CMS Energy - 10-Q quarterly report FY

 

Indicate by check mark whether the Registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes þ     No o

Indicate by check mark whether the 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: Yeso     Noo     Consumers Energy Company: Yeso     Noo

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:

Consumers Energy Company:

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock at October 29, 2009:

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

This report should be read in its entirety. No one section of this report deals with all aspects of the subject matter of this report. This report should be read in conjunction with the consolidated financial statements and related notes and with Management’s Discussion and Analysis included in CMS Energy Corporation’s and Consumers Energy Company’s Annual Report on Form 10-K for the year ended December 31, 2008 (each, the “2008 Form 10-K”).

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

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This MD&A is a combined report of CMS Energy and Consumers. It has been prepared in accordance with the instructions to Form 10-Q and Item 303 of Regulation S-K. This MD&A should be read in conjunction with the MD&A contained in CMS Energy’s and Consumers’ 2008 Form 10-K.

This Form 10-Q 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,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” 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’ business 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:

For additional details regarding these and other uncertainties, see the “Outlook” section included in this MD&A, Note 4, Contingencies, Note 5, Utility Rate Matters, and Part II, Item 1A. Risk Factors.

CMS Energy is an energy company operating primarily in Michigan and is the parent holding company of several subsidiaries, including Consumers and Enterprises. Consumers is a combination electric and gas utility company serving Michigan’s Lower Peninsula. Consumers’ electric utility operations include the generation, purchase, distribution, and sale of electricity. Consumers’ gas utility operations include the purchase, transportation, storage, distribution, and sale of natural gas. Consumers’ customer base includes a mix of residential, commercial, and diversified industrial customers. Enterprises, through its equity investments and subsidiaries, is primarily engaged in independent power production.

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 power generation, gas distribution, transmission and storage, and other energy-related services. Their businesses are affected primarily by:

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

Consumers’ forecast calls for capital investments in excess of $6 billion from 2009 through 2013, 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 power purchase agreements to complement existing generating sources; and potential retirement of older, less efficient generating units.

Consumers filed an air permit application with the MDEQ in October 2007 for its proposed new 830 MW coal-fueled plant. Consumers expects the MDEQ to act on the application by the end of 2009. Consumers prepared and filed with the MDEQ and the MPSC a needs-and-alternatives analysis that supported Consumers’ current balanced energy initiative and the construction of its proposed power plant. In September 2009, the MPSC staff issued a report to the MDEQ on Consumers’ analysis, 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.

The 2008 Energy Legislation requires that at least ten percent of Consumers’ electric sales volume come from renewable energy sources by 2015, and includes requirements for specific capacity additions. In compliance with this legislation, Consumers filed a renewable energy plan with the MPSC in February 2009 outlining its plans to build or contract for additional renewable energy capacity of 200 MW by December 31, 2013, and an additional 300 MW of renewable energy capacity by December 31, 2015. Consumers’ plan proposed that half of the new renewable capacity would 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. 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. Consumers’ filings include a request for recovery of the cost of the renewable energy and energy optimization measures. In May 2009, the MPSC approved the energy optimization plan and, with minor exceptions, the renewable energy plan.

In April 2009, Consumers filed tariff sheets indicating that it planned to self-implement an electric rate increase in the annual amount of $179 million based on an 11 percent authorized return on equity, beginning in May 2009. The MPSC issued an order in May 2009 requiring that, if Consumers self-implemented the $179 million electric rate increase, it must simultaneously distribute to customers $36 million of proceeds from the April 2007 sale of Palisades. Accordingly, Consumers self-implemented an annual electric rate increase of $179 million, subject to refund with interest, and also implemented a one-time distribution of $36 million. Consumers anticipates a final order in this rate filing in November 2009. Additionally, in May 2009, Consumers filed an application with the MPSC seeking an annual increase in gas revenue of $114 million based on an 11 percent authorized return on equity. In October 2009, Consumers filed tariff sheets indicating it plans to self-implement a gas rate case in the annual amount of $89 million beginning November 19, 2009. These rate filings include requests for increases in rates to cover various costs, including capital additions under the balanced energy initiative.

In October 2009, the MPSC issued a show-cause order that directed Consumers to present details of its forestry and fossil-fueled plant operation and maintenance expenditures for 2006 through 2008, as well as available detail for 2009 expenditures, and also to explain why Consumers should not be found in violation of the MPSC’s December 2005 order, which required certain minimum operation and maintenance expenditures on these activities.

There is uncertainty associated with federal legislative and regulatory proposals related to the regulation of carbon dioxide emissions, particularly associated with coal-fueled generation. Federal legislation is being considered to establish a cap and trade system, or alternatively, to tax carbon dioxide emissions. In addition, in April 2009, the EPA issued a proposed 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. CMS Energy and Consumers are monitoring these developments for potential effects on their plans and operations.

Consumers is developing an advanced metering infrastructure system that 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. Consumers will also make certain modifications to its software to enable the new system.

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

As CMS Energy and Consumers execute this strategy, they 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. The financial market crisis, the effects of which became evident in a global economic downturn during the fourth quarter of 2008, continues to result in a negative economic outlook. A range of possible outcomes exists due to the uncertain financial market environment and ongoing government policy responses. Consumers expects its annual 2009 weather-adjusted sales to decline by four percent for the electric utility and five percent for the gas utility and it projects slower growth in the longer term. While CMS Energy and Consumers believe that their sources of liquidity will be sufficient to meet their requirements, they 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.

For the three months ended September 30, 2009, net income was $73 million, compared with $78 million for 2008. Combined net income for Consumers’ electric and gas utility segments increased, as the impact of the MPSC’s December 2008 gas rate order, a self-implemented rate increase, and a favorable sales mix more than offset lower electric deliveries, increased operating expenses, and increased interest expense. The positive impacts from the utility segments on CMS Energy’s consolidated net income offset partially the premiums paid on retirement of debt.

Specific after-tax changes to net income available to common stockholders for the three months ended September 30, 2009 versus 2008 are:

For the nine months ended September 30, 2009, net income was $216 million, compared with $224 million for 2008. Combined net income from Consumers’ electric utility and gas utility segments decreased, reflecting decreased deliveries, the absence of gains from the sale of sulfur dioxide allowances recognized in 2008, and an increase in operating expenses and interest expense. These decreases were offset partially by increased earnings from a June 2008 electric rate order and a December 2008 gas rate order, a self-implemented rate increase, and a favorable sales mix. CMS Energy’s consolidated net income was also negatively impacted by an increase in projected Bay Harbor remediation costs and higher corporate expenses, which were offset partially by the expiration of an indemnity obligation related primarily to discontinued operations.

Specific after-tax changes to net income available to common stockholders for the nine months ended September 30, 2009 versus 2008 are:

Electric deliveries and rate increase: For the three months ended September 30, 2009, electric delivery revenues increased $17 million compared with 2008. The increase resulted from $49 million of additional revenue from the May 2009 self-implemented rate increase and other rate-related items, and a $13 million increase in revenues from a favorable sales mix. These increases were offset partially by $40 million in lower deliveries. Deliveries to end-use customers were 9 billion kWh, a decrease of 0.7 billion kWh or 7.2 percent compared with 2008, primarily reflecting unfavorable economic conditions in Michigan. Additionally, surcharge revenues and related reserves decreased $5 million due to the expiration of the electric restructuring implementation plan surcharge of $5 million and a reduction in PA 141 surcharge revenue of $4 million, offset partially by a $4 million increase resulting from the implementation of an energy optimization program in June 2009.

For the nine months ended September 30, 2009, electric delivery revenues increased $54 million compared with 2008. The increase resulted from a combined $121 million of additional revenue from the June 2008 MPSC rate order and the May 2009 self-implemented rate increase and other rate-related items, net of a $20 million decrease from a new rate design structure that provides lower winter and higher summer rates to encourage conservation. These variances, together with a $44 million increase in revenues from a favorable sales mix, were offset partially by $90 million in lower deliveries. Deliveries to end-use customers were 27 billion kWh, a decrease of 1.8 billion kWh or 6.3 percent compared with 2008, primarily reflecting unfavorable economic conditions in Michigan. Additionally, surcharge revenues and related reserves decreased $21 million, reflecting the absence of $12 million of retirement benefits expense recovered in revenue in 2008. Also contributing to the decrease were the expiration of the electric restructuring implementation plan surcharge of $9 million and a reduction in PA 141 surcharge revenue of $5 million, offset partially by a $5 million increase resulting from the implementation of an energy optimization program in June 2009.

Power supply costs and related revenue: For the three months ended September 30, 2009, PSCR and related revenue increased $1 million compared with 2008, due primarily to an increase in wholesale fuel recovery revenue.

For the nine months ended September 30, 2009, PSCR and related revenue increased $3 million compared with 2008. The increase reflects the absence of a revenue reduction in 2008 related to amounts excluded from recovery in the 2006 PSCR reconciliation case.

Other income, net of deductions: For the three months ended September 30, 2009, other income increased $8 million compared with 2008. The increase was due to the absence in 2009 of a $6 million impairment charge that recognized an other-than-temporary decline in the fair value of Consumers’ SERP investments. Also contributing to the increase was $5 million related to gains from land sales. These increases were offset partially by a decrease in interest income and related items of $3 million, primarily reflecting lower levels of short-term cash investments.

For the nine months ended September 30, 2009, other income increased $7 million compared with 2008. The increase was due to gains from land sales of $9 million and the absence in 2009 of a $6 million impairment charge that recognized an other-than-temporary decline in the fair value of Consumers’ SERP investments. These increases were offset partially by a decrease in interest income and related items of $8 million, primarily reflecting lower levels of short-term cash investments.

Maintenance and other operating expenses: For the three months ended September 30, 2009, maintenance and other operating expenses increased $2 million compared with 2008. The increase was due to cost increases for plant maintenance of $4 million, and a $5 million increase in OPEB expense due to the unfavorable market performance of retirement benefit plan assets. Also contributing to the increase were the absence in 2009 of $4 million of resource conservation savings recorded in 2008 related to Consumers’ power purchase agreement with the MCV Partnership, higher expenses of $5 million related to forestry and tree-trimming services, and additional expenses of $4 million associated with the implementation of an energy optimization program in 2009. These increases were offset largely by a $7 million decrease in uncollectible accounts expense and a $13 million decrease in storm restoration, outside services, and other net expenses.

For the nine months ended September 30, 2009, maintenance and other operating expenses increased $51 million compared with 2008. The increase was due to cost increases for plant maintenance of $18 million, the absence of an $18 million benefit from the sale of sulfur dioxide credits recognized in 2008, higher expenses of $18 million related to forestry and tree-trimming services, and $5 million associated with the implementation of an energy optimization program in 2009. Also contributing to the increase was the absence of $16 million of resource conservation savings recorded in 2008 related to Consumers’ power purchase agreement with the MCV Partnership. Additionally, pension and OPEB expenses increased $5 million, as a $17 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 $1 million decrease in uncollectible accounts expense and a $28 million decrease in storm restoration, outside services, and other net expenses.

Depreciation and amortization: For the three months ended September 30, 2009, depreciation and amortization expense decreased $5 million compared with 2008. The decrease was due to a $9 million reduction in amortization expense on certain regulatory assets, offset partially by a $4 million increase in depreciation from higher plant in service.

For the nine months ended September 30, 2009, depreciation and amortization expense decreased $2 million compared with 2008. The decrease was due to a $14 million reduction in amortization expense on certain regulatory assets, offset partially by a $12 million increase in depreciation from higher plant in service.

General taxes: For the three months ended September 30, 2009, general taxes increased $5 million and for the nine months ended September 30, 2009, general taxes increased $8 million, due to increased property taxes, primarily reflecting higher capital spending.

Interest charges: For the three months ended September 30, 2009, interest charges increased $5 million and for the nine months ended September 30, 2009, interest charges increased $15 million due primarily to the issuance of debt in 2009.

Income taxes: For the three months ended September 30, 2009, income taxes increased $10 million compared with 2008, reflecting $6 million associated with higher utility earnings in the third quarter of 2009 and a $4 million increase in the MBT.

For the nine months ended September 30, 2009, income taxes increased $3 million compared with 2008, reflecting a $6 million increase in the MBT, offset partially by $3 million associated with lower earnings in 2009.

Gas deliveries and rate increase: For the three months ended September 30, 2009, gas delivery revenue increased $13 million compared with 2008. The increase was due to additional revenue of $3 million from the MPSC’s December 2008 gas rate order. Also contributing to the increase were higher deliveries of $1 million, and $6 million from a combination of a favorable sales mix and lower system losses incurred in 2009. Gas deliveries, including miscellaneous transportation to end-use customers, were 25 bcf, an increase of 1 bcf or 4.2 percent compared with 2008. Additionally, surcharge revenues increased $3 million due to the implementation of an energy optimization program in June 2009.

For the nine months ended September 30, 2009, gas delivery revenue increased $17 million compared with 2008. The increase was due to additional revenue of $14 million from the MPSC’s December 2008 gas rate order. Also contributing to the increase was $10 million from a favorable sales mix and lower system losses incurred in 2009. These increases were offset partially by lower deliveries of $11 million. Gas deliveries, including miscellaneous transportation to end-use customers, were 196 bcf, a decrease of 8 bcf or 3.9 percent compared with 2008. Additionally, surcharge revenues increased $4 million due to the implementation of an energy optimization program in June 2009.

Gas wholesale and retail services, other gas revenues, and other income: For the nine months ended September 30, 2009, gas delivery revenue increased $2 million compared with 2008. The increase was due to additional revenue from the appliance service plan program and an increase in transmission line revenue.

Other income, net of deductions: For the three months and nine months ended September 30, 2009, other income increased $5 million compared with 2008. The increase was due primarily to the absence in 2009 of an impairment charge that recognized an other-than-temporary decline in the fair value of Consumers’ SERP investments.

Maintenance and other operating expenses: For the three months ended September 30, 2009, maintenance and other operating expenses increased $5 million compared with 2008. The increase was due to higher OPEB expense of $3 million, reflecting unfavorable market performance of Consumers’ retirement benefit plan assets and an expense associated with prior year retirement benefits recovered in revenue in 2009. Also contributing to the increase were additional expenses related to the implementation

of an energy optimization program of $3 million, offset partially by a decrease of $1 million in other net expenses.

For the nine months ended September 30, 2009, maintenance and other operating expenses increased $19 million compared with 2008. The increase was due to higher OPEB expense of $10 million, reflecting unfavorable market performance of Consumers’ retirement benefit plan assets. Also contributing to the increase were higher uncollectible account expense of $8 million and additional expenses of $4 million related to the implementation of an energy optimization program. These increases were offset partially by a decrease of $3 million in other net expenses.

Depreciation and amortization: For the three months ended September 30, 2009, depreciation and amortization expense decreased $1 million compared with 2008. The MPSC’s December 2008 gas rate order reduced amortization expense by $2 million, and delayed collection of an equal amount of amortization in rates. This decrease was offset partially by $1 million of higher depreciation expense due to an increase in plant in service.

For the nine months ended September 30, 2009, depreciation and amortization expense decreased $9 million compared with 2008. The MPSC’s December 2008 gas rate order reduced amortization expense by $13 million, and delayed collection of an equal amount of amortization in rates. This decrease was offset partially by $4 million of higher depreciation expense due to an increase in plant in service.

General taxes: For the three months ended September 30, 2009, general taxes increased $2 million and for the nine months ended September 30, 2009, general taxes increased $3 million, due to increased property taxes, primarily reflecting higher capital spending.

Interest charges: For the three months ended September 30, 2009, interest charges increased $1 million and for the nine months ended September 30, 2009, interest charges increased $3 million, due primarily to the issuance of debt in 2009.

Income taxes: For the three months ended September 30, 2009, income taxes increased $5 million and for the nine months ended September 30, 2009, income taxes increased $2 million, due to higher utility earnings in the third quarter of 2009.

For the three months ended September 30, 2009, Enterprises reported no change in net income, as the impact of depressed power demand and prices was offset by higher fuel reimbursement revenue.

For the nine months ended September 30, 2009, Enterprises recorded a net loss of $12 million compared with net income 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.

For the three months ended September 30, 2009, corporate interest and other net expenses increased $19 million, due primarily to a premium paid on the early retirement of debt and the absence of benefits recorded in 2008 related to the reduction of certain tax valuation allowances.

For the nine months ended September 30, 2009, corporate interest and other net expenses increased $7 million. The increase was due to premiums paid on the early retirement of CMS Energy senior notes, the 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. These increases were offset partially by a gain recognized on the early retirement of CMS Energy’s long-term debt — related parties.

For the three months ended September 30, 2009, CMS Energy reported no income from discontinued operations. In 2008, income from discontinued operations was $1 million due primarily to a reduction to a legal reserve related to previously sold assets.

For the nine months ended September 30, 2009, income from discontinued operations was $29 million, due primarily to the expiration of an indemnity obligation related to a 2007 asset sale.

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:

Despite the 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:

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 6, Financings and Capitalization.

At September 30, 2009, CMS Energy and Consumers were each in compliance with the financial covenants in their respective debt agreements, and no events of default had occurred with respect to any debt covenants.

CMS Energy’s and Consumers’ operating, investing, and financing activities meet their consolidated cash needs. At September 30, 2009, CMS Energy had $213 million of consolidated cash and cash equivalents, which includes $30 million of restricted cash and cash equivalents and $14 million of cash and cash equivalents held by consolidated VIEs. At September 30, 2009, Consumers had $120 million of consolidated cash and cash equivalents, which includes $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 $233 million in common stock dividends and Enterprises paid $55 million in common stock dividends to CMS Energy for the nine months ended September 30, 2009. For details on dividend restrictions, see Note 6, Financings and Capitalization.

Operating Activities: For the nine months ended September 30, 2009, CMS Energy generated $638 million in cash from operations and Consumers generated $703 million in cash from operations. For the nine months ended September 30, 2008, CMS Energy generated $181 million in cash from operations and Consumers generated $524 million in cash from operations. Specific components of cash provided by (used in) operating activities for the nine months ended September 30, 2009 and 2008 are:

For the nine months ended September 30, 2009, net cash provided by operating activities at CMS Energy increased $457 million compared with 2008. This increase was due to the absence in 2009 of a payment made by CMS ERM in 2008 to terminate electricity sales agreements and the changes affecting Consumers’ cash provided by operating activities described in the following paragraph.

For the nine months ended September 30, 2009, net cash provided by operating activities at Consumers increased $179 million compared with 2008. This increase was due primarily to the impact of lower gas prices on inventory purchased in 2009, collection of increased billings due to recent regulatory actions, and other timing differences. These changes were offset partially by the 2009 pension contribution and the absence of 2008 accounts receivable sales.

Investing Activities: For the nine months ended September 30, 2009, net cash used in investing activities was $679 million at CMS Energy and $639 million at Consumers. For the nine months ended September 30, 2008, net cash used in investing activities was $538 million at CMS Energy and $531 million at Consumers. Specific components of cash used in investing activities for the nine months ended September 30, 2009 and 2008 are:

For the nine months ended September 30, 2009, net cash used in investing activities at CMS Energy increased $141 million compared with 2008. For the nine months ended September 30, 2009, net cash used in investing activities at Consumers increased $108 million compared with 2008. These increases were due primarily to an increase in Consumers’ capital expenditures.

Financing Activities: For the nine months ended September 30, 2009, net cash provided by financing activities was $11 million at CMS Energy and net cash used in financing activities was $35 million at Consumers. For the nine months ended September 30, 2008, net cash provided by financing activities was $171 million at CMS Energy and net cash used in financing activities was $99 million at Consumers. Specific components of cash provided by (used in) financing activities for the nine months ended September 30, 2009 and 2008 are:

For the nine months ended September 30, 2009, net cash provided by financing activities at CMS Energy decreased $160 million compared with 2008. This decrease was due primarily to a decrease in net proceeds from borrowings.

For the nine months ended September 30, 2009, net cash used in financing activities at Consumers decreased $64 million compared with 2008. This decrease was due primarily to a stockholder’s contribution from CMS Energy offset partially by a decrease in net proceeds from borrowings.

For additional details on long-term debt activity, see Note 6, Financings and Capitalization.

The following table provides the most recent estimates of pension cost and pension cash contributions:

Based on recent guidance from the federal Pension Protection Act of 2006, IRS notices, and the federal Worker, Retiree, and Employer Recovery Act of 2008, CMS Energy reduced its estimated pension contribution for 2009 by $94 million to $206 million. During the first nine months of 2009, CMS Energy contributed $206 million to its pension fund, which includes a contribution of $199 million by Consumers. Actual future pension cost and contributions will depend on future investment performance, changes in discount rates, and various other factors related to the Pension Plan participants.

For additional details on retirement benefits, see Note 10, Retirement Benefits.

Revolving Credit Facilities: For details on CMS Energy’s and Consumers’ revolving credit facilities, see Note 6, Financings and Capitalization.

Dividend Restrictions: For details on CMS Energy’s and Consumers’ dividend restrictions, see Note 6, Financings and Capitalization.

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 4, Contingencies, “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 September 30, 2009, $250 million of accounts receivable were eligible for sale, and no accounts receivable were sold under the program.

Several business trends and uncertainties may affect CMS Energy’s and Consumers’ financial condition and future 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 the “Forward-Looking Statements and Information” section included in this MD&A and Part II, Item 1A. Risk Factors.

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:

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. The 2008 Energy Legislation provided guidelines with respect to 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 legislation.

In October 2007, Consumers filed an air permit application with the MDEQ for its proposed coal-fueled plant. The MDEQ published Consumers’ draft air permit for public comment in March 2009 and, in response to public comments, indicated that it would require a needs-and-alternatives analysis. In June 2009, Consumers prepared and filed with the MDEQ and the MPSC a needs-and-alternatives analysis that supported Consumers’ current balanced energy initiative and the construction of its proposed coal-fueled power plant. In September 2009, the MPSC staff issued a report to the MDEQ on Consumers’ analysis, concluding that the long-term capacity need identified by Consumers in its analysis was unjustified without the retirement of certain existing coal-fueled power plants from its fleet. The MPSC staff’s report also stated that the proposed coal-fueled plant is only one alternative out of a range of options that Consumers may use to fill the projected capacity need, and that such options include increased energy efficiency and renewable energy.

Renewable Energy Plan: The 2008 Energy Legislation prescribed renewable energy standards for energy and capacity. The energy standard requires that at least ten percent of Consumers’ electric sales volume come from renewable sources by 2015 with interim target requirements. Using the guidelines of the standard, four percent of Consumers’ electric sales volume now comes from renewable sources. The capacity standard requires Consumers to add new renewable energy capacity of 200 MW by December 31, 2013, and an additional 300 MW by December 31, 2015, from owned renewable energy sources or agreements to purchase power.

In February 2009, Consumers filed its renewable energy plan with the MPSC. The plan detailed how Consumers would meet the renewable energy standards for energy and capacity, with wind generation as Consumers’ primary resource. Consumers’ plan proposed that half of the new renewable capacity would 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. The plan also proposed a schedule of surcharges to be applied over a 20-year period to recover the incremental cost of compliance. Consumers’ plan was approved by the MPSC in May 2009 with minor exceptions. It is subject to biennial review and annual cost and revenue reconciliation proceedings.

Consumers has secured more than 52,000 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 standards. 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 approved these agreements in October, which will enable Consumers to recover the full costs of these contracts from its customers. Additionally, in May 2009, Consumers requested proposals, due in December 2009, for capacity and energy from larger projects to meet its renewable capacity and energy needs through 2015.

Energy Optimization Plan: The 2008 Energy Legislation requires utilities to prepare energy optimization plans 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 natural gas use by December 31, 2015. In February 2009, Consumers filed its energy optimization plan with the MPSC. The plan detailed Consumers’ proposals for energy cost savings among all customer classes through incentives to reduce customer usage by offering customer energy audits, rebates and discounts on purchases of highly efficient appliances, and other incentives and programs. The plan also sought recovery of program costs. Consumers’ plan was approved by the MPSC in May 2009. It is subject to biennial review and annual cost and revenue reconciliation proceedings. In July 2009, Consumers launched its energy optimization programs for residential customers.

Electric Customer Revenue: Michigan’s economy has suffered from plant closures, restructurings, and bankruptcies in the automotive sector and from the depressed housing market. The Michigan economy also has been harmed by the present volatility in the financial and credit markets. Although Consumers’ electric utility results are not substantially dependent upon a single customer, or even a few customers, customers in the automotive sector and their direct suppliers represented four percent of Consumers’ total 2008 electric revenue and 2.5 percent of Consumers’ 2008 electric operating income. Consumers cannot predict the financial impact of the Michigan economy on its electric customer revenue.

Electric Deliveries: Consumers expects weather-adjusted electric deliveries to decrease in 2009 by four percent compared with 2008. Consumers’ outlook for 2009 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 2009 to decrease six percent compared with 2008. Consumers’ outlook reflects reduced deliveries associated with its investment in energy efficiency programs included in the 2008 Energy Legislation, as well as recent projections of Michigan economic conditions.

Beginning in 2010, Consumers expects economic conditions to stabilize, resulting in modestly growing deliveries of electricity through 2014. This modest growth expectation takes into account the predicted effects of energy efficiency programs. Actual deliveries will depend on:

Electric Supply Resources: Consumers, through its supply resources, which consist of electric generating plants, long-term power purchase contracts, and short-term purchases of capacity and energy, is planning to meet the resource adequacy requirements established by MISO.

Electric Transmission Expenses: Consumers expects the transmission charges it incurs to increase by $47 million in 2009 compared with 2008, due primarily to a 25 percent increase in METC and Wolverine transmission rates. This increase was included in Consumers’ 2009 PSCR plan filed with the MPSC in September 2008. For details on litigation concerning Consumers’ recovery of its electric transmission expense, see Note 4, Contingencies, “Consumers’ Electric Utility Contingencies — Litigation.”

Electric ROA: The Customer Choice Act allows Consumers’ electric customers to buy electric generation service from Consumers or from an alternative electric supplier. However, the 2008 Energy Legislation generally limits alternative electric supply to ten percent of Consumers’ weather-adjusted retail sales of the preceding calendar year. During the third quarter of 2009, customer enrollment in the ROA program reached the ten percent limit. At September 30, 2009, alternative electric suppliers were providing 586 MW of generation service to ROA customers, a 77 percent increase from December 31, 2008. For the twelve-month period ended September 30, 2009, alternative electric supply represented 4.5 percent of Consumers’ weather-adjusted retail sales of the preceding calendar year.

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. Consumers estimates expenditures of $1.32 billion from 2009 through 2017 for equipment installation to comply with a number of environmental regulations, including regulations limiting nitrogen oxides, sulfur dioxide, and mercury emissions. Consumers expects to recover these costs in customer rates.

It is expected that allowances and installation of pollution control equipment will cover the shortfall in nitrogen oxides emission allowances through 2015. Consumers also plans to purchase sulfur dioxide emission allowances between 2012 and 2015 at an average cost of $5 million per year. Consumers expects to recover emission allowance costs from its customers through the PSCR process.

Clean Air Interstate Rule: In 2005, the EPA adopted the CAIR, which required additional coal-fueled electric generating plant emission controls for nitrogen oxides and sulfur dioxide. The CAIR was appealed to the U.S. Court of Appeals for the District of Columbia. The court initially nullified the CAIR and the CAIR federal implementation plan in its entirety, but subsequently changed course and remanded the rule to the EPA, maintaining the rule in effect pending EPA revision. At this time, the CAIR remains in effect, with 2009 as the first nitrogen oxides compliance year. The EPA must now revise the rule to resolve the court’s concerns. The impacts of this revision are unknown, but stricter regulation is envisioned. A draft rule is expected in 2010.

State and Federal Mercury Air Rules: In 2005, the EPA issued the 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 the 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 U.S. Supreme Court denied a request to review this decision. The EPA has initiated the development of a revised rule based on MACT. The rule is expected to be proposed in early 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 MDEQ promulgated a rule that became

effective in October 2009. Consumers has a plan in place to comply with this proposed rule; however, the development of the Federal rule may affect Consumers’ plan. Consumers cannot predict the financial impact or outcome of this matter until this state regulation can be evaluated with respect to a Federal rule that is under development.

Greenhouse Gases: In June 2009, the United States House of Representatives passed the American Clean Energy and Security Act, which requires reductions in emissions of greenhouse gases, including carbon 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 in order to mitigate price impacts to customers. Consumers considers it likely that Congress will pass greenhouse gas legislation, but the form and timing of any final bill is difficult to predict. These laws, or similar 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, beginning January 1, 2010. 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 addition, the EPA, through public statements and actions, has signaled that it intends to initiate regulation of greenhouse gases through the Clean Air Act.

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 have an opportunity to recover these costs and capital expenditures in rates consistent with the recovery of other reasonable costs of complying with environmental laws and regulations.

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 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 early 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 4, Contingencies, “Consumers’ Electric Utility Contingencies — Electric Environmental Matters.”

Electric Rate Matters: Rate matters are critical to Consumers’ electric utility business. For details on Consumers’ stranded cost recovery, power supply cost recovery, electric rate case and self-implemented rates, Palisades regulatory proceedings, and Big Rock decommissioning proceedings, see Note 5, Utility Rate Matters, “Consumers’ Electric Utility Rate Matters.”

Gas Deliveries: Consumers expects weather-adjusted gas deliveries to decline in 2009 by five percent compared with 2008, 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 2010 through 2014, which reflects expected effects of energy efficiency programs. Actual delivery levels from year to year may vary from this trend due to:

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 4, Contingencies, “Consumers’ Gas Utility Contingencies — Gas Environmental Matters.”

Gas Rate Matters: Rate matters are critical to Consumers’ gas utility business. For details on Consumers’ gas cost recovery, gas depreciation, gas rate case, and lost and unaccounted for gas, see Note 5, Utility Rate Matters, “Consumers’ Gas Utility Rate Matters.”

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:

For additional details regarding Enterprises’ uncertainties, see Note 4, Contingencies and Part II, Item 1. Legal Proceedings.

Advanced Metering Infrastructure: Consumers’ development of an advanced metering infrastructure system is proceeding as planned. This system is designed to provide two-way communications between Consumers and its customers and should allow Consumers to read meters, receive outage and restoration notification, and turn service on and off without visiting the meter. It should 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 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.

Litigation: CMS Energy, Consumers, and certain of their subsidiaries are named as a party 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 4, Contingencies and Part II, Item 1. Legal Proceedings.

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 $227 million at September 30, 2009. Its loan portfolio was funded primarily by deposit liabilities of $163 million and borrowings from the U.S. Federal Reserve bank of $50 million. Twelve-month rolling average default rates on loans held by EnerBank have risen from 1.4 percent at December 31, 2008 to 2.2 percent at September 30, 2009. Due to the economic downturn, EnerBank expects the level of loan defaults to continue to increase throughout the remainder of 2009 and into 2010, returning to lower levels thereafter.

For details regarding the implementation of new accounting standards and new accounting standards issued that are not yet effective, see Note 2, New Accounting Standards.

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