery
GWh		Gigawatt-hour (a unit of energy equal to one million kWh)
Health Care Acts		Comprehensive health care reform enacted in March 2010, comprising the Patient Protection and Affordable Care Act and the related Health Care and Education Reconciliation Act
IRS		Internal Revenue Service
ISFSI		Independent spent fuel storage installation
kWh		Kilowatt-hour (a unit of energy equal to one thousand watt-hours)
Ludington		Ludington pumped-storage plant, jointly owned by Consumers and Detroit Edison
MACT		Maximum Achievable Control Technology, which is the emission control that is achieved in practice by the best-controlled similar source; for existing sources, MACT is the average emission limitation achieved by the best performing 12 percent of existing sources or the average limitation achieved by the best performing five sources, depending on the number of sources in the category
MBT		Michigan Business Tax
MCIT		Michigan Corporate Income Tax
MD&A		Management’s Discussion and Analysis
MDEQ		Michigan Department of Environmental Quality

MDL		A pending multi-district litigation case in Nevada
MGP		Manufactured gas plant
Midwest Energy Market		An energy market developed by MISO to provide day-ahead and real-time market information and centralized dispatch for market participants
MISO		The Midwest Independent Transmission System Operator, Inc.
MPSC		Michigan Public Service Commission
MW		Megawatt (a unit of power equal to one million watts)
MWh		Megawatt-hour (a unit of energy equal to one million watt-hours)
NOV		Notice of Violation
NPDES		National Pollutant Discharge Elimination System
NREPA		Part 201 of Michigan Natural Resources and Environmental Protection Act, a statute that covers environmental activities including remediation
NSR		New Source Review, a construction-permitting program under the Clean Air Act
NYMEX		New York Mercantile Exchange
OPEB		Postretirement benefit plans other than pensions
Palisades		Palisades nuclear power plant, sold by Consumers to Entergy in 2007
Panhandle		Panhandle Eastern Pipe Line Company, including its wholly owned subsidiaries Trunkline Gas Company, LLC, Pan Gas Storage Company, Panhandle Storage Company, and Panhandle Holding Company, a former wholly owned subsidiary of CMS Gas Transmission
PCB		Polychlorinated biphenyl
Pension Plan		Trusteed, non-contributory, defined benefit pension plan of CMS Energy, Consumers, and Panhandle
PPA		Power purchase agreement
PSCR		Power supply cost recovery
PSD		Prevention of Significant Deterioration

REC		Renewable energy credit established under the 2008 Energy Law
RMRR		Routine maintenance, repair, and replacement
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
SERP		Supplemental Executive Retirement Plan
Smart Grid		Consumers’ grid modernization project, which includes the installation of smart meters that are capable of transmitting and receiving data, a two-way communications network, and modifications to Consumers’ existing information technology system to manage the data and enable changes to key business processes
Superfund		Comprehensive Environmental Response, Compensation and Liability Act
Supplemental Environmental Projects		Environmentally beneficial projects that a party agrees to undertake as part of the settlement of an enforcement action, but which the party is not otherwise legally required to perform
Title V		A federal program under the Clean Air Act designed to standardize air quality permits and the permitting process for major sources of emissions across the U.S.
U.S.		United States
XBRL		eXtensible Business Reporting Language

FILING FORMAT

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

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 MD&A included in the 2010 Form 10-K.

FORWARD-LOOKING STATEMENTS AND INFORMATION

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

	•		the price of CMS Energy common stock, capital and financial market conditions, and the effect of these market conditions on CMS Energy’s and Consumers’ postretirement benefit plans, interest costs, and access to the capital markets, including availability of financing (including Consumers’ accounts receivable sales program and CMS Energy’s and Consumers’ revolving credit facilities) to CMS Energy, Consumers, or any of their affiliates, and the energy industry;
	•		the impact of the economy, particularly in Michigan, and potential future volatility in the financial and credit markets on CMS Energy’s, Consumers’, or any of their affiliates’:

	■		revenues;
	■		capital expenditure programs and related earnings growth;
	■		ability to collect accounts receivable from customers;
	■		cost of capital and availability of capital; and
	■		Pension Plan and postretirement benefit plans assets and required contributions;

	•		changes in the economic and financial viability of CMS Energy’s and Consumers’ suppliers, customers, and other counterparties and the continued ability of these third parties, including third parties in bankruptcy, to meet their obligations to CMS Energy and Consumers;
	•		population changes in the geographic areas where CMS Energy and Consumers conduct business;

	•		national, regional, and local economic, competitive, and regulatory policies, conditions, and developments;
	•		changes in applicable laws, rules, regulations, principles, or practices, or in their interpretation, including those related to taxes, the environment, and accounting matters, that could have an impact on CMS Energy’s and Consumers’ businesses or financial results, including the impact of any future regulations or lawsuits regarding:

	■		carbon dioxide and other greenhouse gas emissions, including potential future legislation to establish a cap and trade system;
	■		criteria pollutants, such as nitrogen oxide, sulfur dioxide, and particulate, and hazardous air pollutants, including impacts of CSAPR and MACT;
	■		CCBs;
	■		PCBs;
	■		cooling water intake or discharge from power plants or other industrial equipment;
	■		limitations on the use or construction of coal-fueled electric power plants;
	■		nuclear-related regulation;
	■		renewable portfolio standards and energy efficiency mandates;
	■		energy-related derivatives and hedges under the Dodd-Frank Act; and
	■		any other potential legislative changes, including changes to the ten-percent ROA limit;

	•		potentially adverse regulatory or legal interpretations or decisions, including those related to environmental laws and regulations, and potential environmental remediation costs associated with these interpretations or decisions, including those that may affect Bay Harbor or Consumers’ RMRR classification under NSR regulations;
	•		potentially adverse or delayed regulatory treatment or permitting decisions concerning significant matters affecting CMS Energy or Consumers that are or could come before the MDEQ and/or EPA, including Bay Harbor;
	•		potentially adverse regulatory treatment or failure to receive timely regulatory orders concerning a number of significant matters affecting Consumers that are or could come before the MPSC, including:

■

sufficient and timely recovery of:

	▪		environmental and safety-related expenditures for coal-fueled plants and other utility properties;
	▪		power supply and natural gas supply costs;
	▪		operating and maintenance expenses;
	▪		additional utility rate-based investments;
	▪		costs associated with the proposed retirement and decommissioning of facilities;
	▪		MISO energy and transmission costs;
	▪		costs associated with energy efficiency investments and state or federally mandated renewable resource standards; and
	▪		Smart Grid program costs;

	■		actions of regulators with respect to expenditures subject to tracking mechanisms;
	■		actions of regulators to prevent or curtail shutoffs for non-paying customers;
	■		actions of regulators with respect to Consumers’ pilot electric and gas decoupling mechanisms;
	■		regulatory orders preventing or curtailing rights to self-implement rate requests;
	■		regulatory orders potentially requiring a refund of previously self-implemented rates;
	■		implementation of new energy legislation or revisions of existing regulations; and
	■		regulatory treatment of the DOE settlement;

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

	•		costs and availability of personnel, equipment, and materials for operating and maintaining existing facilities;
	•		factors affecting operations, such as unusual weather conditions, catastrophic weather-related damage, unscheduled generation outages, maintenance or repairs, environmental incidents, or electric transmission and distribution or gas pipeline system constraints;
	•		potential disruption or interruption of facilities or operations due to accidents, war, cyber-attacks, or terrorism, and the ability to obtain or maintain insurance coverage for these events;
	•		the impact of an accident, explosion, or other physical disaster involving Consumers’ gas pipelines, gas storage fields, overhead or underground electrical lines, or other utility infrastructure;
	•		CMS Energy’s and Consumers’ ability to achieve generation planning goals and the occurrence and duration of scheduled or unscheduled generation or gas compression outages;
	•		technological developments in energy production, delivery, usage, and storage;
	•		achievement of capital expenditure and operating expense goals, including the 2011 capital expenditures forecast;
	•		the impact of CMS Energy’s and Consumers’ integrated business software system on their operations, including utility customer billing and collections;
	•		potential effects of the Health Care Acts on existing or future health care costs;
	•		adverse outcomes regarding tax positions;
	•		adverse consequences resulting from any past or future assertion of indemnity or warranty claims associated with assets and businesses previously owned by CMS Energy or Consumers, including claims resulting from attempts by foreign or domestic governments to assess taxes on past operations or transactions;
	•		the outcome, cost, and other effects of legal or administrative proceedings, settlements, investigations, or claims;
	•		earnings volatility resulting from the application of fair value accounting to certain energy commodity contracts, such as electricity sales agreements and interest rate and foreign currency contracts;
	•		changes in financial or regulatory accounting principles or policies;
	•		a possible future requirement to comply with International Financial Reporting Standards, which differ from GAAP in various ways, including the present lack of special accounting treatment for regulated activities; and
	•		other business or investment matters that may be disclosed from time to time in CMS Energy’s and Consumers’ SEC filings, or in other publicly issued documents.

For additional details regarding these and other uncertainties, see the “Outlook” section included in MD&A; Note 3, Contingencies and Commitments; Note 4, Regulatory Matters; and Part II, Item 1A. Risk Factors.

CMS Energy Corporation
Consumers Energy Company

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

EXECUTIVE OVERVIEW

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

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

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

	•		regulation and regulatory matters;
	•		economic conditions;
	•		weather;
	•		energy commodity prices;
	•		interest rates; and
	•		CMS Energy’s and Consumers’ securities’ credit ratings.

During the past several years, CMS Energy’s “Growing Forward” business strategy has emphasized the key elements depicted below:

Safe, excellent operations

The safety and security of employees, customers, and the general public remain a priority of CMS Energy and Consumers. Accordingly, CMS Energy and Consumers have worked to integrate a set of safety principles into their business operations and culture. These principles include complying with applicable safety, health, and security regulations and implementing programs and processes aimed at continually improving safety and security conditions. From 2007 to 2010, Consumers achieved a 63 percent reduction in the annual number of recordable safety incidents.

Customer Value

Consumers is undertaking a number of initiatives that reflect its intensified customer focus. Consumers’ planned investments in reliability are aimed at improving safety, reducing customer outage frequency, reducing repetitive outages, and increasing customer satisfaction. Consumers’ productivity improvements are expected to help keep annual base rate increases (excluding PSCR and GCR charges) at or below the average rate of inflation. Consumers considers these and other aspects of its customer value initiative to be important to its success.

Utility Investment

Consumers expects to make capital investments of $6.5 billion over the next five years, with a key aspect of its strategy being the balanced energy initiative. The balanced energy initiative is a comprehensive energy resource plan to meet Consumers’ projected short-term and long-term electric power requirements with energy efficiency, demand management, expanded use of renewable energy, development of new power plants, pursuit of additional PPAs to complement existing generating sources, potential retirement or mothballing of older generating units, and continued operation of other existing units.

Renewable energy projects are a major component of Consumers’ planned capital investments. Consumers expects to spend $600 million on renewable energy investments from 2011 through 2015. The 2008 Energy Law requires that at least ten percent of Consumers’ electric sales volume come from renewable energy sources by 2015, and it includes requirements for specific capacity additions. Consumers has historically included renewable resources as part of its portfolio, with about five percent of its present power supply coming from such renewable sources as hydroelectric, landfill gas, biomass, and wind. In May 2011, the MPSC issued an order approving Consumers’ amended renewable energy plan, with slight modifications. The amended plan reduces the renewable energy surcharge billed to customers in the future by an annual amount of $54 million. The reduction is a result of lower-than-anticipated costs to comply with the renewable energy requirements prescribed by the 2008 Energy Law.

In February 2011, Consumers and Detroit Edison together announced an $800 million maintenance and upgrade project at their jointly owned Ludington pumped-storage plant. The project, scheduled to begin in 2013 and extend through 2019, is expected to increase the capacity of Ludington by 16 percent, from its present level of 1,872 MW to about 2,172 MW, and increase the plant’s efficiency by five percent. Consumers expects its share of the project cost to total $400 million.

Consumers’ Smart Grid program, with a total project capital cost of $750 million, also represents a major capital investment. The deployment, planned for mid-2012, will include advanced metering infrastructure. Consumers has spent $97 million through 2010 on its Smart Grid program, and expects to spend an additional $267 million, following a phased approach, from 2011 through 2015.

Two additional major investment areas for Consumers are environmental spending and reliability improvements. Consumers expects its environmental investments to total $1.4 billion and its investments in system reliability to total $1.2 billion through 2015.

Regulation

Regulatory matters are a key aspect of CMS Energy’s and Consumers’ businesses, particularly Consumers’ rate cases and regulatory proceedings before the MPSC. Recent important regulatory events and developments are summarized below.

	•		2010 Gas Rate Case: In August 2010, Consumers filed an application with the MPSC seeking an annual gas rate increase of $55 million, based on an 11 percent authorized return on equity. In January 2011, Consumers filed support for a self-implemented annual gas rate increase of $48 million. In February, Consumers reduced the proposed self-implemented increase to $29 million. The MPSC then issued an order delaying Consumers’ self-implementation. The MPSC approved a partial settlement agreement in May, authorizing a $31 million annual gas rate increase, based on a 10.5 percent authorized return on equity. Matters not yet addressed in this case include the decoupling mechanism, the Smart Grid program, and contributions to the low-income and energy efficiency fund.
	•		Electric Revenue Decoupling Mechanism: Consumers’ 2009 electric rate case order authorized an electric revenue decoupling mechanism, subject to certain conditions. This decoupling mechanism, which was extended in the 2010 electric rate case order, allows Consumers to adjust future electric rates to compensate for changes in sales volumes resulting from weather fluctuations, energy efficiency, and conservation. In March 2011, Consumers filed its first reconciliation of the electric decoupling mechanism, requesting recovery of $27 million from customers for the period December 2009 through November 2010.
	•		2011 Electric Rate Case: In June 2011, Consumers filed a new general electric rate case seeking a $195 million revenue increase, based on a 10.7 percent authorized return on equity.

Environmental regulation is another area of importance for CMS Energy and Consumers, and they are monitoring numerous legislative and regulatory initiatives to regulate greenhouse gases, as well as related litigation. The EPA has taken steps to regulate greenhouse gases under the Clean Air Act and is expected to issue final new source performance standards in May 2012 addressing greenhouse gas emissions from fossil-fueled electric generating units. The EPA is also expected to propose guidelines for states to regulate greenhouse gas emissions from existing sources.

During 2010, the EPA issued various proposals for regulating PCBs, CCBs, sulfur dioxide, and nitrogen oxides. Additionally, in March 2011, the EPA proposed a hazardous air pollutant rule that would establish MACT emission standards for mercury and other hazardous air pollutants. Under the proposed rule, some coal-fueled electric generating units would require additional controls for hazardous air pollutants. Also in March 2011, the EPA issued a proposed rule to regulate existing electric generating plant cooling water intake systems. In July 2011, the EPA finalized the CSAPR, which requires Michigan and 26 other states to improve air quality by reducing power plant emissions that allegedly contribute to ground-level ozone and fine particle pollution in other downwind states. This rule, which replaces CAIR, mandates emission reductions beginning in 2012. CMS Energy and Consumers are monitoring the MACT emission standards developments for potential effects on their operations and assessing the impact and cost of complying with the CSAPR.

Financial Performance in 2011 and Beyond

For the three months ended June 30, 2011, CMS Energy’s net income available to common stockholders was $100 million, and diluted earnings per share were $0.38. This compares with net income available to common stockholders of $80 million and diluted earnings per share of $0.32 for the three months ended June 30, 2010. For the six months ended June 30, 2011, CMS Energy’s net income available to common stockholders was $235 million, and diluted earnings per share were $0.90. This compares with net income available to common stockholders of $165 million and diluted earnings per share of $0.67 for the six months ended June 30, 2010. Among the factors contributing to CMS Energy’s improved

performance for both the three months and the six months ended June 30, 2011 were benefits from electric and gas rate orders and increased gas deliveries, offset partially by decreased electric delivery revenues and higher depreciation, property taxes, and distribution and service restoration costs. A tax benefit resulting from the enactment of the MCIT in May 2011 was offset by the absence, in 2011, of an insurance settlement recovery recorded in 2010.

A more detailed discussion of the factors affecting CMS Energy’s and Consumers’ performance can be found in the “Results of Operations” section that follows this Executive Overview.

CMS Energy believes that economic conditions in Michigan have improved. Although Michigan’s economy continues to be affected by the recession and its impact on the state’s automotive industry, by high unemployment rates, and by a modestly shrinking population, there are indications that the recession has eased in Michigan. Consumers expects its electric sales to increase by about 1.7 percent annually through 2016, driven largely by the continued rise in industrial production. Consumers is projecting that its gas sales will decline by about one percent annually through 2016, due largely to energy efficiency and conservation.

As Consumers continues to seek fair and timely regulatory treatment, delivering customer value will remain a key strategic priority. To keep costs down for its utility customers, Consumers has set goals to achieve further annual productivity improvements. Additionally, Consumers will strive to give priority to capital investments that increase customer value or lower costs.

Consumers expects to continue to have sufficient capacity to fund its investment-based growth plans. CMS Energy also expects its sources of liquidity to remain sufficient to meet its cash requirements. CMS Energy and Consumers will continue to monitor developments in the financial and credit markets, as well as government policy responses to those developments, for potential implications for their businesses and their future financial needs.

RESULTS OF OPERATIONS

CMS Energy’s Consolidated Results of Operations

In Millions, Except Per Share Amounts
		Three Months Ended												Six Months Ended
June 30		2011				2010				Change				2011				2010				Change
Net Income Available to Common Stockholders		$	100			$	80			$	20			$	235			$	165			$	70
Basic Earnings Per Share		$	0.40			$	0.35			$	0.05			$	0.94			$	0.72			$	0.22
Diluted Earnings Per Share		$	0.38			$	0.32			$	0.06			$	0.90			$	0.67			$	0.23

In Millions
		Three Months Ended												Six Months Ended
June 30		2011				2010				Change				2011				2010				Change
Electric Utility		$	85			$	86			$	(1	)		$	150			$	127			$	23
Gas Utility			5				1				4				93				67				26
Enterprises			29				33				(4	)			32				42				(10	)
Corporate Interest and Other			(19	)			(24	)			5				(42	)			(54	)			12
Discontinued Operations			—				(16	)			16				2				(17	)			19
Net Income Available to Common Stockholders		$	100			$	80			$	20			$	235			$	165			$	70

Presented in the following table are specific after-tax changes to net income available to common stockholders for the three and six months ended June 30, 2011 versus 2010:

In Millions
		2011 better/(worse) than 2010
		Three Months Ended												Six Months Ended
		June 30												June 30
Electric and gas rate orders						$	29											$	52
Gas sales
Weather		$	7											$	23
Deliveries and decoupling benefit			4				11								12				35
Electric sales and decoupling							(13	)											(4	)
Distribution and service restoration costs							(13	)											(21	)
Other, mainly depreciation and property tax							(11	)		$	3								(19	)		$	43
Subsidiary earnings of enterprises segment											(1	)											(7	)
Other, mainly lower corporate interest expense											1												7
2010 insurance settlement recovery							(31	)											(31	)
MCIT enactment							32												32
Voluntary separation plan cost in 2010							—												7
Other, mainly tax adjustments related to previously sold businesses							16				17								19				27
Total change										$	20											$	70

Consumers’ Electric Utility Results of Operations

In Millions
June 30		2011				2010				Change
Net Income Available to Common Stockholders
Three months ended		$	85			$	86			$	(1	)
Six months ended			150				127				23

In Millions
		Three Months Ended				Six Months Ended
Reasons for the change:		June 30, 2011 vs. 2010				June 30, 2011 vs. 2010
Electric deliveries and rate increases		$	(26	)		$	2
Power supply costs and related revenue			—				10
Other income, net of expenses			(5	)			(7	)
Maintenance and other operating expenses			15				1
Depreciation and amortization			10				24
General taxes			(5	)			(5	)
Interest charges			8				9
Income taxes			2				(11	)
Total change		$	(1	)		$	23

Electric deliveries and rate increases: For the three months ended June 30, 2011, electric delivery revenues decreased $26 million compared with 2010. This variance was due to the absence, in 2011, of $43 million of surcharges in 2010 to recover retirement benefit expenses and certain regulatory assets, and a $23 million decrease in sales revenue resulting from cooler weather and lower decoupling revenue, offset partially by a $40 million increase in revenues from a November 2010 rate increase. Overall, deliveries to end-use customers were 8.9 billion kWh in 2011, a decrease of 0.1 billion kWh, or 1.1 percent, compared with 2010.

For the six months ended June 30, 2011, electric delivery revenues increased $2 million compared with 2010. This variance was due to a $66 million increase in revenues from a November 2010 rate increase, offset largely by the absence, in 2011, of $61 million of surcharges in 2010 to recover retirement benefit expenses and certain regulatory assets, and a $3 million decrease in other revenues. Overall, deliveries to end-use customers were 18.3 billion kWh in 2011, an increase of 0.2 billion kWh, or 1.1 percent, compared with 2010.

Power supply costs and related revenue: For the six months ended June 30, 2011, PSCR revenue increased $10 million compared with 2010. This increase was due to the absence, in 2011, of a disallowance in 2010 of certain power supply costs in Consumers’ 2007 PSCR reconciliation case.

Other income, net of expenses: For the three months ended June 30, 2011, other income decreased $5 million compared with 2010, and for the six months ended June 30, 2011, other income decreased $7 million compared with 2010. These decreases were due primarily to a reduction in interest income recorded as a result of the declining balance of certain regulatory assets.

Maintenance and other operating expenses: For the three months ended June 30, 2011, maintenance and other operating expenses decreased $15 million compared with 2010. This variance was due primarily to the absence, in 2011, of $26 million of retirement benefit expenses that were recovered in revenue in 2010, offset partially by a $9 million increase in service restoration costs.

For the six months ended June 30, 2011, maintenance and other operating expenses decreased $1 million compared with 2010. The absence, in 2011, of $26 million of retirement benefit expenses that were recovered in revenue in 2010 and $6 million of voluntary separation plan expenses incurred in 2010 was offset largely by $22 million of higher service restoration costs, caused by a series of unusually severe

storms, and $9 million of higher forestry and tree-trimming costs, plant maintenance, and other operating expenses.

Depreciation and amortization: For the three months ended June 30, 2011, depreciation and amortization expense decreased $10 million compared with 2010, and for the six months ended June 30, 2011, depreciation and amortization expense decreased $24 million compared with 2010. These decreases were due to lower amortization expense on certain regulatory assets, offset partially by higher depreciation expense from increased plant in service.

Interest charges: For the three months ended June 30, 2011, interest charges decreased $8 million compared with 2010, and for the six months ended June 30, 2011, interest charges decreased $9 million compared with 2010. These decreases resulted primarily from the absence, in 2011, of interest expense on a Michigan use tax assessment.

Income taxes: For the three months ended June 30, 2011, income taxes decreased $2 million compared with 2010, reflecting lower electric utility earnings. For the six months ended June 30, 2011, income taxes increased $11 million compared with 2010, reflecting higher electric utility earnings.

Consumers’ Gas Utility Results of Operations

In Millions
June 30		2011				2010				Change
Net Income Available to Common Stockholders
Three months ended		$	5			$	1			$	4
Six months ended			93				67				26

In Millions
		Three Months Ended				Six Months Ended
Reasons for the change:		June 30, 2011 vs. 2010				June 30, 2011 vs. 2010
Gas deliveries and rate increases		$	19			$	52
Other income, net of expense			(2	)			(4	)
Maintenance and other operating expenses			(7	)			5
Depreciation and amortization			(2	)			(5	)
General taxes			(4	)			(6	)
Interest charges			3				3
Income taxes			(3	)			(19	)
Total change		$	4			$	26

Gas deliveries and rate increases: For the three months ended June 30, 2011, gas delivery revenues increased $19 million compared with 2010. This increase reflected higher customer usage, of which $11 million was due to colder weather in 2011. Gas deliveries, including miscellaneous transportation to end-use customers, were 45.6 bcf in 2011, an increase of 8.8 bcf, or 23.9 percent, compared with 2010.

For the six months ended June 30, 2011, gas delivery revenues increased $52 million compared with 2010. This increase reflected higher customer usage, of which $37 million was due to colder weather in 2011. Gas deliveries, including miscellaneous transportation to end-use customers, were 179.5 bcf in 2011, an increase of 23.6 bcf, or 15.1 percent, compared with 2010.

Maintenance and other operating expenses: For the three months ended June 30, 2011, maintenance and other operating expenses increased $7 million compared with 2010, due primarily to higher transmission and distribution operating expenses.

For the six months ended June 30, 2011, maintenance and other operating expenses decreased $5 million compared with 2010, due primarily to the absence, in 2011, of voluntary separation plan expenses incurred in 2010.

Income taxes: For the three months ended June 30, 2011, income taxes increased $3 million compared with 2010, and for the six months ended June 30, 2011, income taxes increased $19 million, reflecting higher gas utility earnings in 2011.

Enterprises Results of Operations

In Millions
June 30		2011				2010				Change
Net Income Available to Common Stockholders
Three months ended		$	29			$	33			$	(4	)
Six months ended			32				42				(10	)

For the three months ended June 30, 2011, net income of the enterprises segment decreased $4 million compared with 2010, due to the absence, in 2011, of a $31 million insurance settlement recovery in 2010, offset largely by a $28 million income tax benefit resulting from the enactment of the MCIT in May 2011.

For the six months ended June 30, 2011, net income of the enterprises segment decreased $10 million compared with 2010, due to the absence, in 2011, of a $31 million insurance settlement recovery in 2010 and lower electric revenues of $7 million in 2011. These decreases were offset partially by a $28 million income tax benefit resulting from the enactment of the MCIT in May 2011.

For further details about the enactment of the MCIT, see Note 11, Income Taxes.

Corporate Interest and Other Results of Operations

In Millions
June 30		2011				2010				Change
Net Loss Available to Common Stockholders
Three months ended		$	(19	)		$	(24	)		$	5
Six months ended			(42	)			(54	)			12

For the three months ended June 30, 2011, corporate interest and other net expenses decreased $5 million compared with 2010, due primarily to lower income tax expense resulting from the enactment of the MCIT in May 2011.

For the six months ended June 30, 2011, corporate interest and other net expenses decreased $12 million compared with 2010, due primarily to lower income tax expense resulting partially from the enactment of the MCIT in May 2011.

Discontinued Operations

For the three months ended June 30, 2011, the net loss recorded from discontinued operations was less than $1 million, compared with a loss from discontinued operations of $16 million in 2010 related to prior asset sales.

For the six months ended June 30, 2011, income of $2 million was recorded from discontinued operations due to a legal settlement, compared with a loss from discontinued operations of $17 million in 2010 related to prior asset sales.

CASH POSITION, INVESTING, AND FINANCING

At June 30, 2011, CMS Energy had $994 million of consolidated cash and cash equivalents and $29 million of restricted cash and cash equivalents. At June 30, 2011, Consumers had $766 million of consolidated cash and cash equivalents and $28 million of restricted cash and cash equivalents.

Operating Activities

Presented in the following table are specific components of net cash provided by operating activities for the six months ended June 30, 2011 and 2010:

In Millions
Six Months Ended June 30		2011				2010				Change
CMS Energy, including Consumers
Net income		$	236			$	172			$	64
Non-cash transactions1			480				539				(59	)
		$	716			$	711			$	5
Sale of gas purchased in the prior year			514				474				40
Purchase of gas in the current year			(293	)			(274	)			(19	)
Accounts receivable sales, net			—				(50	)			50
Change in other core working capital2			232				299				(67	)
Postretirement benefits contributions			(39	)			(153	)			114
Other changes in assets and liabilities, net			86				41				45
Net cash provided by operating activities		$	1,216			$	1,048			$	168
Consumers
Net income		$	245			$	195			$	50
Non-cash transactions1			473				398				75
		$	718			$	593			$	125
Sale of gas purchased in the prior year			514				474				40
Purchase of gas in the current year			(293	)			(274	)			(19	)
Accounts receivable sales, net			—				(50	)			50
Change in other core working capital2			230				300				(70	)
Postretirement benefits contributions			(37	)			(143	)			106
Other changes in assets and liabilities, net			113				83				30
Net cash provided by operating activities		$	1,245			$	983			$	262

For the six months ended June 30, 2011, net cash provided by operating activities at CMS Energy increased $168 million compared with 2010. The increase was due primarily to the absence of Pension Plan contributions in 2011 and increased collections of accounts receivable.

For the six months ended June 30, 2011, net cash provided by operating activities at Consumers increased $262 million compared with 2010. The increase was due primarily to higher net income, the absence of Pension Plan contributions in 2011, and increased collections of accounts receivable.

Investing Activities

Presented in the following table are specific components of net cash used in investing activities for the six months ended June 30, 2011 and 2010:

In Millions
Six Months Ended June 30		2011				2010				Change
CMS Energy, including Consumers
Capital expenditures		$	(399	)		$	(424	)		$	25
Cash effect of deconsolidation of partnerships			—				(10	)			10
Costs to retire property and other			(72	)			(56	)			(16	)
Net cash used in investing activities		$	(471	)		$	(490	)		$	19
Consumers
Capital expenditures		$	(394	)		$	(423	)		$	29
Costs to retire property and other			(51	)			(21	)			(30	)
Net cash used in investing activities		$	(445	)		$	(444	)		$	(1	)

For the six months ended June 30, 2011, net cash used in investing activities decreased $19 million at CMS Energy compared with 2010. This variance was due primarily to a decrease in capital expenditures and the absence, in 2011, of the cash effect of deconsolidating certain partnerships in 2010, offset partially by other investing activities, including CMS Energy’s contribution of $27 million to its SERP fund.

For the six months ended June 30, 2011, net cash used in investing activities increased $1 million at Consumers compared with 2010. A decrease in capital expenditures was offset largely by other investing activities, including Consumers’ contribution of $20 million to its SERP fund.

Financing Activities

Presented in the following table are specific components of net cash used in financing activities for the six months ended June 30, 2011 and 2010:

In Millions
Six Months Ended June 30		2011				2010				Change
CMS Energy, including Consumers
Issuance of FMBs, convertible senior notes, senior notes, and other debt		$	396			$	366			$	30
Retirement of long-term debt			(292	)			(352	)			60
Common stock issued			22				5				17
Payment of common stock dividends			(106	)			(69	)			(37	)
Other financing activities			(20	)			(61	)			41
Net cash used in financing activities		$	—			$	(111	)		$	111
Consumers
Retirement of debt and other debt maturity payments		$	(18	)		$	(327	)		$	309
Payments of common stock dividends			(196	)			(168	)			(28	)
Stockholder’s contribution from CMS Energy			125				250				(125	)
Other financing activities			(16	)			(13	)			(3	)
Net cash used in financing activities		$	(105	)		$	(258	)		$	153

For the six months ended June 30, 2011, net cash used in financing activities at CMS Energy decreased $111 million compared to 2010. The change was due primarily to an increase in net proceeds from borrowings and common stock issued by CMS Energy in 2011.

For the six months ended June 30, 2011, net cash used in financing activities at Consumers decreased $153 million compared with 2010. The change was due primarily to a decrease in debt retirements, offset partially by a decrease in stockholder’s contribution from CMS Energy.

CAPITAL RESOURCES AND LIQUIDITY

CMS Energy uses dividends from its subsidiaries and external financing and capital transactions to invest in its utility and non-utility businesses, retire debt, pay dividends, and fund its other obligations. The ability of CMS Energy’s subsidiaries, including Consumers, to pay dividends to CMS Energy depends upon each subsidiary’s revenues, earnings, cash needs, and other factors. In addition, Consumers’ ability to pay dividends may be restricted by certain terms included in its articles of incorporation, by provisions under the Federal Power Act and the Natural Gas Act, and by FERC requirements. For additional details on Consumers’ dividend restrictions, see Note 5, Financings, “Dividend Restrictions.” For the six months ended June 30, 2011, Consumers paid $196 million in common stock dividends to CMS Energy.

Consumers uses cash flows generated from operations and external financing transactions, as well as stockholder’s contributions from CMS Energy, to fund capital expenditures, retire debt, pay dividends, contribute to its employee benefit plans, and fund its other obligations.

CMS Energy’s and Consumers’ access to the financial and capital markets depends on their credit ratings and on market conditions. As evidenced by past financing transactions, CMS Energy and Consumers have had ready access to these markets and, barring major market dislocations or disruptions, they expect to continue to have such access. If access to these markets were to become diminished or otherwise restricted, however, CMS Energy and Consumers would implement contingency plans to address debt maturities, which could include reduced capital spending. CMS Energy and Consumers also had the following secured revolving credit facilities available at June 30, 2011:

In Millions
		Amount of				Amount				Letters of Credit				Amount				Expiration
		Facility				Borrowed				Outstanding				Available				Date
CMS Energy
Revolving credit facility1		$	550			$	—			$	3			$	547			March 2016
Consumers
Revolving credit facility2,3		$	500			$	—			$	189			$	311			March 2016
Revolving credit facility3			150				—				—				150			August 2013

CMS Energy and Consumers use these credit facilities for general working capital purposes and to issue letters of credit. An additional source of liquidity is Consumers’ revolving accounts receivable sales program, which allows it to transfer up to $250 million of accounts receivable as a secured borrowing. At June 30, 2011, $250 million of accounts receivable were eligible for transfer under this program.

CMS Energy’s $550 million revolving credit agreement specifies a maximum debt-to-EBITDA ratio, as defined therein. Consumers’ $500 million revolving credit agreement specifies a maximum debt-to-capital ratio, as defined therein. CMS Energy and Consumers were each in compliance with these limits as of June 30, 2011, as presented in the following table:

Ratio at

Revolving Credit Agreement

Description

Maximum Limit

June 30, 2011

CMS Energy

$550 million revolving credit agreement

Debt to EBITDA

6.0 to 1.0

4.80 to 1.0

Consumers

$500 million revolving credit agreement

Debt to Capital

0.65 to 1.0

0.50 to 1.0

Components of CMS Energy’s and Consumers’ cash management plan include controlling operating expenses and capital expenditures and evaluating market conditions for financing and refinancing opportunities. CMS Energy and Consumers believe that their present level of cash and their expected cash flows from operating activities, together with their access to sources of liquidity, will be sufficient to fund their contractual obligations for 2011 and beyond.

Off-Balance-Sheet Arrangements

CMS Energy, Consumers, and certain of their subsidiaries also enter into various arrangements in the normal course of business to facilitate commercial transactions with third parties. These arrangements include indemnities, surety bonds, letters of credit, and financial and performance guarantees. Indemnities are usually agreements to reimburse a counterparty that may incur losses due to outside claims or breach of contract terms. The maximum payment that could be required under a number of these indemnity obligations is not estimable. While CMS Energy and Consumers believe it is unlikely that they will incur any material losses related to indemnities they have not recorded as liabilities, they cannot predict the impact of these contingent obligations on their liquidity and financial condition. For additional details on these and other guarantee arrangements, see Note 3, Contingencies and Commitments, “Guarantees.”

OUTLOOK

Several business trends and uncertainties may affect CMS Energy’s and Consumers’ financial condition and results of operations. These trends and uncertainties could have a material impact on CMS Energy’s and Consumers’ consolidated income, cash flows, or financial position. For additional details regarding these and other uncertainties, see “Forward-Looking Statements and Information;” Note 3, Contingencies and Commitments; and Part II, Item 1A. Risk Factors.

Consumers’ Electric Utility Business Outlook and Uncertainties

Balanced Energy Initiative: Consumers’ balanced energy initiative is a comprehensive energy resource plan designed to meet the short-term and long-term energy needs of its customers through:

	•		energy efficiency;
	•		demand management;
	•		expanded use of renewable energy;
	•		development of new power plants;
	•		pursuit of additional PPAs to complement existing generating sources;
	•		continued operation of existing units; and
	•		potential retirement or mothballing of older generating units.

In 2010, Consumers announced plans to defer the development of its proposed 830-MW coal-fueled plant at its Karn/Weadock generating complex. This decision reflects reduced customer demand for electricity due to the recession, forecasted lower natural gas prices due to recent developments in shale gas recovery technology, and projected surplus generating capacity in the MISO market. Consumers has been monitoring customer demand, fuel and power prices, and other market conditions, and has not set a timetable for a future decision about the project. Although the likelihood that the plant will be constructed has diminished significantly, in July 2011 the MDEQ granted Consumers an extension of the project’s air permit. Consumers’ alternatives to constructing the proposed coal-fueled plant include constructing new gas-fueled generation, relying on additional market purchases, and continued operation of several existing generating units.

Renewable Energy Plan: Consumers’ renewable energy plan details how Consumers will meet REC and capacity standards prescribed by the 2008 Energy Law. This law requires Consumers to obtain RECs in an amount equal to at least ten percent of its electric sales volume (estimated to be 3.5 million RECs annually) by 2015. RECs represent proof that the associated electricity was generated from a renewable energy resource. The law also requires Consumers to obtain 500 MW of capacity from renewable energy resources by 2015, either through generation resources owned by Consumers or through agreements to purchase capacity from other parties. Under its renewable energy plan, Consumers expects to secure its renewable energy requirement each year with a combination of newly generated RECs and previously generated RECs carried over from prior years. At June 30, 2011, the combination of these sources represented 84 percent of Consumers’ 2015 REC requirement.

To meet its renewable capacity requirements, Consumers expects to add more than 500 MW of owned or contracted renewable capacity by 2015. Through June 2011, Consumers has contracted for the purchase of 296 MW of nameplate capacity from renewable energy suppliers, which represents 59 percent of the 2015 renewable capacity requirement.

Consumers has secured more than 81,000 acres of land easements in Michigan’s Huron, Mason, and Tuscola Counties for the potential development of wind generation, and is now collecting wind speed and other meteorological data at those sites. Consumers has entered into construction and supply contracts as well as a contract to purchase wind turbine generators for the construction of a 100-MW wind park in Mason County, the Lake Winds Energy Park, which Consumers expects to be operational in late 2012. In July 2011, the Mason County Planning Commission voted in favor of granting a special

land use permit for the construction of the Lake Winds Energy Park. The action by the Mason County Planning Commission has been appealed to the Mason County Zoning Board of Appeals. Consumers will also continue development of its 150-MW wind park in Tuscola County, Cross Winds Energy Park, scheduled for operation by late 2014, as well as seek other opportunities for wind generation development in support of the renewable capacity standards.

Electric Customer Deliveries and Revenue: Consumers’ electric customer deliveries are largely dependent on Michigan’s economy, which has suffered from economic and financial instability in the automotive and real estate sectors. Consumers believes economic conditions have improved, and expects weather-adjusted electric deliveries to increase in 2011 by two percent compared with 2010.

Consumers expects average electric delivery growth of about 1.7 percent annually over the next five years. This increase reflects growth in electric demand, offset partially by the predicted effects of energy efficiency programs and appliance efficiency standards. Actual deliveries will depend on:

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

A decoupling mechanism was authorized by the MPSC in Consumers’ 2009 electric rate case order, subject to certain conditions, and extended in the 2010 electric rate case order. It allows Consumers to adjust future electric rates to compensate for changes in sales volumes resulting from weather fluctuations, energy efficiency, and conservation. This mechanism reduces the volatility of Consumers’ electric utility revenue.

Electric ROA: The Customer Choice Act allows all of Consumers’ electric customers to buy electric generation service from Consumers or from an alternative electric supplier. The 2008 Energy Law revised the Customer Choice Act by limiting alternative electric supply to ten percent of Consumers’ weather-adjusted retail sales of the preceding calendar year. At June 30, 2011, electric deliveries under the ROA program were at the ten percent limit and alternative electric suppliers were providing 796 MW of generation service to ROA customers. Based on 2010 weather-adjusted retail sales, Consumers expects 2011 electric deliveries under the ROA program to be at a similar level to 2010.

Electric Transmission: In July 2011, FERC issued an order in a rulemaking proceeding concerning regional electric transmission planning and cost allocations. In a related matter, in July 2010, MISO filed a tariff revision with FERC proposing a cost allocation methodology for a new category of transmission projects. In December 2010, FERC approved MISO’s cost allocation proposal. Under this tariff revision, the cost of these new transmission projects will be spread proportionally across the Midwest Energy Market. Consumers believes that Michigan customers will bear additional costs under MISO’s tariff without receiving comparable benefits from these projects. In January 2011, Consumers, along with the Michigan Attorney General, ABATE, Detroit Edison, the Michigan Municipal Electric Association, and the Michigan Public Power Agency, filed a protest and request for rehearing with FERC, opposing the allocation methodology in the MISO tariff revision. Consumers expects to continue to recover transmission expenses, including those associated with the MISO tariff revision, through the PSCR process.

Electric Rate Matters: Rate matters are critical to Consumers’ electric utility business. For details on Consumers’ electric rate cases, PSCR, electric revenue decoupling mechanism, uncollectible expense tracking mechanism, electric operation and maintenance expenditures show-cause order, Big Rock decommissioning, renewable energy plan, energy optimization plan, and electric depreciation, see Note 4, Regulatory Matters, “Consumers’ Electric Utility.”

Electric Environmental Estimates: Consumers’ operations are subject to various state and federal environmental laws and regulations. Consumers continues to focus on complying with the Clean Air Act, Clean Water Act, and numerous state and federal environmental regulations, and estimates that it will incur expenditures of $1.6 billion from 2011 through 2018 to comply with these regulations. Consumers expects to recover these costs in customer rates, but cannot guarantee this result. Consumers’ primary environmental compliance focus includes, but is not limited to, the following matters:

Clean Air Interstate Rule/Cross-State Air Pollution Rule: In December 2008, a court decision remanded CAIR back to the EPA. Until the EPA finalized a new rule, CAIR remained in effect. In July 2011, the EPA released CSAPR, a final replacement rule for CAIR, which requires Michigan and 26 other states to improve air quality by reducing power plant emissions that allegedly contribute to ground-level ozone and fine particle pollution in other downwind states. This rule mandates emission reductions beginning in 2012. Consumers is analyzing this final rule to assess its impact on Consumers’ operations.

Electric Generating Unit MACT: In March 2011, the EPA proposed MACT emission standards for electric generating units, based on Section 112 of the Clean Air Act. Under the proposed rule, some coal-fueled electric generating units would require additional controls for hazardous air pollutants. Existing sources must meet the standards generally within three years of issuance of the final rule. The final rule is expected to be issued in November 2011.

Presently, Consumers’ strategy to comply with CSAPR, and with MACT in its present form, involves the installation of state-of-the-art emission control equipment; however, Consumers continues to evaluate CSAPR and MACT standards in conjunction with other EPA rulemakings. These rules could result in additional or accelerated environmental compliance costs related to Consumers’ fossil-fueled power plants and the retirement or mothballing of some or all of Consumers’ older, smaller generating units.

Greenhouse Gases: There are numerous legislative and regulatory initiatives at the state, regional, and national levels that involve the regulation of greenhouse gases. Consumers monitors and comments on these initiatives and also follows litigation involving greenhouse gases. Consumers believes Congress may eventually pass greenhouse gas legislation, but is unable to predict the form and timing of any final legislation.

In 2009, the U.S. Court of Appeals for the Second Circuit issued a decision that allowed states and private plaintiffs to bring lawsuits in the federal courts against utilities and others based on common law nuisance theories that challenged the defendants’ greenhouse gas emissions. This decision potentially allowed federal judges to impose caps on such emissions on a case-by-case basis without reference to any legislatively created standards. A group of utilities filed a petition with the U.S. Supreme Court, seeking review of the U.S. Court of Appeals decision. In June 2011, the U.S. Supreme Court reversed the decision of the U.S. Court of Appeals for the Second Circuit, agreeing with the position taken by the utility industry that the Clean Air Act displaces any common law actions to force greenhouse gas emissions reductions from fossil-based power plants.

In 2010, the EPA released its Prevention of Significant Deterioration and Title V Greenhouse Gas Tailoring Rule. The final rule, which numerous parties have challenged in the U.S. Court of Appeals for the D.C. Circuit, sets limits for greenhouse gas emissions that define when permits are required for new and existing industrial facilities under NSR PSD and Title V Operating Permit programs. The EPA issued revised guidance on this rule in March 2011. Consumers does not expect that the rule will require it to incur significant expenditures for efficiency upgrades for modified or new facilities.

In December 2010, the EPA entered into a settlement agreement with certain states and environmental groups that puts it on a path to issue proposed new source performance standards in September 2011. This proposal will address greenhouse gas emissions for new fossil-fueled electric generating units and major modifications under Section 111(b) of the Clean Air Act. The EPA is expected to promulgate final standards by May 2012. On the same schedule, the EPA is expected to propose emissions guidelines for

the states to regulate greenhouse gas emissions from existing sources under Section 111(d) of the Clean Air Act. Under the expected schedule, states will need to submit plans to the EPA within nine months of issuance of the final rule and guidelines. Consumers will continue to monitor this settlement and any proposed new source performance standards regulations.

In March 2011, the EPA issued a final rule that extends to September 30, 2011 the deadline for reporting 2010 greenhouse gas emissions data under the Greenhouse Gas Reporting Program. The original deadline was March 31, 2011. Consumers is prepared to comply with the final rule.

Litigation, as well as federal laws, EPA regulations regarding greenhouse gases, or similar treaties, state laws, or rules, if enacted, could require Consumers to replace equipment, install additional equipment for emission controls, purchase emission allowances, curtail operations, arrange for alternative sources of supply, or take other steps to manage or lower the emission of greenhouse gases. Although associated capital or operating costs relating to greenhouse gas regulation or legislation could be material and cost recovery cannot be assured, Consumers expects to recover these costs and capital expenditures in rates consistent with the recovery of other reasonable costs of complying with environmental laws and regulations.

Coal Combustion By-Products: In June 2010, the EPA proposed rules regulating CCBs, such as coal ash, under the Resource Conservation and Recovery Act. Michigan already regulates CCBs as low-hazard industrial waste. The EPA proposed a range of alternatives for regulating CCBs, including regulation as either a non-hazardous waste or a hazardous waste. If coal ash were regulated as a hazardous waste, Consumers would likely cease the beneficial re-use of this product, resulting in significantly more coal ash requiring costly disposal. Additionally, it is possible that existing coal ash disposal areas could be closed and costly alternative arrangements for coal ash disposal could be required if the upgrades to hazardous waste landfill standards are economically prohibitive. Consumers is unable to predict accurately the impacts from this wide range of possible outcomes, but significant expenditures are likely.

Water: In March 2011, the EPA issued a proposed rule to regulate existing electric generating plant cooling water intake systems. Consumers is evaluating this proposed rule and its potential impacts on Consumers’ plants. A final rule is expected in July 2012.

Advance Notice of Proposed Rulemaking on PCBs: In April 2010, the EPA issued an Advance Notice of Proposed Rulemaking, indicating that it is considering a variety of regulatory actions with respect to PCBs. One proposal aims to phase out equipment containing PCBs by 2025. Another proposal eliminates an exemption for small equipment containing PCBs. Consumers could incur substantial costs associated with the regulation of PCBs due to prior installation of electrical equipment potentially containing PCBs.

Other electric environmental matters could have a major impact on Consumers’ outlook. For additional details on other electric environmental matters, see Note 3, Contingencies and Commitments, “Consumers’ Electric Utility Contingencies — Electric Environmental Matters.”

Consumers’ Gas Utility Business Outlook and Uncertainties

Gas Deliveries: Consumers believes economic conditions in Michigan have improved, and expects weather-adjusted gas deliveries to increase in 2011 by two percent compared with 2010. Over the next five years, Consumers expects average gas deliveries to decline about one percent annually, reflecting the predicted effects of energy efficiency programs and continued conservation. Actual delivery levels from year to year may vary from this trend due to:

	•		fluctuations in weather;
	•		use by 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.

A decoupling mechanism was authorized by the MPSC in Consumers’ 2009 gas rate case order, subject to certain conditions. It allows Consumers to adjust future gas rates to compensate for changes in sales volumes by class arising from the difference between the level of average sales per customer adopted in the order and actual average weather-adjusted sales per customer. The mechanism does not provide rate adjustments for changes in sales volumes arising from weather fluctuations. This mechanism mitigates the impacts of energy efficiency programs, conservation, and changes in economic conditions on its gas revenue.

Gas Rate Matters: Rate matters are critical to Consumers’ gas utility business. For details on Consumers’ gas rate case and GCR, see Note 4, Regulatory Matters, “Consumers’ Gas Utility.”

Gas Pipeline Safety: In response to the natural gas pipeline explosion that occurred in San Bruno, California in September 2010 and other recent events, the U.S. House of Representatives and the U.S. Senate have proposed bills stipulating stricter regulation of natural gas pipelines nationwide. These proposed bills affect both transmission and distribution pipelines. The proposed bills contain provisions mandating:

	•		the installation of automatic shutoff equipment in high consequence areas;
	•		redefinition of “high consequence areas”
	•		increased civil penalties;
	•		prescribed notification and on-site incident response times;
	•		plans for safe management and replacement of cast iron pipelines;
	•		consideration of seismic activity;
	•		verification of maximum allowable operating pressure of all pipelines; and
	•		certain disclosures to homeowners and regulatory agencies.

Consumers continues to comply with laws and regulations governing natural gas pipeline safety. If these proposed laws are put into effect, Consumers could incur significant additional costs related to its natural gas pipeline safety programs. Consumers expects that it would be able to recover the costs in rates, consistent with the recovery of other reasonable costs of complying with laws and regulations.

Gas Environmental Estimates: Consumers expects to incur response activity costs at a number of sites, including 23 former MGP sites. For additional details, see Note 3, Contingencies and Commitments, “Consumers’ Gas Utility Contingencies — Gas Environmental Matters.”

Consumers’ Other Outlook and Uncertainties

Smart Grid: Consumers’ grid modernization effort continues to move forward. The foundation of this effort is the installation of advanced metering and the infrastructure to support it. The installation will include smart meters that are capable of transmitting and receiving data, a two-way communications network, and modifications to Consumers’ existing information technology systems to manage the data and enable changes to key business processes. Consumers expects to experience operational benefits upon the installation of smart meters. Smart meters are also intended to allow customers to monitor and manage their energy usage and help reduce demand during critical peak times, resulting in lower peak capacity requirements. Due to this system’s complexity and the relative immaturity of the technology, Consumers intends to continue its phased implementation approach. In mid-2012, Consumers plans to begin a larger-scale deployment to expand testing of the operations and systems of the selected advanced metering infrastructure network communications vendor.

Enterprises Outlook and Uncertainties

The primary focus with respect to CMS Energy’s remaining non-utility businesses is to optimize cash flow and maximize the value of their assets.

Trends, uncertainties, and other matters that could have a material impact on CMS Energy’s consolidated income, cash flows, or financial position include:

	•		indemnity and environmental remediation obligations at Bay Harbor;
	•		the outcome of certain legal proceedings;
	•		impacts of declines in electricity prices on the profitability of the enterprises segment’s generating units;
	•		representations, warranties, and indemnities provided by CMS Energy or its subsidiaries in connection with previous sales of assets;
	•		changes in commodity prices and interest rates on certain derivative contracts that do not qualify for hedge accounting and must be marked to market through earnings;
	•		changes in various environmental laws, regulations, principles, or practices, or in their interpretation; and
	•		economic conditions in Michigan, including population trends and housing activity.

For additional details regarding the enterprises segment’s uncertainties, see Note 3, Contingencies and Commitments.

Other Outlook and Uncertainties

EnerBank: EnerBank, a wholly owned subsidiary of CMS Capital, is a Utah state-chartered, FDIC-insured industrial bank providing unsecured home improvement loans. EnerBank represented one percent of CMS Energy’s net assets at June 30, 2011, and two percent of CMS Energy’s net income available to common stockholders for the six months ended June 30, 2011. The carrying value of EnerBank’s loan portfolio was $398 million at June 30, 2011. Its loan portfolio was funded primarily by deposit liabilities of $385 million. Twelve-month rolling average default rates on loans held by EnerBank have declined from 1.4 percent at December 31, 2010 to 1.1 percent at June 30, 2011. EnerBank expects the rate of loan defaults to level out at about 1.0 percent. CMS Energy is required to ensure that EnerBank remains well capitalized.

Litigation: CMS Energy, Consumers, and certain of their subsidiaries are named as parties in various litigation matters, as well as in administrative proceedings before various courts and governmental agencies, arising in the ordinary course of business. For additional details regarding these and other legal matters, see Note 3, Contingencies and Commitments and Note 4, Regulatory Matters.

NEW ACCOUNTING STANDARDS

For details regarding the implementation of new accounting standards and new accounting standards issued that are not yet effective, see Note 1, New Accounting Standards.

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CMS Energy Corporation
Consolidated Statements of Income
(Unaudited)

In Millions
		Three Months Ended								Six Months Ended
June 30		2011				2010				2011				2010
Operating Revenue		$	1,364			$	1,340			$	3,419			$	3,307
Operating Expenses
Fuel for electric generation			153				151				305				289
Purchased and interchange power			303				314				603				592
Purchased power — related parties			20				21				41				42
Cost of gas sold			220				178				988				956
Maintenance and other operating expenses			288				296				567				571
Depreciation and amortization			122				131				284				303
General taxes			51				41				118				107
Insurance settlement			—				(50	)			—				(50	)
Gain on asset sales, net			—				(4	)			—				(4	)
Total operating expenses			1,157				1,078				2,906				2,806
Operating Income			207				262				513				501
Other Income (Expense)
Interest income			2				4				4				9
Allowance for equity funds used during construction			2				2				3				3
Income from equity method investees			2				2				6				5
Other income			5				9				9				18
Other expense			(3	)			(3	)			(5	)			(5	)
Total other income			8				14				17				30
Interest Charges
Interest on long-term debt			99				98				199				196
Other interest expense			6				20				12				28
Allowance for borrowed funds used during construction			(1	)			(1	)			(2	)			(2	)
Total interest charges			104				117				209				222
Income Before Income Taxes			111				159				321				309
Income Tax Expense			10				59				87				120
Income From Continuing Operations			101				100				234				189
Income (Loss) From Discontinued Operations, Net of Tax Expense of $ —, $6, $1, and $5			—				(16	)			2				(17	)
Net Income			101				84				236				172
Income Attributable to Noncontrolling Interests			1				2				1				2
Net Income Attributable to CMS Energy			100				82				235				170
Preferred Stock Dividends			—				2				—				5
Net Income Available to Common Stockholders		$	100			$	80			$	235			$	165

The accompanying notes are an integral part of these statements.

In Millions, Except Per Share Amounts
		Three Months Ended								Six Months Ended
June 30		2011				2010				2011				2010
Net Income Attributable to Common Stockholders
Amounts Attributable to Continuing Operations		$	100			$	96			$	233			$	182
Amounts Attributable to Discontinued Operations			—				(16	)			2				(17	)
Net Income Available to Common Stockholders		$	100			$	80			$	235			$	165
Income Attributable to Noncontrolling Interests
Amounts Attributable to Continuing Operations		$	1			$	2			$	1			$	2
Amounts Attributable to Discontinued Operations			—				—				—				—
Income Attributable to Noncontrolling Interests		$	1			$	2			$	1			$	2
Basic Earnings Per Average Common Share
Basic Earnings from Continuing Operations		$	0.40			$	0.42			$	0.93			$	0.80
Basic Earnings (Loss) from Discontinued Operations			—				(0.07	)			0.01				(0.08	)
Basic Earnings Attributable to Common Stock		$	0.40			$	0.35			$	0.94			$	0.72
Diluted Earnings Per Average Common Share
Diluted Earnings from Continuing Operations		$	0.38			$	0.39			$	0.89			$	0.74
Diluted Earnings (Loss) from Discontinued Operations			—				(0.07	)			0.01				(0.07	)
Diluted Earnings Attributable to Common Stock		$	0.38			$	0.32			$	0.90			$	0.67
Dividends Declared Per Common Share		$	0.21			$	0.15			$	0.42			$	0.30

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CMS Energy Corporation
Consolidated Statements of Cash Flows
(Unaudited)

In Millions
Six Months ended June 30		2011				2010
Cash Flows from Operating Activities
Net Income		$	236			$	172
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization			284				303
Deferred income taxes and investment tax credit			74				107
Postretirement benefits expense			83				88
Other non-cash operating activities			39				41
Postretirement benefits contributions			(39	)			(153	)
Changes in other assets and liabilities:
Decrease in accounts receivable, notes receivable, and accrued revenue			215				178
Decrease in accrued power supply revenue			15				22
Decrease in inventories			204				230
Increase in accounts payable			34				41
Decrease in accrued expenses			(36	)			(51	)
Decrease in other current and non-current assets			71				88
Increase (decrease) in other current and non-current liabilities			36				(18	)
Net cash provided by operating activities			1,216				1,048
Cash Flows from Investing Activities
Capital expenditures (excludes assets placed under capital lease)			(399	)			(424	)
Cost to retire property			(28	)			(20	)
Cash effect of deconsolidation of partnerships			—				(10	)
Other investing activities			(44	)			(36	)
Net cash used in investing activities			(471	)			(490	)
Cash Flows from Financing Activities
Proceeds from issuance of long-term debt			375				300
Proceeds from EnerBank notes, net			21				66
Issuance of common stock			22				5
Retirement of long-term debt			(292	)			(352	)
Payment of common stock dividends			(106	)			(69	)
Payment of preferred stock dividends			—				(5	)
Payment of capital and finance lease obligations			(12	)			(12	)
Other financing costs			(8	)			(44	)
Net cash used in financing activities			—				(111	)
Net Increase in Cash and Cash Equivalents, Including Assets Held for Sale			745				447
Decrease (Increase) in Cash and Cash Equivalents Included in Assets Held for Sale			2				(1	)
Net Increase in Cash and Cash Equivalents			747				446
Cash and Cash Equivalents, Beginning of Period			247				90
Cash and Cash Equivalents, End of Period		$	994			$	536

The accompanying notes are an integral part of these statements.

CMS Energy Corporation
Consolidated Balance Sheets
(Unaudited)

In Millions
		June 30				December 31
ASSETS		2011				2010
Current Assets
Cash and cash equivalents		$	994			$	247
Restricted cash and cash equivalents			29				23
Accounts receivable and accrued revenue, less allowances of $25 in 2011 and 2010			719				981
Notes receivable			57				70
Accounts receivable — related parties			10				10
Accrued power supply revenue			—				15
Inventories at average cost
Gas in underground storage			720				946
Materials and supplies			106				104
Generating plant fuel stock			143				125
Deferred property taxes			133				180
Regulatory assets			8				19
Assets held for sale			—				2
Prepayments and other current assets			37				37
Total current assets			2,956				2,759
Plant, Property & Equipment (at cost)
Plant, property & equipment, gross			14,413				14,145
Less accumulated depreciation, depletion, and amortization			4,802				4,646
Plant, property & equipment, net			9,611				9,499
Construction work in progress			644				570
Total plant, property & equipment			10,255				10,069
Non-current Assets
Regulatory assets			2,050				2,093
Accounts and notes receivable, less allowances of $5 in 2011 and 2010			398				397
Investments			52				49
Assets held for sale			—				4
Other non-current assets			234				245
Total non-current assets			2,734				2,788
Total Assets		$	15,945			$	15,616

The accompanying notes are an integral part of these statements.

In Millions
		June 30				December 31
LIABILITIES AND EQUITY		2011				2010
Current Liabilities
Current portion of long-term debt, capital and finance lease obligations		$	1,123			$	750
Accounts payable			444				492
Accounts payable — related parties			8				9
Accrued rate refunds			43				19
Accrued interest			107				102
Accrued taxes			239				302
Deferred income taxes			154				180
Regulatory liabilities			1				22
Liabilities held for sale			—				1
Other current liabilities			122				144
Total current liabilities			2,241				2,021
Non-current Liabilities
Long-term debt			6,184				6,448
Non-current portion of capital and finance lease obligations			177				188
Regulatory liabilities			1,860				1,988
Postretirement benefits			1,136				1,135
Asset retirement obligations			252				245
Deferred investment tax credit			47				49
Deferred income taxes			768				438
Other non-current liabilities			278				267
Total non-current liabilities			10,702				10,758
Commitments and Contingencies (Notes 3, 4, 5, 7, and 8)
Equity
Common stockholders’ equity
Common stock, authorized 350.0 shares; outstanding 251.8 shares in 2011 and 249.6 shares in 2010			3				2
Other paid-in capital			4,621				4,588
Accumulated other comprehensive loss			(38	)			(40	)
Accumulated deficit			(1,628	)			(1,757	)
Total common stockholders’ equity			2,958				2,793
Noncontrolling interests			44				44
Total equity			3,002				2,837
Total Liabilities and Equity		$	15,945			$	15,616