CMS-PB

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2009, for CMS Energy Corporation (CMS Energy) and its wholly-owned subsidiary, Consumers Energy Company (Consumers). CMS Energy is a holding company operating primarily in Michigan through three segments: Electric Utility, Gas Utility, and Enterprises (non-utility investments). Consumers is a regulated combination electric and gas utility serving Michigan's Lower Peninsula. The filing highlights the impact of the Michigan economic downturn, particularly in the automotive sector, and ongoing regulatory proceedings regarding rate cases and environmental compliance.

Key Financial Metrics

Note: Operating cash flow for the three-month period is not explicitly provided in the summary tables; the nine-month figure is used for liquidity assessment.

Material Changes vs. Prior Period

• Net Income: For the three months ended September 30, 2009, net income decreased by $5 million (6.4%) to $73 million compared to $78 million in 2008. For the nine-month period, net income decreased by $8 million (3.6%) to $216 million from $224 million in 2008.
• Revenue Drivers: Revenue increases were driven by rate orders (December 2008 gas rate order, May 2009 self-implemented electric rate increase) and favorable sales mix. These were partially offset by decreased deliveries due to unfavorable economic conditions in Michigan.
• Segment Performance:
  • Electric Utility: Net income increased $9 million for the quarter but decreased $11 million for the nine months, reflecting lower deliveries and higher operating expenses.
  • Gas Utility: Net income improved by $6 million for both the quarter and nine months, aided by rate increases and lower system losses.
  • Enterprises: Recorded a net loss of $12 million for the nine months (vs. $13 million income in 2008), primarily due to a $22 million increase in projected environmental remediation costs for the Bay Harbor site and lower power demand.
• Corporate Expenses: Corporate interest and other expenses increased significantly due to premiums paid on the early retirement of debt.

Guidance, Outlook, and Risks

• Rate Cases: Consumers self-implemented an annual electric rate increase of $179 million in May 2009 and plans to self-implement a gas rate increase of $89 million in November 2009. Final orders are pending, with potential refunds if the Michigan Public Service Commission (MPSC) disallows portions of the increases.
• Deliveries Outlook: Consumers expects weather-adjusted electric sales to decline 4% and gas sales to decline 5% in 2009 compared to 2008, driven by economic conditions and energy efficiency programs.
• Capital Projects: Consumers is pursuing a "Balanced Energy Initiative" with capital investments exceeding $6 billion from 2009-2013. This includes a proposed 830 MW coal-fueled plant, though regulatory approval for the air permit and certificate of need remains uncertain.
• Environmental Risks: Significant uncertainty exists regarding the Bay Harbor remediation costs (liability recorded at $85 million) and compliance with federal and state regulations on greenhouse gases, mercury, and nitrogen oxides.
• Liquidity: Management believes current cash levels and access to capital markets are sufficient to meet requirements, though they are monitoring credit market volatility.

Investor Verification Checklist

• Rate Case Outcomes: Verify the final MPSC orders for the self-implemented electric and gas rate increases to confirm if refunds are required.
• Bay Harbor Liability: Monitor updates on the Bay Harbor environmental remediation costs, as estimates have increased recently and could impact future earnings.
• Coal Plant Approval: Track the status of the air permit and certificate of need for the proposed 830 MW coal plant, which is central to the long-term resource plan.
• Michigan Economic Impact: Assess the continued impact of the automotive industry downturn on customer deliveries and credit risk (uncollectible accounts).
• Debt Maturities: Review the schedule of debt maturities and refinancing needs, particularly given the premiums paid on recent debt retirements.