UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2011

OR

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

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

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).
CMS Energy Corporation : Yes þ No o Consumers Energy Company : Yes þ No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
CMS Energy Corporation : Yes o No þ Consumers Energy Company : Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock at April 14, 2011:
CMS Energy Corporation:
CMS Energy Common Stock, $0.01 par value			252,352,702
Consumers Energy Company:
Consumers Energy Common Stock, $10 par value, privately held by CMS Energy Corporation			84,108,789

 

 

CMS Energy Corporation
Consumers Energy Company

Quarterly Reports on Form 10-Q to the Securities and Exchange Commission for the Period Ended
March 31, 2011

TABLE OF CONTENTS

			Page
Glossary			3
Filing Format			8
Forward-Looking Statements and Information			8
PART I — FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited)
CMS Energy			30
Consumers			38
Notes to Consolidated Financial Statements			45
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			13
Item 3. Quantitative and Qualitative Disclosures about Market Risk			73
Item 4. Controls and Procedures			73
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			74
Item 1A. Risk Factors			74
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			74
Item 3. Defaults Upon Senior Securities			75
Item 4 Removed and Reserved			75
Item 5. Other Information			75
Item 6. Exhibits			76
Signatures			79
EX-10.4
EX-10.5
EX-10.6
EX-12.1
EX-12.2
EX-31.1
EX-31.2
EX-31.3
EX-31.4
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

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FILING FORMAT

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

This report should be read in its entirety. No one section of this report deals with all aspects of the subject matter of this report. This report should be read in conjunction with the consolidated financial statements and related notes and with MD&A included in the 2010 Form 10-K.

FORWARD-LOOKING STATEMENTS AND INFORMATION

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

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

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

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

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

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

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

•

sufficient and timely recovery of:

	•		environmental and safety-related expenditures for coal-fueled plants and other utility properties;
	•		power supply and natural gas supply costs;
	•		operating and maintenance expenses;
	•		additional utility rate-based investments;
	•		costs associated with the proposed retirement and decommissioning of facilities;
	•		MISO energy and transmission costs; 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 Consumers’ pilot electric and gas decoupling mechanisms;
	•		regulatory orders preventing or curtailing rights to self-implement rate requests;
	•		regulatory orders potentially requiring a refund of previously self-implemented rates; 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;
	•		loss of customer demand for electric generation supply to alternative energy suppliers;
	•		the ability of Consumers to recover its regulatory assets in full and in a timely manner;
	•		the effectiveness of Consumers’ electric and gas decoupling mechanisms in moderating the impact of sales variability on net revenues;
	•		the 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 or at all, and the outcome of pending litigation with the DOE;
	•		the impact of enforcement powers and investigation activities at FERC;
	•		federal regulation of electric sales and transmission of electricity, including periodic re-examination by federal regulators of CMS Energy’s and Consumers’ market-based sales authorizations in wholesale power markets without price restrictions;
	•		effects of weather conditions, such as unseasonably warm weather during the winter, on sales;
	•		the market perception of the energy industry or of CMS Energy, Consumers, or any of their affiliates;
	•		the credit ratings of CMS Energy or Consumers;
	•		the impact of credit markets, economic conditions, and any new banking regulations on EnerBank;
	•		potential effects of the Dodd-Frank Act and related regulations on CMS Energy and Consumers, including regulation of financial institutions such as EnerBank, and shareholder activity that is permitted or may be permitted under the Act;
	•		disruptions in the normal commercial insurance and surety bond markets that may increase costs or reduce traditional insurance coverage, particularly terrorism and sabotage insurance, performance bonds, and tax-exempt debt insurance, and stability of insurance providers, and the ability of Consumers to recover the costs of any such insurance from customers;
	•		energy markets, including availability of capacity and the timing and extent of changes in commodity prices for oil, coal, natural gas, natural gas liquids, electricity, and certain related products due to lower or higher demand, shortages, transportation problems, or other developments, and their impact on CMS Energy’s and Consumers’ cash flows and working capital;
	•		the effectiveness of CMS Energy’s and Consumers’ risk management policies, procedures, and strategies, including their strategies to hedge risk related to future prices of electricity, natural gas, and other energy-related commodities;
	•		changes in construction material prices and the availability of qualified construction personnel to implement Consumers’ construction program;

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

For additional details regarding these and other uncertainties, see the “Outlook” section included in MD&A; Note 2, Contingencies and Commitments; Note 3, Regulatory Matters; and Part II, Item 1A. Risk Factors.

CMS Energy Corporation
Consumers Energy Company

Utility Investment

Consumers expects to make capital investments of more than $6 billion over the next five years, with a key aspect of its strategy being the balanced energy initiative. The balanced energy initiative is a comprehensive energy resource plan to meet Consumers’ projected short-term and long-term electric power requirements with energy efficiency, demand management, expanded use of renewable energy, development of new power plants, pursuit of additional PPAs to complement existing generating sources, potential retirement or mothballing of older generating units, and continued operation of others.

Renewable energy projects are a major component of Consumers’ planned capital investments. Consumers expects to spend $600 million on renewable energy investments through 2015. The 2008 Energy Law requires that at least ten percent of Consumers’ electric sales volume come from renewable energy sources by 2015, and it includes requirements for specific capacity additions. Consumers has historically included renewable resources as part of its portfolio, with about five percent of its present power supply coming from such renewable sources as hydroelectric, landfill gas, biomass, and wind. In February 2011, Consumers filed with the MPSC an amended renewable energy plan, reducing the surcharge billed to customers by an annual amount of $55 million. Consumers proposed the amendment as a result of lower-than-anticipated costs to comply with the renewable energy requirements prescribed by the 2008 Energy Law.

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

Consumers’ smart grid program will also represent a significant capital investment. The initial substantial deployment, planned for 2012, will include advanced metering infrastructure and follow a phased approach. Consumers expects to spend $355 million on its smart grid program through 2015.

Regulation

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

	•		2010 Gas Rate Case: In August 2010, Consumers filed an application with the MPSC seeking an annual gas rate increase of $55 million based on an 11 percent authorized return on equity.
			In January 2011, Consumers filed support for a self-implemented annual gas rate increase of $48 million. In February 2011, Consumers revised the proposed self-implemented increase to $29 million. The MPSC issued an order in February 2011, delaying Consumers’ self-implementation in order to give other parties to the proceeding an opportunity to respond to Consumers’ revised self-implementation filing. In anticipation of a final order, all parties may file briefs supporting their positions. In April 2011, Consumers filed an initial brief supporting an annual gas rate increase of $45 million, and the MPSC Staff submitted a revised recommended annual revenue increase of $16 million. The parties have engaged in discussions in an effort to settle the issues in this case. As of April 28, 2011, a settlement was not yet finalized, but Consumers believes settlement is likely.
	•		Electric Revenue Decoupling Mechanism: In March 2011, Consumers filed its first reconciliation of the electric revenue decoupling mechanism, requesting recovery of $27 million from customers for the period December 2009 through November 2010. The decoupling mechanism was authorized in Consumers’ 2009 electric rate case order, subject to certain conditions, and extended in the 2010 electric rate case order. It allows Consumers to adjust future electric rates to compensate for changes in sales volumes resulting from weather fluctuations, energy efficiency,

and conservation. Various parties have filed appeals concerning the electric decoupling mechanism.

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

During 2010, the EPA issued various proposals for regulating PCBs, CCBs, sulfur dioxide, and nitrogen oxides. Additionally, in March 2011, the EPA proposed a hazardous air pollutant rule that would establish MACT emission standards for mercury and other hazardous air pollutants. Under the proposed rule, some coal-fueled electric generating units would require additional controls for hazardous air pollutants. Also in March 2011, the EPA issued a proposed rule to regulate existing electric generating plant cooling water intake systems. CMS Energy and Consumers are monitoring these developments for potential effects on their operations.

Safety

The safety and security of employees, customers, and the general public remain a priority of CMS Energy and Consumers. Accordingly, CMS Energy and Consumers have worked to integrate a set of safety principles into their business operations and culture. These principles include complying with applicable safety, health, and security regulations and implementing programs and processes aimed at continually improving safety and security conditions.

Financial Performance in 2011 and Beyond

For the three months ended March 31, 2011, CMS Energy’s net income available to common stockholders was $135 million, and diluted earnings per share were $0.52. This compares with net income available to common stockholders of $85 million and diluted earnings per share of $0.34 for the three months ended March 31, 2010. Among the most significant factors contributing to CMS Energy’s improved performance were benefits from electric and gas rate orders and increased gas deliveries, offset partially by higher distribution and service restoration costs.

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

CMS Energy believes that economic conditions in Michigan have stabilized. Although Michigan’s economy continues to be affected by the recession and its impact on the state’s automotive industry, by high unemployment rates, and by a modestly shrinking population, there are indications that the recession has eased in Michigan. Consumers expects its electric sales to increase by about 1.5 percent annually through 2016, driven largely by the continued rise in industrial production. Consumers is projecting that its gas sales will decline by about one percent annually through 2016, due largely to energy efficiency and conservation.

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

Consumers expects to continue to have sufficient capacity to fund its investment-based growth plans. CMS Energy also expects its sources of liquidity to remain sufficient to meet its cash requirements. CMS Energy and Consumers will continue to monitor developments in the financial and credit markets,

as well as government policy responses to those developments, for potential implications for their businesses and their future financial needs.

Presented in the following table are specific after-tax changes to net income available to common stockholders for the three months ended March 31, 2011 versus 2010:

Electric deliveries and rate increases: For the three months ended March 31, 2011, electric delivery revenues increased $28 million compared with 2010. This variance consisted of $26 million from a

November 2010 rate increase and $2 million of other miscellaneous revenue increases. Overall, deliveries to end-use customers were 9.3 billion kWh in 2011, an increase of 0.2 billion kWh, or 2.2 percent, compared with 2010.

Power supply costs and related revenue: For the three months ended March 31, 2011, PSCR revenue increased $11 million compared with 2010. This increase was due to the absence, in 2011, of a disallowance in 2010 of certain power supply costs in Consumers’ 2007 PSCR reconciliation case.

Maintenance and other operating expenses: For the three months ended March 31, 2011, maintenance and other operating expenses increased $14 million compared with 2010. This increase was due to $13 million of higher service restoration costs, caused by a series of unusually severe winter storms, and $7 million of higher plant maintenance and other operating expenses. These increases were offset partially by a $6 million decrease resulting from the absence, in 2011, of voluntary separation plan expenses incurred in 2010.

Depreciation and amortization: For the three months ended March 31, 2011, depreciation and amortization expense decreased $13 million compared with 2010, due primarily to lower amortization expense on certain regulatory assets.

Income taxes: For the three months ended March 31, 2011, income taxes increased $13 million compared with 2010, due to higher electric utility earnings in 2011.

Gas deliveries and rate increases: For the three months ended March 31, 2011, gas delivery revenues increased $32 million compared with 2010. This increase consisted of $26 million of additional revenues from colder weather in 2011 and $6 million from higher customer usage. Gas deliveries, including miscellaneous transportation to end-use customers, were 133.9 bcf in 2011, an increase of 14.8 bcf, or 12.4 percent, compared with 2010.

Maintenance and other operating expenses: For the three months ended March 31, 2011, maintenance and other operating expenses decreased $12 million compared with 2010. This decrease reflected $4 million of voluntary separation plan expenses incurred in 2010, lower uncollectible accounts expense of $3 million, and a $5 million decrease in other operating expenses.

Income taxes: For the three months ended March 31, 2011, income taxes increased $16 million compared with 2010, due to higher gas utility earnings in 2011.

For the three months ended March 31, 2011, net income of the enterprises segment decreased $6 million compared with 2010, reflecting lower electric capacity revenue of $3 million and lower net mark-to-market gains of $3 million.

For the three months ended March 31, 2011, corporate interest and other net expenses decreased $7 million compared with 2010, due primarily to lower income tax expense in 2011.

Discontinued Operations

For the three months ended March 31, 2011, income of $2 million was recorded from discontinued operations due to a legal settlement, compared with a loss of $1 million in 2010, reflecting operating results of Exeter.

For the three months ended March 31, 2011, net cash provided by operating activities at CMS Energy and at Consumers increased $184 million compared with 2010. The increase was due primarily to higher net income, the absence of Pension Plan contributions in 2011, and increased collection of accounts receivable.

For the three months ended March 31, 2011, net cash used in investing activities increased $16 million at CMS Energy and $26 million at Consumers compared with 2010. These changes were due primarily to CMS Energy’s contribution of $27 million to its SERP fund, which included a contribution of $20 million by Consumers.

Financing Activities

Presented in the following table are specific components of net cash (used in) provided by financing activities for the three months ended March 31, 2011 and 2010:

For the three months ended March 31, 2011, net cash used in financing activities at CMS Energy increased $282 million compared to 2010. The change was due primarily to a decrease in net proceeds from borrowings by CMS Energy.

For the three months ended March 31, 2011, net cash provided by financing activities at Consumers decreased $68 million compared with 2010. The change was due primarily to a decrease in stockholder’s contribution from CMS Energy, offset partially by a decrease in common stock dividend payments to CMS Energy.

CAPITAL RESOURCES AND LIQUIDITY

CMS Energy uses dividends from its subsidiaries and external financing and capital transactions to invest in its utility and non-utility businesses, retire debt, pay dividends, and fund its other obligations. The ability of CMS Energy’s subsidiaries, including Consumers, to pay dividends to CMS Energy depends upon each subsidiary’s revenues, earnings, cash needs, and other factors. In addition, Consumers’ ability to pay dividends is restricted by certain terms included in its articles of incorporation, as well as by FERC requirements. For the three months ended March 31, 2011, Consumers paid $104 million in common stock dividends to CMS Energy.

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

CMS Energy’s and Consumers’ access to the financial and capital markets depends on their credit ratings and on market conditions. As evidenced by past financing transactions, CMS Energy and Consumers have had ready access to these markets and, barring major market dislocations or disruptions, they expect to continue to have such access. If access to these markets were to become diminished or otherwise restricted, however, CMS Energy and Consumers would implement contingency plans to address debt maturities, which could include reduced capital spending. CMS Energy and Consumers also had the following secured revolving credit facilities available at March 31, 2011:

CMS Energy and Consumers use these credit facilities for general working capital purposes and to issue letters of credit. An additional source of liquidity is Consumers’ revolving accounts receivable sales program, which allows it to transfer up to $250 million of accounts receivable as a secured borrowing. At March 31, 2011, $250 million of accounts receivable were eligible for transfer under this program.

CMS Energy’s new $550 million revolving credit agreement specifies a maximum debt-to-EBITDA ratio, as defined therein. Consumers’ new $500 million revolving credit agreement specifies a maximum debt-to-capital ratio, as defined therein. CMS Energy and Consumers were each in compliance with these limits as of March 31, 2011, as presented in the following table:

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

Off-Balance-Sheet Arrangements

CMS Energy, Consumers, and certain of their subsidiaries also enter into various arrangements in the normal course of business to facilitate commercial transactions with third parties. These arrangements include indemnities, surety bonds, letters of credit, and financial and performance guarantees. Indemnities are usually agreements to reimburse a counterparty that may incur losses due to outside claims or breach of contract terms. The maximum payment that could be required under a number of these indemnity obligations is not estimable. While CMS Energy and Consumers believe it is unlikely that they will incur any material losses related to indemnities they have not recorded as liabilities, they cannot predict the impact of these contingent obligations on their liquidity and financial condition. For additional details on these and other guarantee arrangements, see Note 2, Contingencies and Commitments, “Guarantees.”

OUTLOOK

Several business trends and uncertainties may affect CMS Energy’s and Consumers’ financial condition and results of operations. These trends and uncertainties could have a material impact on CMS Energy’s and Consumers’ consolidated income, cash flows, or financial position. For additional details regarding these and other uncertainties, see “Forward-Looking Statements and Information;” Note 2, Contingencies and Commitments; and Part II, Item 1A. Risk Factors.

Consumers’ Electric Utility Business Outlook and Uncertainties

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

•

energy efficiency;

•

demand management;

•

expanded use of renewable energy;

•

development of new power plants;

	•		pursuit of additional PPAs to complement existing generating sources;
	•		continued operation of existing units; and

•

potential retirement or mothballing of older generating units.

In May 2010, Consumers announced plans to defer the development of its proposed 830 MW coal-fueled plant at its Karn/Weadock generating complex. This decision reflects reduced customer demand for

electricity due to the recession, forecasted lower natural gas prices due to recent developments in shale gas recovery technology, and projected surplus generating capacity in the MISO market. Consumers has been monitoring customer demand, fuel and power prices, and other market conditions, and has not set a timetable for a future decision about the project; however, the likelihood that the plant will be constructed has diminished significantly. Consumers’ alternatives to constructing the proposed coal-fueled plant include constructing new gas-fueled generation, relying on additional market purchases, and continued operation of several existing generating units.

Renewable Energy Plan: Consumers’ renewable energy plan details how Consumers will meet REC and capacity standards prescribed by the 2008 Energy Law. This law requires Consumers to obtain RECs in an amount equal to at least ten percent of its electric sales volume (estimated to be 3.5 million RECs annually) by 2015. RECs represent proof that the associated electricity was generated from a renewable energy resource. The law also requires Consumers to obtain 500 MW of capacity from renewable energy resources by 2015, either through generation resources owned by Consumers or through agreements to purchase capacity from other parties. Under its renewable energy plan, Consumers expects to secure its renewable energy requirement each year with a combination of newly generated RECs and previously generated RECs carried over from prior years. At March 31, 2011, the combination of these sources represented 77 percent of Consumers’ 2015 REC requirement.

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

Consumers has secured more than 80,000 acres of land easements in Michigan’s Huron, Mason, and Tuscola Counties for the potential development of wind generation, and is now collecting wind speed and other meteorological data at those sites. Consumers has entered into construction and supply contracts as well as a contract to purchase wind turbine generators for the construction of a 100-MW wind park in Mason County, the Lake Winds Energy Park, which Consumers expects to be operational in late 2012. Various parties are opposing a special use permit or have proposed restrictive zoning conditions before the local planning commission in an effort to stop the Lake Winds project. Consumers will continue to seek opportunities for wind generation development in support of the renewable capacity standards.

Electric Customer Deliveries and Revenue: Consumers’ electric customer deliveries are largely dependent on Michigan’s economy, which has suffered from economic and financial instability in the automotive and real estate sectors. Consumers believes economic conditions have stabilized, and expects weather-adjusted electric deliveries to increase in 2011 by 2.5 percent compared with 2010. Consumers’ outlook for 2011 includes continuing growth in deliveries to its largest customer, which produces energy-related and electronic device components. Excluding this customer’s growth, Consumers expects weather-adjusted electric deliveries in 2011 to increase by 1.5 percent compared with 2010.

Consumers expects average electric delivery growth of about 1.5 percent annually over the next five years. This increase reflects growth in electric demand, offset partially by the predicted effects of energy efficiency programs and appliance efficiency standards. Actual deliveries will depend on:

•

energy conservation measures and results of energy efficiency programs;

•

fluctuations in weather; and

•

changes in economic conditions, including utilization and expansion or contraction of manufacturing facilities, population trends, and housing activity.

A decoupling mechanism was authorized by the MPSC in Consumers’ 2009 electric rate case order, subject to certain conditions, and extended in the 2010 electric rate case order. It allows Consumers to adjust future electric rates to compensate for changes in sales volumes resulting from weather

fluctuations, energy efficiency, and conservation. This mechanism reduces the volatility of Consumers’ electric utility revenue.

Electric ROA: The Customer Choice Act allows all of Consumers’ electric customers to buy electric generation service from Consumers or from an alternative electric supplier. The 2008 Energy Law revised the Customer Choice Act by limiting alternative electric supply to ten percent of Consumers’ weather-adjusted retail sales of the preceding calendar year. At March 31, 2011, electric deliveries under the ROA program were at the ten percent limit and alternative electric suppliers were providing 801 MW of generation service to ROA customers. Based on 2010 weather-adjusted retail sales, Consumers expects 2011 electric deliveries under the ROA program to be at a similar level to 2010.

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

Electric Rate Matters: Rate matters are critical to Consumers’ electric utility business. For details on Consumers’ electric rate case, PSCR, electric revenue decoupling, uncollectible expense tracking mechanism, electric operation and maintenance expenditures show-cause order, Big Rock decommissioning, renewable energy plan, energy optimization plan, and electric depreciation, see Note 3, Regulatory Matters, “Consumers’ Electric Utility.”

Electric Environmental Estimates: Consumers’ operations are subject to various state and federal environmental laws and regulations. Consumers continues to focus on complying with the Clean Air Act, Clean Water Act, and numerous state and federal environmental regulations, and estimates that it will incur expenditures of $1.9 billion from 2011 through 2018 to comply with these regulations. Consumers expects to recover these costs in customer rates, but cannot guarantee this result. Consumers’ primary environmental compliance focus includes, but is not limited to, the following matters:

Clean Air Interstate Rule/Clean Air Transport Rule/Federal Hazardous Air Pollutant Regulation: Due to a December 2008 court decision that remanded CAIR back to the EPA, CAIR remains in effect, pending the EPA’s finalization of a new rule. In July 2010, the EPA released CATR, a proposed rule that would replace CAIR.

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

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

Greenhouse Gases: There are numerous legislative and regulatory initiatives at the state, regional, and national levels that involve the regulation of greenhouse gases. Consumers monitors and comments on these initiatives and also follows litigation involving greenhouse gases. Consumers believes Congress

may eventually pass greenhouse gas legislation, but is unable to predict the form and timing of any final legislation.

In 2009, the U.S. Court of Appeals for the Second Circuit issued a decision that allowed states and private plaintiffs to bring lawsuits in the federal courts against utilities and others based on common law nuisance theories that challenged the defendants’ greenhouse gas emissions. This decision potentially allowed federal judges to impose caps on such emissions on a case-by-case basis without reference to any legislatively created standards. A group of utilities filed a petition with the U.S. Supreme Court, seeking review of the U.S. Court of Appeals decision. In December 2010, the U.S. Supreme Court granted the petition and will decide the case on its merits. Consumers will continue to monitor this litigation.

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

In December 2010, the EPA entered into a settlement agreement with certain states and environmental groups that puts it on a path to issue proposed new source performance standards in July 2011. This proposal will address greenhouse gas emissions for new fossil-fueled electric generating units and major modifications under Section 111(b) of the Clean Air Act. The EPA will promulgate final standards by May 2012. On the same schedule, the EPA is expected to propose emissions guidelines for the states to regulate greenhouse gas emissions from existing sources under Section 111(d) of the Clean Air Act. Under the expected schedule, states will need to submit plans to the EPA within nine months of issuance of the final rule and guidelines. Consumers will continue to monitor this settlement and any proposed new source performance standards regulations.

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

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

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

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

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

Other electric environmental matters could have a major impact on Consumers’ outlook. For additional details on other electric environmental matters, see Note 2, Contingencies and Commitments, “Consumers’ Electric Utility Contingencies — Electric Environmental Matters.”

Consumers’ Gas Utility Business Outlook and Uncertainties

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

•

fluctuations in weather;

•

use by IPPs;

•

availability and development of renewable energy sources;

•

changes in gas prices;

•

Michigan economic conditions, including population trends and housing activity;

•

the price of competing energy sources or fuels; and

•

energy efficiency and conservation.

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

Gas Rate Matters: Rate matters are critical to Consumers’ gas utility business. For details on Consumers’ gas rate case and GCR, see Note 3, Regulatory Matters, “Consumers’ Gas Utility.”

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

•

the use of internal inspection devices or comparable methods effective in detecting pipeline deterioration;

•

the installation of automatic shutoff equipment in high-consequence areas; and

•

certain disclosures to homeowners and regulatory agencies.

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

Gas Environmental Estimates: Consumers expects to incur response activity costs at a number of sites, including 23 former MGP sites. For additional details, see Note 2, Contingencies and Commitments, “Consumers’ Gas Utility Contingencies — Gas Environmental Matters.”

Consumers’ Other Outlook and Uncertainties

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

Enterprises Outlook and Uncertainties

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

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

•

indemnity and environmental remediation obligations at Bay Harbor;

•

the outcome of certain legal proceedings;

•

impacts of declines in electricity prices on the profitability of the enterprises segment’s generating units;

•

representations, warranties, and indemnities provided by CMS Energy or its subsidiaries in connection with previous sales of assets;

•

changes in commodity prices and interest rates on certain derivative contracts that do not qualify for hedge accounting and must be marked to market through earnings;

•

changes in various environmental laws, regulations, principles, practices, or in their interpretation; and

•

economic conditions in Michigan, including population trends and housing activity.

For additional details regarding the enterprises segment’s uncertainties, see Note 2, Contingencies and Commitments.

Other Outlook and Uncertainties

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 2, Contingencies and Commitments and Note 3, Regulatory Matters.

EnerBank: EnerBank, a wholly owned subsidiary of CMS Capital, is a Utah state-chartered, FDIC-insured industrial bank providing unsecured home improvement loans. EnerBank represented one percent of CMS Energy’s net assets at March 31, 2011, and two percent of CMS Energy’s Net Income Available to Common Stockholders for the three months ended March 31, 2011. The carrying value of EnerBank’s loan portfolio was $380 million at March 31, 2011. Its loan portfolio was funded primarily by deposit liabilities of $377 million. Twelve-month rolling average default rates on loans held by EnerBank have declined from 1.4 percent at December 31, 2010 to 1.3 percent at March 31, 2011. EnerBank expects the rate of loan defaults to decline further, and to level out at about 1.0 percent. CMS Energy is required to ensure that EnerBank remains well capitalized.

NEW ACCOUNTING STANDARDS

There were no implementations of new accounting standards that had a material impact on CMS Energy’s or Consumers’ consolidated financial statements. Also, there are no new accounting standards issued but not yet effective that are expected to have a material impact on CMS Energy’s or Consumers’ consolidated financial statements.

The accompanying notes are an integral part of these statements.

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CMS Energy Corporation
Consolidated Statements of Cash Flows
(Unaudited)

		In Millions
Three Months ended March 31		2011				2010
Cash Flows from Operating Activities
Net Income		$	135			$	88
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization			162				172
Deferred income taxes and investment tax credit			73				42
Postretirement benefits expense			40				49
Other non-cash operating activities			21				21
Postretirement benefits contributions			(19	)			(135	)
Changes in other assets and liabilities:
Decrease in accounts receivable, notes receivable, and accrued revenue			9				36
Decrease in accrued power supply revenue			15				38
Decrease in inventories			462				460
Decrease in accounts payable			(9	)			(44	)
Decrease in accrued expenses			(89	)			(77	)
Decrease in other current and non-current assets			29				39
Increase (decrease) in other current and non-current liabilities			12				(32	)
Net cash provided by operating activities			841				657
Cash Flows from Investing Activities
Capital expenditures (excludes assets placed under capital lease)			(191	)			(190	)
Cost to retire property			(17	)			(11	)
Cash effect of deconsolidation of partnerships			—				(10	)
Other investing activities			(20	)			(1	)
Net cash used in investing activities			(228	)			(212	)
Cash Flows from Financing Activities
Proceeds from issuance of long-term debt			—				300
Proceeds from EnerBank notes, net			13				25
Retirement of long-term debt			(13	)			(34	)
Payment of common stock dividends			(53	)			(34	)
Payment of capital and finance lease obligations			(6	)			(6	)
Other financing costs			(2	)			(30	)
Net cash (used in) provided by financing activities			(61	)			221
Net Increase in Cash and Cash Equivalents, Including Assets Held for Sale			552				666
Decrease (Increase) in Cash and Cash Equivalents Included in Assets Held for Sale			2				(1	)
Net Increase in Cash and Cash Equivalents			554				665
Cash and Cash Equivalents, Beginning of Period			247				90
Cash and Cash Equivalents, End of Period		$	801			$	755

The accompanying notes are an integral part of these statements.

CMS Energy Corporation
Consolidated Balance Sheets
(Unaudited)

		In Millions
		March 31				December 31
ASSETS		2011				2010
Current Assets
Cash and cash equivalents		$	801			$	247
Restricted cash and cash equivalents			30				23
Accounts receivable and accrued revenue, less allowances of $25 in 2011 and 2010			930				981
Notes receivable			55				70
Accounts receivable — related parties			11				10
Accrued power supply revenue			—				15
Inventories at average cost
Gas in underground storage			480				946
Materials and supplies			106				104
Generating plant fuel stock			126				125
Deferred property taxes			149				180
Regulatory assets			14				19
Assets held for sale			—				2
Prepayments and other current assets			39				37
Total current assets			2,741				2,759
Plant, Property & Equipment (at cost)
Plant, property & equipment, gross			14,242				14,145
Less accumulated depreciation, depletion, and amortization			4,731				4,646
Plant, property & equipment, net			9,511				9,499
Construction work in progress			627				570
Total plant, property & equipment			10,138				10,069
Non-current Assets
Regulatory assets			2,079				2,093
Accounts and notes receivable, less allowances of $5 in 2011 and 2010			381				397
Investments			51				49
Assets held for sale			—				4
Other non-current assets			252				245
Total non-current assets			2,763				2,788
Total Assets		$	15,642			$	15,616

The accompanying notes are an integral part of these statements.

The accompanying notes are an integral part of these statements.

Consumers Energy Company
Consolidated Statements of Income
(Unaudited)

		In Millions
Three Months Ended March 31		2011				2010
Operating Revenue		$	1,988			$	1,890
Operating Expenses
Fuel for electric generation			129				125
Purchased and interchange power			293				277
Purchased power — related parties			21				21
Cost of gas sold			753				746
Maintenance and other operating expenses			265				262
Depreciation and amortization			161				171
General taxes			66				64
Total operating expenses			1,688				1,666
Operating Income			300				224
Other Income (Expense)
Interest			2				5
Allowance for equity funds used during construction			1				1
Other income			8				9
Other expense			(2	)			(2	)
Total other income			9				13
Interest Charges
Interest on long-term debt			63				63
Other interest			4				6
Allowance for borrowed funds used during construction			(1	)			(1	)
Total interest charges			66				68
Income Before Income Taxes			243				169
Income Tax Expense			90				62
Net Income Available to Common Stockholder		$	153			$	107