CMS-PB

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 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, with Consumers serving as the regulated electric and gas utility. The company operates in three segments: Electric Utility, Gas Utility, and Enterprises (non-utility investments). The reporting period was significantly impacted by the economic downturn in Michigan, particularly the automotive sector bankruptcies (GM and Chrysler), and ongoing regulatory proceedings regarding rate increases and environmental compliance.

Key Financial Metrics

Material Changes vs. Prior Period

• Net Income Increase (Q2): CMS Energy's net income available to common stockholders rose to $74 million in Q2 2009 from $44 million in Q2 2008. This increase was driven by a $30 million benefit from discontinued operations (expiration of an indemnity obligation), a $15 million gain on debt retirement, and higher utility revenues due to rate orders and a favorable sales mix. These gains were partially offset by a $22 million increase in projected environmental remediation costs at the Bay Harbor site and lower electric deliveries due to economic conditions.
• Net Income Decline (YTD): For the six months ended June 30, 2009, net income decreased slightly to $143 million from $146 million in the prior year. The decline was primarily due to decreased electric deliveries, higher operating expenses, and the absence of gains from sulfur dioxide credit sales recognized in 2008.
• Segment Performance: The Electric Utility segment saw increased earnings in Q2 due to rate increases, though YTD earnings declined due to lower deliveries. The Gas Utility segment earnings remained flat YTD. The Enterprises segment reported a net loss of $17 million for both Q2 and YTD, primarily due to increased Bay Harbor remediation costs.
• Revenue Trends: Operating revenue decreased year-over-year for both the three-month and six-month periods, reflecting lower commodity costs (gas) and reduced deliveries, despite rate increases.

Guidance, Outlook, and Risks

• Rate Matters: Consumers self-implemented an annual electric rate increase of $179 million in May 2009, subject to a $36 million refund of excess Palisades sale proceeds. A final order is expected in November 2009. Consumers also filed for a $114 million annual gas revenue increase in May 2009.
• Outlook: Consumers expects weather-adjusted electric sales to decline by 3.5% in 2009 and gas sales to decline by 5%. The company anticipates modest growth in deliveries beginning in 2010. Capital investments are forecast to exceed $6 billion from 2009 through 2013.
• Environmental and Regulatory Risks:
  • Bay Harbor: CMS Energy recorded a $36 million charge in Q2 2009 for increased remediation costs. Total remaining liability is estimated at $90 million (discounted).
  • Greenhouse Gases: Potential federal legislation (American Clean Energy and Security Act) and EPA regulations could require significant capital expenditures for emission controls.
  • Coal Plant: Consumers is pursuing an 830 MW coal-fueled plant, pending regulatory approval and environmental permits.
• Liquidity: CMS Energy and Consumers maintain strong liquidity with $1.056 billion and $760 million in cash equivalents, respectively. They have access to revolving credit facilities and recently issued $500 million in First Mortgage Bonds (Consumers) and $473 million in senior/convertible notes (CMS Energy).

Investor Verification Checklist

• Rate Case Outcomes: Verify the final MPSC orders regarding the $179 million electric rate increase and the $114 million gas rate increase, specifically regarding the $36 million refund requirement and potential adjustments.
• Bay Harbor Liability: Monitor updates on the Bay Harbor remediation project, as cost estimates have increased significantly and could impact future earnings if further delays or scope changes occur.
• Michigan Economic Impact: Assess the ongoing impact of the automotive industry downturn on customer deliveries and credit risk (uncollectible accounts), particularly given the bankruptcies of GM and Chrysler.
• Environmental Compliance Costs: Track the status of the proposed coal plant and potential costs associated with new greenhouse gas regulations or Clean Air Act compliance.
• Debt Maturities: Review the schedule of debt maturities and the company's ability to refinance or repay obligations in a volatile credit market environment.