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EX-31.A - EX-31.A - CONSUMERS ENERGY COk48861exv31wa.htm
EX-12.A - EX-12.A - CONSUMERS ENERGY COk48861exv12wa.htm
EX-12.B - EX-12.B - CONSUMERS ENERGY COk48861exv12wb.htm
EX-24.B - EX-24.B - CONSUMERS ENERGY COk48861exv24wb.htm
EX-31.D - EX-31.D - CONSUMERS ENERGY COk48861exv31wd.htm
EX-32.B - EX-32.B - CONSUMERS ENERGY COk48861exv32wb.htm
EX-24.A - EX-24.A - CONSUMERS ENERGY COk48861exv24wa.htm
EX-32.A - EX-32.A - CONSUMERS ENERGY COk48861exv32wa.htm
EX-31.C - EX-31.C - CONSUMERS ENERGY COk48861exv31wc.htm
EX-31.B - EX-31.B - CONSUMERS ENERGY COk48861exv31wb.htm
EX-10.S.S - EX-10.S.S - CONSUMERS ENERGY COk48861exv10wsws.htm
EX-10.R.R - EX-10.R.R - CONSUMERS ENERGY COk48861exv10wrwr.htm
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EX-23.A - EX-23.A - CONSUMERS ENERGY COk48861exv23wa.htm
Table of Contents

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 ___
 
         
Commission
  Registrant; State of Incorporation;
  IRS Employer
File Number
 
Address; and Telephone Number
  Identification No.
1-9513
  CMS ENERGY CORPORATION
(A Michigan Corporation)
One Energy Plaza, Jackson, Michigan 49201
(517) 788-0550
  38-2726431
         
         
1-5611
  CONSUMERS ENERGY COMPANY
(A Michigan Corporation)
One Energy Plaza, Jackson, Michigan 49201
(517) 788-0550
  38-0442310
 
Securities registered pursuant to Section 12(b) of the Act:
         
        Name of Each Exchange
Registrant
 
Title of Class
 
on Which Registered
 
CMS Energy Corporation
  Common Stock, $.01 par value   New York Stock Exchange
Consumers Energy Company
  Preferred Stocks, $100 par value: $4.16 Series, $4.50 Series   New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:  None
 
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
 
CMS Energy Corporation: Yes [X] No o Consumers Energy Company: Yes [X] No o
 
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
 
CMS Energy Corporation: Yes o No [X] Consumers Energy Company: Yes o No [X]
 
Indicate by check mark whether the Registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days.
 
CMS Energy Corporation: Yes [X] No o Consumers Energy Company: Yes [X] No o
 
Indicate by check mark whether the Registrants have submitted electronically and posted on their corporate Web sites, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrants were required to submit and post such files).
 
CMS Energy Corporation: Yes [X] No o Consumers Energy Company: Yes [X] No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  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
 
         
       
Page
  3
         
         
     
  9
         
         
     
  9
         
PART I:        
  Business   14
  Risk Factors   31
  Unresolved Staff Comments   39
  Properties   39
  Legal Proceedings   39
  Omitted   39
         
PART II:        
  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   40
  Selected Financial Data   41
  Management’s Discussion and Analysis of Financial Condition and Results of Operations   41
  Quantitative and Qualitative Disclosures About Market Risk   41
  Financial Statements and Supplementary Data   42
  Changes in and Disagreements With Accountants on Accounting and Financial Disclosure   175
  CMS Energy’s Controls and Procedures   175
  Consumers’ Controls and Procedures   176
  Other Information   176
         
PART III:        
  Directors, Executive Officers and Corporate Governance   177
  Executive Compensation   178
  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   178
  Certain Relationships and Related Transactions, and Director Independence   179
  Principal Accountant Fees and Services   179
         
PART IV:        
  Exhibits and Financial Statement Schedules   179
 EX-10.P.P
 EX-10.R.R
 EX-10.S.S
 EX-12.A
 EX-12.B
 EX-21
 EX-23.A
 EX-23.B
 EX-24.A
 EX-24.B
 EX-31.A
 EX-31.B
 EX-31.C
 EX-31.D
 EX-32.A
 EX-32.B


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Certain terms used in the text and financial statements are defined below.
 
     
2008 Energy Legislation
  Comprehensive energy reform package enacted in October 2008 with the approval of Michigan Senate Bill 213 and Michigan House Bill 5524
ABATE
  Association of Businesses Advocating Tariff Equity
ABO
  Accumulated Benefit Obligation. The liabilities of a pension plan based on service and pay to date. This differs from the PBO that is typically disclosed in that it does not reflect expected future salary increases.
AEI
  Ashmore Energy International, a non-affiliated company
AFUDC
  Allowance for borrowed and equity funds used during construction
ALJ
  Administrative Law Judge
AMT
  Alternative minimum tax
AOC
  Administrative Order on Consent
AOCL
  Accumulated Other Comprehensive Loss
APB
  Accounting Principles Board
ARB
  Accounting Research Bulletin
ARO
  Asset retirement obligation
ASC
  FASB Accounting Standards Codification
ASU
  FASB Accounting Standards Update
Bay Harbor
  A residential/commercial real estate area located near Petoskey, Michigan. In 2002, CMS
    Energy sold its interest in Bay Harbor.
bcf
  Billion cubic feet of gas
Beeland
  Beeland Group LLC, a wholly owned subsidiary of CMS Land
Big Rock
  Big Rock Point nuclear power plant, formerly owned by Consumers
Board of Directors
  Board of Directors of CMS Energy
Btu
  British thermal unit; one Btu equals the amount of energy required to raise the temperature of one pound of water by one degree Fahrenheit
CAIR
  The Clean Air Interstate Rule
CAMR
  The Clean Air Mercury Rule
Cantera Gas Company
  Cantera Gas Company LLC, a non-affiliated company
Cantera Natural Gas, Inc. 
  Cantera Natural Gas, Inc., a non-affiliated company that purchased CMS Field Services
CAO
  Chief Accounting Officer
CEO
  Chief Executive Officer
CFO
  Chief Financial Officer
C&HR Committees
  The Compensation and Human Resources Committees of the Boards of Directors of CMS Energy and Consumers
Chrysler
  Chrysler LLC, a non-affiliated company
City-gate arrangement
  The arrangement made for the point at which a local distribution company physically receives gas from a supplier or pipeline
CKD
  Cement kiln dust
Clean Air Act
  Federal Clean Air Act, as amended
CMS Capital
  CMS Capital, L.L.C., a wholly owned subsidiary of CMS Energy
CMS Electric & Gas
  CMS Electric & Gas, L.L.C., a wholly owned subsidiary of CMS International Ventures
CMS Energy
  CMS Energy Corporation, the parent of Consumers and CMS Enterprises


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Table of Contents

     
CMS Energy Brasil S.A. 
  CMS Energy Brasil S.A., a former wholly owned subsidiary of CMS Electric & Gas
CMS Energy Common Stock or common stock
  Common stock of CMS Energy, par value $0.01 per share
CMS Enterprises
  CMS Enterprises Company, a wholly owned subsidiary of CMS Energy
CMS ERM
  CMS Energy Resource Management Company, formerly CMS MST, a wholly owned subsidiary of CMS Enterprises
CMS Field Services
  CMS Field Services, Inc., a former wholly owned subsidiary of CMS Gas Transmission
CMS Gas Transmission
  CMS Gas Transmission Company, a wholly owned subsidiary of CMS Enterprises
CMS Generation
  CMS Generation Co., a former wholly owned subsidiary of CMS Enterprises
CMS Generation San Nicolas Company
  CMS Generation San Nicolas Company, a company in which CMS Enterprises owns a 0.1 percent interest
CMS International Ventures
  CMS International Ventures LLC, a subsidiary of CMS Enterprises in which CMS Enterprises owns a 61.49 percent interest
CMS Land
  CMS Land Company, a wholly owned subsidiary of CMS Capital
CMS MST
  CMS Marketing, Services and Trading Company, a wholly owned subsidiary of CMS Enterprises, whose name was changed to CMS ERM effective January 2004
CMS Oil and Gas
  CMS Oil and Gas Company, a former wholly owned subsidiary of CMS Enterprises
CMS Viron
  CMS Viron Corporation, a wholly owned subsidiary of CMS ERM
Consumers
  Consumers Energy Company, a wholly owned subsidiary of CMS Energy
Consumers Funding
  Consumers Funding LLC, a wholly owned consolidated bankruptcy-remote subsidiary of Consumers and special- purpose entity organized for the sole purpose of purchasing and owning Securitization property, assuming Securitization bonds, and pledging its interest in Securitization property to a trustee to collateralize the Securitization bonds
Customer Choice Act
  Customer Choice and Electricity Reliability Act, a Michigan statute
D.C. 
  District of Columbia
DCCP
  Defined Company Contribution Plan
DC SERP
  Defined Contribution SERP
Detroit Edison
  The Detroit Edison Company, a non-affiliated company
DIE
  Dearborn Industrial Energy, L.L.C., a wholly owned subsidiary of CMS Energy
DIG
  Dearborn Industrial Generation, L.L.C., a wholly owned subsidiary of DIE
DOE
  U.S. Department of Energy
DOJ
  U.S. Department of Justice
Dow
  The Dow Chemical Company, a non-affiliated company
DSSP
  Deferred Salary Savings Plan
EBITDA
  Earnings Before Interest, Taxes, Depreciation, and Amortization
EISP
  Executive Incentive Separation Plan
EITF
  Emerging Issues Task Force
El Chocon
  A 1,200 MW hydro power plant located in Argentina, in which CMS Generation formerly held a 17.2 percent ownership interest
EnerBank
  EnerBank USA, a wholly owned subsidiary of CMS Capital


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Entergy
  Entergy Corporation, a non-affiliated company
EPA
  U.S. Environmental Protection Agency
EPS
  Earnings per share
Exchange Act
  Securities Exchange Act of 1934, as amended
Exeter
  Exeter Energy Limited Partnership, a limited partnership owned directly and indirectly by HYDRA-CO
FASB
  Financial Accounting Standards Board
FDIC
  Federal Deposit Insurance Corporation
FERC
  Federal Energy Regulatory Commission
First Mortgage Bond Indenture
  The indenture dated as of September 1, 1945 between Consumers and The Bank of New York Mellon, as Trustee, as amended and supplemented
Fitch
  Fitch Ratings, Ltd.
FMB
  First mortgage bond
FOV
  Finding of Violation
FSP
  FASB Staff Position
GAAP
  U.S. Generally Accepted Accounting Principles
GasAtacama
  GasAtacama Holding Limited, a limited liability partnership that manages GasAtacama S.A., which includes Atacama Finance Company, an integrated natural gas pipeline and electric generating plant in Argentina and Chile, in which CMS International Ventures formerly owned a 50 percent interest
GCC
  Gas Customer Choice, which allows gas customers to purchase gas from alternative suppliers
GCR
  Gas cost recovery
Genesee
  Genesee Power Station Limited Partnership, a consolidated variable interest entity in which HYDRA-CO has a 50 percent interest
GM
  General Motors Corporation, a non-affiliated company
Grayling
  Grayling Generating Station Limited Partnership, a consolidated variable interest entity
    in which HYDRA-CO has a 50 percent interest
GWh
  Gigawatt-hour (a unit of energy equal to one million kilowatt-hours)
HYDRA-CO
  HYDRA-CO Enterprises, Inc., a wholly owned subsidiary of CMS Enterprises
ICSID
  International Centre for the Settlement of Investment Disputes
IPP
  Independent power producer or independent power production
IRS
  Internal Revenue Service
ISFSI
  Independent spent fuel storage installation
ITC
  Income tax credit
Jamaica Power
  Jamaica Private Power Company, Limited, a 63 MW diesel-fueled power plant in Jamaica, in which CMS Generation formerly owned a 42 percent interest
Jorf Lasfar
  A 1,356 MW coal-fueled power plant in Morocco, in which CMS Generation formerly owned a 50 percent interest
kilovolts
  Thousand volts (unit used to measure the difference in electrical pressure along a current)
kVA
  Thousand volt-amperes (unit used to measure the flow rate of electrical current that is available for an electrical service)
kWh
  Kilowatt-hour (a unit of energy equal to one thousand watt-hours)
LIBOR
  London Interbank Offered Rate
Lucid Energy
  Lucid Energy LLC, a non-affiliated company


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Table of Contents

     
Ludington
  Ludington pumped storage plant, jointly owned by Consumers and Detroit Edison
Marathon
  Marathon Oil Company, Marathon E.G. Holding, Marathon E.G. Alba, Marathon E.G. LPG, Marathon Production LTD, and Alba Associates, LLC, each a non-affiliated company
MBT
  Michigan Business Tax
MCV Facility
  A 1,500 MW natural gas-fueled, combined-cycle cogeneration facility operated by the MCV Partnership
MCV Partnership
  Midland Cogeneration Venture Limited Partnership
MCV PPA
  The PPA between Consumers and the MCV Partnership, with a 35-year term commencing in March 1990, as amended and restated in an agreement dated as of June 9, 2008 between Consumers and the MCV Partnership
MD&A
  Management’s Discussion and Analysis
MDL
  A pending multi-district litigation case in Nevada
MDNRE
  Michigan Department of Natural Resources and Environment, which, effective January 17, 2010 as a result of department reorganizations, is the successor to the Michigan Department of Environmental Quality and the Michigan Department of Natural Resources
MEI
  Michigan Energy Investments LLC, an affiliate of Lucid Energy and a non-affiliated company
METC
  Michigan Electric Transmission Company, LLC, a non-affiliated company owned by ITC Holdings Corporation and a member of MISO
MGP
  Manufactured gas plant
Midwest Energy Market
  An energy market developed by the MISO to provide day-ahead and real-time market information and centralized dispatch for market participants
MISO
  Midwest Independent Transmission System Operator, Inc.
Moody’s
  Moody’s Investor Services, Inc.
MPSC
  Michigan Public Service Commission
MRV
  Market-Related Value of Plan assets
MW
  Megawatt (a unit of power equal to one million watts)
MWh
  Megawatt-hour (a unit of energy equal to one million watt- hours)
NAV
  Net asset value
NERC
  North American Electric Reliability Corporation, a non-affiliated company
NMC
  Nuclear Management Company, LLC, a non-affiliated company
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
NYMEX
  New York Mercantile Exchange
OPEB
  Postretirement benefit plans other than pensions
Palisades
  Palisades nuclear power plant, formerly owned by Consumers
Panhandle
  Panhandle Eastern Pipe Line Company, including its wholly owned subsidiaries Trunkline, Pan Gas Storage, Panhandle Storage, and Panhandle Holdings, a former wholly owned subsidiary of CMS Gas Transmission
PBO
  Pension benefit obligation


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PCB
  Polychlorinated biphenyl
PDVSA
  Petroleos de Venezuela S.A., a non-affiliated company
Peabody Energy
  Peabody Energy Corporation, a non-affiliated company
Pension Plan
  The trustee, non-contributory, defined benefit pension plan of Panhandle, Consumers, and CMS Energy
Pension Protection Act
  The Pension Protection Act of 2006, signed into law on August 17, 2006
PISP
  Performance Incentive Stock Plan
PowerSmith
  A 124 MW natural gas power plant located in Oklahoma, in which CMS Generation formerly held a 6.25 percent limited partner ownership interest
PPA
  Power purchase agreement
Prairie State
  Prairie State Energy Campus, a planned 1,600 MW power plant and coal mine in southern Illinois
PSCR
  Power supply cost recovery
PSD
  Prevention of Significant Deterioration
PURPA
  Public Utility Regulatory Policies Act of 1978
Quicksilver
  Quicksilver Resources, Inc., a non-affiliated company
QSPE
  Qualifying special-purpose entity
RCP
  Resource Conservation Plan
REC
  Renewable energy credit established under the 2008 Energy Legislation
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
S&P
  Standard and Poor’s Financial Services LLC, which includes Standard and Poor’s Ratings Services
SEC
  U.S. Securities and Exchange Commission
Securitization
  A financing method authorized by statute and approved by the MPSC which allows a utility to sell its right to receive a portion of the rate payments received from its customers for the repayment of securitization bonds issued by a special-purpose entity affiliated with such utility
SENECA
  Sistema Electrico del Estado Nueva Esparta C.A., a former wholly owned subsidiary of CMS International Ventures
SERP
  Supplemental Executive Retirement Plan
SFAS
  Statement of Financial Accounting Standards
Stranded Costs
  Costs incurred by utilities in order to serve their customers in a regulated monopoly environment, which may not be recoverable in a competitive environment because of customers leaving their systems and ceasing to pay for their costs. These costs could include owned and purchased generation and regulatory assets.
Superfund
  Comprehensive Environmental Response, Compensation and Liability Act
Supplemental Environmental Programs
  Environmentally beneficial projects which a party agrees to undertake as part of the settlement of an enforcement action, but which the party is not otherwise legally required to perform
TAQA
  Abu Dhabi National Energy Company, a subsidiary of Abu Dhabi Water and Electricity Authority, a non-affiliated company
T.E.S. Filer City
  T.E.S. Filer City Station Limited Partnership, a consolidated variable interest entity in which HYDRA-CO has a 50 percent interest


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TGN
  A natural gas transportation and pipeline business located in Argentina, in which CMS Gas Transmission formerly owned a 23.54 percent interest
TRAC
  Terminal Rental Adjustment Clause, a provision of a leasing agreement which permits or requires the rental price to be adjusted upward or downward by reference to the amount realized by the lessor under the agreement upon sale or other disposition of formerly leased property
Trunkline
  Trunkline Gas Company, LLC, a former wholly owned subsidiary of CMS Panhandle Holdings, LLC
Trust Preferred Securities
  Securities representing an undivided beneficial interest in the assets of statutory business trusts, the interests of which have a preference with respect to certain trust distributions over the interests of either CMS Energy or Consumers, as applicable, as owner of the common beneficial interests of the trusts
TSR
  Total shareholder return
TSU
  Texas Southern University, a non-affiliated entity
Union
  Utility Workers Union of America, AFL-CIO
U.S. 
  United States
VEBA
  Voluntary employees’ beneficiary association trusts accounts established specifically to set aside employer-contributed assets to pay for future expenses of the OPEB plan
VIE
  Variable interest entity
Wolverine
  Wolverine Power Supply Cooperative, Inc., a non-affiliated company
Zeeland
  A 935 MW gas-fueled power plant located in Zeeland, Michigan


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FILING FORMAT
 
This combined Form 10-K is separately filed by CMS Energy 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.
 
FORWARD-LOOKING STATEMENTS AND INFORMATION
 
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:
 
  •  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 continued downturn in the economy and the sharp downturn and extreme volatility in the financial and credit markets on CMS Energy, Consumers, or any of their affiliates, including their:
 
  •  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 growth or decline in the geographic areas where CMS Energy and Consumers conduct business;
 
  •  changes in applicable laws, rules, regulations, principles or practices, or in their interpretation, including those related to taxes, the environment, and accounting matters, that could have an impact on CMS Energy’s


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  and Consumers’ businesses or financial results, including the impact of any future regulations or laws 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;
 
  •  coal ash;
 
  •  limitations on the use or construction of coal-fueled electric power plants; and
 
  •  renewable portfolio standards and energy efficiency mandates;
 
  •  national, regional, and local economic, competitive, and regulatory policies, conditions, and developments;
 
  •  adverse regulatory or legal interpretations or decisions, including those related to environmental laws and regulations, and potential environmental remediation costs associated with these interpretations or decisions, including but not limited to those that may affect Bay Harbor or Consumers’ RMRR classification under NSR regulations;
 
  •  potentially adverse regulatory treatment or failure to receive timely regulatory orders concerning a number of significant matters affecting Consumers that are presently or potentially before the MPSC, including:
 
  •  sufficient and timely recovery of:
 
  •  environmental and safety-related expenditures;
 
  •  power supply and natural gas supply costs;
 
  •  operating and maintenance expenses;
 
  •  additional utility rate-based investments;
 
  •  proposed retirement and decommissioning of facilities;
 
  •  increased MISO energy and transmission costs; and
 
  •  costs associated with energy efficiency investments and state or federally mandated renewable resource standards;
 
  •  actions of regulators with respect to expenditures subject to tracking mechanisms;
 
  •  actions of regulators to prevent or curtail shutoffs for non-paying customers;
 
  •  actions of regulators with respect to the implementation of the “pilot” decoupling mechanism and an uncollectible expense tracking mechanism described in the November 2009 MPSC electric rate case order;
 
  •  regulatory orders preventing or curtailing rights to self-implement rate requests;
 
  •  regulatory orders potentially requiring a refund of previously self-implemented rates;
 
  •  authorization of a new coal-fueled plant; and
 
  •  implementation of new energy legislation or revisions of existing regulations;
 
  •  potentially adverse regulatory treatment resulting from pressure on regulators to oppose annual rate increases or to lessen rate impacts upon customers, particularly in difficult economic times;
 
  •  potential legislative changes to the ten-percent ROA limit;
 
  •  potentially adverse regulatory treatment concerning a number of significant matters affecting Consumers that are presently before the MDNRE;
 
  •  the ability of Consumers to recover its regulatory assets in full and in a timely manner;


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  •  the ability of Consumers to recover nuclear fuel storage costs incurred as a result of the DOE’s failure to accept spent nuclear fuel on schedule, and the outcome of pending litigation with the DOE;
 
  •  loss of customer load to alternative energy suppliers;
 
  •  the impact of expanded enforcement powers and investigation activities at the FERC;
 
  •  federal regulation of electric sales and transmission of electricity, including periodic re-examination by federal regulators of CMS Energy’s and Consumers’ market-based sales authorizations in wholesale power markets without price restrictions;
 
  •  effects of weather conditions, such as 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 new banking regulations on EnerBank;
 
  •  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;
 
  •  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;
 
  •  changes in construction material prices and the availability of qualified construction personnel to implement Consumers’ construction program;
 
  •  factors affecting operations, such as unusual weather conditions, catastrophic weather-related damage, unscheduled generation outages, maintenance or repairs, environmental incidents, or electric transmission or gas pipeline system constraints;
 
  •  potential disruption or interruption of facilities or operations due to accidents, war, or terrorism, and the ability to obtain or maintain insurance coverage for these events;
 
  •  technological developments in energy production, delivery, usage, and storage;
 
  •  achievement of capital expenditure and operating expense goals, including the 2010 capital expenditures forecast;
 
  •  the impact of CMS Energy’s and Consumers’ integrated business software system on their operations, including utility customer billing and collections;
 
  •  the effectiveness of CMS Energy’s and Consumers’ risk management policies and procedures;
 
  •  CMS Energy’s and Consumers’ ability to achieve generation planning goals and the occurrence and duration of planned or unplanned generation outages;
 
  •  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 the F.T. Barr matter and 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;


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  •  changes in financial or regulatory accounting principles or policies, including possible changes to rules involving fair value accounting;
 
  •  new or revised interpretations of GAAP by regulators, which could affect how accounting principles are applied, and could impact future periods’ financial statements or previously filed financial statements;
 
  •  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 the MD&A, Note 6, Contingencies and Commitments, Note 7, Utility Rate Matters, and Item 1A. Risk Factors.


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PART I
ITEM 1. BUSINESS
 
GENERAL
 
CMS Energy
 
CMS Energy was formed in Michigan in 1987 and is an energy company operating primarily in Michigan. It is the parent holding company of several subsidiaries, including Consumers, an electric and gas utility, and CMS Enterprises, primarily a domestic IPP. Consumers serves individuals and businesses operating in the alternative energy, automotive, chemical, metal, and food products industries as well as a diversified group of other industries. CMS Enterprises, through its subsidiaries and equity investments, is engaged primarily in IPP and owns power generation facilities fueled mostly by natural gas and biomass.
 
CMS Energy manages its businesses by the nature of services each provides and operates, principally in three business segments: electric utility, gas utility, and enterprises, its non-utility operations and investments. Consumers’ consolidated operations account for substantially all of CMS Energy’s total assets, income, and operating revenue. CMS Energy’s consolidated operating revenue was $6.2 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.


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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:
 
(MAP)


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BUSINESS SEGMENTS
 
Consumers Electric Utility
 
Electric Utility Operations:  Consumers’ electric utility operations, which include the generation, purchase, distribution, and sale of electricity, generated operating revenue of $3.4 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:
 
(PIE CHART)
 
Consumers’ electric utility operations are not dependent on a single customer, or even a few customers, and the loss of any one or even a few of its largest customers is not reasonably likely to have a material adverse effect on 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.


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


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Electric Utility Properties:  At December 31, 2009, Consumers’ electric generating system consisted of the following:
 
                     
        2009
       
        Summer Net
       
    Number of Units and Year
  Demonstrated
    2009 Net
 
Name and Location (Michigan)
  Entering Service   Capability (MW)     Generation (GWh)  
 
Coal Generation
                   
J H Campbell 1 & 2 — West Olive
  2 Units, 1962-1967     615       3,303  
J H Campbell 3 — West Olive(a)
  1 Unit, 1980     770       5,893  
B C Cobb — Muskegon
  2 Units, 1956-1957     312       1,733  
D E Karn — Essexville
  2 Units, 1959-1961     515       2,743  
J C Weadock — Essexville
  2 Units, 1955-1958     310       1,869  
J R Whiting — Erie
  3 Units, 1952-1953     328       1,714  
                     
Total coal generation
        2,850       17,255  
                     
Oil/Gas Generation
                   
B C Cobb — Muskegon
  3 Units, 1999-2000(b)            
D E Karn — Essexville
  2 Units, 1975-1977     1,276       26  
Zeeland — Zeeland
  1 Unit, 2002     538       388  
                     
Total oil/gas generation
        1,814       414  
                     
Hydroelectric
                   
Conventional hydro generation
  13 Plants, 1906-1949     74       466  
Ludington — Ludington
  6 Units, 1973     955 (c)     (303 )(d)
                     
Total hydroelectric
        1,029       163  
                     
Gas/Oil Combustion Turbine
                   
Various plants
  7 Plants, 1966-1971     331       37  
Zeeland — Zeeland
  2 Units, 2001     330       128  
                     
Total gas/oil combustion turbine
        661       165  
                     
Total owned generation
        6,354       17,997  
Purchased and Interchange Power(e)
        2,600 (f)     18,463 (g)
                     
Total
        8,954       36,460  
                     
 
 
(a) Represents Consumers’ share of the capacity of the J H Campbell 3 unit, net of the 6.69 percent ownership interest of the Michigan Public Power Agency and Wolverine.
 
(b) B C Cobb 1-3 are retired coal-fueled units that were converted to gas-fueled. Units were placed back into service in the years indicated. B C Cobb 1-3 were placed out-of-service beginning in April 2009. Consumers plans to return B C Cobb 1-3 to service in April 2012.
 
(c) Represents Consumers’ 51 percent share of the capacity of Ludington. Detroit Edison owns the remaining 49 percent.
 
(d) Represents Consumers’ share of net pumped storage generation. This facility electrically pumps water during off-peak hours for storage to generate electricity later during peak-demand hours.
 
(e) Includes purchases from the Midwest Energy Market, long-term purchase contracts, options, spot market, and other seasonal purchases.
 
(f) Includes 1,240 MW of purchased contract capacity from the MCV Facility and 778 MW of purchased contract capacity from Palisades.
 
(g) Includes 2,232 GWh of purchased energy from the MCV Facility and 6,119 GWh of purchased energy from Palisades.


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Consumers’ distribution system includes:
 
  •  409 miles of high-voltage distribution radial lines operating at 120 kilovolts or above;
 
  •  4,244 miles of high-voltage distribution overhead lines operating at 23 kilovolts and 46 kilovolts;
 
  •  17 subsurface miles of high-voltage distribution underground lines operating at 23 kilovolts and 46 kilovolts;
 
  •  55,816 miles of electric distribution overhead lines;
 
  •  9,976 miles of underground distribution lines; and
 
  •  substations having an aggregate transformer capacity of 24 million kVA.
 
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:
 
(PIE CHART)


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Consumers’ generation came from the following sources:
 
                                         
    GWh  
Power Generated
  2009     2008     2007     2006     2005  
 
Coal
    17,255       17,701       17,903       17,744       19,711  
Gas
    565       804       129       161       356  
Hydro
    466       454       416       485       387  
Oil
    14       41       112       48       225  
Nuclear
                1,781       5,904       6,636  
Net pumped storage
    (303 )     (382 )     (478 )     (426 )     (516 )
                                         
Total owned generation
    17,997       18,618       19,863       23,916       26,799  
Non-utility generation
    11,538       13,643       12,502       8,594       8,999  
Net interchange power
    6,925       6,653       8,009       7,244       1,772  
                                         
Net purchased and interchange power
    18,463       20,296       20,511       15,838       10,771  
                                         
Total Net Power Supply
    36,460       38,914       40,374       39,754       37,570  
                                         
 
The cost of all fuels consumed, shown in the following table, fluctuates with the mix of fuel used.
 
                                         
    Cost per Million Btu  
Fuel Consumed
  2009     2008     2007     2006     2005  
 
Coal
  $ 2.37     $ 2.01     $ 2.04     $ 2.09     $ 1.78  
Gas
    6.57       10.94       10.29       8.92       9.76  
Oil
    9.59       11.54       8.21       8.68       5.98  
Nuclear
                0.42       0.24       0.34  
                                         
All Fuels(a)
  $ 2.56     $ 2.47     $ 2.07     $ 1.72     $ 1.64  
                                         
 
 
(a) Weighted average fuel costs
 
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


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


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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:
 
(BAR GRAPH)
 
Gas Utility Properties: Consumers’ gas distribution and transmission system located in Michigan’s Lower Peninsula consists of:
 
  •  26,526 miles of distribution mains;
 
  •  1,652 miles of transmission lines;
 
  •  7 compressor stations with a total of 136,180 installed and available horsepower; and
 
  •  15 gas storage fields with an aggregate storage capacity of 307 bcf and a working storage capacity of 142 bcf.
 
Gas Supply: In 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.


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The following illustration shows the sources of Consumers’ gas supply during 2009:
 
(PIE CHART)
 
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.


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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:
 
                             
                    Percentage of
 
                    Gross Capacity
 
                    Under Long-Term
 
    Primary
  Ownership Interest
    Gross Capacity
    Contract
 
Location
  Fuel Type   (%)     (MW)     (%)  
 
California
  Biomass     37.8       36       100  
Connecticut(a)
  Scrap tire     100       31        
Michigan
  Natural gas     100       710       92  
Michigan
  Natural gas     100       224        
Michigan
  Coal     50       73       100  
Michigan
  Biomass     50       40       100  
Michigan
  Biomass     50       38       100  
North Carolina
  Biomass     50       50        
                             
Total
                1,202          
                             
 
 
(a) Represents Exeter, whose assets and liabilities were reclassified as held for sale in 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.


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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.


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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


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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:
 
  •  industrial customers relocating all or a portion of their production capacity outside Consumers’ service territory for economic reasons;
 
  •  municipalities owning or operating competing electric delivery systems;
 
  •  customer self-generation; and
 
  •  adjacent utilities that extend lines to customers in contiguous service territories.
 
Consumers addresses this competition by monitoring activity in adjacent areas and 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.


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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)
 
             
Name
 
Age
 
Position
 
Period
 
David W. Joos
  56  
President and CEO of CMS Energy
  2004-Present
       
CEO of Consumers
  2004-Present
       
Chairman of the Board, President, CEO of CMS Enterprises
  5/2008-Present
       
Director of CMS Energy
  2001-Present
       
Director of Consumers
  2001-Present
       
Director of CMS Enterprises
  2000-Present
       
Chairman of the Board, CEO of CMS Enterprises
  2003-5/2008
Thomas J. Webb
  57  
Executive Vice President, CFO of CMS Energy
  2002-Present
       
Executive Vice President, CFO of Consumers
  2002-Present
       
Executive Vice President, CFO of CMS Enterprises
  2002-Present
       
Director of CMS Enterprises
  2002-Present
James E. Brunner
  57  
Senior Vice President and General Counsel of CMS Energy
  11/2006-Present
       
Senior Vice President and General Counsel of Consumers
  11/2006-Present
       
Senior Vice President and General Counsel of CMS Enterprises
  11/2007-Present
       
Director of CMS Enterprises
  2006-Present
       
Senior Vice President of CMS Enterprises
  2006-11/2007
       
Senior Vice President, General Counsel and Chief Compliance Officer of CMS Energy
  5/2006-11/2006
       
Senior Vice President, General Counsel and Chief Compliance Officer of Consumers
  5/2006-11/2006
       
Senior Vice President, General Counsel and Interim Chief Compliance Officer of Consumers
  2/2006-5/2006
       
Senior Vice President and General Counsel of CMS Energy
  2/2006-5/2006
       
Vice President and General Counsel of Consumers
  7/2004-2/2006
John M. Butler*
  45  
Senior Vice President of CMS Energy
  2006-Present
       
Senior Vice President of Consumers
  2006-Present
       
Senior Vice President of CMS Enterprises
  2006-Present
David G. Mengebier
  52  
Senior Vice President and Chief Compliance Officer of CMS Energy
  11/2006-Present
       
Senior Vice President and Chief Compliance Officer of Consumers
  11/2006-Present
       
Senior Vice President of CMS Enterprises
  2003-Present
       
Senior Vice President of CMS Energy
  2001-11/2006
       
Senior Vice President of Consumers
  2001-11/2006


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Name
 
Age
 
Position
 
Period
 
John G. Russell
  52  
President and Chief Operating Officer of Consumers
  2004-Present
Glenn P. Barba
  44  
Vice President, Controller and Chief Accounting Officer of CMS Energy
  2003-Present
       
Vice President, Controller and Chief Accounting Officer of Consumers
  2003-Present
       
Vice President, Chief Accounting Officer and Controller of CMS Enterprises
  11/2007-Present
       
Vice President and Chief Accounting Officer of CMS Enterprises
  2003-11/2007
 
 
* From 2004 until June 2006, Mr. Butler was Human Resources Director, Manufacturing and Engineering at Dow.
 
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)
 
             
Name
 
Age
 
Position
 
Period
 
David W. Joos
  56  
President and CEO of CMS Energy
  2004-Present
       
CEO of Consumers
  2004-Present
       
Chairman of the Board, President, CEO of CMS Enterprises
  5/2008-Present
       
Director of CMS Energy
  2001-Present
       
Director of Consumers
  2001-Present
       
Director of CMS Enterprises
  2000-Present
       
Chairman of the Board, CEO of CMS Enterprises
  2003-5/2008
Thomas J. Webb
  57  
Executive Vice President, CFO of CMS Energy
  2002-Present
       
Executive Vice President, CFO of Consumers
  2002-Present
       
Executive Vice President, CFO of CMS Enterprises
  2002-Present
       
Director of CMS Enterprises
  2002-Present
James E. Brunner
  57  
Senior Vice President and General Counsel of CMS Energy
  11/2006-Present
       
Senior Vice President and General Counsel of Consumers
  11/2006-Present
       
Senior Vice President and General Counsel of CMS Enterprises
  11/2007-Present
       
Director of CMS Enterprises
  2006-Present
       
Senior Vice President of CMS Enterprises
  2006-11/2007
       
Senior Vice President, General Counsel and Chief Compliance Officer of CMS Energy
  5/2006-11/2006
       
Senior Vice President, General Counsel and Chief Compliance Officer of Consumers
  5/2006-11/2006
       
Senior Vice President, General Counsel and Interim Chief Compliance Officer of Consumers
  2/2006-5/2006
       
Senior Vice President and General Counsel of CMS Energy
  2/2006-5/2006
       
Vice President and General Counsel of Consumers
  7/2004-2/2006

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Name
 
Age
 
Position
 
Period
 
John M. Butler*
  45  
Senior Vice President of CMS Energy
  2006-Present
       
Senior Vice President of Consumers
  2006-Present
       
Senior Vice President of CMS Enterprises
  2006-Present
David G. Mengebier
  52  
Senior Vice President and Chief Compliance Officer of CMS Energy
  11/2006-Present
       
Senior Vice President and Chief Compliance Officer of Consumers
  11/2006-Present
       
Senior Vice President of CMS Enterprises
  2003-Present
       
Senior Vice President of CMS Energy
  2001-11/2006
       
Senior Vice President of Consumers
  2001-11/2006
John G. Russell
  52  
President and Chief Operating Officer of Consumers
  2004-Present
William E. Garrity
  61  
Senior Vice President of Consumers
  2005-Present
       
Vice President of Consumers
  1999-2005
Frank Johnson
  61  
Senior Vice President of Consumers
  2001-Present
Glenn P. Barba
  44  
Vice President, Controller and Chief Accounting Officer of CMS Energy
  2003-Present
       
Vice President, Controller and Chief Accounting Officer of Consumers
  2003-Present
       
Vice President, Chief Accounting Officer and Controller of CMS Enterprises
  11/2007-Present
       
Vice President and Chief Accounting Officer of CMS Enterprises
  2003-11/2007
 
 
* From 2004 until June 2006, Mr. Butler was Human Resources Director, Manufacturing and Engineering at Dow.
 
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:
 
  •  Corporate Governance Principles;
 
  •  Codes of Conduct (Code of Conduct and Guide to Ethical Business Behavior 2010);
 
  •  Board committee charters (including the Audit Committee, the Compensation and Human Resources Committee, the Finance Committee, and the Governance and Public Responsibility Committee); and
 
  •  Articles of Incorporation (and amendments) and Bylaws.
 
CMS Energy will provide this information in print to any stockholder who requests it.
 
Any materials CMS Energy files with the SEC may also be read and copied at the SEC’s Public Reference Room at 100 F Street, NE, Washington 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.

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ITEM 1A. RISK FACTORS
 
Actual results in future periods for CMS Energy and Consumers could differ materially from historical results and the forward-looking statements contained in this report. Factors that might cause or contribute to these differences include, but are not limited to, those discussed in the following sections. CMS Energy’s and Consumers’ businesses are influenced by many factors that are difficult to predict, 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:
 
  •  a significant portion of its cash flow from operations will be dedicated to the payment of principal and interest on its indebtedness and will not be available for other purposes;
 
  •  covenants contained in its existing debt arrangements require it to meet certain financial tests, which may affect its flexibility in planning for, and reacting to, changes in its business;
 
  •  its ability to obtain additional financing for working capital, capital expenditures, acquisitions, and general corporate and other purposes may be limited;
 
  •  it may be at a competitive disadvantage to its competitors that are less leveraged;
 
  •  its vulnerability to adverse economic and industry conditions may increase; and
 
  •  its future credit ratings may fluctuate.
 
CMS Energy’s ability to meet its debt service obligations and to reduce its total indebtedness will depend on its future performance, which will be subject to general economic conditions, industry cycles, changes in laws or regulatory decisions (including with respect to environmental matters), and financial, business, and other factors affecting its operations, many of which are beyond its control. CMS Energy cannot make assurances that its business will continue to generate sufficient cash flow from operations to service its indebtedness. If CMS Energy is unable to generate sufficient cash flows from operations, it may be required to sell assets or obtain additional


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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:
 
  •  options for the disposal of leachate;
 
  •  the capping and excavation of CKD;
 
  •  the location and design of collection lines and upstream diversion of water;
 
  •  potential flow of leachate below the collection system;
 
  •  applicable criteria for various substances such as mercury; and
 
  •  other matters that are likely to affect the scope of remedial work that CMS Land and CMS Capital may be obligated to undertake.
 
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:
 
  •  retain specified preexisting liabilities, such as for taxes, pensions, or environmental conditions;
 
  •  indemnify the buyers against specified risks, including the inaccuracy of representations and warranties they make; and
 
  •  make payments to the buyers depending on the outcome of post-closing adjustments, litigation, audits, or other reviews.


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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,


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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:
 
  •  litigation originated by third parties against CMS Energy, Consumers, or their subsidiaries due to CMS Energy’s or Consumers’ greenhouse gas emissions;
 
  •  impairment of CMS Energy’s or Consumers’ reputation due to their greenhouse gas emissions and public perception of their response to potential greenhouse gas regulations, rules, and legislation;
 
  •  extreme weather conditions, such as severe storms, that may affect customer demand, company operations, or assets.
 
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


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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


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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.


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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.


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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


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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.
 
ITEM 1B. UNRESOLVED STAFF COMMENTS
 
None.
 
ITEM 2. PROPERTIES
 
Descriptions of CMS Energy’s and Consumers’ properties are found in the following sections of Item 1, all of which are incorporated by reference in this Item 2:
 
  •  Business, Business Segments, Consumers Electric Utility, Electric Utility Properties;
 
  •  Business, Business Segments, Consumers Gas Utility, Gas Utility Properties; and
 
  •  Business, Business Segments, IPP, IPP Properties.
 
ITEM 3. LEGAL PROCEEDINGS
 
For information regarding CMS Energy’s, Consumers’ and their subsidiaries’ significant pending administrative and judicial proceedings involving regulatory, operating, transactional, environmental, and other matters, see Item 8. Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 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.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
CMS Energy
 
Omitted.
 
Consumers
 
Omitted.


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PART II
 
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
CMS Energy
 
CMS Energy’s Common Stock is traded on the New York Stock Exchange. Market prices for CMS Energy’s Common Stock and related security holder matters are contained in Item 7. MD&A and Item 8. Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 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.


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ITEM 6. SELECTED FINANCIAL DATA
 
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.
 
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
CMS Energy
 
Management’s discussion and analysis of financial condition and results of operations is contained in Item 8. Financial Statements and Supplementary Data, MD&A, which is incorporated by reference herein.
 
Consumers
 
Management’s discussion and analysis of financial condition and results of operations is contained in Item 8. Financial Statements and Supplementary Data, MD&A, which is incorporated by reference herein.
 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
CMS Energy
 
Quantitative and qualitative disclosures about market risk are contained in Item 8. Financial Statements and Supplementary Data, MD&A, Critical Accounting Policies, “Financial and Derivative Instruments and Market Risk Information,” which is incorporated by reference herein.
 
Consumers
 
Quantitative and qualitative disclosures about market risk are contained in Item 8. Financial Statements and Supplementary Data, MD&A, Critical Accounting Policies, “Financial and Derivative Instruments and Market Risk Information,” which is incorporated by reference herein.


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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
         
    Page
 
Index to Financial Statements:
       
Selected Financial Information
       
    44  
    45  
    47  
Consolidated Financial Statements
       
    76  
    84  
    93  
    172  


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(CONSUMERS ENERGY ENERGY LOGO)
 
 
2009 Consolidated Financial Statements
 
and
 
(CMS LOGO)
 
 
2009 Consolidated Financial Statements
 


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Selected Financial Information CMS Energy Corporation
 
                                                         
          2009     2008     2007     2006     2005        
 
Operating revenue (in millions)
    ($)       6,205       6,807       6,451       6,117       5,869          
Income (loss) from equity method investees (in millions)
    ($)       (2 )     5       40       89       125          
Income (loss) from continuing operations (in millions)(c)(d)
    ($)       220       301       (120 )     (244 )     (590 )        
Income (loss) from discontinued operations (in millions)
    ($)       20       1       (110 )     60       61          
Net income (loss) available to common stockholders (in millions)(c)
    ($)       218       284       (234 )     (96 )     (99 )        
Average common shares outstanding (in thousands)
            227,169       225,671       224,473       221,618       213,335          
Net income (loss) from continuing operations per average common share
                                                       
CMS Energy — Basic(c)
    ($)       0.87       1.25       (0.65 )     (0.67 )     (0.73 )        
- Diluted(c)
    ($)       0.83       1.20       (0.65 )     (0.67 )     (0.73 )        
Net income (loss) per average common share
                                                       
CMS Energy — Basic(c)
    ($)       0.96       1.25       (1.04 )     (0.43 )     (0.47 )        
- Diluted(c)
    ($)       0.91       1.20       (1.04 )     (0.43 )     (0.47 )        
Cash provided by operations (in millions)
    ($)       848       557       23       688       599          
Capital expenditures, excluding assets placed under capital lease (in millions)
    ($)       818       792       1,263       670       593          
Total assets (in millions)(a)(c)
    ($)       15,256       14,901       14,180       15,324       15,974          
Long-term debt, excluding current portion (in millions)(a)(c)
    ($)       5,861       5,837       5,355       6,160       6,728          
Long-term debt-related parties, excluding current portion (in millions)
    ($)       34       178       178       178       178          
Non-current portion of capital and finance lease obligations (in millions)
    ($)       197       206       225       42       308          
Total preferred stock (in millions)
    ($)       283       287       294       305       305          
Cash dividends declared per common share
    ($)       0.50       0.36       0.20                      
Market price of common stock at year-end
    ($)       15.66       10.11       17.38       16.70       14.51          
Book value per common share at year-end
    ($)       11.42       10.93       9.54       10.14       10.67          
Number of employees at year-end (full-time equivalents)
            8,039       7,970       7,898       8,640       8,713          
Electric Utility Statistics
                                                       
Sales (billions of kWh)
            36       37       39       38       39          
Customers (in thousands)
            1,796       1,814       1,799       1,797       1,789          
Average sales rate per kWh
    (¢)       9.81       9.48       8.65       8.46       6.73          
Gas Utility Statistics
                                                       
Sales and transportation deliveries (bcf)
            319       338       340       309       350          
Customers (in thousands)(b)
            1,708       1,713       1,710       1,714       1,708          
Average sales rate per mcf
    ($)       10.73       11.25       10.66       10.44       9.61          
 
(a) Until their sale in November 2006 , CMS Energy was the primary beneficiary of both the MCV Partnership and the First Midland Limited Partnership. As a result, CMS Energy consolidated their assets, liabilities and activities into its consolidated financial statements as of and for the year ended December 31, 2005. These partnerships had third-party obligations totaling $482 million at December 31, 2005. Property, plant and equipment serving as collateral for these obligations had a carrying value of $224 million at December 31, 2005.
 
(b) Excludes off-system transportation customers.
 
(c) Prior year data has been updated to reflect the impacts of FSP APB 14-1. For additional information, see Note 4, New Accounting Standards, “Implementation of New Accounting Standards.”
 
(d) Income (loss) from continuing operations includes income (loss) attributable to noncontrolling interests of $11 million at December 31, 2009, $7 million at December 31, 2008, $(8) million at December 31, 2007, $(97) million at December 31, 2006, and $(438) million at December 31, 2005.


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Selected Financial Information Consumers Energy Company
 
                                                 
          2009     2008     2007     2006     2005  
 
Operating revenue (in millions)
    ($)       5,963       6,421       6,064       5,721       5,232  
Income from equity method investees (in
                                               
millions)
    ($)                         1       1  
Net income (loss) (in millions)
    ($)       293       364       312       186       (96 )
Net income (loss) available to common
                                               
stockholder (in millions)
    ($)       291       362       310       184       (98 )
Cash provided by operations (in millions)
    ($)       922       873       440       474       639  
Capital expenditures, excluding assets
                                               
placed under capital lease (in millions)
    ($)       811       789       1,258       646       572  
Total assets (in millions)(a)
    ($)       14,622       14,246       13,401       12,845       13,178  
Long-term debt, excluding current
                                               
portion (in millions)(a)
    ($)       4,063       3,908       3,692       4,127       4,303  
Non-current portion of capital and finance
                                               
lease obligations (in millions)
    ($)       197       206       225       42       308  
Total preferred stock (in millions)
    ($)       44       44       44       44       44  
Number of preferred stockholders at year-end
            1,531       1,584       1,641       1,728       1,823  
Number of employees at year-end
                                               
(full-time equivalents)
            7,755       7,697       7,614       8,026       8,114  
Electric Utility Statistics
                                               
Sales (billions of kWh)
            36       37       39       38       39  
Customers (in thousands)
            1,796       1,814       1,799       1,797       1,789  
Average sales rate per kWh
    (¢)       9.81       9.48       8.65       8.46       6.73  
Gas Utility Statistics
                                               
Sales and transportation deliveries (bcf)
            319       338       340       309       350  
Customers (in thousands)(b)
            1,708       1,713       1,710       1,714       1,708  
Average sales rate per mcf
    ($)       10.73       11.25       10.66       10.44       9.61  
                                                 
 
 
(a) Until their sale in November 2006, Consumers was the primary beneficiary of the MCV Partnership and the First Midland Limited Partnership. As a result, Consumers consolidated their assets, liabilities and activities into its consolidated financial statements as of and for the year ended December 31, 2005. These partnerships had third-party obligations totaling $482 million at December 31, 2005. Property, plant and equipment serving as collateral for these obligations had a carrying value of $224 million at December 31, 2005.
 
(b) Excludes off-system transportation customers.


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CMS Energy Corporation
 
Consumers Energy Company
 
 
This MD&A is a combined report of CMS Energy and Consumers.
 
EXECUTIVE OVERVIEW
 
CMS Energy is an energy company operating primarily in Michigan. It is the parent holding company of several subsidiaries, including Consumers, an electric and gas utility, and CMS Enterprises, primarily a domestic IPP. Consumers’ electric utility operations include the generation, purchase, distribution, and sale of electricity and Consumers’ gas utility operations include the purchase, transmission, storage, distribution, and sale of natural gas. Consumers’ customer base consists of a mix of residential, commercial, and diversified industrial customers. CMS Enterprises, through its subsidiaries and equity investments, owns 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, especially during the heating season;
 
  •  energy commodity prices;
 
  •  interest rates; and
 
  •  CMS Energy’s and Consumers’ securities credit ratings.
 
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


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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:
 
  •  investing in Consumers’ utility system;
 
  •  growing earnings and operating cash flow while controlling operating and fuel costs; and
 
  •  maintaining principles of safe, efficient operations, customer value, fair and timely regulation, and consistent financial performance.
 
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


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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
 
                         
Years Ended December 31
  2009     2008     2007  
    In Millions (except for Per Share Amounts)  
 
Net Income (Loss) Available to Common Stockholders
  $ 218     $ 284     $ (234 )
Basic Earnings (Loss) Per Share
  $ 0.96     $ 1.25     $ (1.04 )
Diluted Earnings (Loss) Per Share
  $ 0.91     $ 1.20     $ (1.04 )
                         
 
                                                 
Years Ended December 31
  2009     2008     Change     2008     2007     Change  
    In Millions  
 
Electric Utility
  $ 194     $ 271     $ (77 )   $ 271     $ 196     $ 75  
Gas Utility
    96       89       7       89       87       2  
Enterprises
    (7 )     13       (20 )     13       (412 )     425  
Corporate Interest and Other
    (85 )     (90 )     5       (90 )     (16 )     (74 )
Discontinued Operations
    20       1       19       1       (89 )     90  
                                                 
Net Income (Loss) Available to Common Stockholders
  $ 218     $ 284     $ (66 )   $ 284     $ (234 )   $ 518  
                                                 
 
In 2009, net income available to common stockholders was $218 million, compared with $284 million for 2008. Combined net income available to common stockholders for Consumers’ electric and gas utility segments decreased as the Big Rock decommissioning refund, decreased deliveries, and increased operating expenses more than offset the positive impact of rate orders and a favorable sales mix. Further decreasing net income available to common stockholders was an increase in projected Bay Harbor remediation costs. These decreases were offset partially by the expiration of an indemnity obligation related to discontinued operations.


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Specific after-tax changes to net income available to common stockholders for 2009 versus 2008 are:
 
             
        2009 Over/(Under) 2008  
        (In Millions)  
   
 
  increase in electric and gas revenues at Consumers due primarily to rate orders   $ 139  
  increase from discontinued operations due primarily to a benefit from the expiration of an indemnity obligation, offset partially by operating losses from assets held for sale     19  
  absence of an impairment charge on SERP investments recorded in 2008     15  
  change in corporate interest and other due primarily to impacts from early retirement of debt     10  
  decrease in other net expenses at enterprises due primarily to reduced maintenance expense     5  
  decrease at Consumers’ electric utility due to the Big Rock nuclear decommissioning refund     (79 )
  decrease in electric and gas revenues due to unfavorable weather     (34 )
  increase in other net expenses at Consumers related primarily to higher interest and higher forestry and tree-trimming costs     (31 )
  increase in projected Bay Harbor remediation costs     (22 )
  increase in plant maintenance expense at Consumers     (20 )
  increase in pension and OPEB expenses at Consumers     (19 )
  decrease in electric and gas revenues at Consumers due to unfavorable economic conditions, offset partially by a favorable sales mix     (14 )
  absence of gains from the sale of sulfur dioxide credits recognized at Consumers in 2008     (12 )
  other net decrease at enterprises and corporate and other due primarily to lower gains on asset sales and the absence of benefits related to the reduction of certain tax valuation allowances     (12 )
  absence of RCP savings recorded in 2008 at Consumers related to the MCV PPA     (11 )
 
 
Total change
  $ (66 )
 
 
 
In 2008, net income available to common stockholders was $284 million, compared with a net loss available to common stockholders of $234 million for 2007. Combined net income available to common stockholders from Consumers’ electric and gas utility segments increased reflecting the positive impact of rate orders and the elimination of certain costs associated with the MCV PPA, offset partially by lower electric deliveries and increased depreciation expense. Further increasing net income available to common stockholders were the absence of activities associated with assets sold in 2007, the absence of costs associated with the termination of contracts in 2007, and a reduction in corporate interest expense.


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Specific after-tax changes to net income (loss) available to common stockholders for 2008 versus 2007 are:
 
             
        2008 Over/(Under) 2007  
        (In Millions)  
   
 
  absence of costs incurred by CMS ERM due to the termination of certain electricity sales agreements and the rescission of a contract with Quicksilver   $ 217  
  absence of impairment charges related to international businesses sold in 2007     133  
  increase in electric and gas revenues at Consumers due primarily to favorable rate orders     129  
  absence of a net loss on the disposal of discontinued operations in 2007     90  
  other net increase at enterprises and corporate and other due primarily to reduced interest and operating and maintenance expense, and the absence of early debt retirement premiums paid in 2007     38  
  elimination of certain costs at Consumers from the MCV PPA     29  
  absence of an increase in the provision for environmental remediation costs at Bay Harbor     29  
  absence of a 2007 net tax benefit, associated with the sale of assets, recorded at enterprises and corporate and other     (53 )
  decreased electric deliveries at Consumers     (51 )
  decrease due to a charge that recognized an other-than-temporary decline in the fair value of SERP investments in 2008 which replaced a gain on the sale of SERP assets in 2007     (30 )
  other combined net decrease at Consumers due primarily to higher depreciation expense offset by a reduction in nuclear operating and maintenance costs     (13 )
 
 
Total change
  $ 518  
 
 
 
Consumers’ Electric Utility Results of Operations
 
                                                 
Years Ended December 31
  2009     2008     Change     2008     2007     Change  
    In Millions  
 
Net Income Available to Common Stockholders
  $ 194     $ 271     $ (77 )   $ 271     $ 196     $ 75  
                                                 
Reasons for the change:
                                               
Electric deliveries and rate increase
                  $ (6 )                   $ 90  
Power supply costs and related revenue
                    (1 )                     18  
Other income, net of expenses
                    14                       (46 )
Maintenance and other operating expenses
                    (77 )                     78  
Depreciation and amortization
                    (2 )                     (38 )
General taxes
                    (10 )                     15  
Interest charges
                    (42 )                     11  
Income taxes
                    47                       (53 )
                                                 
Total change
                  $ (77 )                   $ 75  
                                                 
 
Electric deliveries and rate increase: For 2009, electric delivery revenues decreased $6 million compared with 2008. The largest component of this decrease was a $99 million reduction in revenue due to the order received from the MPSC to refund revenue collected for Big Rock decommissioning. For more details regarding the Big Rock decommissioning order, see Note 7, Utility Rate Matters. This decrease was offset by a combined $153 million of additional revenues resulting primarily from the June 2008 rate order and from the November 2009 rate order for which a rate increase was self-implemented in May 2009. Also included in the $153 million of additional revenues were other rate-related items, including the elimination of a regulatory reserve. These items


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were offset partially by a decrease in revenues resulting from a new rate design structure that provides lower winter and higher summer rates to encourage conservation.
 
These rate-related variances, together with a $30 million increase in revenues from a favorable sales mix, were offset partially by $87 million in lower deliveries. Deliveries to end-use customers were 35.8 billion kWh, a decrease of 1.7 billion kWh or 4.5 percent compared with 2008, reflecting unfavorable economic conditions in Michigan.
 
Additionally, surcharge revenues and related reserves decreased $3 million in 2009, reflecting the absence of $12 million of retirement benefits expense recovered in revenue in 2008. Also contributing to the decrease in surcharge revenues were $10 million associated with the expiration of the surcharge for the electric restructuring implementation plan and a $7 million reduction in surcharge revenue related to the Customer Choice Act. These variances were offset partially by a $26 million increase in surcharge revenues resulting from the implementation of the energy optimization program in June 2009.
 
For 2008, electric delivery revenues increased $90 million compared with 2007 due to additional revenue of $168 million from the inclusion of Zeeland in rates and from the June 2008 rate order. This increase was offset partially by $59 million in lower deliveries, a $20 million decrease due to an unfavorable sales mix, and a $14 million decrease in non-commodity revenue due primarily to the absence, in 2008, of METC transmission services revenue. The METC transmission service agreement expired in April 2007. Deliveries to end-use customers were 37.5 billion kWh, a decrease of 1.3 billion kWh or 3.4 percent compared with 2007. Additionally, surcharge revenue increased $15 million due primarily to the April 2008 rate order allowing recovery of retirement benefits expense.
 
Power supply costs and related revenue: For 2009, PSCR revenue decreased $1 million compared with 2008, due to a decrease in wholesale fuel recovery revenue.
 
For 2008, PSCR revenue increased $18 million compared with 2007. The increase primarily reflects the absence of a 2007 reduction to revenue made in response to the MPSC’s position that PSCR discounts given to Consumers’ transitional primary rate customers could not be recovered under the PSCR mechanism.
 
Other income, net of expenses: For 2009, other income increased $14 million compared with 2008. The increase was due to the absence, in 2009, of an $11 million impairment charge that recognized an other-than-temporary decline in the fair value of Consumers’ SERP investments, and $9 million in gains from land sales in 2009. These increases were offset partially by a decrease in interest income and related items of $6 million, primarily reflecting lower levels of short-term cash investments and a reduction of interest recorded on certain regulatory assets.
 
For 2008, other income decreased $46 million compared with 2007. The decrease was due to reduced interest income of $22 million, primarily reflecting lower levels of short-term cash investments, and an $11 million impairment charge in 2008 that recognized an other-than-temporary decline in the fair value of Consumers’ SERP investments. Also contributing to the decrease was the absence, in 2008, of a $7 million gain recognized on Consumers’ SERP investments in 2007 and $6 million in related items reported in other income.
 
Maintenance and other operating expenses: For 2009, maintenance and other operating expenses increased $77 million compared with 2008. The increase was due to cost increases for plant maintenance of $24 million, $23 million associated with the implementation of the energy optimization program in 2009, an $18 million increase in expenses for forestry and tree-trimming services, and the absence of an $18 million benefit from the sale of sulfur dioxide credits recognized in 2008. Also contributing to the increase was the absence of $17 million of RCP savings recorded in 2008 related to the MCV PPA. Additionally, pension and OPEB expenses increased $7 million, as a $19 million expense increase due to the unfavorable market performance of retirement benefit plan assets more than offset the absence of $12 million of expense associated with retirement benefits recovered in revenue in 2008. These increases were offset partially by a $24 million decrease in storm restoration, outside services, and other net expenses and a $6 million decrease in uncollectible accounts expense, which reflects the benefits of the tracking mechanism authorized in the November 2009 rate order.


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For 2008, maintenance and other operating expenses decreased $78 million compared with 2007. The decrease was due to the absence, in 2008, of $44 million of costs that were no longer incurred under the MCV PPA and $35 million of operating expenses associated with Palisades, which was sold in April 2007. Also contributing to the decrease were an $18 million benefit from the sale of sulfur dioxide credits in 2008 and a reduction in other net expenses of $1 million. These decreases were offset partially by $12 million of higher retirement benefits expense resulting from the April 2008 MPSC order allowing recovery of certain costs through a surcharge and $8 million of higher uncollectible accounts expense.
 
Depreciation and amortization: For 2009, depreciation and amortization expense increased $2 million compared with 2008. The increase was due to higher depreciation expense of $11 million from an increase in plant in service, offset partially due to lower amortization expense of $9 million on certain regulatory assets.
 
For 2008, depreciation and amortization expense increased $38 million compared with 2007. The increase was due to higher depreciation expense of $27 million from an increase in plant in service. Also contributing to the increase were $8 million due to higher amortization expense on certain regulatory assets and a $3 million increase in other related expenses.
 
General taxes: For 2009, general taxes increased $10 million compared with 2008. The increase was due to increased property taxes, reflecting higher capital spending, offset partially by a reduction in sales and use tax.
 
For 2008, general taxes decreased $15 million compared with 2007. The decrease was due to the absence, in 2008, of $23 million of Michigan Single Business Tax, which was replaced with the MBT effective January 1, 2008. The MBT is recorded within income taxes. The decrease was offset partially by $8 million of higher property tax expense, reflecting primarily higher capital spending.
 
Interest charges: For 2009, interest charges increased $42 million compared with 2008. The increase resulted from higher expenses of $31 million due to the order received from the MPSC to refund revenue collected for Big Rock decommissioning, with interest. For more details regarding the Big Rock decommissioning order, see Note 7, Utility Rate Matters. Also contributing to the increase was $16 million associated with the issuance of debt in 2009, offset partially by a $5 million reduction in other interest expenses, including $4 million associated with the elimination of a reserve related to a transmission tariff.
 
For 2008, interest charges decreased $11 million compared with 2007, due to lower interest expense of $9 million associated with amounts to be refunded to customers as a result of the sale of Palisades. The MPSC order approving the Palisades PPA with Entergy directed Consumers to record interest on the unrefunded balances. Also contributing to the decrease was the absence, in 2008, of interest charges related to an IRS settlement of $4 million, offset partially by $2 million due to lower average debt levels in 2008.
 
Income taxes: For 2009, income taxes decreased $47 million compared with 2008, reflecting $45 million associated with lower utility earnings in 2009. Also contributing to the decrease were a $7 million reduction in expenses related to research tax credits and a $2 million decrease related to the tax treatment of property, plant and equipment, as required by MPSC orders. These decreases were offset partially by a $7 million increase in the MBT.
 
For 2008, income taxes increased $53 million compared with 2007. The increase reflects $47 million associated with higher utility earnings and $6 million due to the inclusion of the MBT.


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Consumers’ Gas Utility Results of Operations
 
                                                 
Years Ended December 31
  2009     2008     Change     2008     2007     Change  
    In Millions  
 
Net Income Available to Common Stockholders
  $ 96     $ 89     $ 7     $ 89     $ 87     $ 2  
                                                 
Reasons for the change:
                                               
Gas deliveries and rate increase
                  $ 29                     $ 44  
Other income, net of expenses
                    13                       (28 )
Maintenance and other operating expenses
                    (32 )                     (24 )
Depreciation and amortization
                    18                       (8 )
General taxes
                    (4 )                     7  
Interest charges
                    (5 )                     9  
Income taxes
                    (12 )                     2  
                                                 
Total change
                  $ 7                     $ 2  
                                                 
 
Gas deliveries and rate increase: For 2009, gas delivery revenue increased $29 million compared with 2008. The increase resulted from a combined $32 million of additional revenue from the December 2008 gas rate order and the November 2009 self-implemented rate increase. Also contributing to the increase was $12 million from a favorable sales mix. Additionally, surcharge revenues increased $16 million due to the implementation of the energy optimization program in June 2009. These increases were offset partially by lower deliveries of $31 million. Gas deliveries, including miscellaneous transportation to end-use customers, were 284.3 bcf, a decrease of 19.4 bcf or 6.4 percent compared with 2008.
 
For 2008, gas delivery revenue increased $44 million compared with 2007. The increase was due to additional revenue of $33 million from the August 2007 and December 2008 gas rate orders. Also contributing to the increase were higher deliveries of $6 million and a favorable sales mix of $5 million. Gas deliveries, including miscellaneous transportation to end-use customers, were 303.7 bcf, an increase of 4.1 bcf or 1.4 percent compared with 2007.
 
Other income, net of expenses: For 2009, other income increased $13 million compared with 2008. The increase was due to the absence, in 2009, of a $5 million impairment charge that recognized an other-than-temporary decline in the fair value of Consumers’ SERP investments, and increased interest income of $8 million in 2009 relating to Consumers’ gas segment’s secured borrowing agreements.
 
For 2008, other income decreased $28 million compared with 2007. The decrease was due to lower interest income of $16 million, reflecting lower short-term investments, and decreased interest income from Consumers’ gas segment’s secured borrowing agreements. Also contributing to the decrease were a $5 million impairment charge in 2008 that recognized an other-than-temporary decline in the fair value of Consumers’ SERP investments, a decrease due to the absence, in 2008, of a $3 million gain recognized on Consumers’ SERP investments in 2007, and a $4 million decrease in other income related items.
 
Maintenance and other operating expenses: For 2009, maintenance and other operating expenses increased $32 million compared with 2008. The increase was due to additional expenses of $14 million related to the implementation of the energy optimization program in 2009. Also contributing to the increase were higher OPEB expense of $12 million, reflecting unfavorable market performance of Consumers’ retirement benefit plan assets, and higher uncollectible accounts expense of $6 million.
 
For 2008, maintenance and other operating expenses increased $24 million compared with 2007. The increase was due to higher operating expenses across Consumers’ storage, transmission, and distribution systems of $15 million, and higher uncollectible accounts expense of $9 million.
 
Depreciation and amortization: For 2009, depreciation and amortization expense decreased $18 million compared with 2008, due primarily to the December 2008 gas rate order, which reduced depreciation expense and delayed collection of an equal amount of depreciation in rates.
 
For 2008, depreciation and amortization expense increased $8 million compared with 2007 due primarily to higher depreciation expense associated with an increase in plant in service.


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General taxes: For 2009, general taxes increased $4 million compared with 2008, due to increased property taxes, reflecting higher capital spending, offset partially by a reduction in sales and use tax.
 
For 2008, general taxes decreased $7 million compared with 2007. The decrease was due primarily to the absence, in 2008, of the Michigan Single Business Tax, which was replaced by the MBT effective January 1, 2008. The MBT is recorded within income taxes.
 
Interest charges: For 2009, interest charges increased $5 million compared with 2008, due primarily to the issuance of debt in 2009.
 
For 2008, interest charges decreased $9 million compared with 2007 due primarily to lower average debt levels and a lower average interest rate in 2008.
 
Income taxes: For 2009, income taxes increased $12 million compared with 2008. The increase reflects $8 million associated with higher utility earnings in 2009 and a $4 million increase in the MBT.
 
For 2008, income taxes decreased $2 million compared with 2007. The decrease reflects $3 million related to the tax treatment of items related to property, plant, and equipment, as required by the MPSC orders. This decrease was offset partially by a $1 million increase due to the inclusion of the MBT.
 
Enterprises Results of Operations
 
                                                 
Years Ended December 31
  2009     2008     Change     2008     2007     Change  
    In Millions  
 
Net Income (Loss) Available to Common Stockholders
  $ (7 )   $ 13     $ (20 )   $ 13     $ (412 )   $ 425  
                                                 
 
For 2009, enterprises recorded a net loss available to common stockholders of $7 million compared with net income available to common stockholders of $13 million in 2008. The change reflects an after-tax expense of $22 million resulting from an increase in projected future environmental remediation costs associated with Bay Harbor and $3 million of lower earnings due to depressed power demand and prices. These variances were offset partially by a $5 million increase to net income due primarily to lower operating and maintenance expense and the absence, in 2009, of a 2008 impairment charge that recognized an other-than-temporary decline in the fair value of enterprises’ SERP investments.
 
For 2008, enterprises recorded net income available to common stockholders of $13 million compared with a net loss available to common stockholders of $412 million in 2007. The change reflects the absence of $217 million of costs incurred for the termination of certain electricity sales agreements and the rescission of a contract with Quicksilver recorded in 2007, and $33 million in cost savings in 2008 resulting from the absence of certain sales and supply contracts, offset partially by an $8 million net decrease in mark-to-market activity, all at CMS ERM. Activities associated with the sale of international assets in 2007 further increased net income available to common stockholders in 2008 by $164 million, due to the absence of $122 million in net impairment charges and $46 million of tax expense on deferred earnings recognized in 2007. In addition, the absence, in 2008, of a $29 million after-tax expense resulting from an increase in projected future environmental remediation costs associated with Bay Harbor in 2007 was offset partially by a $9 million change associated with SERP investment activity, as a $4 million impairment charge that recognized an other-than-temporary decline in the fair value of enterprises’ SERP investments was recognized in 2008, compared with a $5 million gain on SERP investments in 2007.
 
Corporate Interest and Other Results of Operations
 
                                                 
Years Ended December 31
  2009     2008     Change     2008     2007     Change  
    In Millions  
 
Net Income (Loss) Available to Common Stockholders
  $ (85 )   $ (90 )   $ 5     $ (90 )   $ (16 )   $ (74 )
                                                 
 
For 2009, corporate interest and other net expenses decreased $5 million due to a gain recognized on the early retirement of CMS Energy’s long-term debt to related parties and lower fixed charges due to lower average debt levels. These items were offset partially by premiums paid on the early retirement of CMS Energy senior notes, the


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absence of benefits recorded in 2008 related to the reduction of certain tax valuation allowances, and an increase in tax expense due to legislation related to the MBT.
 
For 2008, corporate interest and other net expenses increased $74 million, reflecting the absence of tax benefits related to the sale of CMS Energy’s international operations recognized in 2007 and reduced interest income in 2008. These items were offset partially by the absence, in 2008, of the reduction in fair value of notes receivable from GasAtacama and premiums paid on the early retirement of CMS Energy debt in 2007, as well as reduced interest expense due to lower debt levels in 2008.
 
Discontinued Operations
 
For 2009, net income available to common stockholders from discontinued operations was $20 million, reflecting the expiration of a $28 million indemnity obligation related to a 2007 asset sale, offset partially by a loss of $8 million resulting primarily from the reclassification of an enterprises IPP located in Connecticut as held for sale.
 
For 2008, net income from discontinued operations was $1 million, reflecting the reclassification of an enterprises IPP located in Connecticut as held for sale. The $89 million net loss available to common stockholders from discontinued operations in 2007 represents the net loss on the disposal of international businesses sold in 2007.
 
CAPITAL RESOURCES AND LIQUIDITY
 
Components of CMS Energy’s and Consumers’ cash management plan include controlling operating expenses and capital expenditures and evaluating market conditions for financing opportunities, if needed. Recent major financing transactions and commitments are as follows:
 
  •  In February 2009, Consumers retired $200 million of FMBs at maturity;
 
  •  In March 2009, Consumers issued $500 million in FMBs;
 
  •  In June 2009, CMS Energy issued $173 million in convertible senior notes and $300 million in senior notes, and early retired $144 million of its $178 million of long-term debt to related parties;
 
  •  In July 2009, CMS Energy repurchased and early retired $233 million principal amount of the senior notes due 2010 and $87 million principal amount of the senior notes due 2011;
 
  •  In August 2009, Consumers retired $150 million of FMBs at maturity;
 
  •  In December 2009, CMS Energy’s $239 million preferred stock and $139 million 3.375 percent senior notes became convertible at the holders’ option for the first quarter of 2010; and
 
  •  In January 2010, CMS Energy issued $300 million of 6.25 percent senior notes due 2020.
 
Despite present market volatility, CMS Energy and Consumers expect to continue to have access to the financial and capital markets. Recent and upcoming credit renewals and maturities are as follows:
 
  •  Consumers renewed its accounts receivable sales program in February 2010 through February 2011;
 
  •  Consumers renewed its $150 million 364-day revolving credit facility in August 2009;
 
  •  Consumers renewed its letter of credit facility in the amount of $30 million in September 2009;
 
  •  Consumers’ $500 million revolving credit facility is planned for renewal in 2012;
 
  •  Consumers’ FMBs maturities are $250 million in 2010 and $300 million in 2012;
 
  •  Consumers’ tax-exempt pollution control revenue bond maturities are $58 million in 2010;
 
  •  CMS Energy’s senior notes maturities are $67 million in 2010, $214 million in 2011, and $150 million in 2012; and
 
  •  CMS Energy’s $550 million revolving credit facility is planned for renewal in 2012.


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CMS Energy and Consumers believe that their present level of cash and their expected cash flows from operating activities, together with access to sources of liquidity, will be sufficient to meet cash requirements. If access to the capital markets were to become diminished or otherwise restricted, CMS Energy and Consumers would implement contingency plans to address debt maturities, which could include reduced capital spending. For additional details, see Note 4, New Accounting Standards and Note 8, Financings and Capitalization.
 
Cash Position, Investing, and Financing
 
At December 31, 2009, CMS Energy had $122 million of consolidated cash and cash equivalents, which included $32 million of restricted cash and cash equivalents and $8 million of cash and cash equivalents held by consolidated VIEs. At December 31, 2009, Consumers had $61 million of consolidated cash and cash equivalents, which included $22 million of restricted cash and cash equivalents.
 
CMS Energy’s primary ongoing source of cash is dividends and other distributions from its subsidiaries. Consumers paid $285 million in common stock dividends and CMS Enterprises paid $55 million in common stock dividends to CMS Energy for the year ended December 31, 2009. For details on dividend restrictions, see Note 8, Financings and Capitalization.
 
Operating Activities: Specific components of net cash provided by operating activities for the years ended December 31, 2009 and 2008 were:
 
                         
Years Ended December 31
  2009     2008     Change  
    In Millions  
 
CMS Energy, including Consumers
                       
•   Net income
  $ 240     $ 302     $ (62 )
•   Non-cash transactions(a)
    865       907       (42 )
                         
    $ 1,105     $ 1,209     $ (104 )
•   Sale of gas purchased in prior year
    845       915       (70 )
•   Purchase of gas in current year
    (718 )     (963 )     245  
•   Electric sales contract termination payment
          (275 )     275  
•   Accounts receivable sales, net
    (120 )     170       (290 )
•   Postretirement benefits contribution
    (262 )     (51 )     (211 )
•   Change in other core working capital(b)
    (62 )     (278 )     216  
•   Other changes in assets and liabilities, net
    60       (170 )     230  
                         
Net cash provided by operating activities
  $ 848     $ 557     $ 291  
                         
Consumers
                       
•   Net income
  $ 293     $ 364     $ (71 )
•   Non-cash transactions(a)
    841       956       (115 )
                         
    $ 1,134     $ 1,320     $ (186 )
•   Sale of gas purchased in prior year
    845       915       (70 )
•   Purchase of gas in current year
    (718 )     (963 )     245  
•   Accounts receivable sales, net
    (120 )     170       (290 )
•   Postretirement benefits contribution
    (254 )     (50 )     (204 )
•   Change in other core working capital(b)
    (58 )     (289 )     231  
•   Other changes in assets and liabilities, net
    93       (230 )     323  
                         
Net cash provided by operating activities
  $ 922     $ 873     $ 49  
                         
 
 
(a) Non-cash transactions comprise depreciation and amortization, changes in deferred income taxes, postretirement benefits expense, and other non-cash items.
 
(b) Other core working capital comprises other changes in accounts receivable and accrued revenues, inventories, and accounts payable.
 
For the year ended December 31, 2009, net cash provided by operating activities at CMS Energy increased $291 million compared with 2008. This increase was due primarily to the absence in 2009 of a payment made by CMS ERM in 2008 to terminate electricity sales agreements and the changes affecting Consumers’ cash provided by operating activities described in the following paragraph.


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For the year ended December 31, 2009, net cash provided by operating activities at Consumers increased $49 million compared with 2008. This increase was due primarily to the impact of lower gas prices on inventory purchased in 2009, increased billings due to recent regulatory actions, the absence, in 2009, of refunds to customers of excess Palisades decommissioning funds, and other timing differences. These changes were offset partially by the pension contribution of $199 million and lower sales of accounts receivable in 2009.
 
Specific components of net cash provided by operating activities for the years ended December 31, 2008 and 2007 were:
 
                         
Years Ended December 31
  2008     2007     Change  
    In Millions  
 
CMS Energy, including Consumers
                       
•   Net income (loss)
  $ 302     $ (230 )   $ 532  
•   Non-cash transactions(a)
    907       1,078       (171 )
                         
    $ 1,209     $ 848     $ 361  
•   Sale of gas purchased in prior year
    915       823       92  
•   Purchase of gas in current year
    (963 )     (818 )     (145 )
•   Electric sales contract termination payment
    (275 )           (275 )
•   Accounts receivable sales
    170             170  
•   Postretirement benefits contribution
    (51 )     (184 )     133  
•   Change in other core working capital(b)
    (278 )     (511 )     233  
•   Shareholder class action settlement payment
          (125 )     125  
•   Other changes in assets and liabilities, net
    (170 )     (10 )     (160 )
                         
Net cash provided by operating activities
  $ 557     $ 23     $ 534  
                         
Consumers
                       
•   Net income
  $ 364     $ 312     $ 52  
•   Non-cash transactions(a)
    956       747       209  
                         
    $ 1,320     $ 1,059     $ 261  
•   Sale of gas purchased in prior year
    915       823       92  
•   Purchase of gas in current year
    (963 )     (818 )     (145 )
•   Accounts receivable sales
    170             170  
•   Postretirement benefits contribution
    (50 )     (173 )     123  
•   Change in other core working capital(b)
    (289 )     (475 )     186  
•   Other changes in assets and liabilities, net
    (230 )     24       (254 )
                         
Net cash provided by operating activities
  $ 873     $ 440     $ 433  
                         
 
 
(a) Non-cash transactions comprise depreciation and amortization, changes in deferred income taxes, postretirement benefits expense, electric contract sales termination, and other non-cash items.
 
(b) Other core working capital comprises other changes in accounts receivable and accrued revenues, inventories, and accounts payable.
 
For the year ended December 31, 2008, net cash provided by operating activities at CMS Energy increased $534 million compared with 2007. This increase was due primarily to increased earnings and the absence of CMS Energy’s payment to settle a shareholder class action lawsuit, offset partially by a payment made by CMS ERM, in 2008, to terminate electric sales contracts, and the changes affecting Consumers’ cash provided by operating activities described in the following paragraph.
 
For the year ended December 31, 2008, net cash provided by operating activities at Consumers increased $433 million compared with 2007. This increase was due primarily to the sale of accounts receivable in 2008 and lower postretirement benefit contributions, offset partially by refunds to customers of excess Palisades decommissioning funds.


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Investing Activities: Specific components of cash used in investing activities for the years ended December 31, 2009 and 2008 were:
 
                         
Years Ended December 31
  2009     2008     Change  
    In Millions  
 
CMS Energy, including Consumers
                       
•   Capital expenditures
  $ (818 )   $ (792 )   $ (26 )
•   Increase in non-current notes receivable
    (83 )     (19 )     (64 )
•   Proceeds from the sale of assets
    7       3       4  
•   Costs to retire property and other
    (41 )     (31 )     (10 )
                         
Net cash used in investing activities
  $ (935 )   $ (839 )   $ (96 )
                         
Consumers
                       
•   Capital expenditures
  $ (811 )   $ (789 )   $ (22 )
•   Proceeds from sale of assets
    7             7  
•   Costs to retire property and other
    (46 )     (34 )     (12 )
                         
Net cash used in investing activities
  $ (850 )   $ (823 )   $ (27 )
                         
 
For the year ended December 31, 2009, net cash used in investing activities at CMS Energy increased $96 million compared with 2008. For the year ended December 31, 2009, net cash used in investing activities at Consumers increased $27 million compared with 2008. These increases at CMS Energy were due primarily to increases in lending to EnerBank customers and in capital expenditures.
 
Specific components of net cash provided by (used in) investing activities for the years ended December 31, 2008 and 2007 were:
 
                         
Years Ended December 31
  2008     2007     Change  
    In Millions  
 
CMS Energy, including Consumers
                       
•   Capital expenditures
  $ (792 )   $ (1,263 )   $ 471  
•   Proceeds from nuclear decommissioning funds, net
          332       (332 )
•   Proceeds from the sale of assets
    3       1,717       (1,714 )
•   Cash relinquished from the sale of assets
          (113 )     113  
•   Increase in non-current notes receivable
    (19 )     (32 )     13  
•   Costs to retire property and other
    (31 )     21       (52 )
                         
Net cash provided by (used in) investing activities
  $ (839 )   $ 662     $ (1,501 )
                         
Consumers
                       
•   Capital expenditures
  $ (789 )   $ (1,258 )   $ 469  
•   Proceeds from nuclear decommissioning funds, net
          332       (332 )
•   Proceeds from sale of assets
          337       (337 )
•   Costs to retire property and other
    (34 )     6       (40 )
                         
Net cash used in investing activities
  $ (823 )   $ (583 )   $ (240 )
                         
 
For the year ended December 31, 2008, net cash used in investing activities at CMS Energy increased $1.5 billion compared with 2007. For the year ended December 31, 2008, net cash used in investing activities at Consumers increased $240 million compared with 2007. These increases were due primarily to the absence, in 2008, of proceeds from asset sales and Consumers’ nuclear decommissioning funds. These increases were partially offset by a decrease in capital expenditures resulting from the absence, in 2008, of the Zeeland purchase.


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Financing Activities: Specific components of net cash provided by (used in) financing activities for the years ended December 31, 2009 and 2008 were:
 
                         
Years Ended December 31
  2009     2008     Change  
    In Millions  
 
CMS Energy, including Consumers
                       
•   Issuance of FMBs, convertible senior notes,
                       
senior notes, and other debt
  $ 1,129     $ 796     $ 333  
•   Borrowings on revolving credit facility
    245       600       (355 )
•   Retirement of debt and other debt
                       
maturity payments
    (946 )     (570 )     (376 )
•   Payments on revolving credit facility
    (325 )     (560 )     235  
•   Payments of common and preferred stock dividends
    (125 )     (93 )     (32 )
•   Other financing activities
    (13 )     (26 )     13  
                         
Net cash provided by (used in) financing activities
  $ (35 )   $ 147     $ (182 )
                         
Consumers
                       
•   Issuance of FMBs
  $ 500     $ 600     $ (100 )
•   Retirement of debt and other debt
                       
maturity payments
    (387 )     (444 )     57  
•   Payments of common and preferred stock dividends
    (287 )     (299 )     12  
•   Stockholder’s contribution from CMS Energy
    100             100  
•   Other financing activities
    (28 )     (33 )     5  
                         
Net cash used in financing activities
  $ (102 )   $ (176 )   $ 74  
                         
 
For the year ended December 31, 2009, net cash used in financing activities at CMS Energy increased by $182 million compared with 2008. The increase in net cash used in financing activities was due primarily to an increase in net debt retirements.
 
For the year ended December 31, 2009, net cash used in financing activities at Consumers decreased $74 million compared with 2008. This decrease was due primarily to a stockholder’s contribution from CMS Energy, offset partially by a decrease in net proceeds from borrowings.
 
                         
Years Ended December 31
  2008     2007     Change  
    In Millions  
 
CMS Energy, including Consumers
                       
•   Issuance of FMBs, convertible senior notes,
                       
senior notes and other debt
  $ 796     $ 515     $ 281  
•   Borrowings on revolving credit facility
    600             600  
•   Retirement of debt and other debt
                       
maturity payments
    (570 )     (1,095 )     525  
•   Payments on revolving credit facility
    (560 )           (560 )
•   Payments of common and preferred stock dividends
    (93 )     (56 )     (37 )
•   Other financing activities
    (26 )     (54 )     28  
                         
Net cash provided by (used in) financing activities
  $ 147     $ (690 )   $ 837  
                         
Consumers
                       
•   Issuance of FMBs
  $ 600     $     $ 600  
•   Retirement of debt and other debt
                       
maturity payments
    (444 )     (34 )     (410 )
•   Payments of common and preferred stock dividends
    (299 )     (252 )     (47 )
•   Stockholder’s contribution from CMS Energy
          650       (650 )
•   Other financing activities
    (33 )     (63 )     30  
                         
Net cash provided by (used in) financing activities
  $ (176 )   $ 301     $ (477 )
                         
 
For the year ended December 31, 2008, net cash provided by financing activities at CMS Energy increased $837 million compared with 2007. This increase was due primarily to an increase in proceeds from long-term debt issuances combined with a decrease in long-term debt retirements.


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For the year ended December 31, 2008, net cash used in financing activities at Consumers increased $477 million compared with 2007. This increase was due primarily to the absence of contributions from CMS Energy in 2008, offset partially by an increase in net proceeds from long-term debt issuances.
 
For additional details on long-term debt activity, see Note 8, Financings and Capitalization.
 
Restrictive Covenants: CMS Energy’s senior notes indenture requires it to maintain a minimum interest coverage ratio, as defined. CMS Energy’s $550 million revolving credit agreement requires it to maintain a maximum debt to EBITDA ratio, as defined, and a minimum interest coverage ratio, as defined. Consumers’ credit agreements require it to maintain a maximum debt to capital ratio, as defined. At December 31, 2009, no events of default had occurred with respect to any debt covenants, and CMS Energy and Consumers were each in compliance with these requirements as detailed in the following table:
 
                     
        (1) Minimum
    Result at
 
        (2)Maximum
    December 31,
 
Credit agreement or facility
 
Ratio
  Requirement     2009  
 
CMS Energy’s senior notes indenture
  Interest Coverage     (1)1.7 to 1.0       3.10 to 1.0  
CMS Energy’s revolving credit agreement
  Debt to EBITDA     (2)7.0 to 1.0       5.43 to 1.0  
CMS Energy’s revolving credit agreement
  Interest Coverage     (1)1.2 to 1.0       3.05 to 1.0  
Consumers’ credit agreements
  Debt to Capital     (2)0.7 to 1.0       0.52 to 1.0  
 
Credit Ratings: CMS Energy’s and Consumers’ access to capital markets and costs of financing are influenced by the ratings of their securities. The following table displays CMS Energy’s and Consumers’ securities ratings as of January 31, 2010. The ratings outlook from S&P, Moody’s, and Fitch on all securities is stable.
 
                 
Issuer
 
Securities
  S&P   Moody’s   Fitch
 
CMS Energy
  Senior unsecured debt   BB+   Ba1   BB+
CMS Energy
  Secured bank credit facilities    −   Baa3   BBB-
CMS Energy
  Trust preferred securities   BB   Ba2   BB-
    (Long-term debt - related parties)            
CMS Energy
  Preferred stock   BB   Ba2   BB-
Consumers
  Senior secured debt (FMBs)   BBB   A3   BBB+
Consumers
  Senior unsecured debt   BBB-   Baa2   BBB
Consumers
  Preferred stock   BB   Baa3   BB+
Consumers
  Securitization bonds   AAA   Aaa   AAA
Consumers
  Tax exempt bonds   BBB   A3    −
Consumers
  Tax exempt bonds, letter of credit backed   AA   Aa2   AA
 
For additional details on long-term debt activity, see Note 8, Financings and Capitalization.
 
Obligations And Commitments
 
Contractual Obligations: The following table summarizes CMS Energy’s and Consumers’ contractual cash obligations for each of the periods presented. The table shows the timing of the obligations and their expected effect on CMS Energy’s and Consumers’ liquidity and cash flow in future periods. The table excludes all amounts


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classified as current liabilities on CMS Energy’s and Consumers’ Consolidated Balance Sheets, other than the current portion of long-term debt and capital and finance leases.
 
                                         
    Payments Due  
          Less Than
    One to
    Three to
    More Than
 
Contractual Obligations at December 31, 2009
  Total     One Year     Three Years     Five Years     Five Years  
    In Millions  
 
CMS Energy, including Consumers
                                       
Long-term debt(a)
  $ 6,609     $ 533     $ 840     $ 845     $ 4,391  
Interest payments on long-term debt(b)
    2,873       346       618       519       1,390  
Capital and finance leases(c)
    219       22       49       40       108  
Interest payments on capital and finance leases(d)
    128       17       28       23       60  
Operating leases(e)
    250       28       56       47       119  
Purchase obligations(f)
    14,217       1,978       2,853       1,534       7,852  
                                         
Total contractual obligations
  $ 24,296     $ 2,924     $ 4,444     $ 3,008     $ 13,920  
                                         
Consumers
                                       
Long-term debt(a)
  $ 4,411     $ 343     $ 376     $ 659     $ 3,033  
Interest payments on long-term debt(b)
    1,923       226       427       359       911  
Capital and finance leases(c)
    219       22       49       40       108  
Interest payments on capital and finance leases(d)
    128       17       28       23       60  
Operating leases(e)
    250       28       56       47       119  
Purchase obligations(f)
    14,217       1,978       2,853       1,534       7,852  
Purchase obligations — related parties(f)
    1,737       79       169       186       1,303  
                                         
Total contractual obligations
  $ 22,885     $ 2,693     $ 3,958     $ 2,848     $ 13,386  
                                         
 
 
(a) Principal amounts due on outstanding debt obligations, current and long-term, at December 31, 2009. For additional details on long-term debt, see Note 8, Financings and Capitalization.
 
(b) Scheduled interest payments on both variable-rate and fixed-rate long-term debt, current and long-term. Variable interest payments are based on contractual rates in effect at December 31, 2009.
 
(c) Principal portion of lease payments under capital and finance leases, comprising mainly leased service vehicles and certain PPAs.
 
(d) Imputed interest on capital and finance leases.
 
(e) Minimum noncancelable lease payments under leases of railroad cars and miscellaneous office buildings and equipment, which are accounted for as operating leases.
 
(f) Long-term contracts for purchase of commodities and services. These obligations include operating contracts used to ensure adequate supply from generating facilities that meet PURPA requirements.
 
These commodities and services include natural gas and associated transportation, electricity, and coal and associated transportation.
 
For details related to benefit payments, see Note 12, Retirement Benefits.
 
CMS Energy’s and Consumers’ purchase obligations include long-term PPAs with various generating plants, which require CMS Energy and Consumers to make monthly capacity payments based on the plants’ availability or deliverability. These payments will approximate $36 million per month during 2010 for CMS Energy and $40 million per month during 2010 for Consumers. If a plant is not available to deliver electricity, CMS Energy and Consumers will not be obligated to make these payments for that period. For additional details on power supply costs, see “Consumers’ Electric Utility Results of Operations” within this MD&A, Note 6, Contingencies and Commitments, “Contractual Commitments,” and Note 7, Utility Rate Matters, “Consumers’ Electric Utility Rate Matters — Power Supply Cost Recovery.”
 
Revolving Credit Facilities: For details on CMS Energy’s and Consumers’ revolving credit facilities, see Note 8, Financings and Capitalization.


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Dividend Restrictions: For details on CMS Energy’s and Consumers’ dividend restrictions, see Note 8, Financings and Capitalization.
 
Capital Expenditures: For planning purposes, CMS Energy and Consumers forecast capital expenditures over a three-year period. They may revise these estimates periodically due to a number of factors, including environmental regulations, business opportunities, market volatility, economic trends, and the ability to access capital. The following is a summary of CMS Energy’s and Consumers’ estimated capital expenditures, including lease commitments, for 2010 through 2012:
 
                                 
                      Three
 
Years Ending December 31
  2010     2011     2012     Years Total  
    In Millions  
 
CMS Energy, including Consumers
                               
Consumers
  $ 1,090     $ 1,020     $ 1,560     $ 3,670  
Enterprises
    2       1       1       4  
                                 
Total
  $ 1,092     $ 1,021     $ 1,561     $ 3,674  
                                 
Consumers
                               
Electric utility operations(a)(b)
  $ 790     $ 760     $ 1,330     $ 2,880  
Gas utility operations(b)
    300       260       230       790  
                                 
Total Consumers
  $ 1,090     $ 1,020     $ 1,560     $ 3,670  
                                 
 
 
(a) These amounts include estimates for capital expenditures that may be required by current environmental laws, regulations, or potential consent decrees.
 
(b) These amounts include estimates for capital expenditures related to information technology projects, facility improvements, and vehicle leasing.


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The following is an illustration of CMS Energy’s and Consumers’ planned capital spending for 2010 through 2012:
 
(PERFORMANCE GRAPH)
 
Off-Balance-Sheet Arrangements
 
Off-Balance-Sheet Arrangements: CMS Energy, Consumers, and certain of their subsidiaries 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 6, Contingencies and Commitments, “Guarantees.”
 
Sale of Accounts Receivable: Under Consumers’ revolving accounts receivable sales program, Consumers may sell up to $250 million of accounts receivable, subject to certain eligibility requirements. At December 31, 2009, $250 million of accounts receivable were eligible for sale, of which $50 million were sold.
 
CRITICAL ACCOUNTING POLICIES
 
The following accounting policies and related information are important to an understanding of CMS Energy’s and Consumers’ results of operations and financial condition and should be considered an integral part of their MD&A. For additional accounting policies, see Note 1, Significant Accounting Policies.
 
Use of Estimates and Assumptions
 
In the preparation of CMS Energy’s and Consumers’ consolidated financial statements, estimates and assumptions are used that may affect reported amounts and disclosures. CMS Energy and Consumers use


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accounting estimates for asset valuations, depreciation, amortization, financial and derivative instruments, employee benefits, the effects of regulation, indemnifications, and contingencies. Actual results may differ from estimated results due to changes in the regulatory environment, regulatory decisions, lawsuits, competition, and other factors. CMS Energy and Consumers consider all relevant factors in making these assessments.
 
Fair Value Measurements: CMS Energy and Consumers have assets and liabilities that are accounted for or disclosed at fair value. Fair value measurements incorporate assumptions that market participants would use in pricing an asset or liability, including assumptions about risk. Development of these assumptions requires significant judgment.
 
The most material of CMS Energy’s and Consumers’ fair value measurements are of the SERP assets, derivative instruments, and pension and OPEB plan assets. For a detailed discussion of the methods used to calculate fair value measurements, see Note 5, Fair Value Measurements.
 
Income Taxes: The amount of income taxes paid by CMS Energy is subject to ongoing audits by federal, state, and foreign tax authorities, which can result in proposed assessments. An estimate of the potential outcome of any uncertain tax issue is highly judgmental. CMS Energy believes adequate reserves have been provided for these exposures; however, future results may include favorable or unfavorable adjustments to the estimated tax liabilities in the period the assessments are made or resolved or when statutes of limitation on potential assessments expire. Additionally, CMS Energy’s judgment as to the ability to recover its deferred tax assets may change. CMS Energy believes the valuation allowances related to its deferred tax assets are adequate, but future results may include favorable or unfavorable adjustments. As a result, CMS Energy’s effective tax rate may fluctuate significantly over time.
 
Long-Lived Assets and Equity Method Investments: CMS Energy and Consumers assess the recoverability of their long-lived assets and equity method investments by performing impairment tests if certain triggering events occur or if there has been a decline in value that may be other than temporary. CMS Energy and Consumers base their evaluations of impairment on such indicators as:
 
  •  the nature of the assets;
 
  •  projected future economic benefits;
 
  •  regulatory and political environments;
 
  •  historical and future cash flow and profitability measurements; and
 
  •  other external market conditions and factors.
 
The estimates CMS Energy and Consumers use may change over time, which could have a material impact on their consolidated financial statements. For additional details, see Note 22, Asset Sales, Discontinued Operations, and Impairment Charges.
 
Unbilled Revenues: CMS Energy and Consumers estimate unbilled revenues by applying an average billed rate for each customer class based on actual billed volume distributions. Unbilled revenues, which are recorded as Accounts receivable on CMS Energy’s and Consumers’ Consolidated Balance Sheets, were $477 million at December 31, 2009 and $507 million at December 31, 2008.
 
Accounting for the Effects of Industry Regulation
 
Because Consumers has regulated operations, it uses regulatory accounting to recognize the effects of the regulators’ decisions on its financial statements. Consumers continually assesses whether future recovery of its regulatory assets is probable by considering communications and experience with its regulators and changes in the regulatory environment. If Consumers determined that recovery of a regulatory asset were not probable, Consumers would be required to write off the asset and immediately recognize the expense to earnings.
 
Consumers is allowed to self-implement new energy rates six months after a new rate case filing; however, the rates that Consumers self-implements may be subject to refund, with interest. Consumers recognizes revenue


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associated with self-implemented rates. If Consumers considers it probable that it will be required to refund a portion of its self-implemented rates, it records a provision for revenue subject to refund. A final rate order could differ materially from Consumers’ estimates underlying its self-implemented rates, giving rise to accounting adjustments. Under accounting rules for prior period adjustments, CMS Energy and Consumers may need to record such differences, if they are specifically identifiable to prior interim periods, as revisions to those periods.
 
For additional details, see Note 3, Utility Regulation.
 
Financial and Derivative Instruments and Market Risk Information
 
Financial Instruments: Debt and equity securities classified as available-for-sale are reported at fair value determined from quoted market prices. Unrealized gains and losses resulting from changes in fair value of available-for-sale debt and equity securities are reported, net of tax, in equity as part of AOCL. Unrealized losses are excluded from earnings unless the related changes in fair value are determined to be other than temporary.
 
Derivative Instruments: CMS Energy and Consumers account for certain contracts as derivative instruments. The criteria used to determine if an instrument qualifies for derivative accounting are complex and often require significant judgment in application. If a contract is a derivative and does not qualify for the normal purchases and sales exception, it is recorded on the consolidated balance sheet at its fair value. Each quarter, the resulting asset or liability is adjusted to reflect any change in the fair value of the contract. For additional details on CMS Energy’s and Consumers’ derivatives, see Note 11, Derivative Instruments.
 
CMS Energy and Consumers generally use information from external sources, such as quoted market prices and other valuation information to determine the fair value of their derivatives. For certain contracts, this information is not available and mathematical models are used to value the derivatives. The most material of CMS Energy’s derivative liabilities, an electricity sales agreement held by CMS ERM, extends beyond the term for which quoted electricity prices are available. Thus, to value this derivative, CMS Energy uses a valuation model that incorporates a proprietary forward pricing curve for electricity based on forward natural gas prices and an implied heat rate. The model incorporates discounting, credit, and modeling risks. The model is sensitive to electricity and natural gas forward prices, and the fair value of this derivative liability will increase as these forward prices increase. The model is adjusted each quarter to incorporate market data as it becomes available.
 
The fair values calculated for CMS Energy’s and Consumers’ derivatives may change significantly as commodity prices and volatilities change. The cash returns actually realized on derivatives may be different from their estimated fair values. For derivatives in an asset position, calculations of fair value include reserves of less than $1 million to reflect the credit risk of CMS Energy’s and Consumers’ counterparties. For derivatives in a liability position, calculations include reserves of less than $1 million to reflect CMS Energy’s and Consumers’ own credit risk. For additional details on how the fair values of derivatives are determined, see Note 5, Fair Value Measurements.
 
The types of contracts typically classified as derivatives are interest rate swaps, financial transmission rights, fixed price fuel contracts, natural gas futures, electricity swaps, and forward and option contracts for electricity, natural gas, and foreign currencies. Most of CMS Energy’s and Consumers’ commodity purchase and sale contracts are not subject to derivative accounting because:
 
  •  they do not have a notional amount (that is, a number of units specified in a derivative instrument, such as MWh of electricity or bcf of natural gas);
 
  •  they qualify for the normal purchases and sales exception; or
 
  •  there is not an active market for the commodity.
 
CMS Energy’s and Consumers’ coal purchase contracts are not derivatives because there is not an active market for the coal they purchase. If an active market for coal develops in the future, some of these contracts may qualify as derivatives. For Consumers, which is subject to regulatory accounting, the resulting mark-to-market gains and losses would be offset by changes in regulatory assets and liabilities and would not affect net income. For other subsidiaries, CMS Energy does not believe the resulting mark-to-market impact on earnings would be material.


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Market Risk Information: CMS Energy and Consumers are exposed to market risks including, but not limited to, changes in interest rates, commodity prices, and equity security prices. They may enter into various risk management contracts to limit exposure to these risks, including swaps, options, futures, and forward contracts. CMS Energy and Consumers enter into these contracts using established policies and procedures, under the direction of an executive oversight committee consisting of senior management representatives and a risk committee consisting of business unit managers.
 
These contracts contain credit risk, which is the risk that the counterparties will fail to meet their contractual obligations. CMS Energy and Consumers reduce this risk using established policies and procedures, such as evaluating counterparties’ credit quality and setting collateral requirements as necessary. If terms permit, standard agreements are used that allow for the netting of positive and negative exposures associated with the same counterparty. Given these policies, current exposures, and credit reserves, CMS Energy and Consumers do not expect a material adverse effect on their financial position or future earnings because of counterparty nonperformance.
 
The following risk sensitivities illustrate the potential loss in fair value, cash flows, or future earnings from financial instruments, including derivative contracts, assuming a hypothetical adverse change in market rates or prices of ten percent. Potential losses could exceed the amounts shown in the sensitivity analyses if changes in market rates or prices were to exceed ten percent.
 
Interest Rate Risk: CMS Energy and Consumers are exposed to interest rate risk resulting from issuing fixed-rate and variable-rate financing instruments, and from interest rate swap agreements. A combination of these instruments are used to manage this risk as deemed appropriate, based upon market conditions. These strategies are designed to provide and maintain a balance between risk and the lowest cost of capital.
 
Interest Rate Risk Sensitivity Analysis (assuming an increase in market interest rates of ten percent):
 
                 
December 31
  2009     2008  
    In Millions  
 
CMS Energy, including Consumers
               
Variable-rate financing — before-tax annual earnings exposure
  $     $ 1  
Fixed-rate financing — potential reduction in fair value(a)
    183       208  
Consumers
               
Variable-rate financing — before-tax annual earnings exposure
  $     $ 1  
Fixed-rate financing — potential reduction in fair value(a)
    122       136  
 
 
(a) Fair value reduction could be realized only if CMS Energy and Consumers transferred all of their fixed-rate financing to other creditors.
 
Commodity Price Risk: CMS Energy and Consumers are exposed to commodity price risk, which arises from fluctuations in the price of electricity, natural gas, coal, and other commodities. Commodity prices are influenced by a number of factors, including weather, changes in supply and demand, and liquidity of commodity markets. In order to manage commodity price risk, they may enter into various non-trading derivative contracts, such as forward purchase and sale contracts, options, and swaps.
 
Commodity Price Risk Sensitivity Analysis (assuming an adverse change in market prices of ten percent):
 
                 
December 31
  2009     2008  
    In Millions  
 
Potential reduction in fair value:
               
Fixed price fuel contracts
  $     $ 1  
Electricity swaps and futures
    1        
Natural gas swaps and futures
    1       1  
 
Investment Securities Price Risk: Through investments in debt and equity securities, CMS Energy and Consumers are exposed to changes in interest rates and price fluctuations in equity markets. The following table


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shows the potential effect of adverse changes in interest rates and fluctuations in equity prices on CMS Energy’s and Consumers’ available-for-sale investments.
 
Investment Securities Price Risk Sensitivity Analysis (assuming an adverse change in market prices of ten percent):
 
                 
December 31
  2009     2008  
    In Millions  
 
CMS Energy, including Consumers
               
Potential reduction in fair value of available-for-sale:
               
Mutual funds
  $     $ 4  
Municipal bonds
    1       1  
(Primarily SERP investments)
               
Consumers
               
Potential reduction in fair value of available-for-sale equity securities (SERP investments and investment in CMS Energy common stock)
  $ 3     $ 4  
 
For additional details on market risk, financial instruments, and derivatives, see Note 10, Financial Instruments and Note 11, Derivative Instruments.
 
Retirement Benefits
 
Pension: CMS Energy and Consumers have external trust funds to provide retirement pension benefits to their employees under a non-contributory, defined benefit Pension Plan. On September 1, 2005, the defined benefit Pension Plan was closed to new participants and CMS Energy and Consumers implemented the qualified DCCP, which provides an employer contribution of five percent of base pay to the existing 401(k) plan. An employee contribution is not required to receive the plan’s employer cash contribution. All employees hired on or after September 1, 2005 participate in this plan as part of their retirement benefit program. Previous cash balance Pension Plan participants also participate in the DCCP as of September 1, 2005. Additional pay credits under the cash balance Pension Plan were discontinued as of that date.
 
401(k): CMS Energy and Consumers provide an employer match in their 401(k) plan equal to 60 percent on eligible contributions up to the first six percent of an employee’s wages.
 
OPEB: CMS Energy and Consumers provide postretirement health and life benefits under their OPEB plan to qualifying retired employees.
 
CMS Energy and Consumers record liabilities for pension and OPEB on their consolidated balance sheets at the present value of the future obligations, net of any plan assets. The calculation of the liabilities and associated expenses requires the expertise of actuaries, and requires many assumptions, including:
 
  •  life expectancies;
 
  •  discount rates;
 
  •  expected long-term rate of return on plan assets;
 
  •  rate of compensation increases; and
 
  •  anticipated health care costs.
 
A change in these assumptions could change significantly CMS Energy’s and Consumers’ recorded liabilities and associated expenses.


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The following table provides an estimate of CMS Energy’s and Consumers’ pension cost, OPEB cost, and cash contributions for the next three years:
 
                                 
Expected
  Pension Cost     OPEB Cost     Pension Contribution     OPEB Contribution  
    In Millions  
 
CMS Energy, including Consumers
                               
2010
  $ 112     $ 74     $ 19     $ 71  
2011
    112       71       179       71  
2012
    105       67       142       71  
Consumers
                               
2010
  $ 109     $ 75     $ 18     $ 70  
2011
    108       73       173       70  
2012
    102       69       137       70  
 
Contribution estimates include amounts required and discretionary contributions. Consumers’ pension and OPEB costs are recoverable through its general ratemaking process. Actual future pension cost and contributions will depend on future investment performance, changes in future discount rates, and various other factors related to the populations participating in the Pension Plan.
 
Lowering the expected long-term rate of return on the Pension Plan assets by 0.25 percentage point (from 8.00 percent to 7.75 percent) would increase estimated pension cost for 2010 by $3 million for both CMS Energy and Consumers. Lowering the discount rate by 0.25 percentage point (from 5.85 percent to 5.60 percent) would increase estimated pension cost for 2010 by $5 million for both CMS Energy and Consumers.
 
For additional details on postretirement benefits, see Note 12, Retirement Benefits.
 
Asset Retirement Obligations
 
CMS Energy and Consumers are required to record the fair value of the cost to remove assets at the end of their useful lives if there is a legal obligation to remove them. CMS Energy and Consumers have legal obligations to remove some of their assets at the end of their useful lives. CMS Energy and Consumers calculate the fair value of ARO liabilities using an expected present value technique that reflects assumptions about costs, inflation, and profit margin that third parties would require to assume the obligation. CMS Energy and Consumers did not include market risk premiums in their ARO fair value estimates since reasonable estimates could not be made. If a five percent market risk premium were assumed, CMS Energy’s and Consumers’ ARO liability at December 31, 2009 would increase by $11 million.
 
If a reasonable estimate of fair value cannot be made in the period in which the ARO is incurred, such as for assets with indeterminate lives, the liability is recognized when a reasonable estimate of fair value can be made. CMS Energy and Consumers have not recorded liabilities for assets that have insignificant cumulative disposal costs, such as substation batteries. For additional details, see Note 17, Asset Retirement Obligations.
 
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”, Item 1A. Risk Factors, and Note 6, Contingencies and Commitments.
 
Consumers’ Electric Utility Business Outlook and Uncertainties
 
Balanced Energy Initiative: Consumers’ balanced energy initiative is a comprehensive energy resource plan designed to meet its projected short-term and long-term electric power requirements through:
 
  •  energy efficiency;


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  •  demand management;
 
  •  expanded use of renewable energy;
 
  •  development of new power plants and pursuit of additional PPAs to complement existing generating sources; and
 
  •  retirement of older, less efficient generating units.
 
Consumers’ balanced energy initiative includes plans to build an 830 MW coal-fueled plant at its Karn/Weadock generating complex near Bay City, Michigan. Consumers expects the plant to be in operation in 2017 and plans to use five-eighths of the plant’s output to serve its own customers, with the remaining output to be committed to others.
 
In December 2009, the MDNRE approved an air permit for Consumers’ proposed coal-fueled plant. As outlined in the air permit, Consumers agreed to retire up to seven of its older, less-efficient generating units; this is consistent with Consumers’ balanced energy initiative. Consumers plans to retire five units or 638 MW within six months of commencement of operation of the new coal plant, with retirement of the additional two units or 320 MW dependent on customer need.
 
The 2008 Energy Legislation provided guidelines for the MPSC’s review and approval of energy resource plans and proposed power plants through the issuance of a certificate of need. Consumers plans to file a new case with the MPSC seeking a certificate of need that conforms to the 2008 Energy Legislation in 2010.
 
Renewable Energy Plan: The 2008 Energy Legislation requires that at least ten percent of Consumers’ electric sales volume come from renewable energy sources by 2015, and includes requirements for specific capacity additions. Consumers’ renewable energy plan details how Consumers will meet these renewable energy standards for energy and capacity, with wind generation as Consumers’ primary resource. Consumers plans to build or contract for additional renewable energy capacity of 200 MW by December 31, 2013, and an additional 300 MW of renewable energy capacity by December 31, 2015. Under Consumers’ plan, half of the new renewable capacity will be obtained through long-term agreements to purchase power from third parties, with the remaining capacity to be supplied by facilities built and owned by Consumers.
 
Consumers has secured more than 58,000 acres of land easements in Michigan’s Tuscola and Mason Counties for potential wind generation development and is collecting wind speed and other meteorological data at the sites. Consumers will continue to seek opportunities for wind generation development in support of the renewable energy standard. Consumers has also executed agreements with six small-scale renewable energy suppliers for the purchase of 9.4 MW of renewable capacity and an estimated two percent of its long-term renewable energy needs. The MPSC has approved these agreements, enabling Consumers to recover the full costs of these contracts from its customers. Additionally, Consumers is in the process of reviewing proposals for capacity and energy from larger projects to meet its renewable capacity and energy needs through 2015.
 
Energy Optimization Plan: The 2008 Energy Legislation also requires Consumers to achieve annual sales reduction targets through at least 2015. The targets are incremental with the goal of achieving a six percent reduction in customers’ electricity use and a four percent reduction in customers’ natural gas use by December 31, 2015. Consumers’ energy optimization plan details its proposals for energy cost savings among all customer classes through incentives to reduce customer usage by offering customer energy audits, rebates and discounts on purchase of highly efficient appliances, and other incentives and programs. In July 2009, Consumers launched its energy optimization program for residential customers.
 
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. Volatility in the financial and credit markets has also harmed the Michigan economy.
 
Consumers expects weather-adjusted electric deliveries to decrease in 2010 by one percent compared with 2009. Consumers’ outlook for 2010 includes continuing growth in deliveries to its largest customer, which produces semiconductor and solar energy components. Excluding this customer’s growth, Consumers expects weather-adjusted electric deliveries in 2010 to decrease three percent compared with 2009. Consumers’ outlook reflects


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reduced deliveries associated with its investment in energy efficiency programs included in the 2008 Energy Legislation, as well as recent projections of Michigan’s economic conditions.
 
Consumers expects economic conditions to stabilize by the end of 2010, resulting in electric deliveries remaining essentially unchanged through 2014. This reflects growth in electric deliveries offset by the predicted effects of energy efficiency programs and appliance efficiency standards. Actual deliveries will depend on:
 
  •  energy conservation measures and results of energy efficiency programs;
 
  •  fluctuations in weather; and
 
  •  changes in economic conditions, including utilization and expansion or contraction of manufacturing facilities, population trends, and housing activity.
 
In its November 2009 order in Consumers’ electric rate case, the MPSC authorized Consumers to adopt a “pilot” decoupling mechanism beginning December 1, 2009. This mechanism, subject to certain conditions, allows Consumers to adjust its rates to collect or refund the change in marginal revenue arising from the difference between the level of average sales per customer adopted in the order and actual average sales per customer. The order also adopts an uncollectible expense tracking mechanism, effective January 1, 2009, that allows rates to be adjusted to collect or refund 80 percent of the difference between the level of uncollectible expense included in rates and actual uncollectible expense. Consumers expects these mechanisms to mitigate partially the effects of weather fluctuations, the economy, and energy efficiency programs on Consumers’ electric revenue in future periods. For details on this rate order, see Note 7, Utility Rate Matters, “Consumers’ Electric Utility Rate Matters.”
 
Electric ROA: The Customer Choice Act allows Consumers’ electric customers to buy electric generation service from Consumers or from an alternative electric supplier. The 2008 Energy Legislation limited alternative electric supply to ten percent of Consumers’ weather-adjusted retail sales of the preceding calendar year. During 2009, customer enrollment in the ROA program reached the ten percent limit. At December 31, 2009, alternative electric suppliers were contracted to provide 854 MW of generation service to ROA customers.
 
Electric Environmental Estimates: Consumers’ operations are subject to various state and federal environmental laws and regulations. Generally, Consumers has been able to recover in customer rates its costs to operate its facilities in compliance with these laws and regulations.
 
Clean Air Act: Consumers continues to focus on complying with the federal Clean Air Act and numerous state and federal environmental regulations, including CAIR, and state mercury air rules. Consumers estimates expenditures of $1.4 billion from 2010 through 2017 to comply with these regulations. Consumers expects to recover these costs in customer rates.
 
Clean Air Interstate Rule: At this time, CAIR remains in effect, pending EPA revision. While the impacts of this revision are unknown, Consumers expects the EPA to propose stricter standards. A draft rule is expected in 2010. Consumers’ strategy to comply with CAIR involves the installation of state-of-the-art emission control equipment.
 
State and Federal Mercury Air Rules: In 2005, the EPA issued CAMR, which required initial reductions of mercury emissions from coal-fueled electric generating plants by 2010 and further reductions by 2018. A number of states and other entities appealed certain portions of CAMR to the U.S. Court of Appeals for the District of Columbia. In 2008, the U.S. Court of Appeals for the District of Columbia determined that the rules developed by the EPA were not consistent with the Clean Air Act. The EPA has initiated the development of a revised rule based on Maximum Achievable Control Technology, which is a method for establishing strict emissions limits based on the best performing controlled sources of air contaminants. A proposed rule is expected in 2010, at which time Consumers will have a better understanding of the potential impact.
 
In 2006, Michigan’s governor proposed a plan that would result in mercury emissions reductions of 90 percent by 2015. In response to the governor’s proposal, the MDNRE promulgated a rule that became effective in October 2009. Consumers has a plan in place to comply with this rule.
 
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


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dioxide. The bill proposes to reduce carbon dioxide and other greenhouse gas emissions by 3 percent below 2005 levels by 2012, 17 percent below 2005 levels by 2020, and 42 percent below 2005 levels by 2030. The bill also contains provisions for the direct granting of substantial free greenhouse gas emission allowances to load-serving entities, which would mitigate some of the price impact to Consumers’ customers. Consumers believes Congress may pass greenhouse gas legislation, but the form and timing of any final bill is difficult to predict. These 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 allowances, curtail operations, arrange for alternative sources of supply, or take other steps to manage or lower the emission of greenhouse gases.
 
In September 2009, the EPA finalized the Mandatory Reporting of Greenhouse Gases Rule. This rule will require facilities producing 25,000 metric tons or more of greenhouse gases to collect emissions data under a new reporting system. The first reports will be due to the EPA on March 31, 2011. The rule covers carbon dioxide, methane, nitrous oxide, hydro fluorocarbons, and other fluorinated gases. The purpose of the rule is to collect accurate and timely data on greenhouse gas emissions that can be used to inform future climate change policy decisions.
 
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 2009, carbon dioxide emissions from fossil-fueled power plants owned by Consumers, excluding the portion of Campbell Unit 3 that is owned by others, exceeded 17 million metric tons of carbon dioxide. During the same period, coal-fueled plants owned by enterprises emitted 620,000 metric tons of carbon dioxide.
 
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.
 
Water: In 2004, the EPA issued rules that govern existing electric generating plant cooling water intake systems. These rules require a significant reduction in the number of fish harmed by cooling water intake structures at existing power plants. The EPA compliance options in the rule were challenged before the U.S. Court of Appeals for the Second Circuit, which remanded the bulk of the rule back to the EPA for reconsideration in 2007. In April 2009, the U.S. Supreme Court ruled in favor of the utility industry’s position that the EPA can rely on a cost-benefit analysis in setting the national performance standards for fish protection. The EPA has announced plans to issue a revised draft rule in 2010. Consumers estimates capital expenditures of $150 million to comply with these regulations.
 
Other electric environmental matters, including routine maintenance classification, could have a major impact on Consumers’ outlook. For additional details on these and other electric environmental matters, see Note 6, Contingencies and Commitments, “Consumers’ Electric Utility Contingencies — Electric Environmental Matters.”
 
Electric Rate Matters: Rate matters are critical to Consumers’ electric utility business. For details on Consumers’ PSCR, electric rate case and self-implemented rates, electric operation and maintenance expenditures show-cause order, Big Rock decommissioning proceedings, and electric depreciation case, see Note 7, Utility Rate Matters, “Consumers’ Electric Utility Rate Matters.”
 
Consumers’ Gas Utility Business Outlook and Uncertainties
 
Gas Deliveries: Consumers expects weather-adjusted gas deliveries to decline in 2010 by two percent compared with 2009, due to continuing conservation and overall economic conditions in Michigan. In addition, Consumers expects weather-adjusted gas deliveries to decline an average of two percent annually from 2011


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through 2015, which includes expected effects of energy efficiency programs. Actual delivery levels from year to year may vary from this trend due to:
 
  •  fluctuations in weather;
 
  •  use by IPP;
 
  •  availability and development of renewable energy sources;
 
  •  changes in gas prices;
 
  •  Michigan economic conditions including population trends and housing activity;
 
  •  the price of competing energy sources or fuels; and
 
  •  energy efficiency and conservation.
 
Gas Environmental Estimates: Consumers expects to incur investigation and remedial action costs at a number of sites, including 23 former manufactured gas plant sites. For additional details, see Note 6, Contingencies and Commitments, “Consumers’ Gas Utility Contingencies — Gas Environmental Matters.”
 
The Mandatory Reporting of Greenhouse Gases Rule requires facilities engaging in the distribution of natural gas to collect data on greenhouse gas emissions resulting from the combustion of natural gas. In 2009, Consumers estimated that carbon dioxide emissions from its customers were 16 million metric tons.
 
Gas Rate Matters: Rate matters are critical to Consumers’ gas utility business. For details on Consumers’ GCR, gas depreciation, and gas rate case, see Note 7, Utility Rate Matters, “Consumers’ Gas Utility Rate Matters.”
 
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 and uncertainties that could have a material impact on CMS Energy’s consolidated income, cash flows, or financial position include:
 
  •  the impact of indemnity and environmental remediation obligations at Bay Harbor;
 
  •  the outcome of certain legal proceedings;
 
  •  the impact of lower electricity prices, caused primarily by lower natural gas prices, unseasonably cool weather in the summer, and decreased industrial production, on the profitability of enterprises’ generating units;
 
  •  the impact of representations, warranties, and indemnities provided by CMS Energy or its subsidiaries in connection with the sales of assets;
 
  •  the impact of 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; and
 
  •  the impact of economic conditions in Michigan, including population trends and housing activity.
 
For additional details regarding enterprises’ uncertainties, see Note 6, Contingencies and Commitments.
 
Other Outlook and Uncertainties
 
Smart Grid: Consumers’ development of a smart grid is proceeding as planned. The foundation of the smart grid program is an advanced metering infrastructure. The program will include electric and gas smart meters that are capable of transmitting and receiving data, a two-way communications network, and modifications to Consumers’ existing systems to manage the data. It is intended to enable customers to monitor and manage their energy usage and help reduce demand during critical peak times, resulting in higher energy efficiency and environmental benefits. Due to this system’s complexity and relative market immaturity, Consumers is using a phased implementation approach that will allow it to analyze, test, and pilot the new technology prior to widespread


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investment and deployment. Consumers will also make certain modifications to its software to enable the new system. Consumers intends to begin mass deployment of the system and installation of new meters in 2012.
 
Employee Separation Program: In November 2009, Consumers announced a voluntary separation program for all salaried and union employees. Decisions to accept or deny employees’ requests for voluntary separation, and communication of those decisions to the affected employees, occurred in January 2010. A total of 177 salaried employees and 120 union employees have been approved for early separation. Further, in February 2010, Consumers announced the lay-off of an additional 76 union employees. Consumers expects to recognize a charge of $11 million in 2010 related to the voluntary and involuntary components of this program.
 
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 6, Contingencies and Commitments and Note 7, Utility Rate Matters.
 
EnerBank: EnerBank, a wholly owned subsidiary of CMS Capital that represents one percent of CMS Energy’s net assets, is a state-chartered, FDIC-insured industrial bank providing unsecured home improvement loans. The carrying value of EnerBank’s loan portfolio was $269 million at December 31, 2009. Its loan portfolio was funded primarily by deposit liabilities of $214 million and borrowings from the U.S. Federal Reserve Bank of $40 million. Twelve-month rolling average default rates on loans held by EnerBank have risen from 1.4 percent at December 31, 2008 to 2.1 percent at December 31, 2009. Due to the economic downturn, EnerBank expects the level of loan defaults to remain elevated throughout 2010, returning to lower levels thereafter.
 
NEW ACCOUNTING STANDARDS
 
For details regarding the implementation of new accounting standards and new accounting standards issued that are not yet effective, see Note 4, New Accounting Standards.


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CMS Energy Corporation
 
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
 
                         
    Years Ended December 31  
 
  2009     2008     2007  
    In Millions  
 
Operating Revenue
  $ 6,205     $ 6,807     $ 6,451  
Income (Loss) from Equity Method Investees
    (2 )     5       40  
Operating Expenses
                       
Fuel for electric generation
    541       600       523  
Purchased and interchange power
    1,163       1,335       1,407  
Cost of gas sold
    1,866       2,277       2,172  
Electric sales contract termination
                279  
Other operating expenses
    943       827       966  
Maintenance
    220       192       199  
Depreciation and amortization
    570       588       539  
General taxes
    217       203       222  
Asset impairment charges
                204  
Gain on asset sales, net
    (13 )     (9 )     (21 )
                         
      5,507       6,013       6,490  
                         
Operating Income
    696       799       1  
Other Income (Expense)
                       
Interest and dividends
    24       30       96  
Allowance for equity funds used during construction
    26       33       31  
Other income
    54       15       41  
Other expense
    (30 )     (37 )     (39 )
                         
      74       41       129  
                         
Interest Charges
                       
Interest on long-term debt
    383       371       405  
Other interest
    56       33       48  
Allowance for borrowed funds used during construction
    (4 )     (4 )     (6 )
                         
      435       400       447  
                         
Income (Loss) Before Income Taxes
    335       440       (317 )
Income Tax Expense (Benefit)
    115       139       (197 )
                         
Income (Loss) From Continuing Operations
    220       301       (120 )
Income (Loss) From Discontinued Operations, Net of Tax
                       
Expense (Benefit) of $13, $1, and $(1)
    20       1       (110 )
                         
Net Income (Loss)
    240       302       (230 )
Income (Loss) Attributable to Noncontrolling Interests
    11       7       (8 )
                         
Net Income (Loss) Attributable to CMS Energy
    229       295       (222 )
Preferred Stock Dividends
    11       11       11  
Redemption Premium on Preferred Stock
                1  
                         
Net Income (Loss) Available to Common Stockholders
  $ 218     $ 284     $ (234 )
                         


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Table of Contents

                         
    Years Ended December 31  
    2009     2008     2007  
    In Millions, Except Per
 
    Share Amounts  
 
Amounts Attributable to Common Stockholders
                       
Income (Loss) from Continuing Operations
  $ 198     $ 283     $ (145 )
Income (Loss) from Discontinued Operations
    20       1       (89 )
                         
Net Income (Loss) Available to Common Stockholders
  $ 218     $ 284     $ (234 )
                         
Amounts Attributable to Noncontrolling Interests
                       
Income from Continuing Operations
  $ 11     $ 7     $ 13  
Loss from Discontinued Operations
                (21 )
                         
Income (Loss) Attributable to Noncontrolling Interests
  $ 11     $ 7     $ (8 )
                         
Basic Earnings (Loss) Per Average Common Share
                       
Income (Loss) from Continuing Operations
  $ 0.87     $ 1.25     $ (0.65 )
Income (Loss) from Discontinued Operations
    0.09             (0.39 )