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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON,
Washington, DC 20549
FORM 10-Q

[X]  
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2007
OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934

     FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2007

                                       OR

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

     
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______

Commission Registrant; State of Incorporation; IRS Employer
File Number Address; and Telephone Number Identification No.
- -----------   -----------------------------------------   ------------------
1-9513 CMS ENERGY CORPORATION 38-2726431
                      (A
(A Michigan Corporation) 
One Energy Plaza, Jackson, Michigan 49201 
 (517) 788-0550 
1-5611 CONSUMERS ENERGY COMPANY 38-0442310
                      (A
(A Michigan Corporation) 
One Energy Plaza, Jackson, Michigan 49201 
 (517) 788-0550 
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 [X]þ No [ ]

o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated“accelerated filer and large accelerated filer"filer” in Rule 12b-2 of the Exchange Act.
CMS ENERGY CORPORATION:Energy Corporation:       Large accelerated filer [X]þ       Accelerated filer [ ]o       Non-Accelerated filer [ ]

CONSUMERS ENERGY COMPANY:o
Consumers Energy Company:       Large accelerated filer [ ]o       Accelerated filer [ ]o       Non-Accelerated filer [X]

þ
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
CMS ENERGY CORPORATION:Energy Corporation:       Yes [ ]o No [X] CONSUMERS ENERGY COMPANY:þConsumers Energy Company: Yes [ ]o No [X]

þ
Indicate the number of shares outstanding of each of the issuer'sissuer’s classes of common stock at April 30,July 31, 2007:CMS ENERGY CORPORATION:

Energy Corporation:
CMS Energy Common Stock, $.01 par value       224,497,687
CONSUMERS ENERGY COMPANY, 224,580,202
Consumers Energy Company, $10 par value, privately held by CMS Energy Corporation 84,108,789


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CMS ENERGY CORPORATION
                                       AND
                            CONSUMERS ENERGY COMPANY

                      QUARTERLY REPORTS ON FORMEnergy Corporation
and
Consumers Energy Company
Quarterly reports on Form 10-Q TO THE
                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                      FOR THE QUARTER ENDED MARCH 31,to the
United States Securities and Exchange Commission
for the Quarter Ended June 30, 2007
This combined Form 10-Q is separately filed by CMS Energy Corporation and Consumers Energy Company. Information contained herein relating to each individual registrant is filed by such registrant on its own behalf. Accordingly, except for its subsidiaries, Consumers Energy Company makes no representation as to information relating to any other companies affiliated with CMS Energy Corporation.
TABLE OF CONTENTS
Page
                                                                        --------
Glossary ............................................................          3 
PART I -— FINANCIAL INFORMATION 
Item 1. Financial Statements 
CMS Energy Corporation 
Consolidated Statements of Income (Loss) ......................   CMS - 29
      33
Consolidated Statements of Cash Flows .........................   CMS - 31
      35
Consolidated Balance Sheets ...................................   CMS - 32
      36
Consolidated Statements of Common Stockholders'Stockholders’ Equity ........   CMS - 34
   38
Notes to Consolidated Financial Statements (Unaudited): 
1. Corporate Structure and Accounting Policies ...............   CMS - 37
       39
2. Asset Sales, Discontinued Operations and Impairment Charges ................................................   CMS - 39
       42
3. Contingencies .............................................   CMS - 43
       48
4. Financings and Capitalization .............................   CMS - 58
       62
5. Earnings Per Share ........................................   CMS - 60
       64
6. Financial and Derivative Instruments ......................   CMS - 61
       65
7. Retirement Benefits .......................................   CMS - 65
       69
8. Income Taxes ..............................................   CMS - 66
       71
9. Asset Retirement Obligations ..............................   CMS - 68
      72
10. Equity Method Investments .................................   CMS - 70
      74
11. Reportable Segments .......................................   CMS - 71
   75
Consumers Energy Company 
Consolidated Statements of Income .............................    CE - 22
      24
Consolidated Statements of Cash Flows .........................    CE - 23
      25
Consolidated Balance Sheets ...................................    CE - 24
      26
Consolidated Statements of Common Stockholder'sStockholder’s Equity ........    CE - 26
   28
Notes to Consolidated Financial Statements (Unaudited): 
1. Corporate Structure and Accounting Policies ...............    CE - 29
      2.  Contingencies .............................................    CE - 30
2. Asset Sales CE - 32
3. Contingencies CE - 34
4. Financings and Capitalization .............................    CE - 41
      4.43
5. Financial and Derivative Instruments ......................    CE - 43
      5.  Retirement Benefits .......................................    CE - 45
6. Retirement Benefits CE - 47
7. Asset Retirement Obligations ..............................    CE - 46
      7.  Income Taxes ..............................................    CE - 48
8. Reportable Segments .......................................    Income Taxes CE - 50
9. Reportable Segments CE - 52
1
TABLE OF CONTENTS
                                   (CONTINUED)


(Continued)
Page
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations 
CMS Energy Corporation
      Executive Overview.............................................   CMS -  1
      
Forward-Looking Statements and Information.....................   Information CMS -   2
      1
Executive Overview CMS -   3
Results of Operations..........................................   Operations CMS -   5
      6
Critical Accounting Policies...................................   Policies CMS - 11
      15
Capital Resources and Liquidity................................   Liquidity CMS - 15
      Outlook........................................................   19
Outlook CMS - 17
      21
Implementation of New Accounting Standards.....................   Standards CMS - 26
      31
New Accounting Standards Not Yet Effective.....................   Effective CMS - 27
   32
Consumers Energy Company
      Executive Overview.............................................    CE -  1
      
Forward-Looking Statements and Information.....................    Information CE -   2
      1
Executive Overview CE -   3
Results of Operations..........................................    Operations CE -   5
Critical Accounting Policies...................................Policies      CE - 8
      10
Capital Resources and Liquidity................................Liquidity      CE - 11
      Outlook........................................................12
Outlook      CE - 13
      14
Implementation of New Accounting Standards.....................Standards      CE - 20
      21
New Accounting Standards Not Yet Effective.....................Effective      CE - 21
   22
Item 3. Quantitative and Qualitative Disclosures about Market Risk...........................................................    Risk CO -   1
Item 4. Controls and Procedures...................................    Procedures CO -   1
PART II -— OTHER INFORMATION 
Item 1. Legal Proceedings........................................    Proceedings CO -   1
Item 1A. Risk Factors.............................................    Factors CO -   6
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.......................................................    Proceeds CO -   8
   9
Item 3. Defaults Upon Senior Securities..........................    Securities CO -   8
   9
Item 4. Submission of Matters to a Vote of Security Holders......    Holders CO -   8
   9
Item 5. Other Information........................................Information     CO - 8
   10
Item 6. Exhibits.................................................    CO -  9
   Signatures........................................................Exhibits     CO - 10
Signatures     CO - 11
302 Certification of CMS Energy Corporation's CEO
302 Certification of CMS Energy Corporation's CFO
302 Certification of Consumers Energy Company's CEO
302 Certification of Consumers Energy Company's CFO
Section 906 Certifications for CMS Energy Corporation
Section 906 Certifications of Consumers Energy Company
2
GLOSSARY
Certain terms used in the text and financial statements are defined below

AFUDC..............................   
AEI Ashmore Energy International, a non-affiliated company
AFUDC Allowance for Funds Used During Construction

ALJ................................   
ALJ Administrative Law Judge

AOC................................   
AOC Administrative Order on Consent

AOCL...............................   
AOCL Accumulated Other Comprehensive Loss

APB................................   
APB Accounting Principles Board

APB Opinion No. 18.................   APB Opinion No. 18, "The Equity Method of
                                      Accounting for Investments in Common
                                      Stock"

ARO................................   
ARO Asset retirement obligation
Bay Harbor.........................   Harbor A residential/commercial real estate area located near Petoskey, Michigan. In 2002, CMS Energy sold its interest in Bay Harbor.

bcf................................   
bcf One billion cubic feet of gas
Big Rock...........................   Rock Big Rock Point nuclear power plant

CEO................................   
Big Rock ISFSI Big Rock Independent Spent Fuel Storage Installation
Broadway Gen Funding LLC Broadway Gen Funding LLC, an unaffiliated limited liability company
CEO Chief Executive Officer

CFO................................   
CFO Chief Financial Officer

CFTC...............................   
CFTC Commodity Futures Trading Commission

CKD................................   
CKD Cement Kiln Dust
Clean Air Act......................   Act Federal Clean Air Act, as amended
CMS Energy.........................   Energy CMS Energy Corporation, the parent of Consumers and Enterprises
CMS Energy Common Stock or common stock...........................   stock Common stock of CMS Energy, par value $.01 per share
CMS ERM............................   ERM CMS Energy Resource Management Company, formerly CMS MST, a subsidiary of Enterprises
CMS Field Services.................   Services CMS Field Services, Inc., formerly a wholly owned subsidiary of CMS Gas Transmission. The sale of this subsidiary
                                      closed in July 2003.

Transmission
CMS Gas Transmission...............   Transmission CMS Gas Transmission Company, a wholly owned subsidiary of Enterprises
CMS Generation.....................   Generation CMS Generation Co., a formerly wholly owned subsidiary of Enterprises
CMS International Ventures.........   Ventures CMS International Ventures LLC, a subsidiary of Enterprises
CMS MST............................   MST CMS Marketing, Services and Trading Company, a wholly owned subsidiary of
Enterprises, whose name was changed to CMS ERM effective January 2004

Consumers..........................   
Consumers Consumers Energy Company, a subsidiary of CMS Energy
Customer Choice Act................   Act Customer Choice and Electricity Reliability Act, a Michigan statute enacted in June 2000

DCCP...............................   
DCCP Defined Company Contribution Plan
Detroit Edison.....................   Edison The Detroit Edison Company, a non-affiliated company

DFD................................   Duke/Fluor Daniel, a non-affiliated
                                      company
3

DIG................................   
DIG Dearborn Industrial Generation, LLC, an
                                      indirecta wholly owned subsidiary of CMS Energy

DOE................................   
DOE U.S. Department of Energy

DOJ................................   
DOJ U.S. Department of Justice

Dow................................   
Dow The Dow Chemical Company, a non-affiliated company

EISP...............................   
EISP Executive Incentive Separation Plan

EITF...............................   
EITF Emerging Issues Task Force
EITF Issue No. 02-03...............   02-03 Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities
El Chocon..........................   Chocon The 1,200 MW hydro power plant located in Argentina, in which CMS Generation held a 17.2 percent ownership interest

Entergy............................   
Entergy Entergy Corporation, a non-affiliated company

Enterprises........................   
Enterprises CMS Enterprises Company, a subsidiary of CMS Energy

EPA................................   
EPA U.S. Environmental Protection Agency

EPS................................   
EPS Earnings per share
Exchange Act.......................   Act Securities Exchange Act of 1934, as amended

FASB...............................   
FASB Financial Accounting Standards Board

FERC...............................   
FERC Federal Energy Regulatory Commission
FIN 14.............................   14 FASB Interpretation No. 14, Reasonable Estimation of the Amount of a Loss
FIN 46(R)..........................   Revised FASB Interpretation No. 46, Consolidation of Variable Interest Entities
FIN 47.............................   47 FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations
FIN 48.............................   48 FASB Interpretation No. 48, Uncertainty in Income Taxes

FMLP...............................   
FMLP First Midland Limited Partnership, a partnership that holds a lessor interest in
the MCV Facility

GAAP...............................   
FSP FIN 39-1 FASB Staff Position on FASB Interpretation No. 39-1, Amendment of FASB Interpretation No. 39
GAAP Generally Accepted Accounting Principles

GasAtacama.........................   
GasAtacama GasAtacama Holding Limited, a limited liability partnership that manages GasAtacama S.A., which includes an integrated natural gas pipeline and electric generating plant located in Argentina and Chile and Atacama Finance Company

GCR................................   
GCR Gas cost recovery

IRS................................   
IRS Internal Revenue Service

ISFSI..............................   
ISFSI Independent Spent Fuel Storage Installation
Jamaica Jamaica Private Power Company, Limited, a diesel-fueled electric generating plant located in Jamaica, in which CMS Generation owns a 42 percent interest
Jorf Lasfar........................   Lasfar The 1,356 MW coal-fueled power plant in Morocco

Jubail.............................   
4
Jubail A 240 MW natural gas cogeneration power plant located in Saudi Arabia, in which
CMS Generation owned a 25 percent interest

kWh................................   
kWh Kilowatt-hour (a unit of energy equal to one thousand watt hours)
LS Power Group LS Power Group, a non-affiliated company
Lucid Energy.......................   Energy Lucid Energy LLC, a non-affiliated company



                                       4


Ludington..........................   Ludington Ludington pumped storage plant, jointly owned by Consumers and Detroit Edison

mcf................................   
mcf One thousand cubic feet of gas
MCV Facility.......................   Facility A natural gas-fueled, combined-cycle cogeneration facility operated by the MCV Partnership
MCV Partnership....................   Partnership Midland Cogeneration Venture Limited Partnership
MCV PPA............................   PPA The Power Purchase Agreement between Consumers and the MCV Partnership with a 35-year term commencing in March 1990, as amended, and as interpreted by the Settlement Agreement dated as of January 1, 1999 between the MCV Partnership and Consumers
MD&A...............................   Management's&A Management’s Discussion and Analysis

MDEQ...............................   
MDEQ Michigan Department of Environmental Quality

MDL................................   
MDL Multidistrict Litigation

METC...............................   
METC Michigan Electric Transmission Company, LLC, a non-affiliated company

MISO...............................   
MISO Midwest Independent Transmission System Operator, Inc.

MMBtu..............................   
MMBtu Million British Thermal Units

Moody's............................   Moody's
Moody’s Moody’s Investors Service, Inc.

MPSC...............................   
MPSC Michigan Public Service Commission

MSBT...............................   
MSBT Michigan Single Business Tax

MW.................................   
MW Megawatt (a unit of power equal to one million watts)

MWh................................   
MWh Megawatt hour (a unit of energy equal to one million watt hours)

NEIL...............................   Nuclear Electric Insurance Limited, an
                                      industry mutual insurance company owned by
                                      member utility companies

Neyveli............................   
Neyveli CMS Generation Neyveli Ltd, a 250 MW lignite-fired power station located in Neyveli, Tamil Nadu, India, in which CMS International Ventures held a 50 percent interest

NMC................................   
NMC Nuclear Management Company LLC, formed in 1999 by Northern States Power Company (now Xcel Energy Inc.), Alliant Energy, Wisconsin Electric Power Company, and Wisconsin Public Service Company to operate and manage nuclear generating facilities owned by the utilities

NRC................................   
NRC Nuclear Regulatory Commission

NYMEX..............................   
NYMEX New York Mercantile Exchange

OPEB...............................   
OPEB Postretirement benefit plans other than pensions for retired employees

Palisades..........................   
Palisades Palisades nuclear power plant

Panhandle..........................   
5
Panhandle Panhandle Eastern Pipe Line Company, including its subsidiaries Trunkline, Pan Gas Storage, Panhandle Storage, and Panhandle Holdings. Panhandle wasHoldings, a former wholly owned subsidiary of CMS Gas Transmission.
                                      The sale of this subsidiary closed in June
                                      2003.

PCB................................   Transmission
PCB Polychlorinated biphenyl



                                       5

Peabody Energy.....................   Energy Peabody Energy Corporation, a non-affiliated company
Pension Plan.......................   Plan The trusteed, non-contributory, defined benefit pension plan of Panhandle, Consumers and CMS Energy

PowerSmith.........................   
PowerSmith A 124 MW natural gas power plant located in Oklahoma City, Oklahoma, in which CMS Generation holds a 6.25% limited partner ownership interest

Price-Anderson Act.................   Price Anderson Act, enacted in 1957 as an
                                      amendment to the Atomic Energy Act of
                                      1954, as revised and extended over the
                                      years. This act stipulates between nuclear
                                      licensees and the U.S. government the
                                      insurance, financial responsibility, and
                                      legal liability for nuclear accidents.

PSCR...............................   
PSCR Power supply cost recovery

PURPA..............................   
PURPA Public Utility Regulatory Policies Act of 1978

Quicksilver........................   
Quicksilver Quicksilver Resources, Inc., a non-affiliated company

RCP................................   
RCP Resource Conservation Plan

ROA................................   
ROA Retail Open Access
S&P................................   &P Standard & Poor'sPoor’s Ratings Group, a division of The McGraw-Hill Companies, Inc.

SEC................................   
SEC U.S. Securities and Exchange Commission
Section 10d(4) Regulatory Asset....   Asset Regulatory asset as described in Section 10d(4) of the Customer Choice Act, as amended

Securitization.....................   
Securitization A financing method authorized by statute and approved by the MPSC which allows a utility to sell its right to receive a portion of the rate payments received from its customers for the repayment of Securitization bonds issued by a special purpose entity affiliated with such utility

SENECA.............................   
SENECA Sistema Electrico del Estado Nueva Esparta C.A., a former subsidiary of Enterprises

SERP...............................   CMS International Ventures
SERP Supplemental Executive Retirement Plan

SFAS...............................   
SFAS Statement of Financial Accounting Standards
SFAS No. 5.........................   5 SFAS No. 5, "Accounting“Accounting for Contingencies"

Contingencies”
SFAS No. 87........................   87 SFAS No. 87, "Employers'“Employers’ Accounting for Pensions"

Pensions”
SFAS No. 88........................   88 SFAS No. 88, "Employers'“Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits"

Benefits”
SFAS No. 98........................   98 SFAS No. 98, "Accounting“Accounting for Leases"

Leases”
SFAS No. 106.......................   106 SFAS No. 106, "Employers'“Employers’ Accounting for Postretirement Benefits Other Than Pensions"

Pensions”
SFAS No. 109.......................   109 SFAS No. 109, "Accounting“Accounting for Income Taxes"

Taxes”
SFAS No. 115.......................   115 SFAS No. 115, "Accounting“Accounting for Certain Investments in Debt and Equity Securities"

Securities”
SFAS No. 132(R)....................   SFAS No. 132 (revised 2003), "Employers'“Employers’ Disclosures about Pensions and Other Postretirement Benefits"

Benefits”
SFAS No. 133.......................   133 SFAS No. 133, "Accounting“Accounting for Derivative Instruments and Hedging Activities, as amended and interpreted"

interpreted”
SFAS No. 143.......................   143 SFAS No. 143, "Accounting“Accounting for Asset Retirement Obligations"
Obligations”
6
SFAS No. 144.......................   144 SFAS No. 144, "Accounting“Accounting for the Impairment or Disposal of Long-Lived Assets"

Assets”
SFAS No. 157.......................   157 SFAS No. 157, "Fair“Fair Value Measurement"

Measurement”
SFAS No. 158.......................   158 SFAS No. 158, "Employers'“Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans -– an amendment of FASB Statements No. 87, 88, 106, and 132(R)"

”
SFAS No. 159.......................   159 SFAS No. 159, "The“The Fair Value Option for Financial Assets and Financial Liabilities, Including an amendment to FASB Statement No. 115"

Shuweihat..........................   115”
Shuweihat A power and desalination plant in which CMS Generation held a 20 percent interest
Stranded Costs.....................   Costs Costs incurred by utilities in order to serve their customers in a regulated monopoly environment, which may not be recoverable in a competitive environment because of customers leaving their systems and ceasing to pay for their costs. These costs could include owned and purchased generation and regulatory assets.

Superfund..........................   
Superfund Comprehensive Environmental Response, Compensation and Liability Act

Takoradi...........................   
Takoradi A 200 MW open-cycle combustion turbine crude oil power plant located in Ghana, in which CMS Generation owned a 90 percent interest

TAQA...............................   
TAQA Abu Dhabi National Energy Company, a subsidiary of Abu Dhabi Water and Electricity Authority

Taweelah...........................   
Taweelah Al Taweelah A2, a power and desalination plant of Emirates CMS Power Company, in which CMS Generation held a 40 percent interest

TGM................................   
TGM A natural gas transportation and pipeline business located in Argentina, in which CMS International Ventures owned a 20 percent interest

TGN................................   
TGN A natural gas transportation and pipeline business located in Argentina, in which CMS Gas Transmission owns a 23.54 percent interest

Trunkline..........................   
Trunkline CMS Trunkline Gas Company, LLC, formerly a subsidiary of CMS Panhandle Holdings, LLC
Zeeland A 946 MW gas-fired power plant located in Zeeland, Michigan
7

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                                       8
CMS Energy Corporation
CMS ENERGY CORPORATION
                      MANAGEMENT'S DISCUSSION AND ANALYSIS

Energy Corporation
Management’s Discussion and Analysis
This MD&A is a consolidated report of CMS Energy and Consumers. The terms "we"“we” and "our"“our” as used in this report refer to CMS Energy and its subsidiaries as a consolidated entity, except where it is clear that such term means only CMS Energy. This MD&A 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'sEnergy’s Form 10-K for the year ended December 31, 2006.

EXECUTIVE OVERVIEW2006 and the Form 8-K filed June 4, 2007 amending CMS Energy is an energy company operating primarily in Michigan. We are the
parent holding company of ConsumersEnergy’s 2006 financial statements to reflect certain discontinued operations resulting from recent asset sales.
Forward-looking statements and Enterprises. Consumers is a combination
electric and gas utility company serving Michigan's Lower Peninsula.
Enterprises, through various subsidiaries and equity investments, is engaged in
domestic and international energy businesses including independent power
production, electric distribution, and natural gas transmission, storage, and
processing. We manage our businesses by the nature of services each provides and
operate principally in three business segments: electric utility, gas utility,
and enterprises.

We earn our revenue and generate cash from operations by providing electric and
natural gas utility services, electric power generation, and gas distribution,
transmission, storage, and processing. Our businesses are affected primarily by:

     -    weather, especially during the normal heating and cooling seasons,

     -    economic conditions, primarily in Michigan,

     -    regulation and regulatory issues that affect our electric and gas
          utility operations,

     -    energy commodity prices,

     -    interest rates, and

     -    our debt credit rating.

During the past several years, our business strategy has involved improving our
consolidated balance sheet and maintaining focus on our core strength: utility
operations and service.

In April 2007, we sold Palisades to Entergy for $380 million. The final purchase
price was subject to various closing adjustments resulting in us receiving $361
million. We also paid Entergy $30 million to assume ownership and responsibility
for the Big Rock Independent Spent Fuel Storage Installation (ISFSI). We entered
into a 15-year power purchase agreement with Entergy for 100 percent of the
plant's current electric output. The sale resulted in an immediate improvement
in our cash flow, a reduction in our nuclear operating and decommissioning risk,
and an improvement in our financial flexibility to support other utility
investments. The MPSC order approving the transaction requires that $255 million
be credited to our retail customers through refunds applied over the remainder
of 2007 and 2008.


                                      CMS-1



                                                          CMS Energy Corporation

In 2007, we intend to complete the sale of our non-North American Enterprises
assets. We plan to use the proceeds from these sales to retire debt and to
invest in our utility business.

In March 2007, we completed the sale of a portfolio of our businesses in
Argentina and our northern Michigan non-utility natural gas assets to Lucid
Energy for $130 million. In March 2007, we also sold our interest in El Chocon,
an Argentine hydroelectric generating business, to Endesa, S.A. for $50 million.
We used the cash proceeds to invest in our utility business and reduce debt.

In April 2007, we entered into an agreement to sell CMS Energy Brasil S.A. for
$211 million to CPFL Energia S.A., a Brazilian utility. The sale is expected to
close by the end of the second quarter of 2007, subject to approval by the
Brazilian national electric utility regulatory agency.

 In April 2007, we completed the sale of our ownership interest in SENECA and
certain associated generating equipment to Petroleos de Venezuela, S.A. for
$106 million.

In May 2007, we completed the sale of our ownership interest in businesses in
the Middle East, Africa, and India to TAQA for $900 million. We plan to use the
proceeds to invest in our utility business and reduce debt.

In addition, during 2007, we plan to conduct an auction to sell our GasAtacama
combined gas pipeline and power generation businesses in Argentina and Chile,
and our electric generating plant in Jamaica. For additional details on our
planned asset sales, see the "Enterprises Outlook" section within this MD&A.

In January 2007, we took an important step in our business plan by reinstating a
dividend on our common stock after a four-year suspension at $0.05 per share. We
paid $11 million in common stock dividends in February 2007. We also took steps
toward resolving a long-outstanding litigation issue. In January 2007, we
reached a preliminary agreement to settle two class action lawsuits related to
round-trip trading by CMS MST. We believe that eliminating this business
uncertainty is in the best interests of our shareholders.

In the future, we will focus our strategy on:

     -    continued investment in our utility business,

     -    successful completion of announced asset sales,

     -    reducing parent debt, and

     -    growing earnings while controlling operating costs.

As we execute our strategy, we will need to overcome a sluggish Michigan economy
that has been hampered by negative developments in Michigan's automotive
industry and limited growth in the non-automotive sectors of the state's
economy. The return of ROA customer load has offset some of these negative
effects. At March 31, 2007, alternative electric suppliers were providing 283 MW
of generation service to ROA customers. This is 3 percent of our total
distribution load and represents a decrease of 19 percent of ROA load compared
to March 31, 2006.

FORWARD-LOOKING STATEMENTS AND INFORMATION

information
This Form 10-Q and other written and oral statements that we make contain forward-looking statements as defined in Rule 3b-6 under the Securities Exchange Act of 1934, as amended, Rule 175 under the Securities Act of 1933, as amended, and relevant legal decisions. Our intention with the use of such words as "may,"
"could," "anticipates," "believes," "estimates," "expects," "intends," "plans,"“may,” “could,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” and other similar words is to identify forward-looking statements that involve risk and uncertainty. We designed this


                                      CMS-2



                                                          CMS Energy Corporation discussion of potential risks and uncertainties to highlight important factors that may impact our business and financial outlook. We 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 our actual results to differ materially from the results anticipated in these statements. Such factors include our inability to predict and (or) control:

     -    the price of CMS Energy Common Stock, capital and financial market
          conditions, and the effect of such market conditions on the Pension
          Plan, interest rates, and access to the capital markets, including
          availability of financing to CMS Energy, Consumers, or any of their
          affiliates, and the energy industry,

     -    market perception of the energy industry, CMS Energy, Consumers, or
          any of their affiliates,

     -    credit ratings of CMS Energy, Consumers, or any of their affiliates,

     -    currency fluctuations, transfer restrictions, and exchange controls,

     -    factors affecting utility and diversified energy operations, such as
          unusual weather conditions, catastrophic weather-related damage,
          unscheduled generation outages, maintenance or repairs, environmental
          incidents, or electric transmission or gas pipeline system
          constraints,

     -    international, national, regional, and local economic, competitive,
          and regulatory policies, conditions and developments,

     -    adverse regulatory or legal decisions, including those related to
          environmental laws and regulations, and potential environmental
          remediation costs associated with such decisions, including but not
          limited to Bay Harbor,

     -    potentially adverse regulatory treatment and (or) regulatory lag
          concerning a number of significant questions presently before the MPSC
          including:

          -    
• the price of CMS Energy Common Stock, capital and financial market conditions, and the effect of such market conditions on the Pension Plan, interest rates, and access to the capital markets, including availability of financing to CMS Energy, Consumers, or any of their affiliates, and the energy industry,
• market perception of the energy industry, CMS Energy, Consumers, or any of their affiliates,
• credit ratings of CMS Energy, Consumers, or any of their affiliates,
• the ability of CMS affiliates, with interests in the DIG power plant, to effectively restructure power supply agreements on a timely basis,
• factors affecting utility and diversified energy operations, such as unusual weather conditions, catastrophic weather-related damage, unscheduled generation outages, maintenance or repairs, environmental incidents, or electric transmission or gas pipeline system constraints,
• national, regional, and local economic, competitive, and regulatory policies, conditions and developments,
• adverse regulatory or legal decisions, including those related to environmental laws and regulations, and potential environmental remediation costs associated with such decisions, including but not limited to Bay Harbor,
• potentially adverse regulatory treatment and (or) regulatory lag and receipt of timely regulatory orders concerning a number of significant questions presently before the MPSC including:
recovery of Clean Air Act capital and operating costs and other environmental and safety-related expenditures,

          -
recovery of power supply and natural gas supply costs when fuel prices are increasing and (or) fluctuating,

          -    timely recognition in rates of additional equity investments in
               Consumers,

          -    adequate and timely recovery of additional electric and gas
               rate-based investments,

          -    adequate and timely recovery of higher MISO energy and
               transmission costs,

          -    recovery of Stranded Costs incurred due to customers choosing
               alternative energy suppliers,

          -    recovery of Palisades plant sale-related costs, and

          -    impact of possible regulation or legislation regarding carbon
               dioxide and other greenhouse gas emissions,

     -    the effects on our ability to purchase capacity to serve our customers
          and fully recover the cost of these purchases, if Consumers exercises
          its regulatory out rights and the owners of the MCV Facility exercise
          their right to terminate the MCV PPA,

     -    federal regulation of electric sales and transmission of electricity,
          including periodic re-examination


                                      CMS-3

CMS-1
CMS Energy Corporation

          by federal regulators of the market-based sales authorizations in
          wholesale power markets without price restrictions,

     -    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 costs problems, or
          other developments,

     -    our ability to collect accounts receivable from our customers,

     -    earnings volatility as a result of the GAAP requirement that we
          utilize mark-to-market accounting on certain energy commodity
          contracts and interest rate swaps, which may have, in any given
          period, a significant positive or negative effect on earnings, which
          could change dramatically or be eliminated in subsequent periods,

     -    the effect on our electric utility of the direct and indirect impacts
          of the continued economic downturn experienced by our automotive and
          automotive parts manufacturing customers,

     -    potential disruption, expropriation or interruption of facilities or
          operations due to accidents, war, terrorism, or changing political
          conditions, and the ability to obtain or maintain insurance coverage
          for such events,

     -    changes in available gas supplies or Argentine government regulations
          that could further restrict natural gas exports to our GasAtacama
          electric generating plant and the operating and financial effects of
          the restrictions, including further impairment of our investment in
          GasAtacama,

     -    the outcome of pending litigation regarding the DOE liability for
          spent nuclear fuel storage during former ownership and operation of
          nuclear power plants,

     -    technological developments in energy production, delivery, and usage,

     -    achievement of capital expenditure and operating expense goals,

     -    changes in financial or regulatory accounting principles or policies,

     -    changes in domestic or foreign tax laws, or new IRS or foreign
          governmental interpretations of existing or past tax laws,

     -    outcome, cost, and other effects of legal and administrative
          proceedings, settlements, investigations and claims, including
          particularly claims, damages, and fines resulting from round-trip
          trading and inaccurate commodity price reporting, including the
          outcome of investigations by the DOJ regarding round-trip trading and
          price reporting,

     -    limitations on our ability to control the development or operation of
          projects in which our subsidiaries have a minority interest,

     -    disruptions in the normal commercial insurance and surety bond markets
          that may increase costs or reduce traditional insurance coverage,
          particularly terrorism and sabotage insurance and performance bonds,


                                      CMS-4

• timely recognition in rates of additional equity investments in Consumers,
• adequate and timely recovery of additional electric and gas rate-based investments,
• adequate and timely recovery of higher MISO energy and transmission costs,
• recovery of Stranded Costs incurred due to customers choosing alternative energy suppliers,
• recovery of Palisades plant sale-related costs,
• authorization of Zeeland power plant purchase costs, and
• impact of possible regulation or legislation regarding carbon dioxide and other greenhouse gas emissions,
• the effects on our ability to purchase capacity to serve our customers and fully recover the cost of these purchases, if Consumers exercises its regulatory-out rights and the owners of the MCV Facility exercise their right to terminate the MCV PPA,
• the ability of Consumers to exercise its regulatory-out rights as to the MCV PPA,
• the ability of Consumers to recover Big Rock decommissioning funding shortfalls and nuclear fuel storage costs due to the DOE’s failure to accept spent nuclear fuel on schedule,
• federal regulation of electric sales and transmission of electricity, including periodic re-examination by federal regulators of the market-based sales authorizations in wholesale power markets without price restrictions,
• 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,
• our ability to collect accounts receivable from our customers,
• earnings volatility as a result of the GAAP requirement that we utilize mark-to-market accounting on certain energy commodity contracts and interest rate swaps, which may have, in any given period, a significant positive or negative effect on earnings, which could change dramatically or be eliminated in subsequent periods,
• the effect on our utility of the direct and indirect impacts of the continued economic downturn experienced by the Michigan economy,
• potential disruption or interruption of facilities or operations due to accidents, war, terrorism, or changing political environment, and the ability to obtain or maintain insurance coverage for such events,
• the outcome of pending litigation regarding the DOE liability for spent nuclear fuel storage during former ownership and operation of nuclear power plants,
• technological developments in energy production, delivery, and usage,
• achievement of capital expenditure and operating expense goals,
• changes in financial or regulatory accounting principles or policies,
• changes in domestic or foreign tax laws, or new IRS or foreign governmental interpretations of existing or past tax laws,
• outcome, cost, and other effects of legal and administrative proceedings, settlements, investigations and claims, including claims, damages, and fines resulting from round-trip trading and inaccurate commodity price reporting, including the outcome of investigations by the DOJ regarding round-trip trading and price reporting,
• disruptions in the normal commercial insurance and surety bond markets that may increase costs or reduce traditional insurance coverage, particularly terrorism and sabotage insurance and performance bonds,
CMS-2
CMS Energy Corporation

     -    the ability to efficiently sell assets when deemed appropriate or
          necessary, including the sale of non-strategic or under-performing
          domestic or international assets and discontinuation of certain
          operations,

     -    other business or investment considerations that may be disclosed from
          time to time in CMS Energy's or Consumers' SEC filings, or in other
          publicly issued written documents,

     -    the successful close of the proposed sale of CMS Energy Brasil S.A.,

     -    the outcome of the planned sales of other generation and distribution
          assets in Latin America, and

     -    other uncertainties that are difficult to predict, many of which are
          beyond our control.

• other business or investment considerations that may be disclosed from time to time in CMS Energy’s or Consumers’ SEC filings, or in other publicly issued written documents, and
• other uncertainties that are difficult to predict, many of which are beyond our control.
For additional information regarding these and other uncertainties, see the "Outlook"“Outlook” section included in this MD&A, Note 3, Contingencies, and Part II, Item 1A. Risk Factors.

RESULTS OF OPERATIONS

Executive Overview
CMS ENERGY CONSOLIDATED RESULTS OF OPERATIONS

Energy is an energy company operating primarily in Michigan. We are the parent holding company of Consumers and Enterprises. Consumers is a combination electric and gas utility company serving Michigan’s Lower Peninsula. Enterprises, through various subsidiaries and equity investments, is engaged primarily in domestic independent power production. We manage our businesses by the nature of services each provides and operate principally in three business segments: electric utility, gas utility, and enterprises.
We earn our revenue and generate cash from operations by providing electric and natural gas utility services, electric power generation, and gas distribution, transmission, and storage. Our businesses are affected primarily by:

                                                  In Millions (except • weather, especially during the normal heating and cooling seasons,
• economic conditions, primarily in Michigan,
• regulation and regulatory issues that affect our electric and gas utility operations,
• energy commodity prices,
• interest rates, and
• our debt credit rating.
During the past several years, our business strategy has involved improving our consolidated balance sheet and maintaining focus on our core strength: utility operations and service. As an indication of our commitment to our utility business, we have invested $650 million in Consumers during the first half of 2007.
We expect to complete the sale of our international Enterprises assets by the end of 2007. Proceeds from asset sales are used to retire debt and to invest in our utility business. Asset sales completed in 2007 include:
• a portfolio of our businesses in Argentina and our northern Michigan non-utility natural gas assets to Lucid Energy for per share amounts)
                                                 ------------------------
Three months ended$130 million in March 312007,
• our ownership interest in El Chocon, an Argentine hydroelectric generating business, to Endesa, S.A. for $50 million in March 2007,
CMS-3
CMS Energy Corporation
• our ownership interest in SENECA and certain associated generating equipment to Petroleos de Venezuela, S.A. for $106 million in April 2007,
• our ownership interest in businesses in the Middle East, Africa, and India to TAQA for $900 million in May 2007,
• CMS Energy Brasil S.A. to CPFL Energia S.A., a Brazilian utility, for $211 million in June 2007, 2006    Change
- ---------------------------                       ----     ----    ------

Net Loss Availableand
• our investment in GasAtacama to Common Stockholders        $ (215)  $  (27)  $ (188)
Basic Loss Per Share                             $(0.97)  $(0.12)  $(0.85)
Diluted Loss Per Share                           $(0.97)  $(0.12)  $(0.85)
                                                 ------   ------   ------
Electric Utility                                 $   51   $   29   $   22
Gas Utility                                          57       37       20
Enterprises (IncludesEndesa S.A. for $80 million in August 2007.
We have also entered into an agreement to sell our investment in Jamaica to AEI for $14 million, which we expect to close by the end of 2007.
We also made important progress at Consumers to reduce business risk and to meet the future needs of our customers. We sold Palisades to Entergy in April 2007 for $380 million. The final purchase price is subject to various closing adjustments resulting in us receiving $364 million as of June 30, 2007. The sale resulted in an immediate improvement in our cash flow, a reduction in our nuclear operating and decommissioning risk, and an improvement in our financial flexibility to support other utility investments.
After September 15, 2007, we expect to claim relief under the regulatory-out provision in the MCV PPA, thereby limiting our capacity and fixed energy payments to the MCV Partnership to the amounts that we collect from our customers. If we are successful in exercising the regulatory-out provision, the MCV Partnership may, under certain circumstances, have the right to terminate or reduce the amount of capacity sold under the MCV PPA, which could affect our need to build or purchase additional generating capacity.
We introduced our Balanced Energy Initiative, a comprehensive plan to meet customer energy needs over the next 20 years, in May 2007. The plan, as filed with the MPSC, is designed to meet the growing customer demand for electricity with energy efficiency, demand management, expanding the use of renewable energy, and developing new power plants to complement existing generating sources.
In May 2007, we entered an agreement to buy a 946 MW natural gas-fired power plant located in Zeeland, Michigan from Broadway Gen Funding LLC, an affiliate of LS Power Group, for $517 million. The purchase is subject to approvals from the MPSC and other regulatory bodies and is expected to close in early 2008.
We took an important step in our business plan in January 2007 by reinstating a quarterly dividend of $0.05 per share on our common stock, after a four-year suspension. We paid $11 million in common stock dividends in February 2007 and $11 million in common stock dividends in May 2007. We also took steps toward resolving a long-outstanding litigation issue. In January 2007, we reached a preliminary agreement to settle two class action lawsuits related to round-trip trading by CMS MST. We believe that eliminating this business uncertainty is in the best interests of our shareholders.
CMS-4
CMS Energy Corporation
We are also in the process of restructuring our investment in DIG. This restructuring may involve renegotiation or possible buyout of the DIG power sales contracts as well as other measures. These options may require material cash payments. We believe that resolving the issues associated with the unfavorable supply contracts will allow us to maximize future benefits from our DIG investment.
In the future, we will focus our strategy on:
• reducing parent debt,
• continued investment in our utility business,
• growing earnings while controlling operating costs, and
   FMLP interests)                                 (187)     (58)    (129)
Corporate Interest
• principles of safe, efficient operations, customer value, fair and Other                         44      (43)      87
Discontinued Operations                            (180)       8     (188)
                                                 ------   ------   ------
Net Loss Available to Common Stockholders        $ (215)  $  (27)  $ (188)
                                                 ======   ======   ======
timely regulation, and consistent financial performance.
As we execute our strategy, we will need to overcome a sluggish Michigan economy that has been hampered by negative developments in Michigan’s automotive industry and limited growth in the non-automotive sectors of the state’s economy. The return of ROA customer load has offset some of these negative effects. At June 30, 2007, alternative electric suppliers were providing 302 MW of generation service to ROA customers. This is 3 percent of our total distribution load and represents a decrease of 3 percent of ROA load compared to June 30, 2006.
CMS-5
CMS Energy Corporation
Results of Operations
CMS Energy Consolidated Results of Operations
                         
In Millions (except for per share amounts)  
Three months ended June 30   2007     2006     Change  
 
Net Income Available to Common Stockholders   $ 33     $ 72     $ (39 )
Basic Earnings Per Share   $ 0.15     $ 0.33     $ (0.18 )
Diluted Earnings Per Share   $ 0.15     $ 0.31     $ (0.16 )
 
                         
Electric Utility   $ 40     $ 37     $ 3  
Gas Utility     4       (3 )     7  
Enterprises (Includes the MCV Partnership and FMLP interests)     (33 )     (16 )     (17 )
Corporate Interest and Other     (69 )     42       (111 )
Discontinued Operations     91       12       79  
 
Net Income Available to Common Stockholders   $ 33     $ 72     $ (39 )
 
For the three months ended March 31,June 30, 2007, our net lossincome was $215$33 million, $188a $39 million worse than 2006.reduction from our 2006 second quarter net income. Compared with the firstsecond quarter of 2006, net income from our gas and electric utility segments increased slightly, reflecting benefits from an MPSC gas rate order and favorable weather impacts. At our Enterprises and Corporate segments, the net positive impact of our asset sales was more than offset by the absence of 2006 tax benefits and increased legal costs.
Specific changes to net income available to common stockholders for the three months ended June 30, 2007 versus 2006 are:
                 
In Millions  
 
  •     absence of tax benefits recorded at Corporate and Enterprises in 2006 from the resolution of an IRS tax audit,   $ (54 )
  •     an impairment charge to recognize the reduction in fair value of our investment in GasAtacama,     (23 )
  •     increase in miscellaneous Corporate and Enterprises expenses,     (20 )
  •     decrease in earnings from CMS ERM primarily due to the write-off of derivative assets associated with a contract that was voided in May 2007,     (16 )
  •     absence of an insurance reimbursement received for previously incurred legal expenses,     (15 )
  •     premiums paid on the early retirement of corporate debt,     (6 )
  •     impact of activities associated with discontinued operations as the gains on the sale of assets more than offset foreign currency losses and the absence of income related to these businesses,     79  
  •     increase in earnings at our Gas utility primarily due to the positive effects of an MPSC gas rate order and an increase in deliveries due to colder April weather,     7  
  •     absence of mark-to-market losses net of operating earnings from our investment in the MCV Partnership, which was sold in November 2006, and     6  
  •     increase in earnings at our Electric utility primarily due to a weather-driven increase in deliveries.     3  
 
Total Change   $ (39 )
 
CMS-6
CMS Energy Corporation
                         
In Millions (except for per share amounts)  
Six months ended June 30   2007     2006     Change  
 
Net Income (Loss) Available to Common Stockholders   $ (182 )   $ 45     $ (227 )
Basic Earnings (Loss) Per Share   $ (0.82 )   $ 0.21     $ (1.03 )
Diluted Earnings (Loss) Per Share   $ (0.82 )   $ 0.20     $ (1.02 )
 
                         
Electric Utility   $ 91     $ 66     $ 25  
Gas Utility     61       34       27  
Enterprises (Includes the MCV Partnership and FMLP interests)     (231 )     (82 )     (149 )
Corporate Interest and Other     (16 )     6       (22 )
Discontinued Operations     (87 )     21       (108 )
 
Net Income (Loss) Available to Common Stockholders   $ (182 )   $ 45     $ (227 )
 
For the six months ended June 30, 2007, our net loss was $182 million, a $227 million reduction in net income from our first half of 2006. Compared with the first six months of 2006, net income from our gas and electric utility segments increased a combined $42$52 million, reflecting benefits from a recentan MPSC gas rate case order and favorable weather impacts, offset slightly by higher depreciation expense associated with
increased plant investment and planned operating expenses.impacts. The positive utility results were more than offset by results at our other operating segments, as
lossescurrency translation adjustments on asset sales, the absence of 2006 tax benefits and impairment charges more than offset the net impact of
mark-to-market activities and the impact of various tax issues.


                                      CMS-5

increased legal costs.
CMS-7
CMS Energy Corporation
Specific changes to net lossincome (loss) available to common stockholders for the threesix months ended March 31,June 30, 2007 versus 2006 are:
                                                                     In Millions
                                                                     -----------

- -    impact of activities associated with discontinued operations
     as the loss on the disposal of our Argentine businesses and
     non-utility Michigan gas assets in March 2007 and lower
     earnings from discontinued businesses expected to be sold
     during the remainder of 2007 replaced earnings recorded for
     these businesses in 2006,                                          $(188)

- -    asset impairment charges primarily related to our investments
     in TGN, Powersmith and Jamaica,                                     (157)

- -    tax provision on the cumulative undistributed earnings of
     foreign subsidiaries at Enterprises that are expected to be
     sold in 2007,                                                        (43)

- -    decrease in earnings from equity method investees at
     Enterprises primarily due to reduced earnings at Jorf Lasfar,
     Taweelah and GasAtacama,                                             (11)

- -    reversal of corporate deferred tax valuation allowances
     associated with capital loss carryforwards and foreign basis
     differences related to international operations that are
     expected to be sold in 2007,                                          81

- -    decrease in losses from our ownership interest in the MCV
     Partnership primarily due to the absence, in 2007, of
     mark-to-market losses on certain long-term gas contracts and
     financial hedges,                                                     57

- -    increase in earnings at our Electric utility primarily due to
     a weather driven increase in deliveries,                              22

- -    increase in earnings at our Gas utility primarily due to the
     positive effects of a recent MPSC gas rate case and an
     increase in deliveries due to the weather,                            20

- -    increase in earnings at CMS ERM primarily due to the
     recording of mark-to-market gains in 2007 versus losses
     recorded in 2006,                                                     16

- -    net gain on additional Argentine and Michigan businesses sold
     in March 2007, and                                                     8

- -    other miscellaneous benefits at corporate and Enterprises.             7
                                                                        -----
Total Change                                                            $(188)
                                                                        =====
                 
In Millions  
 
  •     asset impairment charges primarily related to our investments in TGN, GasAtacama, Jamaica, and PowerSmith,   $ (181 )
  •     impact of activities associated with discontinued operations as the net loss on the disposal of international businesses in 2007 replaced earnings recorded for these businesses in 2006,     (108 )
  •     absence of tax benefits recorded at Corporate and Enterprises in 2006 from the the resolution of an IRS income tax,     (54 )
  •     tax provision on the cumulative undistributed earnings of foreign subsidiaries at Enterprises sold in 2007,     (46 )
  •     absence of an insurance reimbursement received for previously incurred legal expenses,     (15 )
  •     increase in miscellaneous Corporate and Enterprises expenses,     (13 )
  •     premiums paid on the early retirement of corporate debt,     (6 )
  •     reduction to our corporate deferred tax valuation allowances associated with capital loss
carryforwards and foreign basis differences due to the sale of international businesses in 2007,     81  
  •     absence of mark-to-market losses net of operating earnings from our investment in the MCV Partnership, which was sold in November 2006,     63  
  •     increase in earnings at our Gas utility primarily due to the positive effects of an MPSC gas rate order and an increase in deliveries due to the weather, and     27  
  •     increase in earnings at our Electric utility primarily due to a weather-driven increase in deliveries.     25  
 
Total Change   $ (227 )
 
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CMS Energy Corporation
ELECTRIC UTILITY RESULTS OF OPERATIONS
                                                     In Millions
                                            --------------------
March 31                                    2007   2006   Change
- --------                                    ----   ----   ------

Net Income for the three months ended        $51    $29     $22
                                             ===    ===     ===

Reasons for the change:
- -----------------------

Electric deliveries                         $24
Other operating expenses,
   other income and non-commodity revenue     9
General taxes                                (4)
Interest charges                              1
Income taxes                                 (8)
                                            ---
Total change                                $22
                                            ===



                                      CMS-6



                                                          CMS Energy Corporation

ELECTRIC DELIVERIES: In
                         
In Millions  
June 30   2007     2006     Change  
 
Three months ended   $ 40     $ 37     $ 3  
Six months ended   $ 91     $ 66     $ 25  
 
                 
    Three Months Ended     Six Months Ended  
Reasons for the change:   June 30, 2007 vs. 2006     June 30, 2007 vs. 2006  
 
Electric deliveries   $ 16     $ 40  
Palisades revenue to PSCR     (41 )     (41 )
Power supply costs and related revenue     (12 )     (12 )
Other operating expenses, other income, and non-commodity revenue     55       64  
General taxes     (3 )     (7 )
Interest charges     (7 )     (6 )
Income taxes     (5 )     (13 )
     
                 
Total change   $ 3     $ 25  
 
Electric deliveries:For the first quarter ofthree months ended June 30, 2007, electric delivery revenues increased by $24$16 million overversus 2006, as deliveries to end-use customers were 9.5 billion kWh, an increase of 0.20.3 billion kWh or 23 percent versus 2006. The increase in electric deliveries wasfor the three months ended June 30, 2007 is primarily due to colderfavorable weather, in the first
quarter of 2007 versus 2006 andwhich resulted in an increase in electric delivery revenue of $17$13 million. Average temperaturesFor the six months ended June 30, 2007, electric delivery revenues increased $40 million versus 2006, as deliveries to end-use customers were 19.0 billion kWh, an increase of 0.5 billion kWh or 3 percent versus 2006. The increase in the first quarterelectric deliveries for six months ended June 30, 2007 is primarily due to favorable weather, which resulted in an increase in electric delivery revenue of 2007 were
3.8 degrees colder than the same period last year.

$30 million.
In the first quarter of 2006, we started collecting a surcharge that the MPSC authorized under Section 10d(4) of the Customer Choice Act. Due to timing
considerations, thisThis surcharge increased electric delivery revenue by $5$3 million infor the first quarter ofthree months ended June 30, 2007 and $8 million for the six months ended June 30, 2007 versus the same periods in 2006. The increase was primarily due to higher surcharge factors in 2007 versus the same period in 2006.
The Customer Choice Act allows all of our electric customers to buy electric generation service from us or from an alternative electric supplier. At March
31,June 30, 2007, alternative electric suppliers were providing 283302 MW of generation service to ROA customers. This amount represents a decrease of 193 percent compared to March 31,June 30, 2006. The return of former ROA customers to full-service rates increased electric delivery revenue less than $1 million for the three months ended June 30, 2007 and $2 million infor the first quarter ofsix months ended June 30, 2007 versus the same periods in 2006.
Palisades revenue to PSCR:For the three months and six months ended June 30, 2007, as a result of the sale of Palisades, electric revenue of $41 million related to the recovery of the Palisades and Big Rock costs has been used to offset costs incurred under our power purchase agreement with Entergy.
CMS-9
CMS Energy Corporation
Power supply costs and related revenue:For the three months and six months ended June 30, 2007, PSCR revenue decreased by $12 million versus 2006. OTHER OPERATING EXPENSES, OTHER INCOME AND NON-COMMODITY REVENUE: InThe decrease primarily reflects a reduction in amounts to be recovered under the first
quarter ofPSCR mechanism.
Other operating expenses, other income and non-commodity revenue:For the three months ended June 30, 2007, other operating expenses decreased $1$48 million, other income increased $6$10 million, and non-commodity revenue increased $2decreased $3 million versus 2006. For the six months ended June 30, 2007, other operating expenses decreased $49 million, other income increased $16 million, and non-commodity revenue decreased $1 million versus 2006.
The decrease in other operating expenses was primarily due to lower operating and maintenance expense, including reductions to certain workers'workers’ compensation and injuries and damages expense. These decreases were offset partially by higher depreciation amortization, and overheadamortization expense. Operating and maintenance expense decreased primarily due to the absence, in 2007, of costs incurred in 2006 related to a planned refueling outage at our Palisades, nuclear
plant, and lower overhead, line maintenance, and storm restoration costs. Also contributing to the decrease was the sale of Palisades in April 2007. Depreciation and amortization expense increased due to higher non-nuclear plant in service and greater amortization of certain regulatory assets. Overhead expense
increased primarily due to costs related to our voluntary separation program and
costs associated with our utility reorganization.

The
For the three months ended June 30, 2007, the increase in other income was primarily due to higher interest income. For the six months ended June 30, 2007, the increase in other income was primarily due to higher interest income and higher income associated with our Section 10d(4) Regulatory Asset. ThisThe increase on our Section 10d(4) Regulatory Asset reflects the absence, in 2007, of the impact of the MPSC'sMPSC’s final order in this case. The increase in
non-commodity revenue was primarily due to higher revenue from customer late
payment fees.

GENERAL TAXES: In
General taxes:For the first quarter ofthree months ended June 30, 2007, general tax expense increased
primarily due to higher property tax and sales and use tax expense, offset partially by lower MSBT expense. For the six months ended June 30, 2007, general tax expense versus 2006.

INTEREST CHARGES: Inincreased due to higher property tax and sales and use tax expense.
Interest charges:For the first quarter ofthree months and six months ended June 30, 2007, interest charges decreasedincreased primarily due to lower average debt levels and lower interest expense associated with potential customer refundsamounts to be refunded to customers as a result of the sale of Palisades. The MPSC order approving the Palisades power purchase agreement with Entergy directed us to record interest on the unrefunded balance.
Income taxes:For the three months ended June 30, 2007, income taxes increased versus 2006.

INCOME TAXES: In2006 primarily due to the first quarterabsence, in 2007, of the resolution of an IRS income tax audit which resulted in an income tax benefit primarily for the utilization or restoration of income tax credits. For the six months ended June 30, 2007, income taxes increased primarily due to higher earnings by the electric utility versus 2006. Partially offsetting
this increase is the absence, in 2007, of adjustments to certain deferred tax
balances. For additional details, see Note 8, Income Taxes.


                                      CMS-7
CMS-10
CMS Energy Corporation
GAS UTILITY RESULTS OF OPERATIONS
                                                                    In Millions
                                                           --------------------
March 31                                                   2007   2006   Change
- --------                                                   ----   ----   ------

Net Income for the three months ended                       $57    $37    $ 20
                                                            ===    ===    ====

Reasons for the change:
Gas deliveries                                                            $ 14
Gas rate increase                                                           33
Other gas revenue and other income                                           4
Operation and maintenance                                                  (13)
Depreciation and general taxes                                              (5)
Interest charges                                                            (2)
Income taxes                                                               (11)
                                                                          ----
Total change                                                              $ 20
                                                                          ====


GAS DELIVERIES: In
                         
In Millions  
June 30   2007     2006     Change  
 
Three months ended   $ 4     $ (3 )   $ 7  
Six months ended   $ 61     $ 34     $ 27  
 
                 
    Three Months Ended     Six Months Ended  
Reasons for the change:   June 30, 2007 vs. 2006     June 30, 2007 vs. 2006  
 
Gas deliveries   $ 3     $ 17  
Gas rate increase     12       45  
Gas wholesale and retail services, other gas revenues and other income     6       10  
Operation and maintenance     (7 )     (20 )
General taxes and depreciation     (1 )     (6 )
Interest charges     1       (1 )
Income taxes     (7 )     (18 )
     
 
Total change   $ 7     $ 27  
 
Gas deliveries:For the first quarter ofthree months ended June 30, 2007, gas delivery revenues increased by $14$3 million overversus 2006, as gas deliveries, including miscellaneous transportation to end-use customers, were 13746 bcf, an increase of 144 bcf or 11 percent versus
2006.9 percent. The increase in gas deliveries was primarily due to colderfavorable weather in the firstsecond quarter of 2007 versus 2006. Average temperatures
For the six months ended June 30, 2007, gas delivery revenues increased by $17 million over 2006, as gas deliveries, including miscellaneous transportation to end-use customers, were 183 bcf, an increase of 18 bcf or 10 percent. The increase in the first quarter of
2007 were 3.8 degrees colder than the same period last year.

GAS RATE INCREASE: gas deliveries was primarily due to favorable weather.
Gas rate increase:In November 2006, the MPSC issued an order authorizing an annual rate increase of $81 million. As a result of this order, gas revenues increased $33$12 million for the first quarter ofthree months ended June 30, 2007 versus 2006.

OTHER GAS REVENUE AND OTHER INCOME: Inand $45 million for the first quarter of 2007,six months ended June 30, 2007.
Gas wholesale and retail services, other gas revenuerevenues and other income increased $4 million versus 2006income:For the three and six months ended June 30, 2007, the increase was primarily due to higher pipeline capacity optimization revenue.

OPERATION AND MAINTENANCE: Ininterest income.
Operation and maintenance:For the first quarter ofthree months and six months ended June 30, 2007, operation and maintenance expenses increased versus 2006 primarily due to higher customer
service and overhead expense. Customer service expense increased primarily due to higher uncollectible accounts expense and contributions, beginning in November 2006 pursuant to a November 2006 MPSC order, to a fund that provides energy assistance to low-income customers. Overhead expense increased primarily
due to costs related to our voluntary separation program
General taxes and costs associated
with our utility reorganization.

DEPRECIATION AND GENERAL TAXES: Indepreciation:For the first quarter ofthree months ended June 30, 2007, depreciation expense increased versus 2006 primarily due to higher plant in service. General
taxThe increase in general taxes reflects higher MSBT expense. For the six months ended June 30, 2007 depreciation expense also increased versus 2006 primarily due to higher plant in service. The increase in general taxes reflects higher property tax expense, offset partially by lower MSBT expense.

INTEREST CHARGES: In
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CMS Energy Corporation
Interest charges:For the first quarter ofthree months ended June 30, 2007, interest charges reflect lower average debt levels versus 2006. For the six months ended June 30, 2007, interest charges reflect higher interest on our GCR overrecovery balance and higher associated company interest, offset partially by lower average debt levels versus 2006.

INCOME TAXES: In
Income taxes:For the first quarter ofthree and six months ended June 30, 2007, income taxes increased versus 2006 primarily due to higher earnings by the gas utility.


                                     CMS-8




                                                          CMS Energy Corporation

ENTERPRISES RESULTS OF OPERATIONS
                                                                    In Millions
                                                          ---------------------
March 31                                                   2007   2006   Change
- --------                                                  -----   ----   ------

Net Income for the three months ended                     $(187)  $(58)  $(129)
                                                          ======  ====   =====

Reasons for the change:
Operating revenues                                                       $  26
Cost of gas and purchased power                                             20
Earnings from equity method investees                                      (17)
Gain on sale of assets                                                      12
Operation and maintenance                                                    2
General taxes, depreciation, and other income, net                          (3)
Asset impairment charges                                                  (242)
Fixed charges                                                                1
Income taxes                                                                15
The MCV Partnership                                                         57
                                                                         -----
Total change                                                             $(129)
                                                                         =====


OPERATING REVENUES: 
                         
In Millions  
June 30   2007     2006     Change  
 
Three months ended   $ (33 )   $ (16 )   $ (17 )
Six months ended   $ (231 )   $ (82 )   $ (149 )
 
                 
    Three Months Ended     Six Months Ended  
Reasons for the change:   June 30, 2007 vs. 2006     June 30, 2007 vs. 2006  
 
Operating revenues   $ (9 )   $ 7  
Cost of gas and purchased power     (4 )     19  
Earnings from equity method investees     9       (7 )
Loss on sale of assets     (14 )     (2 )
Operation and maintenance     (3 )     (6 )
General taxes, depreciation, and other income, net     2       —  
Asset impairment charges     (21 )     (263 )
Fixed charges     3       5  
Income taxes     14       35  
The MCV Partnership     6       63  
     
 
Total change   $ (17 )   $ (149 )
 
Operating revenues:For the three months ended March 31,June 30, 2007, operating revenues decreased $9 million versus 2006 primarily due to lower revenues at CMS ERM resulting from a write off of derivative assets associated with the Quicksilver contract that was voided by the trial judge in May 2007, losses from third party financial settlements and decreased third party gas sales. These decreases were partially offset by mark-to-market gains in power and gas contracts compared to losses on such items in 2006, and increased power sales.
For the six months ended June 30, 2007, operating revenues increased $26$7 million versus 2006 primarily due to higher revenues at CMS ERM resulting from mark-to-market gains on power and gas contracts compared to losses on such items in 2006 and increased power sales. These were offset partially offset by lower third-partythe write off of derivative assets associated with the Quicksilver contract that was voided by the trial judge in May 2007, losses from third party financial settlements and decreased third party gas sales.

COST OF GAS AND PURCHASED POWER: 
Cost of gas and purchased power:For the three months ended March 31,June 30, 2007, cost of gas and purchased power increased $4 million versus 2006. The increase was primarily due to increased cost of gas resulting from increased usage and higher prices. The increase was offset partially by a decrease in power purchases from the MISO market.
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CMS Energy Corporation
For the six months ended June 30, 2007, cost of gas and purchased power decreased $20$19 million versus 2006. The decrease was primarily due to lower naturala decrease in power purchases from the MISO market, offset partially by higher cost of gas prices at CMS ERM.

EARNINGS FROM EQUITY METHOD INVESTEES: resulting from increased usage and higher prices.
Earnings from equity method investees:For the three months ended March 31,June 30, 2007, earnings from equity method investees increased versus 2006. The increase was primarily due to increased earnings at Jorf Lasfar related to a revised estimate of Jorf Lasfar’s tax reserves during the second quarter 2007, which decreased their tax expense by $11 million.
For the six months ended June 30, 2007 earnings from equity method investees decreased $17 million versus 2006. The decrease iswas primarily the result of lower earnings of $9 million at Jorf
Lasfar due to higher income tax expense, a $6 million reductionthe sale of our investments in mark-to-market gains on interest rate swaps associated with our investmentAfrica, the Middle East and India in Taweelah, and a $5 million reduction in earnings at GasAtacama due to higher
cost of fuel used for generation as a result of gas shortages. These decreases
were partiallyMay 2007, offset by $3 millionthe absence in 2007 of increased earnings at TGN, which was
subsequently impaired.

GAIN ON SALE OF ASSETS: a 2006 provision for higher foreign taxes in Argentina.
Loss on sale of assets:For the three months ended March 31,June 30, 2007, the net gainloss on asset sales was $12 million.$14 million from the sale of our equity investment in Africa, the Middle East and India to TAQA. This loss was offset by a gain recorded in Income (Loss) from Discontinued Operations, for an overall net gain on the sales transaction. There were no gains or losses on asset sales for the three months ended March 31,June 30, 2006.
For the six months ended June 30, 2007, the net loss on asset sales was $2 million. There were no gains or losses on asset sales for the six months ended June 30, 2006. The net gainloss consisted of a $23 million
gainloss on the sale of our equity investmentinvestments in El ChoconAfrica, the Middle East and India to Endesa S.A. partially
offset by an $11 millionTAQA, and a loss on the sale of our equity investment in TGM and our Bay Area Pipeline in Michigan to Lucid Energy. These losses were partially offset by a gain on sale of our equity investment in El Chocon to Endesa S.A. For additional details, see Note 2, Asset Sales, Discontinued Operations and Impairment Charges.


                                     CMS-9



                                                          CMS Energy Corporation

OPERATION AND MAINTENANCE: 
Operation and maintenance:For the three months ended March 31,June 30, 2007, operation and maintenance expenses decreased $2increased $3 million due to higher professional fees related to the sale of equity investments and higher separation benefits associated with asset sales.
For the six months ended June 30, 2007, operation and maintenance expenses increased $6 million due to the absence of researchhigher professional fees and development costs in 2007 at CMS Energy Brasil S.A.

GENERAL TAXES, DEPRECIATION, AND OTHER INCOME, NET: separation benefits associated with the asset sales.
General taxes, depreciation, and other income, net:For the three months ended March 31,June 30, 2007, the net of general tax expense,taxes, depreciation, and other income decreasedincreased operating income compared to 2006 due to higher general taxes recorded in 2006 primarily atrelated to our South American subsidiaries.

ASSET IMPAIRMENT CHARGES: holdings.
Asset impairment charges:For the three months ended March 31,June 30, 2007, asset impairment charges were $242$21 million. There were no asset impairment charges for the three months ended March 31,June 30, 2006. The increase was primarily due to the reduction in fair value of our investment in GasAtacama due to the sale agreement entered into June 2007.
For the six months ended June 30, 2007, asset impairment charges were $263 million. There were no asset impairment charges for the six months ended June 30, 2006. The increase was primarily due to the recognition of the reduction in fair value of our investment in TGN, includingwhich included $197 million of cumulative currency translation loss.

INCOME TAXES: loss, and the recognition of an additional reduction in the fair value of our investment in GasAtacama.
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CMS Energy Corporation
Fixed charges:For the three and six months ended June 30, 2007, fixed charges decreased due to lower interest expenses from subsidiary debt due to asset sales in 2007.
Income taxes:For the three months ended March 31,June 30, 2007, income tax benefit increased $15$14 million versus the same period in 2006. The increase is primarily due to the tax benefits related to asset impairment charges, in 2007, offset partially by the absence, in 2007, of the 2006 resolution of an IRS income tax examination, which resulted in an income tax benefit for the utilization or restoration of income tax credits.
For the six months ended June 30, 2007, income tax benefit increased $35 million versus the same period in 2006. The increase is primarily due to the tax benefit related to asset impairment charges, in 2007, offset by a provision on the cumulative undistributed earnings of foreign subsidiaries expected to be sold during 2007. THEThis was offset partially by the absence, in 2007, of the 2006 resolution of an IRS income tax examination, which resulted in an income tax benefit for the utilization or restoration of income tax credits.
The MCV PARTNERSHIP: Partnership:Due to the November 2006 sale of our ownership interests in the MCV Partnership, we have condensed their consolidated results of operations for the three and six months ended March 31,June 30, 2006 for discussion purposes. The decrease in losses from our ownership interest in the MCV Partnership is primarily due to the absence, in 2007, of mark-to-market losses on certain long-term contracts and financial hedges.
CORPORATE INTEREST AND OTHER RESULTS OF OPERATIONS
                                                                    In Millions
                                                           --------------------
March 31                                                   2007   2006   Change
- --------                                                   ----   ----   ------

Net Income for the three months ended                       $44   $(43)    $87
                                                            ===   =====    ===
                         
In Millions  
June 30   2007     2006     Change  
 
Three months ended   $ (69 )   $ 42     $ (111 )
Six months ended   $ (16 )   $ 6     $ (22 )
 
For the three months ended March 31,June 30, 2007, net incomeloss from corporate interest and other was $44$69 million, versus net expensesincome of $43$42 million in 2006. The $87$111 million change isdecrease primarily reflects the absence, in 2007, of a tax benefit due to the resolution of an analysisIRS income tax audit, higher income tax expenses in 2007, and the absence of an insurance reimbursement received in June 2006 for previously incurred legal expenses. Also contributing to the decrease was the recognition of the reduction in fair value of our investment in GasAtacama and premiums paid on the early retirement of CMS Energy debt in June 2007.
For the six months ended June 30, 2007, net loss from corporate interest and other was $16 million versus net income of $6 million in 2006. The $22 million decrease primarily reflects the absence, in 2007, of a tax position at March 31,
2007. Duebenefit due to salesthe resolution of an IRS income tax audit, higher income tax expense in 2007, and the absence of an insurance reimbursement received in June 2006 for previously incurred legal expenses. Also contributing to the decrease was the recognition of the reduction in fair value of our international operations during 2007, we determined
thatinvestment in GasAtacama and premiums paid on the early retirement of CMS Energy debt in June 2007. Partially offsetting the decrease was the reversal of certain deferred tax valuation allowances associated with capital loss
carryforwards and foreign basis differencesin March 2007 that were no longer required.

DISCONTINUED OPERATIONS: required due to the sale of our international operations.
Discontinued Operations:For the three months ended March 31,June 30, 2007, net income from discontinued operations was $91 million compared to net income of $12 million in 2006. The increase is primarily due to the gains on the sale of assets which more than offset foreign currency losses, the absence of income related to these businesses, and a $5 million adjustment to tax expense related to previously permanently deferred undistributed foreign earnings.
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CMS Energy Corporation
For the six months ended June 30, 2007, the net loss from discontinued operations was $180$87 million compared to $21 million in net income of $8
million in 2006. The $188$108 million differencechange is primarily due to losses related
to the Marchnet loss on the disposal of international businesses in 2007, sale of Argentinewhich replaced earnings recorded for these businesses and non-utility natural gas
assets in Michigan. Further contributing to the difference is a reduction in
earnings from subsidiaries expected to be sold during the remainder of 2007. For
additional details, see Note 2, Asset Sales, Discontinued Operations and
Impairment Charges.


                                     CMS-10



                                                          CMS Energy Corporation

CRITICAL ACCOUNTING POLICIES

2006.
Critical Accounting Policies
The following accounting policies are important to an understanding of our results of operations and financial condition and should be considered an integral part of our MD&A. For additional accounting policies, see Note 1, Corporate Structure and Accounting Policies.

USE OF ESTIMATES AND ASSUMPTIONS

Use of Estimates and Assumptions
We use estimates and assumptions in preparing our consolidated financial statements that may affect reported amounts and disclosures. We use accounting estimates for asset valuations, depreciation, amortization, financial and derivative instruments, employee benefits, and contingencies. For example, we estimate the rate of return on plan assets and the cost of future health-care benefits to determine our annual pension and other postretirement benefit costs. Actual results may differ from estimated results due to factors such as changes in the regulatory environment, competition, foreign exchange, regulatory decisions, and lawsuits.

CONTINGENCIES: 
Contingencies:We are involved in various regulatory and legal proceedings that arise in the ordinary course of our business. We record a liability for contingencies based upon our assessment that a loss is probable and the amount of loss can be reasonably estimated. We use the principles in SFAS No. 5 when recording estimated liabilities for contingencies. We consider many factors in making these assessments, including the history and specifics of each matter.
The amount of income taxes we pay is subject to ongoing audits by federal, state, and foreign tax authorities, which can result in proposed assessments. Our estimate for the potential outcome for any uncertain tax issue is highly judgmental. We believe we have provided adequately for any likely outcome related to these matters. However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved or when statutes of limitation on potential assessments expire. As a result, our effective tax rate may fluctuate significantly on a quarterly basis. The FASB issued a new interpretation on the recognition and measurement of uncertain tax positions that we adopted on January 1, 2007. For additional details, see the "Implementation“Implementation of New Accounting Standards"Standards” section included in this MD&A.

DISCONTINUED OPERATIONS: 
Discontinued Operations:We have determined that certain consolidated subsidiaries meet the criteria of assets held for sale under SFAS No. 144. At March 31, 2007, these subsidiaries include Takoradi, SENECA, and certain
associated holding companies. At December 31, 2006, these subsidiaries includeincluded our Argentine businesses sold in March 2007, a majority of our Michigan non-utility businesses sold in March 2007, CMS Energy Brasil S.A., Takoradi, SENECA, and certain associated holding companies. There were no assets held for sale at June 30, 2007. For additional details, see Note 2, Asset Sales, Discontinued Operations and Impairment Charges.

ACCOUNTING FOR FINANCIAL AND DERIVATIVE INSTRUMENTS, TRADING ACTIVITIES, AND
MARKET RISK INFORMATION

FINANCIAL INSTRUMENTS: 
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CMS Energy Corporation
Accounting for Financial and Derivative Instruments, Trading Activities, and Market Risk Information
Financial Instruments:Debt and equity securities classified as available-for-sale are reported at fair value determined from quoted market prices. Debt and equity securities classified as held-to-maturity are reported
at cost. Unrealized gains or losses resulting from changes in fair value of certain available-for-sale debt and equity securities are reported, net of tax, in equity as part of AOCL. Unrealized gains or losses are excluded from earnings unless the related changes in fair value are determined to be other than temporary. Unrealized gains or losses on our nuclear decommissioning investments are reflected as regulatory liabilities on our CMS-11



                                                          CMS Energy Corporation

Consolidated Balance Sheets. Realized gains or losses would not affect our consolidated earnings or cash flows.

DERIVATIVE INSTRUMENTS: earnings.
Derivative Instruments:We account for derivative instruments in accordance with SFAS No. 133. Except as noted within this section, since the year ended December 31, 2006, there have been no significant changes in the amount or types of derivatives that we hold or to how we account for derivatives. For additional details on our derivatives, see Note 6, Financial and Derivative Instruments.
To determine the fair value of our derivatives, we use information from external sources (i.e., quoted market prices and third-partythird party valuations), if available. For certain contracts, this information is not available and we use mathematical valuation models to value our derivatives. These models require various inputs and assumptions, including commodity market prices and volatilities, as well as interest rates and contract maturity dates. The following table summarizes the interest rate and volatility rate assumptions we used to value these contracts at March 31,June 30, 2007:
Interest Rates (%) Volatility Rates (%)
                                       ------------------   --------------------
Gas-related option contracts                  5.00                 39 - 49
4.7 47 – 60
Electricity-related option contracts          5.00                 50 - 87
4.7 64 – 164
Changes in forward prices or volatilities could significantly change the calculated fair value of our derivative contracts. The cash returns we actually realize on these contracts may vary, either positively or negatively, from the results that we estimate using these models. As part of valuing our derivatives at market, we maintain reserves, if necessary, for credit risks arising from the financial condition of our counterparties.
Derivative Contracts Associated with Equity Investments: At March 31,Investments: In May 2007, certainwe sold our ownership interest in businesses in the Middle East, Africa, and India. Certain of our equity method investments, specifically Taweelah, Shuweihat, Jorf
Lasfar, and Jubail,these businesses held interest rate contracts and foreign exchange contracts.
Wecontracts that were derivatives. Before the sale, we recorded our proportionate share of the change in fair value of these contracts in AOCL if the contracts qualified for cash flow hedge accounting; otherwise, we recorded our share in Earnings from Equity Method Investees.

In May 2007, we sold our ownership interest in businesses in
At the Middle East,
Africa, and India including Taweelah, Shuweihat, Jorf Lasfar, and Jubail. As a
resultdate of the sale, we will no longer recognize gains or losses related to
changes in the fair value of the derivative contracts held by these equity
method investees. At March 31, 2007, we had accumulated a net loss of $14$13 million, net of tax, in AOCL representing our proportionate share of mark-to-market gains and losses from cash flow hedges held by the equity method investees. At the date we closedAfter the sale, we reclassified this amount adjusted for any
additional changes in fair value, was reclassified and recognized it in earnings as parta reduction of the gain on the sale. For additional details on the sale of our interest in these equity method investees, see Note 2, Asset Sales, Discontinued Operations and Impairment Charges.
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CMS Energy Corporation
CMS ERM CONTRACTS: Contracts:CMS ERM enters into and owns energy contracts that support CMS Energy'sEnergy’s ongoing operations. We include the fair value of the derivative contracts held by CMS ERM in either Price risk management assets or Price risk management liabilities on our Consolidated Balance Sheets. The following tables provide a summary of these contracts at March 31,June 30, 2007:


                                     CMS-12


                                                          CMS Energy Corporation

                         
In Millions  
    Non-Trading     Trading     Total  
 
Fair value of contracts outstanding at December 31, 2006   $ 31     $ (68 )   $ (37 )
Fair value of new contracts when entered into during the period (a)     —       (1 )     (1 )
Contracts realized or otherwise settled during the period (b)     (6 )     58       52  
Other changes in fair value (c)     (26 )     (13 )     (39 )
 
Fair value of contracts outstanding at June 30, 2007   $ (1 )   $ (24 )   $ (25 )
 

                                                          In Millions
                                        -----------------------------
                                        Non-Trading   Trading   Total
                                        -----------   -------   -----

Fair 
(a) Reflects only the initial premium payments (receipts) for new contracts. No unrealized gains or losses were recognized at the inception of any new contracts.
(b) The fair value of CMS ERM’s trading contracts outstanding
   athas increased significantly from December 31, 2006 $31        $(68)    $(37)
Fair valuedue to the termination of new contracts when
   entered into during the period (a)       --          (1)       (1)
Contracts realized or otherwise
   settled during the period                (3)          7         4
Other changes in fair value (b)              6          (6)       --
                                            ---        ----     -----
Fair value of contracts outstanding
   at March 31, 2007                        $34        $(68)    $(34)
                                            ===        ====     =====


(a)  Reflects only the initial premium payments (receipts) for new contracts. No
     unrealized gains or losses were recognized at the inception of any new
     contracts.

(b)  certain gas contracts. CMS ERM had recorded derivative liabilities, representing cumulative unrealized mark-to-market losses, associated with these contracts.(c)Reflects changes in the fair value of contracts over the period, as well as increases or decreases to credit reserves. 
Fair ValueThis amount also reflects the rescission of Non-Trading Contracts at March 31, 2007              In Millions
- ------------------------------------------------------------------------------
                                                   Maturity (in years)
                                            ----------------------------------
                                    Total
                                     Fair    Less                      Greater
Source of Fair Value                Value   than 1   1 toa natural gas contract with Quicksilver. CMS ERM had recorded a derivative asset, representing cumulative unrealized mark-to-market gains, associated with this contract. See Note 3, 4 to 5    than 5
- --------------------                -----   ------   ------   ------   -------

Prices actively quoted               $--      $--      $--      $--      $--
Prices obtained from external
   sources or based on models and
   other valuation methods            34       18       16       --       --
                                     ---      ---      ---      ---      ---
Total                                $34      $18      $16      $--      $--
                                     ===      ===      ===      ===      ===
Contingencies, “Other Contingencies – Quicksilver Resources, Inc.” for additional details.

Fair Value of Trading Contracts at March 31, 2007                  In Millions
- ------------------------------------------------------------------------------
                                                   Maturity (in years)
                                            ----------------------------------
                                    Total
                                     Fair    Less                      Greater
Source of Fair Value                Value   than 1   1 to 3   4 to 5    than 5
- --------------------                -----   ------   ------   ------   -------

Prices actively quoted              $(40)    $(20)    $(20)     $--      $--
Prices obtained from external
   sources or based on models and
   other valuation methods           (28)     (25)      (3)      --       --
                                    ----     ----     ----      ---      ---
Total                               $(68)    $(45)    $(23)     $--      $--
                                    ====     ====     ====      ===      ===


MARKET RISK INFORMATION:                                          
Fair Value of Non-Trading Contracts at June 30, 2007           In Millions
    Total           Maturity (in years)        
Source of Fair Value   Fair Value   Less than 1   1 to 3   4 to 5   Greater than 5
 
Prices actively quoted   $ —     $ —     $ —     $ —     $ —  
Prices obtained from external sources or based on models and other valuation methods     (1 )     (1 )     —       —       —  
 
Total   $ (1 )   $ (1 )   $ —     $ —     $ —  
 
                                         
Fair Value of Trading Contracts at June 30, 2007           In Millions
    Total           Maturity (in years)        
Source of Fair Value   Fair Value   Less than 1   1 to 3   4 to 5   Greater than 5
 
Prices actively quoted   $ (2 )   $ (2 )   $ —     $ —     $ —  
Prices obtained from external sources or based on models and other valuation methods     (22 )     (19 )     (3 )     —       —  
 
Total   $ (24 )   $ (21 )   $ (3 )   $ —     $ —  
 
Market Risk Information:The following is an update of our risk sensitivities since December 31, 2006. These sensitivities indicate the potential loss in fair value, cash flows, or future earnings from our financial instruments, including our derivative contracts, assuming a hypothetical adverse change in
CMS-17
CMS Energy Corporation
market rates or prices of 10 percent. Changes in excess of the amounts shown in the sensitivity analyses could occur if changes in market rates or prices exceed the 10 percent shift used for the analyses.
Interest Rate Risk Sensitivity Analysis (assuming(assuming an increase in market interest rates of 10 percent):
                 
In Millions  
    June 30, 2007     December 31, 2006  
 
Variable-rate financing – before-tax annual earnings exposure   $ 2     $ 4  
Fixed-rate financing – potentialreductionin fair value (a)     176       193  
 

                                                                     In Millions
                                              ----------------------------------
                                              March 31, 2007   December 31, 2006
                                              --------------   -----------------

Variable-rate financing - before-tax annual
   earnings exposure                               $  2               $  4
Fixed-rate financing - potential REDUCTION
   in fair 
(a) Fair value (a)                                181                193
reduction could only be realized if we repurchased all of our fixed-rate financing.


(a)  Fair value reduction could only be realized if we repurchased all of our
     fixed-rate financing.


                                     CMS-13



                                                          CMS Energy Corporation

Commodity Price Risk Sensitivity Analysis (assuming(assuming an adverse change in market prices of 10 percent):
                                                                     In Millions
                                              ----------------------------------
                                              March 31, 2007   December 31, 2006
                                              --------------   -----------------

Potential REDUCTION in fair value:
   Non-trading contracts
      Fixed fuel price contracts (a)                $--               $ 1
      CMS ERM gas forward contracts                   4                 3
   Trading contracts
      Electricity-related option contracts            5                 3
      Electricity-related swaps                       1                --
      Gas-related option contracts                    1                 1
      Gas-related swaps and futures                   2                 1


(a)  In 2006, we entered into two contracts that fix the prices we pay for
     gasoline and diesel fuel used in our fleet vehicles and equipment through
     September 2007. These contracts are derivatives with an immaterial fair
     value at March 31, 2007.

                 
In Millions  
    June 30, 2007     December 31, 2006  
 
Potentialreductionin fair value:                
 
Non-trading contracts                
Fixed fuel price contracts   $ —     $ 1  
CMS ERM gas forward contracts     1       3  
                 
Trading contracts                
Electricity-related option contracts     2       3  
Electricity-related swaps     2       —  
Gas-related option contracts     —       1  
Gas-related swaps and futures     2       1  
 
Investment Securities Price Risk Sensitivity Analysis (assuming(assuming an adverse change in market prices of 10 percent):
                                                                     In Millions
                                              ----------------------------------
                                              March 31, 2007   December 31, 2006
                                              --------------   -----------------

Potential REDUCTION in fair value of
   available-for-sale equity securities
   (primarily SERP investments):                    $6                 $6


Consumers maintained trust funds, as required by the NRC, for the purpose of
funding certain costs of nuclear plant decommissioning through April 2007, the
date of the sale of Palisades. These funds were invested primarily in equity
securities, fixed-rate, fixed-income debt securities, and cash and cash
equivalents, and have been recorded at fair value on our Consolidated Balance
Sheets. These investments were exposed to price fluctuations in equity markets
and changes in interest rates. Because the accounting for nuclear plant
decommissioning recognized that costs were recovered through Consumers' electric
rates, fluctuations in equity prices or interest rates did not affect our
consolidated earnings or cash flows.

                 
In Millions  
    June 30, 2007     December 31, 2006  
 
Potentialreductionin fair value of available-for-sale equity securities (primarily SERP investments):   $ 6     $ 6  
 
For additional details on market risk and derivative activities, see Note 6, Financial and Derivative Instruments. For additional details on nuclear plant
decommissioning at Big Rock and Palisades, see the "Other Electric Utility
Business Uncertainties - Nuclear Matters" section included in this MD&A.

OTHER

Other
Other accounting policies important to an understanding of our results of operations and financial condition include:

     -    accounting for long-lived assets and equity method investments,

     -    accounting for the effects of industry regulation,

     -    accounting for pension and OPEB,

     -    accounting for asset retirement obligations, and

     -    accounting for nuclear decommissioning costs.


                                     CMS-14



                                                          CMS Energy Corporation

• accounting for long-lived assets and equity method investments,
• accounting for the effects of industry regulation,
• accounting for pension and OPEB,
• accounting for asset retirement obligations, and
• accounting for nuclear decommissioning costs.
These accounting policies were disclosed in our 2006 Form 10-K and there have been no subsequent material changes.

CAPITAL RESOURCES AND LIQUIDITY

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Capital Resources And Liquidity
Factors affecting our liquidity and capital requirements are:

     -    results of operations,

     -    capital expenditures,

     -    energy commodity and transportation costs,

     -    contractual obligations,

     -    regulatory decisions,

     -    debt maturities,

     -    credit ratings,

     -    working capital needs, and

     -    collateral requirements.

• results of operations,
• capital expenditures,
• energy commodity and transportation costs,
• contractual obligations,
• regulatory decisions,
• debt maturities,
• credit ratings,
• working capital needs, and
• collateral requirements.
During the summer months, we purchase natural gas and store it for resale primarily during the winter heating season. Although our prudent natural gas costs are recoverable from our customers, the amount paid for natural gas stored as inventory requires additional liquidity due to the lag in cost recovery. We
have credit agreements with our commodity suppliers containing terms that can
result in margin calls. While we currently have no outstanding margin calls
associated with our natural gas purchases, they may be required if agency
ratings are lowered or if market conditions become unfavorable relative to our
obligations to those parties.

Our current financial plan includes controlling operating expenses and capital expenditures, executing on asset sales and evaluating market conditions for financing opportunities, if needed.
We believe the following items will be sufficient to meet our liquidity needs:

     -    our current level of cash and revolving credit facilities,

     -    our anticipated cash flows from operating and investing activities,
          including asset sales, and

     -    our ability to access secured and unsecured borrowing capacity in the
          capital markets, if necessary.

• our current level of cash and revolving credit facilities,
• our anticipated cash flows from operating and investing activities, including asset sales, and
• our ability to access secured and unsecured borrowing capacity in the capital markets, if necessary.
In the firstsecond quarter of 2007, Moody'sMoody’s and S&P affirmedupgraded long-term credit ratings of CMS Energy'sEnergy and Consumers' credit ratingsConsumers and revised the rating outlook to positivestable from stable. Moody's also affirmed our liquidity rating. Additionally, Fitch Ratings
upgraded credit ratings on certain of our securities.

CASH POSITION, INVESTING, AND FINANCING

positive.
Cash Position, Investing, and Financing
Our operating, investing, and financing activities meet consolidated cash needs. At March 31,June 30, 2007, we had $642 million$1.944 billion consolidated cash, which includes $65$53 million of restricted cash and $4$5 million from entities consolidated pursuant to FIN 46(R).
Our primary ongoing source of cash is dividends and other distributions from our subsidiaries. For the threesix months ended March 31,June 30, 2007, Consumers paid $94$135 million in common stock dividends to CMS Energy.


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SUMMARY OF CONSOLIDATED STATEMENTS OF CASH FLOWS:


                                                                   In Millions
                                                                  ------------
Three months ended March 31                                       2007    2006
- ---------------------------                                       ----   -----

Net cash provided by (used in):
   Operating activities                                           $315   $ 171
   Investing activities                                              6     (36)
                                                                  ----   -----
Net cash provided by operating and investing activities            321     135
   Financing activities                                            (57)   (225)
Effect of exchange rates on cash                                     1       1
                                                                  ----   -----
Net Increase (Decrease) in Cash and Cash Equivalents              $265   $ (89)
                                                                  ====   =====


OPERATING ACTIVITIES: 
Summary of Consolidated Statements of Cash Flows:
                 
In Millions  
Six months ended June 30   2007     2006  
 
Net cash provided by (used in):                
Operating activities   $ 401     $ 496  
Investing activities     1,479       (250 )
     
Net cash provided by operating and investing activities     1,880       246  
Financing activities     (342 )     (243 )
Effect of exchange rates on cash     2       1  
     
Net Increase in Cash and Cash Equivalents   $ 1,540     $ 4  
 
Operating Activities:For the threesix months ended March 31,June 30, 2007, net cash provided by operating activities was $315$401 million, an increasea decrease of $144$95 million versus 2006. In additionThe decrease in operating cash flow was a result of the timing of our collection of increased billings in 2007 due to anrecent regulatory actions and weather-driven demand. Also decreasing our operating cash flow was the absence of the return of funds formerly held as collateral under certain gas hedging arrangements and other timing differences. An increase in earnings at our electric and gas utility segments partially reduced these decreases. The absence of payments for higher priced gas made during the increase in operating cash flow was mainly due to the
timingfirst part of accounts payable, increased usage of gas inventory in storage, and2006, the absence of the MCV Partnership gas supplier funds on deposit partially offset
byand increased usage of gas already in storage during 2007, as the timing of accounts receivable. We experienced colder weather in the first
quarter of 2007 versus 2006. The timing of payments for increased natural gas
purchases to meet customer demand in the first quarter of 2007, coupled with the
absence of payments for higher priced gas made during the first quarter of 2006,
increased our operating cash flow. A mildmilder winter in 2006 allowed us to accumulate more gas in our underground storage facilities. The increased usage
of gas alreadyfacilities, also offset decreases in storage during the first quarter of 2007 also increased our operating cash flow. These increases were reduced partially by the timing of our
collection of increased billings in the first quarter of 2007 due to recent
regulatory actions and weather-driven demand.

INVESTING ACTIVITIES: 
Investing Activities:For the threesix months ended March 31,June 30, 2007, net cash provided by investing activities was $6$1.479 billion, an increase of $1.729 billion versus 2006. This increase was primarily due to proceeds from asset sales and proceeds from nuclear decommissioning trust funds.
Financing Activities:For the six months ended June 30, 2007, cash used in financing activities was $342 million, an increase of $42$99 million versus 2006. This was primarily due to a netan increase in proceeds from asset
sales of $134 million and the result of a $75 million deposit from TAQA. These
increases were offset by a decrease in restricted cash released in 2007 versus
2006 of $109 million and an increase of $91 million in capital expenditures
primarily at our electric and gas utility segments.

FINANCING ACTIVITIES: For the three months ended March 31, 2007, net cash used
in financing activities was $57 million, a decrease of $168 million versus 2006.
This was primarily due to fewer debt retirements and payment of $196 million.common stock dividends. For additional details on long-term debt activity, see Note 4, Financings and Capitalization.
Our cash flow statements include amounts related to discontinued operations through the date of disposal. For additional details on discontinued operations, see Note 2, Asset Sales, Discontinued Operations and Impairment Charges.

OBLIGATIONS AND COMMITMENTS

REVOLVING CREDIT FACILITIES: 
Obligations and Commitments
Revolving Credit Facilities:For details on our revolving credit facilities, see Note 4, Financings and Capitalization.

DIVIDEND RESTRICTIONS: 
Dividend Restrictions:For details on dividend restrictions, see Note 4, Financings and Capitalization.

OFF-BALANCE SHEET ARRANGEMENTS: 
Off-Balance Sheet Arrangements:CMS Energy and certain of its subsidiaries enter into various arrangements in the normal course of business to facilitate commercial transactions with third parties. These arrangements include indemnifications, letters of credit, surety bonds, and financial and performance guarantees.


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                                                          CMS Energy Corporation

We enter into agreements containing indemnifications standard in the industry and indemnifications specific to a transaction, such as the sale of a subsidiary. Indemnifications are usually agreements to
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reimburse other companies if those companies incur losses due to third-partythird party claims or breach of contract terms. Banks, on our behalf, issue letters of credit guaranteeing payment to a third-party.third party. Letters of credit substitute the bank'sbank’s credit for ours and reduce credit risk for the third-partythird party beneficiary. We monitor these obligations and believe it is unlikely that we would be required to perform or otherwise incur any material losses associated with these guarantees. For additional details on these and other guarantee arrangements, see Note 3, Contingencies, “Other Contingencies — FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.”
In May 2007, we sold our ownership interests in businesses in the Middle East, Africa, and India to TAQA. TAQA has assumed all contingent obligations related to our project-financing security agreements. For more details on the sale of our ownership interests to TAQA, see Note 2, Asset Sales, Discontinued Operations and Impairment Charges.

For additional details on these and other guarantee arrangements, see Note 3,
Contingencies, "Other Contingencies - FASB Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees
Sale of Indebtedness of Others."

SALE OF ACCOUNTS RECEIVABLE: Accounts Receivable:Under a revolving accounts receivable sales program, Consumers may sell up to $325 million of certain accounts receivable. The highly liquid and efficient market for securitized financial assets provides a lower cost source of funding compared to unsecured debt. For additional details, see Note 4, Financings and Capitalization.

OUTLOOK

Outlook
CORPORATE OUTLOOK
Our business strategy will focus on the successful completion of announced asset
sales, continued investment in our utility business, reducing parent debt, and growing earnings while controlling operating costs.
Our primary focus with respect to our non-utility businesses is to optimize cash flow and further reduce our business risk and leverage through the sale of non-strategic assets. In 2007, weWe intend to exitcomplete the sale of our international marketplace.
We have sold, reached agreements to sell, or announced plans to sell our
ownership interests in businesses inEnterprises assets by the Middle East, Africa, India, and Latin
America.end of 2007. We plan to use the proceeds from the pending asset sales to invest in our utility business and reduce parent company debt.

As a result of the reorganization at
Our primary focus with respect to our utility business that we announcedis to continue to invest in 2006our utility system to enable us to meet our customer commitments, comply with increasing environmental performance standards, and our planned exit from the international marketplace, we incurred
charges in the first quarter of 2007. Completion of our planned asset sales may
result in additional charges in 2007. We are unable to estimate the timing or
extent of these charges.

maintain adequate supply and capacity.
In January 2007, we reinstated a dividend on our common stock after a four-year suspension at $0.05 per share. We paid $11 million in common stock dividends in February 2007 and $11 million in common stock dividends in May 2007. On April 24,July 20, 2007, we declared a dividend of $0.05 per share on our common stock payable MayAugust 31, 2007 to shareholders of record on MayAugust 10, 2007.


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ELECTRIC UTILITY BUSINESS OUTLOOK

GROWTH: 
Growth:In 2007, we expect electric deliveries to grow about one-half of one percent compared to 2006 levels. The outlook for 2007 assumes a small decline in industrial economic activity and normal weather conditions throughout the remainder of the year.
Over the next five years, we expect electric deliveries to grow at an average rate of about 1.5 percent per year. This outlook assumes a modestly growing customer base and a stabilizing Michigan economy after 2007. This growth rate includes both full-service sales and delivery service to customers who choose to
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buy generation service from an alternative electric supplier, but excludes transactions with other wholesale market participants and other electric utilities. This growth rate reflects a long-range expected trend of growth. Growth from year to year may vary from this trend due to customer response to the following:

     -    energy conservation measures,

     -    fluctuations in weather conditions, and

     -    changes in economic conditions, including utilization and expansion or
          contraction of manufacturing facilities.

ELECTRIC CUSTOMER REVENUE OUTLOOK: Our electric utility customer base includes a
mix of residential, commercial, and diversified industrial customers. In 2006,
Michigan's
• energy conservation measures,
• fluctuations in weather conditions, and
• changes in economic conditions, including utilization and expansion or contraction of manufacturing facilities.
Electric Customer Revenue Outlook:Michigan’s economy has been hampered by automotive industry experienced manufacturing facility closures and restructurings. OurThe Michigan economy has also had limited growth in the non-automotive sector. Although our electric utility results are not dependent upon a single customer, or even a few customers, and customers in the automotive sector represented five percent of our total 2006 electric revenue.
Electric Reserve Margin:We cannot predict
the impact of current or possible future restructuring plans or possible future
actions by our industrial customers.

ELECTRIC RESERVE MARGIN: We are planning forhave a reserve margin of approximately 11 percent for summer 2007, or supply resources equal to 111 percent of projected firm summer peak load. Of the 2007 supply resources target of 111 percent, we expect 96 percent to comecomes from our electric generating plants and long-term power purchase contracts, and 15 percent to comecomes from other contractual arrangements. Our 15-year power purchase agreement with Entergy for 100 percent of the Palisades facility'sfacility’s current electric output will offset the reduction in the owned capacity represented by the sale of the Palisades
facility in April 2007. We have purchased capacity and energy contracts covering the reserve margin requirements for 2007 and covering partially the estimated reserve margin requirements for 20072008 through 2010. As a
result, we recognized an asset of $62 million for unexpired seasonal capacity
and energy contracts at March 31, 2007.

After September 15, 2007, we expect to exercise the regulatory outregulatory-out provision in the MCV PPA, resulting in a reduction in the amount paid to the MCV Partnership to equal the amount we are allowed to recover in the rate charged to customers. If we are successful in exercising this provision, the MCV Partnership may, under certain circumstances, have the right to terminate the MCV PPA, which could affect our reserve margin status. The MCV PPA represents 13 percent of our 2007 supply resources target.

ELECTRIC UTILITY PLANT OUTAGE: In September 2006, we removed from service unit
three of the J.H. Campbell electric generating plant, representing 765 MW of our
capacity. The scheduled outage was for installation of equipment necessary to
comply with environmental standards. We expected the unit to return to service
in March 2007. However, the outage extended to May 1, 2007 due to unanticipated
delays in construction due to labor shortages, the collapse of an outdoor crane
on unit three and problems with a major generator component that was refurbished
by the original equipment manufacturer. The MPSC allows for the recovery of
reasonable and prudent replacement power costs.

ELECTRIC TRANSMISSION EXPENSES: resources.
Electric Transmission Expenses:METC, which provides electric transmission service to us, increased


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                                                          CMS Energy Corporation substantially the transmission rates it charged us in 2006. The revenue collected by METC under those rates is subject to refund pending a FERC ruling. In January 2007, the parties filed a settlement agreement with the FERC. This settlement, if approved by the FERC, will result in a refund of 2006 transmission charges of $18 million and a corresponding reduction of our power supply costs. For additional details on power supply costs, see Note 3, Contingencies, "Consumers'“Consumers’ Electric Utility Rate Matters -– Power Supply Costs."

21ST CENTURY ELECTRIC ENERGY PLAN: ”
21st Century Electric Energy Plan:In January 2007, the chairman of the MPSC proposed three major policy initiatives to the governor of Michigan. The initiatives involve the use of more renewable energy resources by all load-serving entities such as Consumers, the creation of an energy efficiency program, and a procedure for reviewing proposals to construct new generation facilities. The January proposal indicated that Michigan needs new base-load capacity by 2015 and recommends measures to make it easier to predict customer demand and revenues. The proposed initiatives will require changes to current legislation. We will continue to participate as the MPSC, legislature, and other stakeholders address future electric resource needs.

BALANCED ENERGY INITIATIVE: 
Balanced Energy Initiative:In May 2007, we filed a "Balanced“Balanced Energy Initiative"Initiative” with the MPSC providing a comprehensive energy resource plan to meet our projected short-term and long-term electric
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CMS Energy Corporation
power requirements. The plan is responsive to the 21st Century Electric Energy Plan and assumes that Michigan will implement a state-wide energy efficiency program and a renewable energy portfolio standard. The filing requests the MPSC to rule that the Balanced Energy Initiative represents a reasonable and prudent plan for the acquisition of necessary electric utility resources.
As acknowledged in the 21st Century Electric Energy Plan, implementation of the Balanced Energy Initiative will require legislative repeal or significant reform of the Michigan customer choice law.Customer Choice Act. In addition, we endorse the 21st Century Electric Energy Plan recommendation to adopt a new, up-front certification policy for major power plant investments. Our filing requests the MPSC to find that the addition of 500 MW of gas-fired combined cycle generating capacity is reasonable and prudent. This addition could be in the form of the construction
of a new gas-fired generating plant to begin service in 2011, or in the form of
a purchase of an existing gas-fired facility. The filing also recommends construction of a new 750 MW clean coal generating facility on an existing Consumers site to begin operation in 2015. Ownership of 250 MW of the total capacity is assumed to be allocated to municipal entities or other interested parties, resulting in 500 MW dedicated to us.

PROPOSED RENEWABLE ENERGY LEGISLATION: our use.
Proposed Power Plant Purchase:In May 2007, we reached an agreement with Broadway Gen Funding LLC, an affiliate of LS Power Group, to buy a 946 MW gas-fired power plant located in Zeeland, Michigan for $517 million. The power plant will help meet the growing energy needs of our customers. We expect to close on the purchase in early 2008, subject to MPSC and other regulatory approvals and other closing conditions.
Proposed Renewable Energy Legislation:There are various bills introduced into
in the U.S. Congress and the Michigan legislature relating to mandatory renewable energy standards. If enacted, these bills generally would require electric utilities to acquire a certain percentage of their power from renewable sources or otherwise pay fees or purchase allowances in lieu of having the resources. We cannot predict whether any such bill will be enacted or in what form.
ELECTRIC UTILITY BUSINESS UNCERTAINTIES
Several electric business trends or uncertainties may affect our financial condition and future results of operations. These trends or uncertainties have, or we reasonably expect could have, a material impact on revenues or income from continuing electric operations.
Electric Environmental Estimates:Our operations are subject to environmental laws and regulations. Costs to operate our facilities in compliance with these laws and regulations generally have been recovered in customer rates.
Clean Air Act:Compliance with the federal Clean Air Act and resulting regulations continues to be a significant focus for us. The Nitrogen Oxide State Implementation Plan requires significant reductions in nitrogen oxide emissions. To comply with the regulations, we expect to incur capital expenditures totaling $835 million. These expenditures include installing selective catalytic
reduction control technology on


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                                                          CMS Energy Corporation

four of our coal-fired electric generating units. The key assumptions in the
capital expenditure estimate include:

     -    construction commodity prices, especially construction material and
          labor,

     -    project completion schedules,

     -    cost escalation factor used to estimate future years' costs, and

     -    an AFUDC capitalization rate.

Our current capital cost estimates include an escalation rate of 2.6 percent and
an AFUDC capitalization rate of 7.8 percent. From 1998 to present, we have incurred $760$782 million in capital expenditures to comply with the federal Clean Air Act and resulting regulations and anticipate that the remaining $75$53 million of capital expenditures will be made in 2007 through 2011. These expenditures include installing selective catalytic reduction control technology on four of our coal-fired electric generating units. The key assumptions in the capital expenditure estimate include:
• construction commodity prices, especially construction material and labor,
• project completion schedules,
• cost escalation factor used to estimate future years’ costs, and
• an AFUDC capitalization rate.
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Our current capital cost estimates include an escalation rate of 2.6 percent and an AFUDC capitalization rate of 7.8 percent.
In addition to modifying coal-fired electric generating plants, our compliance plan includes the use of nitrogen oxide emission allowances until all of the control equipment is operational in 2011. The nitrogen oxide emission allowance annual expense is projected to be $3$2 million per year, which we expect to recover from our customers through the PSCR process. The projected annual expense is based on market price forecasts and forecasts of regulatory provisions, known as progressive flow control, that restrict the usage in any given year of allowances banked from previous years. The allowances and their cost are accounted for as inventory. The allowance inventory is expensed at the rolling average cost as the electric generating plants emit nitrogen oxide.
Clean Air Interstate Rule:In March 2005, the EPA adopted the Clean Air Interstate Rule that requires additional coal-fired electric generating plant emission controls for nitrogen oxides and sulfur dioxide. We plan to meet the nitrogen oxide requirements of this rule by year-round operation of our selective catalytic reduction control technology units, installation of low nitrogen oxide burners, and purchasing emission allowances. We plan to meet the sulfur dioxide requirements of this rule using sorbent injection, installation of flue gas desulfurization scrubbers and purchasing emission allowances. Our total cost for equipment installation is expected to reach approximately $700 million by 2015. Additional purchases of sulfur dioxide emission allowances in 2012 and 2013 will be needed for an estimated cost of $12 million per year, which we expect to recover from our customers through the PSCR process.
The Clean Air Interstate Rule was appealed to the U.S. Court of Appeals for the District of Columbia by a number of utilities and other companies. Final briefs are due September 5, 2007, with a decision expected in 2008. We cannot predict the outcome of these appeals.
Clean Air Mercury Rule:Also in March 2005, the EPA issued the Clean Air Mercury Rule, which requires initial reductions of mercury emissions from coal-fired electric generating plants by 2010 and further reductions by 2018. The Clean Air Mercury Rule was appealed to the U.S. Court of Appeals by a number of states and other entities. Final briefs were due July 13, 2007, with a decision expected in 2008. We cannot predict the outcome of these appeals.
In April 2006, Michigan'sMichigan’s governor announced a plan that would result in mercury emissions reductions of 90 percent by 2015. We are currently working with the MDEQ on the details of this rule; however, we have developed preliminary cost estimates and a mercury emissions reduction planscenario based on our best knowledge of control technology options and anticipatedinitially proposed requirements. Our plan includes
expenditures of approximately $550 million for mercury control equipment and
continuous emissions monitoring systems through 2014.

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The following table compares the federal Clean Air Mercury Rule to the proposed state mercury rule:


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                                                          CMS Energy Corporation


                        2010                  2015                  2018
                --------------------  --------------------  --------------------
State and Federal State Federal
Phase I Phase II Phase II
Federal Clean Air Mercury Rule 30% reduction by 2010 with interstate trading of allowances 70% reduction by
Mercury Rule    2010 with interstate 2018 with interstate trading of trading of
                allowances                                  allowances

                $4
$9 million in $136emission allowance purchases $17 million in capital capital plus $30$6 million annually in allowance purchases
Proposed State Mercury Rule 30% reduction by 2010 without interstate trading of allowances 90% reduction by
Mercury Rule    2010 without 2015 without interstate trading interstate trading
                of allowances         of allowances

                $4 
$198 million in $546capital $343 million in capital               capital
Routine Maintenance Classification:The EPA has alleged that some utilities have incorrectly classified plant modifications as “routine maintenance” rather than seeking permits from the EPA to modify the plant. We have received and responded to information requests from the EPA on this subject. We believe that we have properly interpreted the requirements of “routine maintenance.” If our interpretation is found to be incorrect, we may be required to install additional pollution controls at some or all of our coal-fired electric generating plants and potentially pay fines. Additionally, the viability of certain plants remaining in operation could be called into question.
Greenhouse gases:gases: Several legislative proposals have been introduced in the United States Congress that would require reductions in emissions of greenhouse gases, including carbon dioxide. On April 2, 2007, the U.S. Supreme Court ruled that the Clean Air Act gives the EPA the authority to regulate emissions of carbon dioxide and other greenhouse gases from automobiles. In its decision, the court ordered the EPA to revisit its contention that it has the discretion not to regulate greenhouse gas emissions from automobiles.
To the extent that greenhouse gas emission reduction rules come into effect, the mandatory emissions reduction requirements could have far-reaching and significant implications for the energy sector. We cannot estimate the effect of federal or state greenhouse gas policy on our future consolidated results of operations, cash flows, or financial position due to the uncertain nature of the policies at this time. However, we will continue to monitor greenhouse gas policy developments and assess and respond to their potential implications on our business operations.
Water:In March 2004, the EPA issued rules that govern electric generating plant cooling water intake systems. The rules require significant reduction in fish killed by operating equipment. EPA compliance options in the rule were challenged in court. In January 2007, the court rejected many of the compliance options favored by industry and remanded the bulk of the rule back to the EPA for reconsideration. The court'scourt’s ruling is expected to increase significantly the cost of complying with this rule. However, the cost to comply will not be known until the EPA'sEPA’s reconsideration is complete. At this time, the EPA has not established a schedule to address the court decision.
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For additional details on electric environmental matters, see Note 3, Contingencies, "Consumers'“Consumers’ Electric Utility Contingencies -— Electric Environmental Matters."

”
Competition and Regulatory Restructuring:The Customer Choice Act allows all of our electric customers to buy electric generation service from us or from an alternative electric supplier. At March 31,June 30, 2007, alternative electric suppliers were providing 283302 MW of generation service to ROA customers. This is 3 percent of our total distribution load and represents a decrease of 193 percent of ROA load compared to March 31,June 30, 2006. In prior orders, the MPSC approved recovery ofWe recover Stranded Costs incurred from 2002 through 2003 through a surcharge applied to ROA customers. If downward ROA trends continue, it maywill extend the time it takes to recover fully our Stranded Costs. It is difficult to predict future ROA customer trends, which affect our ability to recover timely ourthese Stranded Costs.


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                                                          CMS Energy Corporation

ELECTRIC RATE CASE: 
Electric Rate Case:In March 2007, we filed an application with the MPSC seeking an 11.25 percent authorized return on equity and an annual increase in revenues of $157 million. The increase includesseeks recovery of the costs associated with increased plant investment, increased equity investment, and greater operation and maintenance expenses. In May 2007, we filed supplemental testimony with the MPSC to include transaction costs from the sale of Palisades. In July 2007, we filed an amended application with the MPSC to include the proposed purchase of the Zeeland power plant, the approval of an energy efficiency program, and to make other revisions. The revised application seeks an annual increase in revenues of $282 million.
In July 2007, we also filed a $23 million basemotion for partial and immediate rate reduction,relief that seeks the additionremoval of costs associated with Palisades, the approval of partial and immediate rate relief for certain items, including the proposed purchase of the Zeeland power plant, and the approval of a $13plan to distribute $127 million surchargeof excess proceeds from the sale of Palisades to customers. The case schedule will allow for an MPSC order on our Zeeland request and on our request for partial and immediate rate relief by the return on investmentsend of 2007 and a final rate order in Big Rock,
and the elimination of $167 million Palisades base rate recovery credit in the
PSCR. If approved as requested, the rate requests would go into effect in
January 2008 and would apply to all retail electric customers.mid-2008. We cannot predict the amount or timing of any MPSC decision on the requests.
For additional details and material changes relating to the restructuring of the electric utility industry and Consumers' Electric Utility Rate Matters,electric rate matters, see Note 3, Contingencies, "Consumers'“Consumers’ Electric Utility Rate Matters."

”
OTHER ELECTRIC UTILITY BUSINESS UNCERTAINTIES

THE
The MCV PARTNERSHIP: Partnership:The MCV Partnership, which leases and operates the MCV Facility, contracted to sell electricity to Consumers for a 35-year period beginning in 1990.
Underrecoveries related to the MCV PPA:The cost that we incur under the MCV PPA exceeds the recovery amount allowed by the MPSC. As a result, we estimate cash underrecoveries of capacity and fixed energy payments of $39 million in 2007. However, we use the direct savings from the RCP, after allocating a portion to customers, to offset a portion of our capacity and fixed energy underrecoveries expense. After September 15, 2007, we expect to claim relief under the regulatory outregulatory-out provision in the MCV PPA, thereby limiting our capacity and fixed energy payments to the MCV Partnership to the amounts that we collect from our customers. This action would eliminate our underrecoveries of capacity and fixed energy payments.
The MCV Partnership has notified us that it takes issue withopposes our intended exercise of the regulatory outregulatory-out provision after September 15, 2007. We believe that the provision is valid and fully effective, but cannot assure that itwe will prevail in the event of a dispute. If we are successful in exercising the regulatory outregulatory-out provision, the MCV Partnership may, under certain circumstances, have the right to terminate or reduce the amount of capacity sold under the MCV PPA. If the MCV Partnership terminates the MCV PPA or reduces the amount of capacity sold under the MCV PPA, we would seek to replace the lost capacity to maintain an
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adequate electric reserve margin. This could involve entering into a new PPA and (or) entering into electric capacity contracts on the open market. We cannot predict our ability to enter into such contracts at a reasonable price. We are also unable to predict regulatory approval of the terms and conditions of such contracts, or that the MPSC would allow full recovery of our incurred costs.
To comply with a prior MPSC order, we made a filing in May 2007 with the MPSC, which asked the MPSC to make a determination regarding whether it wished to reconsider the amount of the MCV PPA payments that we recover from customers. Also, in May 2007, the MCV Partnership filed an application with the MPSC seeking approval to increase our recovery of costs incurred under the MCV PPA. We are unable to predict the outcome of this request.these requests. For additional details on the MCV Partnership, see Note 3, Contingencies, "Other Consumers'“Other Consumers’ Electric Utility Contingencies -— The MCV PPA."

NUCLEAR MATTERS: ”
Sale of Nuclear Assets:In April 2007, we sold Palisades to Entergy for $380 million. The final purchase price wasis subject to various closing adjustments resulting in us receiving $361 million.$364 million as of June 30, 2007. We also paid Entergy $30 million to assume ownership and responsibility for the Big Rock ISFSI. Because of the sale of Palisades, we will also paypaid the NMC, the former operator of the Palisades, plant, $7 million in exit fees and will forfeitforfeited our $5 million investment in the NMC of $5 million.


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                                                          CMS Energy Corporation

NMC.
The MPSC order approving the Palisades transaction allowsallowed us to recover the book value of the Palisades plant.Palisades. This will resultresults in us refunding estimated proceeds in excess proceedsof book value of $66 million being credited to our customers through refundscredits applied over the
remainder offrom June 2007 andthrough December 2008. FinalThe final proceeds in excess of the book value are subject to closing adjustments and review by the MPSC. The MPSC order deferred ruling on the recovery of $30 million in estimated transaction costs, including the NMC exit fees, and the $30 million payment to Entergy related to the Big Rock ISFSI until the next general rate case.
Entergy will assumeassumed responsibility for the future decommissioning of the plantPalisades and for storage and disposal of spent nuclear fuel located at the Palisades and the Big Rock ISFSI sites. We transferred $252 million in trust fund assets to Entergy. EstimatedWe are refunding estimated excess decommissioning funds of $189 million will be credited to our retail customers through refundscredits applied overfrom June 2007 through December 2008. Access to additional decommissioning fund balances above the remainderestimates in the MPSC order resulted in excess decommissioning funds of 2007$122 million. We have proposed a plan to refund these balances to our retail customers and 2008.
Final disposition of these fundsthis plan is subject to closing date balances and is
subject tounder review by the MPSC. The disposition of the remaining decommissioning
funds is subject to review by the MPSC.

MPSC in our current electric rate case filing.
As part of the transaction, Entergy will sell us 100 percent of the plant'splant’s output up to its current annual average capacity of 798 MW under a 15-year power purchase agreement. Because of the Palisades power purchase agreement the
transaction is a lease for accounting purposes. Due toand our continuing involvement with the Palisades assets, we will account for the disposal of Palisades plant as a financing for accounting purposes and not a sale. This will resultresulted in the recognition of a finance obligation.

obligation of $197 million.
For additional details on the sale of Palisades and the Big Rock ISFSI, see Note 3, Contingencies, "Other Consumers' Electric Utility Contingencies - The Sale of
Nuclear Assets2, Asset Sales, Discontinued Operations and the Palisades Power Purchase Agreement."

Impairment Charges.
CMS-27
CMS Energy Corporation
GAS UTILITY BUSINESS OUTLOOK

GROWTH: 
Growth:In 2007, we project gas deliveries will decline slightly, on a weather-adjusted basis, from 2006 levels due to continuing conservation and overall economic conditions in the state of Michigan. Over the next five years, we expect gas deliveries to decline by less than one-half of one percent annually. Actual gas deliveries in future periods may be affected by:

     -    fluctuations in weather conditions,

     -    use by independent power producers,

     -    competition in sales and delivery,

     -    changes in gas commodity prices,

     -    Michigan economic conditions,

     -    the price of competing energy sources or fuels,

     -    gas consumption per customer,

     -    improvements in gas appliance efficiency, and

     -    use of a Revenue Decoupling and Conservation Incentive mechanism.

• fluctuations in weather conditions,
• use by independent power producers,
• competition in sales and delivery,
• changes in gas commodity prices,
• Michigan economic conditions,
• the price of competing energy sources or fuels,
• gas consumption per customer,
• improvements in gas appliance efficiency, and
• use of a Revenue Decoupling and Conservation Incentive mechanism.
GAS UTILITY BUSINESS UNCERTAINTIES
Several gas business trends or uncertainties may affect our future financial results and financial condition. These trends or uncertainties could have a material impact on future revenues or income from gas operations.

GAS ENVIRONMENTAL ESTIMATES: 
Gas Environmental Estimates:We expect to incur investigation and remedial action costs at a number of sites, including 23 former manufactured gas plant sites. For additional details, see Note 3, Contingencies, "Consumers'“Consumers’ Gas Utility Contingencies -— Gas Environmental Matters."


                                     CMS-23



                                                          CMS Energy Corporation

GAS COST RECOVERY: ”
Gas Cost Recovery:The GCR process is designed to allow us to recover all of our purchased natural gas costs if incurred under reasonable and prudent policies and practices. The MPSC reviews these costs, policies, and practices for prudency in annual plan and reconciliation proceedings. For additional details on gas cost recovery, see Note 3, Contingencies, "Consumers'“Consumers’ Gas Utility Rate Matters -– Gas Cost Recovery."

GAS DEPRECIATION: We are required to file”
Gas Depreciation:In June 2007, the MPSC issued its final order in the generic ARO accounting case and modified the filing requirement for our next gas depreciation case with
the MPSC withincase. The original filing requirement date was changed from 90 days after the MPSC issuance of this order to no later than August 1, 2008. Additionally, we have been ordered to use 2007 data and prepare a final order incost of removal depreciation study with five alternatives using the pending
case related to ARO accounting. We cannot predict when the MPSC will issue a
final order in the ARO accounting case.

MPSC’s prescribed methods.
If a final order in our next gas depreciation case is not issued concurrently with a final order in a general gas rate case, the MPSC may incorporate the results of the depreciation case into general gas rates through use of a surcharge mechanism (which may be either positive or negative).
2007 GAS RATE CASE: Gas Rate Case:In February 2007, we filed an application with the MPSC seeking an 11.25 percent authorized return on equity along with an $88 million annual increase in our gas delivery and transportation rates, of which $17
million would be contributed to a low income energy efficiency fund.rates. We have proposed the use of a Revenue Decoupling and Conservation Incentive Mechanism for residential and general service rate classes, to help assure a reasonable
opportunitywhich partially separates the collection of fixed costs from gas sales and enhances the utility’s ability to recover its fixed costs regardless.
CMS-28
CMS Energy Corporation
The MPSC Staff and intervenors filed testimony on July 20, 2007. In its testimony, the MPSC Staff recommended a 10.5 percent authorized return on equity with a $35 million annual increase in our gas delivery and transportation rates. The schedule established by the MPSC for processing this case could allow for a final order by the end of sales levels.

2007.
ENTERPRISES OUTLOOK
Our primary focus with respect to our non-utility businesses is to optimize cash flow and further reduce our business risk and leverage through the sale of non-strategic assets. In 2007, we intend to complete the sale of several
Enterprises assets, including all of our businesses in Latin America, the Middle
East, North Africa and India.

In February 2007, we entered into an Agreement of Purchase and Sale with TAQA to
sell our ownership interest in businesses in the Middle East, Africa, and India
for $900 million. Businesses included in the sale are Taweelah, Shuweihat, Jorf
Lasfar, Jubail, Neyveli, and Takoradi and are subject to the receipt of all
necessary governmental, lender and partner approvals. 
We closed on the sale in
May 2007. After considering the effects of taxes, post-closing adjustments, and
closing costs, we anticipate a gain of approximately $50 million. The estimated
gain is also subject to a number of adjustments that will occur at or shortly
after closing.

In March 2007, we completed the sale of a portfolio of our businesses in Argentina and our northern Michigan non-utility natural gas assets to Lucid Energy for $130 million. million in March 2007.
In connection with the sale of our Argentine and Michigan assets, we entered into agreements that grant Lucid Energy:
• an option to buy CMS Gas Transmission’s ownership interest in TGN, subject to the rights of other third parties,
• the right to a portion of proceeds that may be awarded and received by CMS Gas Transmission in connection with certain legal proceedings, and
• the right to all of the proceeds that Enterprises will receive if it sells its stock interest in CMS Generation San Nicolas Company.
Under these agreements, we have essentially sold our rights to certain awards or proceeds that we may receive in the future. A portion of the consideration received in the sale has been allocated to these agreements. We have recorded $32 million as a deferred credit in Other Non-current Liabilities on our Consolidated Balance Sheets.
We also sold our interest in El Chocon, an Argentine hydroelectric generating business, to Endesa, S.A. for $50 million. Ourmillion in March 2007.
We sold our ownership interest in El Chocon was originally part of the asset group that Lucid Energy agreedSENECA and certain associated generating equipment to
purchase; however, Endesa, S.A. had a right of first offer on our interest in El
Chocon that it exercised. We will maintain our interest in the TGN natural gas
business in Argentina, which remains subject to a potential sale to the
government of Argentina or some other disposition. In recognition of our
commitment to sell our 23.5 percent interest in TGN, in the first quarter of
2007 we recorded an after-tax impairment charge of $140 million, which consisted
of a reduction in the fair value of our TGN ownership interest of $12 million,
net of tax, and recognition of cumulative foreign currency translation losses of
$128 million, net of tax.

In April 2007, we entered into a purchase and sale agreement with Petroleos de Venezuela, S.A., which is owned by the Bolivarian Republic of Venezuela, to sell
our ownership interest in SENECA and certain associated generating equipment for gross cash proceeds of $106 million. We closed on the salemillion in April 2007.

In April 2007, we entered into an agreement to sell CMS Energy Brasil S.A. for
$211 million to CPFL Energia S.A., a Brazilian utility. 
We expect to close on
the sale by the end of the second quarter of 2007, subject to approval by the
Brazilian national regulatory agency.


                                     CMS-24


                                                          CMS Energy Corporation

We anticipate gross proceeds from the sales of SENECA, CMS Energy Brasil S.A.
andsold our ownership interest in businesses in the Middle East, Africa, and India to total approximately $1.217 billion. The book valueTAQA for $900 million in May 2007. Gross proceeds from the sale were $792 million in cash and TAQA’s assumption of these assets at March
31,$108 million in debt. Businesses included in the sale were Taweelah, Shuweihat, Jorf Lasfar, Jubail, Neyveli, and Takoradi.
In June 2007, is approximately $932we sold CMS Energy Brasil S.A. to CPFL Energia S.A., a Brazilian utility, for $211 million, which includesincluded $201 million in cash proceeds and CPFL Energia S.A.’s assumption of a cumulative net foreign
currency translation loss of $63 million. The asset book values will vary
between March 31, 2007 and each transaction's closing date. Final book value is
dependent upon the timing of closing, results of operations for certain of the
assets up to closing, and other factors.

$10 million tax liability.
We also announced plans to conductentered into an auctionagreement to sell our investment in GasAtacama combined
gas pipeline and power generation businessesto Endesa S.A. for gross cash proceeds of $80 million in Argentina and Chile, andJuly 2007. We closed on the sale of GasAtacama in August 2007.
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CMS Energy Corporation
We entered into an agreement to sell our electric generating plantinvestment in Jamaica.Jamaica to AEI for gross cash proceeds of $14 million in June 2007. We expect to completeclose on the sale of these
businesses by the end of 2007.
For additional details, see Note 2, Asset Sales, Discontinued Operations and Impairment Charges.

UNCERTAINTIES: 
Uncertainties:Trends or uncertainties that could have a material impact on our consolidated income, cash flows, or balance sheet and credit improvement include:

     -    successful close of the sale of CMS Energy Brasil S.A.,

     -    the outcome of the planned sale of other generation and distribution
          assets, including the following uncertainties which could affect the
          value of certain of these businesses:

               -    changes in available gas supplies or Argentine government
                    regulations that could further restrict natural gas exports
                    to our GasAtacama electric generating plant,

               -    changes in exchange rates or in local economic or political
                    conditions, and

               -    changes in foreign taxes or laws or in governmental or
                    regulatory policies that could reduce significantly the
                    tariffs charged and revenues recognized by certain foreign
                    subsidiaries, or increase expenses,

     -    impact of indemnity and environmental remediation obligations at Bay
          Harbor,

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

     -    impact of representations, warranties, and related indemnities in
          connection with the sales of SENECA, Argentine assets to Lucid Energy,
          CMS Energy Brasil S.A., and other pending sales if completed and
          closed.

GASATACAMA: At March 31, 2007, the carrying value of our investment in
GasAtacama was $114 million. This remaining value continues to be exposed to the
threat of a complete gas restriction by Argentina and the inability of
GasAtacama to pass through the increased costs associated with such a
restriction to its regulated customers. Therefore, if conditions do not improve,
the result could be a further impairment of our investment in GasAtacama.

In February 2007, we announced plans to conduct an auction to sell GasAtacama.
We expect to complete the sale by the end of 2007. For additional details, see
Note 2, Asset Sales, Discontinued Operations and Impairment Charges.


                                     CMS-25



                                                          CMS Energy Corporation

PRAIRIE STATE: 
• the outcome of the planned sale of other generation assets,
• impact of indemnity and environmental remediation obligations at Bay Harbor,
• 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,
• impact of representations, warranties, and related indemnities in connection with the sales of our Middle East, Africa and India businesses to TAQA, SENECA, Argentine assets to Lucid Energy, CMS Energy Brasil S.A., GasAtacama, and other pending sales if completed and closed, and
• outcome of certain legal proceedings, including a proceeding before an international arbitration panel in which Argentina is seeking to annul a prior arbitration result awarding damages to CMS Energy.
Prairie State:In October 2006, we signed agreements with Peabody Energy to co-develop the Prairie State Energy Campus (Prairie State), a 1,600 MW power plant and coal mine in southern Illinois. In April 2007, we withdrew from Prairie State because at this time, it doesdid not meet our investment criteria, including the level of power purchase agreements for our share of output from Prairie State.

OTHER OUTLOOK

RULES REGARDING BILLING PRACTICES: In December 2006, the MPSC issued proposed
rule changes to residential customer billing standards
Other Outlook
Litigation and practices. These
changes, if adopted, would provide additional protection to low-income customers
during the winter heating season that will be defined as November 1 through
March 31, extend the time between billing date and due date from 17 days to 22
days, and eliminate estimated metering readings unless actual readings are not
feasible. We are presently evaluating the impacts of these proposed rules and
are working with other Michigan utilities in providing comments to the MPSC
regarding the proposed rule changes.

LITIGATION AND REGULATORY INVESTIGATION: Regulatory Investigation:We are the subject of an investigation by the DOJ regarding round-trip trading transactions by CMS MST. Also, we are named as a party in various litigation matters including, but not limited to, securities class action lawsuits and several lawsuits regarding alleged false natural gas price reporting and price manipulation. Additionally, the SEC is investigating the actions of former CMS Energy subsidiaries in relation to Equatorial Guinea. For additional details regarding these and other matters, see Note 3, Contingencies and Part II, Item 1. Legal Proceedings.

FIXED PRICE CONTRACTS: 
Fixed Price Contracts:DIG and CMS ERM are parties to long-term requirements contracts to provide steam and/orand (or) electricity based on a fixed price schedule. The price of natural gas, the primary fuel used by DIG, is volatile and has increased substantially in recent years. Because the prices charged under DIG'sDIG’s contracts do not reflect current natural gas prices, DIG'sDIG’s and CMS ERM'sERM’s financial performance has been impacted negatively. However, since not all of its capacity is committed under these contracts, DIG has been able to sell a portion of its electric capacity and (or) energy on the market at a profit, or, through CMS ERM, engage in a hedging strategy to minimize its losses. DIG and CMS ERM may take various actions such as seeking restructuring or buyout of the contracts.contracts, which may require material cash payments. CMS Energy may also take other measures to address the unfavorable returns.

PENSION REFORM: 
Michigan Business Tax Act:In August 2006,July 2007, the PresidentMichigan governor signed into lawSenate Bill 94, the Pension
ProtectionMichigan Business Tax Act, which imposes a business income tax of 2006.4.95 percent and a modified gross receipts tax of 0.8 percent. The bill reformsprovides for a number of tax credits and incentives, geared towards those companies investing and employing in Michigan. The Michigan Business Tax, which is effective January 1, 2008, replaces the funding rulesstate’s current Single Business Tax that expires on December 31, 2007. We are currently evaluating the impact this new tax will have on us. We do not expect an increase to our State tax
CMS-30
CMS Energy Corporation
liability. Absent any State legislative or regulatory action, however, we may need to record a material non-cash deferred tax charge for employer-provided
pension plans, effectivethis new tax.
Implementation of New Accounting Standards
SFAS No. 158, Employers’ Accounting for plan years beginning after 2007. As a resultDefined Benefit Pension and Other Postretirement Plans - - an amendment of this bill, we expect to reduce our contributions to the Pension Plan over the
next 10 years by a present value amount of $56 million.

IMPLEMENTATION OF NEW ACCOUNTING STANDARDS

SFAS NO. 158, EMPLOYERS' ACCOUNTING FOR DEFINED BENEFIT PENSION AND OTHER
POSTRETIREMENT PLANS - AN AMENDMENT OF FASB STATEMENTS NO.Statements No. 87, 88, 106, ANDand 132(R):In September 2006, the FASB issued SFAS No. 158. Phase one of this standard required us to recognize the funded status of our defined benefit postretirement plans on our Consolidated Balance Sheets at December 31, 2006. Phase one was implemented in December 2006. Phase two of this standard requires that we change our plan measurement date from November 30 to December 31, effective December 31, 2008. We do not believe that implementation of phase two of this standard will have a material effect on our consolidated financial statements. We expect to adopt the measurement date provisions of SFAS No. 158 in 2008.
FIN 48, ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES: Accounting for Uncertainty in Income Taxes:We adopted the provisions of FIN 48 on January 1, 2007. This interpretation provides a two-step approach for the recognition and measurement of


                                     CMS-26



                                                          CMS Energy Corporation uncertain tax positions taken, or expected to be taken, by a company on its income tax returns. The first step is to evaluate the tax position to determine if, based on management'smanagement’s best judgment, it is greater than 50 percent likely that we will sustain the tax position. The second step is to measure the appropriate amount of the benefit to recognize. This is done by estimating the potential outcomes and recognizing the greatest amount that has a cumulative probability of at least 50 percent. FIN 48 requires interest and penalties, if applicable, to be accrued on differences between tax positions recognized in our consolidated financial statements and the amount claimed, or expected to be claimed, on the tax return.
As a result of the implementation of FIN 48, we have identified additional uncertain tax benefits of $11 million as of January 1, 2007. Included in this amount is an increase in our valuation allowance of $100 million, decreases to tax reserves of $61 million and a decrease to deferred tax liabilities of $28 million. In addition, our equity method investment, Jorf Lasfar, in which we
held a 50 percent interest, identified $26 million of uncertain tax benefits in
its adoption of FIN 48 for U.S. GAAP purposes. We have reflected our share of
this amount, $13 million, as a reduction to our beginning retained earnings
balance and in our investment in the subsidiary. Thus, our beginning retained
earnings was reduced by $24 million as a result of the adoption of FIN 48.

CMS Energy and its subsidiaries file a consolidated U.S. federal income tax return as well as unitary and combined income tax returns in several states. CMS Energy and its subsidiaries also file separate company income tax returns in several states. The only significant state tax paid by CMS Energy is in Michigan. However, since the Michigan Single Business Tax is not an income tax, it is not part of the FIN 48 analysis. For the U.S. federal income tax return, CMS Energy completed examinations by federal taxing authorities for its taxable years prior to 2002. The federal income tax returns for the years 2002 through 2005 are open under the statute of limitations.
We have reflected a net interest liability of $3 million related to our uncertain income tax positions on our Consolidated Balance Sheets as of January 1, 2007. We have not accrued any penalties with respect to uncertain tax benefits. We recognize accrued interest and penalties, where applicable, related to uncertain tax benefits as part of income tax expense.
As of the date of adoption of FIN 48, we had valuation allowances against certain U.S. and foreign deferred tax assets totaling $216 million and other uncertain tax positions of $31 million, resulting in total unrecognized benefits of $247 million. Of this amount, $217 million would result in a decrease in our effective tax rate, if recognized. We released $81 million of our valuation allowance in the first quarter of 2007, reducing our effective tax rate, due to the anticipated sales of our foreign investments,investments. During the second quarter of 2007, we reversed $63 million of valuation allowance attributable to additional foreign asset sales. This reversal had no income impact, as reflected in our effectivean identical amount of deferred tax rate reconciliation in
Note 8, Income Taxes. Therefore, remaining uncertain tax benefits that would
reduce our effective tax rate beyond this quarter are $136 million.asset was also
CMS-31
CMS Energy Corporation
reversed. As we continue to market our foreign investments, it is reasonably possible that additional valuation allowance adjustments could be made. We are not in a
position to estimate any additional adjustment at this date, other than to state
that we have no expectation of reversing any of the $86 million valuation
allowance attributable to the inflation indexing of our Venezuelan investment.
We are not expecting any other material changes to our uncertain tax positions.

NEW ACCOUNTING STANDARDS NOT YET EFFECTIVE

New Accounting Standards Not Yet Effective
SFAS NO.No. 157, FAIR VALUE MEASUREMENTS: Fair Value Measurements:In September 2006, the FASB issued SFAS No. 157, effective for us January 1, 2008. The standard provides a revised definition of "fair value"“fair value” and gives guidance on how to measure the fair value of assets and liabilities. Under the standard, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly exchange between market participants. The standard does not expand the use of fair value in any new circumstances. However, additional disclosures will be required on the impact and reliability of fair value measurements reflected in CMS-27



                                                          CMS Energy Corporation

our consolidated financial statements. The standard will also eliminate the existing prohibition of recognizing "day one"“day one” gains or losses on derivative instruments, and will generally require such gains and losses to be recognized through earnings. We are presently evaluating the impacts, if any, of implementing SFAS No. 157. We currently do not hold any derivatives that would involve day one gains or losses.
SFAS NO.No. 159, THE FAIR VALUE OPTION FOR FINANCIAL ASSETS AND FINANCIAL
LIABILITIES, INCLUDING AN AMENDMENT TOThe Fair Value Option for Financial Assets and Financial Liabilities, Including an amendment to FASB STATEMENT NO.Statement No. 115:In February 2007, the FASB issued SFAS No. 159, effective for us January 1, 2008. This standard will give us the option to select certain financial instruments and other items, which otherwise are not required to be measured at fair value, and measure those items at fair value. If we choose to elect the fair value option for an item, we would recognize unrealized gains and losses associated with changes in the fair value of the item over time. The statement will also require disclosures for items for which the fair value option has been elected. We are presently evaluating whether we will choose to elect the fair value option for any financial instruments or other items.


                                     CMS-28
FSP FIN 39-1,Amendment of FASB Interpretation No. 39:In April 2007, the FASB issued FSP FIN 39-1, effective for us January 1, 2008. This standard will permit us to offset the fair value of derivative instruments with cash collateral received or paid for those derivative instruments executed with the same counterparty under a master netting arrangement. As a result, we will be permitted to record one net asset or liability that represents the total net exposure of all derivative positions under a master netting arrangement. The decision to offset derivative positions under master netting arrangements remains an accounting policy choice. We presently record the net fair value of derivative assets and liabilities for those contracts held by CMS ENERGY CORPORATION
                    CONSOLIDATED STATEMENTS OF INCOME (LOSS)
                                   (UNAUDITED)


                                                                     In Millions
                                                              ------------------
THREE MONTHS ENDED MARCH 31                                     2007      2006
- ---------------------------                                   -------   --------

OPERATING REVENUE                                             $ 2,237   $ 1,937

EARNINGS FROM EQUITY METHOD INVESTEES                              19        36

OPERATING EXPENSES
   Fuel for electric generation                                    98       182
   Fuel costs mark-to-market at the MCV Partnership                --       156
   Purchased and interchange power                                332       134
   Cost of gas sold                                             1,045       946
   Other operating expenses                                       264       266
   Maintenance                                                     62        74
   Depreciation and amortization                                  161       158
   General taxes                                                   80        76
   Asset impairment charges                                       242        --
                                                              -------   -------
                                                                2,284     1,992
                                                              -------   -------
OPERATING LOSS                                                    (28)      (19)

OTHER INCOME (DEDUCTIONS)
   Gain on asset sales, net                                        12        --
   Interest and dividends                                          17        17
   Regulatory return on capital expenditures                        8         3
   Other income                                                     3         7
   Other expense                                                   (3)      (11)
                                                              -------   -------
                                                                   37        16
                                                              -------   -------
FIXED CHARGES
   Interest on long-term debt                                     101       116
   Interest on long-term debt - related parties                     3         4
   Other interest                                                   6         7
   Capitalized interest                                            (3)       (2)
   Preferred dividends of subsidiaries                              1         1
                                                              -------   -------
                                                                  108       126
                                                              -------   -------
LOSS BEFORE MINORITY INTERESTS                                    (99)     (129)

MINORITY INTERESTS (OBLIGATIONS), NET                               2       (69)
                                                              -------   -------
LOSS BEFORE INCOME TAXES                                         (101)      (60)

INCOME TAX BENEFIT                                                (70)      (28)
                                                              -------   -------
LOSS FROM CONTINUING OPERATIONS                                   (31)      (32)

INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF TAX (TAX
   BENEFIT) OF $(68) IN 2007 AND $1 IN 2006                      (180)        8
                                                              -------   -------
NET LOSS                                                         (211)      (24)
PREFERRED DIVIDENDS                                                 3         3
REDEMPTION PREMIUM ON PREFERRED STOCK                               1        --
                                                              -------   -------

NET LOSS AVAILABLE TO COMMON STOCKHOLDERS                     $  (215)  $   (27)
                                                              =======   =======


THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.


                                     CMS-29


                                                      In Millions, Except
                                                       Per Share Amounts
                                                      -------------------
THREE MONTHS ENDED MARCH 31                              2007     2006
- ---------------------------                             ------   ------

CMS ENERGY
   NET LOSS
      Net Loss Available to Common Stockholders         $ (215)  $  (27)
                                                        ======   ======
   BASIC EARNINGS (LOSS) PER AVERAGE COMMON SHARE
      Loss from Continuing Operations                   $(0.16)  $(0.16)
      Gain (Loss) from Discontinued Operations           (0.81)    0.04
                                                        ------   ------
      Net Loss Attributable to Common Stock             $(0.97)  $(0.12)
                                                        ======   ======
   DILUTED EARNINGS (LOSS) PER AVERAGE COMMON SHARE
      Loss from Continuing Operations                   $(0.16)  $(0.16)
      Gain (Loss) from Discontinued Operations           (0.81)    0.04
                                                        ------   ------
      Net Loss Attributable to Common Stock             $(0.97)  $(0.12)
                                                        ======   ======
   DIVIDENDS DECLARED PER COMMON SHARE                  $ 0.05   $   --
                                                        ------   ------


THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.


                                     CMS-30



                             CMS ENERGY CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)


                                                                   In Millions
                                                                  -------------
THREE MONTHS ENDED MARCH 31                                        2007    2006
- ---------------------------                                       -----   -----

CASH FLOWS FROM OPERATING ACTIVITIES
   Net loss                                                       $(211)  $ (24)
      Adjustments to reconcile net loss to net cash
         provided by operating activities
         Depreciation and amortization (includes
            nuclear decommissioning of $1 per period)               162     162
         Deferred income taxes and investment tax credit           (143)    (29)
         Minority interests (obligations), net                      (15)    (68)
         Asset impairment charges                                   242      --
         Fuel costs mark-to-market at the MCV Partnership            --     156
         Regulatory return on capital expenditures                   (8)     (3)
         Capital lease and other amortization                        10      11
         Loss on the sale of assets                                 267      --
         Earnings from equity method investees                      (19)    (36)
         Cash distributions from equity method investees             13      21
         Changes in other assets and liabilities:
            Increase in accounts receivable and accrued
               revenues                                            (466)   (176)
            Decrease (increase) in accrued power supply and gas
               revenue                                               27     (26)
            Decrease in inventories                                 517     377
            Decrease in accounts payable                             (2)   (149)
            Decrease in accrued taxes                               (50)    (50)
            Decrease in accrued expenses                            (52)    (13)
            Decrease in the MCV Partnership gas supplier funds
               on deposit                                            --     (90)
            Decrease in other current and non-current assets         65      96
            Increase (decrease) in other current and
               non-current liabilities                              (22)     12
                                                                  -----   -----
            Net cash provided by operating activities               315     171
                                                                  -----   -----
CASH FLOWS FROM INVESTING ACTIVITIES
   Capital expenditures (excludes assets placed under capital
      lease)                                                       (220)   (129)
   Cost to retire property                                           (5)    (19)
   Restricted cash and restricted short-term investments             18     127
   Investments in nuclear decommissioning trust funds                (1)    (17)
   Proceeds from nuclear decommissioning trust funds                  2       4
   Maturity of the MCV Partnership restricted investment
      securities held-to-maturity                                    --      28
   Purchase of the MCV Parnership restricted investment
      securities held-to-maturity                                    --     (26)
   Proceeds from sale of assets                                     180      --
   Cash relinquished from sale of assets                            (46)     --
   Deposit on pending asset sale                                     75      --
   Other investing                                                    3      (4)
                                                                  -----   -----
            Net cash provided by (used in) investing activities       6     (36)
                                                                  -----   -----
CASH FLOWS FROM FINANCING ACTIVITIES

   Proceeds from notes, bonds, and other long-term debt              15      13
   Issuance of common stock                                           7       2
   Retirement of bonds and other long-term debt                     (30)   (226)
   Redemption of preferred stock                                    (32)     --
   Payment of common stock dividends                                (11)     --
   Payment of preferred stock dividends                              (3)     (3)
   Payment of capital lease and financial lease obligations          (2)     (3)
   Debt issuance costs, financing fees, and other                    (1)     (8)
                                                                  -----   -----
            Net cash used in financing activities                   (57)   (225)
                                                                  -----   -----
EFFECT OF EXCHANGE RATES ON CASH                                      1       1
                                                                  -----   -----
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                265     (89)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                      351     847
                                                                  -----   -----
CASH AND CASH EQUIVALENTS, END OF PERIOD                          $ 616   $ 758
                                                                  =====   =====


THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.


                                     CMS-31


                             CMS ENERGY CORPORATION
                           CONSOLIDATED BALANCE SHEETS


                                                              In Millions
                                                        ------------------------
                                                         MARCH 31
                                                           2007      DECEMBER 31
ASSETS                                                 (UNAUDITED)       2006
- ------                                                 -----------   -----------

PLANT AND PROPERTY (AT COST)
   Electric utility                                      $ 8,583       $ 8,504
   Gas utility                                             3,283         3,273
   Enterprises                                               533           552
   Other                                                      31            31
                                                         -------       -------
                                                          12,430        12,360
   Less accumulated depreciation, depletion,
     and amortization                                      5,286         5,233
                                                         -------       -------
                                                           7,144         7,127
   Construction work-in-progress                             759           646
                                                         -------       -------
                                                           7,903         7,773
                                                         -------       -------

INVESTMENTS
   Enterprises                                               510           588
   Other                                                      11            10
                                                         -------       -------
                                                             521           598
                                                         -------       -------

CURRENT ASSETS
   Cash and cash equivalents at cost, which
      approximates market                                    577           263
   Restricted cash at cost, which approximates
      market                                                  65            71
   Accounts receivable, notes receivable and accrued
      revenue, less allowances of $22 and $29,
      respectively                                           998           575
   Accrued power supply and gas revenue                      129           156
   Accounts receivable and notes receivable -
      related parties                                         74            63
   Inventories at average cost
      Gas in underground storage                             619         1,129
      Materials and supplies                                  93            87
      Generating plant fuel stock                            112           126
   Assets held for sale                                      113           189
   Price risk management assets                               22            45
   Regulatory assets - postretirement benefits                19            19
   Deferred income taxes                                     151           155
   Deferred property taxes                                   131           150
   Prepayments and other                                     112           115
                                                         -------       -------
                                                           3,215         3,143
                                                         -------       -------

NON-CURRENT ASSETS
   Regulatory Assets
      Securitized costs                                      502           514
      Postretirement benefits                              1,111         1,131
      Customer Choice Act                                    179           190
      Other                                                  506           497
   Nuclear decommissioning trust funds                       606           602
   Assets held for sale                                      160           280
   Price risk management assets                               17            19
   Goodwill                                                   26            26
   Notes receivable                                          138           137
   Notes receivable - related parties                        114           125
   Other                                                     279           336
                                                         -------       -------
                                                           3,638         3,857
                                                         -------       -------
TOTAL ASSETS                                             $15,277       $15,371
                                                         =======       =======
ERM that are subject to master netting arrangements, and separately record amounts for cash collateral received or paid for these instruments. Under this standard, as a result of offsetting the collateral amounts against the fair value of derivative assets and liabilities, both our total assets and total liabilities could be reduced. The standard is to be applied retrospectively by adjusting the financial statements for all periods presented. There will be no impact to earnings from adopting this standard.
EITF Issue 06-11, Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards: In June 2007, the FASB ratified EITF Issue 06-11, effective for us on a prospective basis beginning January 1, 2008. EITF 06-11 requires companies to recognize the income tax benefit realized from dividends or dividend equivalents that are charged to retained earnings and paid to employees for non-vested equity-classified employee share-based payment awards as an increase to additional paid-in capital. We do not believe that implementation of this standard would have a material effect on our financial statements.
CMS-32
                                                              In Millions
                                                        ------------------------
                                                         MARCH 31
                                                           2007      DECEMBER 31
STOCKHOLDERS' INVESTMENT AND LIABILITIES               (UNAUDITED)       2006
- ----------------------------------------               -----------   -----------

CAPITALIZATION
   Common stockholders' equity
      Common stock, authorized 350.0 shares;
         outstanding 224.2 shares and
         222.8 shares, respectively                     $      2      $      2
      Other paid-in capital                                4,468         4,468
      Accumulated other comprehensive loss                  (192)         (318)
      Retained deficit                                    (2,168)       (1,918)
                                                        --------      --------
                                                           2,110         2,234
   Preferred stock of subsidiary                              44            44
   Preferred stock                                           250           261
   Long-term debt                                          6,032         6,202
   Long-term debt - related parties                          178           178
   Non-current portion of capital lease obligations           52            42
                                                        --------      --------
                                                           8,666         8,961
                                                        --------      --------

MINORITY INTERESTS                                            85            77
                                                        --------      --------

CURRENT LIABILITIES
   Current portion of long-term debt and capital
      leases                                                 722           564
   Notes payable                                               1             2
   Accounts payable                                          494           499
   Accrued rate refunds                                        5            37
   Accounts payable - related parties                          1             2
   Accrued interest                                          105           126
   Accrued taxes                                             295           312
   Liabilities held for sale                                  65           101
   Price risk management liabilities                          49            70
   Legal settlement liability                                200           200
   Other                                                     247           243
                                                        --------      --------
                                                           2,184         2,156
                                                        --------      --------

NON-CURRENT LIABILITIES
   Regulatory Liabilities
      Regulatory liabilities for cost of removal           1,200         1,166
      Income taxes, net                                      547           539
      Other regulatory liabilities                           240           249
   Postretirement benefits                                 1,074         1,066
   Deferred income taxes                                     107           111
   Deferred investment tax credit                             61            62
   Asset retirement obligation                               508           498
   Liabilities held for sale                                  31            39
   Price risk management liabilities                          24            31
   Argentine currency impairment reserve                     197            --
   Other                                                     353           416
                                                        --------      --------
                                                           4,342         4,177
                                                        --------      --------
COMMITMENTS AND CONTINGENCIES (Notes 3, 4 and 6)

TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES          $ 15,277      $ 15,371
                                                        ========      ========


THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.


                                     CMS-33



                             CMS ENERGY CORPORATION
             CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
                                   (UNAUDITED)

                                                              In Millions
                                                        ------------------------
THREE MONTHS ENDED MARCH 31                                2007          2006
- ---------------------------                            -----------   -----------

COMMON STOCK
   At beginning and end of period                        $     2       $     2
                                                         -------       -------
OTHER PAID-IN CAPITAL
   At beginning of period                                  4,468         4,436
   Common stock issued                                        13             8
   Common stock reissued                                       6             1
   Redemption of preferred stock                             (19)           --
                                                         -------       -------
      At end of period                                     4,468         4,445
                                                         -------       -------
ACCUMULATED OTHER COMPREHENSIVE LOSS
   Retirement Benefits Liability
      At beginning and end of period                         (23)          (19)
                                                         -------       -------
   Investments
      At beginning of period                                  14             9
      Unrealized gain on investments (a)                      --             2
                                                         -------       -------
         At end of period                                     14            11
                                                         -------       -------
   Derivative Instruments
      At beginning of period                                 (12)           35
      Unrealized loss on derivative instruments (a)           (3)           (4)
      Reclassification adjustments included in net
         loss (a)                                              1            (1)
                                                         -------       -------
         At end of period                                    (14)           30
                                                         -------       -------
   Foreign Currency Translation
      At beginning of period                                (297)         (313)
      Sale of Argentine assets (a)                           128            --
      Other foreign currency translations (a)                 --             5
                                                         -------       -------
         At end of period                                   (169)         (308)
                                                         -------       -------
      Total Accumulated Other Comprehensive Loss            (192)         (286)
                                                         -------       -------
RETAINED DEFICIT
   At beginning of period                                 (1,918)       (1,828)
   Adjustment to initially apply FIN 48                      (24)           --
   Net loss (a)                                             (211)          (24)
   Preferred stock dividends declared                         (3)           (3)
   Common stock dividends declared                           (11)           --
   Redemption of preferred stock (a)                          (1)           --
                                                         -------       -------
      At end of period                                    (2,168)       (1,855)
                                                         -------       -------
TOTAL COMMON STOCKHOLDERS' EQUITY                        $ 2,110       $ 2,306
                                                         =======       =======
(a) DISCLOSURE OF COMPREHENSIVE LOSS:
      Unrealized gain on investments, net of tax
         of $- in 2007 and $1 in 2006                    $    --       $     2
      Derivative Instruments
         Unrealized loss on derivative
            instruments, net of tax (tax benefit)
            of $3 in 2007 and $(5) in 2006                    (3)           (4)
         Reclassification adjustments included in
            net loss, net of tax benefit
            of $- in 2007 and $(1) in 2006                     1            (1)
      Sale of Argentine assets, net of tax of $68            128            --
      Other foreign currency translations                     --             5
      Redemption of preferred stock, net of tax
         benefit of $(1) in 2007                              (1)           --
      Net loss                                              (211)          (24)
                                                         -------       -------
      Total Comprehensive Loss                           $   (86)      $   (22)
                                                         =======       =======


THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.


                                     CMS-34





























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                                   CMS-35





























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                                     CMS-36
CMS Energy Corporation
Consolidated Statements of Income (Loss)
(Unaudited)
                                 
                    In Millions  
    Three Months Ended     Six Months Ended  
June 30   2007     2006     2007     2006  
 
Operating Revenue   $ 1,319     $ 1,219     $ 3,508     $ 3,116  
                                 
Earnings from Equity Method Investees     17       8       36       44  
                                 
Operating Expenses                                
Fuel for electric generation     98       181       196       363  
Fuel costs mark-to-market at the MCV Partnership     —       42       —       198  
Purchased and interchange power     374       151       689       271  
Cost of gas sold     347       297       1,392       1,243  
Other operating expenses     233       230       488       481  
Maintenance     49       81       110       154  
Depreciation and amortization     121       121       281       278  
General taxes     55       55       123       124  
Asset impairment charges     38       —       280       —  
     
      1,315       1,158       3,559       3,112  
 
                                 
Operating Income (Loss)     21       69       (15 )     48  
                                 
Other Income (Deductions)                                
Loss on asset sales, net     (14 )     —       (2 )     —  
Interest and dividends     30       19       45       33  
Regulatory return on capital expenditures     7       7       15       10  
Foreign currency gain, net     1       2       1       2  
Other income     8       14       11       21  
Other expense     (14 )     (2 )     (17 )     (13 )
     
                                 
      18       40       53       53  
 
                                 
Fixed Charges                                
Interest on long-term debt     100       115       199       230  
Interest on long-term debt - related parties     4       4       7       8  
Other interest     17       8       22       13  
Capitalized interest     (1 )     (3 )     (4 )     (5 )
Preferred dividends of subsidiaries     —       2       1       3  
     
                                 
      120       126       225       249  
 
                                 
Loss Before Minority Interests     (81 )     (17 )     (187 )     (148 )
                                 
Minority Interests (Obligations), Net     3       —       5       (71 )
     
                                 
Loss Before Income Taxes     (84 )     (17 )     (192 )     (77 )
                                 
Income Tax Benefit     (29 )     (80 )     (104 )     (107 )
     
                                 
Income (Loss) From Continuing Operations     (55 )     63       (88 )     30  
                                 
Income (Loss) From Discontinued Operations, Net of Tax (Tax Benefit) of $62, $14, $(1), and $13     91       12       (87 )     21  
     
                                 
Net Income (Loss)     36       75       (175 )     51  
Preferred Dividends     3       3       6       6  
Redemption Premium on Preferred Stock     —       —       1       —  
     
                                 
Net Income (Loss) Available to Common Stockholders   $ 33     $ 72     $ (182 )   $ 45  
 
The accompanying notes are an integral part of these statements.
CMS-33
                                 
    In Millions, Except Per Share Amounts  
    Three Months Ended     Six Months Ended  
June 30   2007     2006     2007     2006  
 
CMS Energy                                
Net Income (Loss)                                
Net Income (Loss) Available to Common Stockholders   $ 33     $ 72     $ (182 )   $ 45  
     
                                 
Basic Earnings (Loss) Per Average Common Share                                
Income (Loss) from Continuing Operations   $ (0.26 )   $ 0.27     $ (0.43 )   $ 0.11  
Gain (Loss) from Discontinued Operations     0.41       0.06       (0.39 )     0.10  
     
Net Income (Loss) Attributable to Common Stock   $ 0.15     $ 0.33     $ (0.82 )   $ 0.21  
     
                                 
Diluted Earnings (Loss) Per Average Common Share                                
Income (Loss) from Continuing Operations   $ (0.26 )   $ 0.26     $ (0.43 )   $ 0.11  
Gain (Loss) from Discontinued Operations     0.41       0.05       (0.39 )     0.09  
     
Net Income (Loss) Attributable to Common Stock   $ 0.15     $ 0.31     $ (0.82 )   $ 0.20  
     
                                 
Dividends Declared Per Common Share   $ 0.05     $ —     $ 0.10     $ —  
 
The accompanying notes are an integral part of these statements.
CMS-34
CMS ENERGY CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

Energy Corporation
Consolidated Statements of Cash Flows
(Unaudited)
                 
    Six Months Ended  
June 30   2007     2006  
 
            In Millions  
Cash Flows from Operating Activities                
Net income (loss)   $ (175 )   $ 51  
Adjustments to reconcile net income (loss) to net cash provided by operating activities                
Depreciation and amortization, net of nuclear decommissioning of $2 and $3     286       289  
Deferred income taxes and investment tax credit     (128 )     (184 )
Minority interests (obligations), net     (16 )     (68 )
Asset impairment charges     280       —  
Fuel costs mark-to-market at the MCV Partnership     —       198  
Regulatory return on capital expenditures     (15 )     (10 )
Capital lease and other amortization     24       23  
Loss on the sale of assets     135       —  
Earnings from equity method investees     (36 )     (44 )
Cash distributions from equity method investees     14       48  
Changes in other assets and liabilities:                
Decrease (increase) in accounts receivable and accrued revenues     (198 )     40  
Decrease (increase) in accrued power supply and gas revenue     41       (21 )
Decrease in inventories     192       103  
Decrease in accounts payable     (7 )     (105 )
Increase (decrease) in accrued taxes     (34 )     23  
Increase (decrease) in accrued expenses     (27 )     63  
Decrease in the MCV Partnership gas supplier funds on deposit     —       (100 )
Decrease in other current and non-current assets     117       175  
Increase (decrease) in other current and non-current liabilities     (52 )     15  
     
                 
Net cash provided by operating activities     401       496  
 
                 
Cash Flows from Investing Activities                
Capital expenditures (excludes assets placed under capital lease)     (378 )     (320 )
Cost to retire property     (5 )     (31 )
Restricted cash and restricted short-term investments     30       127  
Investments in nuclear decommissioning trust funds     (1 )     (18 )
Proceeds from nuclear decommissioning trust funds     317       13  
Maturity of the MCV Partnership restricted investment securities held-to-maturity     —       118  
Purchase of the MCV Partnership restricted investment securities held-to-maturity     —       (118 )
Proceeds from sale of assets     1,616       —  
Cash relinquished from sale of assets     (113 )     —  
Deposit on pending asset sale     16       —  
Other investing     (3 )     (21 )
     
                 
Net cash provided by (used in) investing activities     1,479       (250 )
 
                 
Cash Flows from Financing Activities                
Proceeds from notes, bonds, and other long-term debt     47       43  
Issuance of common stock     11       5  
Retirement of bonds and other long-term debt     (332 )     (271 )
Redemption of preferred stock     (32 )     —  
Payment of common stock dividends     (22 )     —  
Payment of preferred stock dividends     (6 )     (6 )
Payment of capital lease and financial lease obligations     (8 )     (5 )
Debt issuance costs, financing fees, and other     —       (9 )
     
                 
Net cash used in financing activities     (342 )     (243 )
 
                 
Effect of Exchange Rates on Cash     2       1  
 
                 
Net Increase in Cash and Cash Equivalents     1,540       4  
                 
Cash and Cash Equivalents, Beginning of Period     351       847  
     
                 
Cash and Cash Equivalents, End of Period   $ 1,891     $ 851  
 
The accompanying notes are an integral part of these statements.
CMS-35
CMS Energy Corporation
Consolidated Balance Sheets
ASSETS
                 
            In Millions  
    June 30     December 31  
    2007     2006  
 
Plant and Property (At cost)   (Unaudited)
       
Electric utility   $ 7,842     $ 8,504  
Gas utility     3,302       3,273  
Enterprises     391       453  
Other     34       33  
     
      11,569       12,263  
Less accumulated depreciation, depletion and amortization     4,076       5,194  
     
      7,493       7,069  
Construction work-in-progress     327       639  
     
      7,820       7,708  
 
                 
Investments                
Enterprises     21       556  
Other     5       10  
     
      26       566  
 
                 
Current Assets                
Cash and cash equivalents at cost, which approximates market     1,891       249  
Restricted cash at cost, which approximates market     53       71  
Accounts receivable, notes receivable and accrued revenue, less allowances of $18 and $25, respectively     696       550  
Accrued power supply and gas revenue     115       156  
Accounts receivable and notes receivable - related parties     3       62  
Inventories at average cost                
Gas in underground storage     922       1,129  
Materials and supplies     81       87  
Generating plant fuel stock     127       126  
Assets held for sale     —       239  
Price risk management assets     2       45  
Regulatory assets - postretirement benefits     19       19  
Deferred income taxes     66       155  
Deferred property taxes     116       150  
Prepayments and other     80       105  
     
      4,171       3,143  
 
                 
Non-current Assets                
Regulatory Assets                
Securitized costs     491       514  
Postretirement benefits     1,048       1,131  
Customer Choice Act     170       190  
Other     503       497  
Nuclear decommissioning trust funds     47       602  
Assets held for sale     —       412  
Price risk management assets     —       19  
Notes receivable     142       137  
Notes receivable - related parties     80       125  
Other     192       327  
     
      2,673       3,954  
 
                 
Total Assets   $ 14,690     $ 15,371  
 
CMS-36
STOCKHOLDERS’ INVESTMENT AND LIABILITIES
                 
            In Millions  
    June 30     December 31  
    2007     2006  
 
Capitalization   (Unaudited)
       
Common stockholders’ equity                
Common stock, authorized 350.0 shares; outstanding 224.6 shares and 222.8 shares, respectively   $ 2     $ 2  
Other paid-in capital     4,477       4,468  
Accumulated other comprehensive loss     (137 )     (318 )
Retained deficit     (2,140 )     (1,918 )
     
      2,202       2,234  
                 
Preferred stock of subsidiary     44       44  
Preferred stock     250       261  
                 
Long-term debt     5,407       6,200  
Long-term debt - related parties     178       178  
Non-current portion of capital and finance lease obligations     232       42  
     
      8,313       8,959  
 
                 
Minority Interests     54       52  
 
                 
Current Liabilities                
Current portion of long-term debt, capital and finance leases     985       563  
Notes payable     1       2  
Accounts payable     469       481  
Accrued rate refunds     20       37  
Accounts payable - related parties     1       2  
Accrued interest     116       126  
Accrued taxes     293       301  
Liabilities held for sale     —       144  
Price risk management liabilities     24       70  
Regulatory liabilities     194       —  
Legal settlement liability     199       200  
Other     171       230  
     
      2,473       2,156  
 
                 
Non-current Liabilities                
Regulatory Liabilities                
Regulatory liabilities for cost of removal     1,216       1,166  
Income taxes, net     551       539  
Other regulatory liabilities     234       249  
Postretirement benefits     1,041       1,066  
Deferred income taxes     68       123  
Deferred investment tax credit     60       62  
Asset retirement obligation     96       498  
Liabilities held for sale     —       59  
Price risk management liabilities     3       31  
Argentine currency impairment reserve     197       —  
Other     384       411  
     
      3,850       4,204  
 
                 
Commitments and Contingencies(Notes 3, 4 and 6)                
                 
Total Stockholders’ Investment and Liabilities   $ 14,690     $ 15,371  
 
The accompanying notes are an integral part of these statements.
CMS-37
CMS Energy Corporation
Consolidated Statements of Common Stockholders’ Equity
(Unaudited)
                                 
                    In Millions  
    Three Months Ended     Six Months Ended  
June 30   2007     2006     2007     2006  
 
Common Stock                                
At beginning and end of period   $ 2     $ 2     $ 2     $ 2  
 
                                 
Other Paid-in Capital                                
At beginning of period     4,468       4,445       4,468       4,436  
Common stock issued     9       7       22       15  
Common stock reissued     —       —       6       1  
Redemption of preferred stock     —       —       (19 )     —  
     
At end of period     4,477       4,452       4,477       4,452  
 
                                 
Accumulated Other Comprehensive Loss                                
Retirement Benefits Liability                                
At beginning and end of period     (23 )     (19 )     (23 )     (19 )
     
                                 
Investments                                
At beginning of period     14       11       14       9  
Unrealized gain (loss) on investments (a)     2       (1 )     2       1  
     
At end of period     16       10       16       10  
     
                                 
Derivative Instruments                                
At beginning of period     (14 )     30       (12 )     35  
Unrealized gain (loss) on derivative instruments (a)     —       4       (3 )     —  
Reclassification adjustments included in net income (loss) (a)     13       1       14       —  
     
At end of period     (1 )     35       (1 )     35  
     
                                 
Foreign Currency Translation                                
At beginning of period     (169 )     (308 )     (297 )     (313 )
Sale of Argentine assets (a)     —       —       128       —  
Sale of Brazilian assets (a)     36       —       36       —  
Other foreign currency translations (a)     4       —       4       5  
     
At end of period     (129 )     (308 )     (129 )     (308 )
     
                                 
Total Accumulated Other Comprehensive Loss     (137 )     (282 )     (137 )     (282 )
 
                                 
Retained Deficit                                
At beginning of period     (2,162 )     (1,855 )     (1,918 )     (1,828 )
Adjustment to initially apply FIN 48     —       —       (18 )     —  
Net income (loss) (a)     36       75       (175 )     51  
Preferred stock dividends declared     (3 )     (3 )     (6 )     (6 )
Common stock dividends declared     (11 )     —       (22 )     —  
Redemption of preferred stock (a)     —       —       (1 )     —  
     
At end of period     (2,140 )     (1,783 )     (2,140 )     (1,783 )
     
                                 
Total Common Stockholders’ Equity   $ 2,202     $ 2,389     $ 2,202     $ 2,389  
 
                                 
(a) Disclosure of Comprehensive Income:                                
Retirement benefits liability adjustments, net of tax of $1, $-, $1, and $-, respectively   $ —     $ —     $ —     $ —  
Unrealized gain (loss) on investments, net of tax (tax benefit) of $1, $(1), $1, and $-, respectively     2       (1 )     2       1  
Derivative Instruments                                
Unrealized gain (loss) on derivative instruments, net of tax (tax benefit) of $(1), $(2), $2, and $(7), respectively     —       4       (3 )     —  
Reclassification adjustments included in net income (loss), net of tax (tax benefit) of $7, $(1), $7, and $(2), respectively     13       1       14       —  
Sale of Argentine assets, net of tax of $68     —       —       128       —  
Sale of Brazilian assets, net of tax of $20     36       —       36       —  
Other foreign currency translations     4       —       4       5  
Redemption of preferred stock, net of tax benefit of $1 in 2007     —       —       (1 )     —  
Net income (loss)     36       75       (175 )     51  
     
                                 
Total Comprehensive Income   $ 91     $ 79     $ 5     $ 57  
     
The accompanying notes are an integral part of these statements.
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CMS Energy Corporation
CMS Energy Corporation
Notes to Consolidated Financial Statements
(Unaudited)
These interim Consolidated Financial Statements have been prepared by CMS Energy in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. As such, certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. Certain prior year amounts have been reclassified to conform to the presentation in the current year, including certain reclassifications to our Consolidated Financial Statements for discontinued operations. Therefore, the consolidated financial statements for the year ended December 31, 2006 and for the three and six months ended June 30, 2006 have been updated for amounts previously reported. In management'smanagement’s opinion, the unaudited information contained in this report reflects all adjustments of a normal recurring nature necessary to assure the fair presentation of financial position, results of operations and cash flows for the periods presented. The Notes to Consolidated Financial Statements and the related Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and related Notes contained in CMS Energy'sEnergy’s Form 10-K for the year ended December 31, 2006.2006 and the Form 8-K filed June 4, 2007 amending CMS Energy’s 2006 financial statements to reflect certain discontinued operations resulting from certain asset sales. Due to the seasonal nature of CMS Energy'sEnergy’s operations, the results as presented for this interim period are not necessarily indicative of results to be achieved for the fiscal year.
1: CORPORATE STRUCTURE AND ACCOUNTING POLICIES

CORPORATE STRUCTURE: Corporate Structure and Accounting Policies
Corporate Structure:CMS Energy is an energy company operating primarily in Michigan. We are the parent holding company of Consumers and Enterprises. Consumers is a combination electric and gas utility company serving Michigan'sMichigan’s Lower Peninsula. Enterprises, through various subsidiaries and equity investments, is engaged in primarily domestic and international diversified energy
businesses including independent power production, electric distribution, and
natural gas transmission, storage and processing.production. We manage our businesses by the nature of services each provides and operate principally in three business segments: electric utility, gas utility, and enterprises.

PRINCIPLES OF CONSOLIDATION: 
Principles of Consolidation:The consolidated financial statements include CMS Energy, Consumers, Enterprises, and all other entities in which we have a controlling financial interest or are the primary beneficiary, in accordance with FIN 46(R). We use the equity method of accounting for investments in companies and partnerships that are not consolidated, where we have significant influence over operations and financial policies, but are not the primary beneficiary. We eliminate intercompany transactions and balances.

USE OF ESTIMATES: 
Use of Estimates:We prepare our consolidated financial statements in conformity with U.S. GAAP. We are required to make estimates using assumptions that may affect the reported amounts and disclosures. Actual results could differ from those estimates.
We record estimated liabilities for contingencies in our consolidated financial statements when it is probable that a loss will be incurred in the future as a result of a current event, and when an amount can be reasonably estimated. For additional details, see Note 3, Contingencies.

REVENUE RECOGNITION POLICY: 
Revenue Recognition Policy:We recognize revenues from deliveries of electricity and natural gas,


                                     CMS-37



                                                          CMS Energy Corporation and the transportation, processing, and storage of natural gas when services are provided. We record
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CMS Energy Corporation
sales tax on a net basis and exclude it from revenues. We recognize revenues on sales of marketed electricity, natural gas, and other energy products at delivery. We recognize mark-to-market changes in the fair values of energy trading contracts that qualify as derivatives as revenues in the periods in which the changes occur.

INTERNATIONAL OPERATIONS AND FOREIGN CURRENCY: 
International Operations and Foreign Currency:Our subsidiaries and affiliates whose functional currency is not the U.S. dollar translate their assets and liabilities into U.S. dollars at the exchange rates in effect at the end of the fiscal period. We translate revenue and expense accounts of such subsidiaries and affiliates into U.S. dollars at the average exchange rates that prevailed during the period. We show these foreign currency translation adjustments in the stockholders'stockholders’ equity section on our Consolidated Balance Sheets. We include exchange rate fluctuations on transactions denominated in a currency other than the functional currency, except those that are hedged, in determining net income.
At March 31,June 30, 2007, the cumulative Foreign Currency Translation component of stockholders'stockholders’ equity was $169$129 million, net of tax, which primarily represents currency losses in Argentina and Brazil.Argentina. The cumulative foreign currency loss due to the unfavorable exchange rate of the Argentine peso using an exchange rate of 3.1023.089 pesos per U.S. dollar was $129 million, net of tax. The cumulative foreign
currency loss due to the unfavorable exchange rate
Impairment of the Brazilian real using
an exchange rate of 2.04 reais per U.S. dollar was $41 million, net of tax.

IMPAIRMENT OF LONG-LIVED ASSETS AND EQUITY METHOD INVESTMENTS: Long-Lived Assets and Equity Method Investments:We evaluate potential impairments of our long-lived assets, other than goodwill, based on various analyses, including the projection of undiscounted cash flows, whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. If the carrying amount of the investment or asset exceeds its estimated undiscounted future cash flows, we recognize an impairment loss and write-down the investment or asset to its estimated fair value.
We also assess our ability to recover the carrying amounts of our equity method investments whenever events or changes in circumstances indicate that the carrying amount of the investments may not be recoverable. This assessment requires us to determine the fair values of our equity method investments. We determine fair value using valuation methodologies, including discounted cash flows and the ability of the investee to sustain an earnings capacity that justifies the carrying amount of the investment. We record a write down if the fair value is less than the carrying value and the decline in value is considered to be other than temporary.
For additional details, see Note 2, Asset Sales, Discontinued Operations and Impairment Charges.

RECLASSIFICATIONS: 
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CMS Energy Corporation
Other Income and Other Expense:The following tables show the components of Other income and Other expense:
                                 
In Millions  
    Three Months Ended     Six Months Ended  
June 30   2007     2006     2007     2006  
 
Other income                                
Interest and dividends – related parties   $ —     $ 4     $ —     $ 6  
Electric restructuring return     —       1       1       2  
Return on stranded and security costs     2       2       3       3  
Nitrogen oxide allowance sales     —       6       —       6  
Refund of surety bond premium     —       —       —       1  
Gain on investment     4       —       4       —  
All other     2       1       3       3  
 
                                 
Total other income   $ 8     $ 14     $ 11     $ 21  
 
                                 
In Millions  
    Three Months Ended     Six Months Ended  
June 30   2007     2006     2007   2006
 
Other expense                                
Accretion expense   $ —     $ (2 )   $ —     $ (4 )
Derivative loss on debt tender offer     (3 )     —       (3 )     —  
Loss on reacquired and extinguished debt     (11 )     —       (11 )     (5 )
Civic and political expenditures     —       —       (1 )     (1 )
Donations     —       —       —       (1 )
All other     —       —       (2 )     (2 )
 
                                 
Total other expense   $ (14 )   $ (2 )   $ (17 )   $ (13 )
 
Reclassifications:We have reclassified certain prior year amounts for comparative purposes. These reclassifications did not affect consolidated net income (loss) for the periods presented. The most significant of these reclassifications is related to certain subsidiaries reclassified as "held“held for sale"sale” on our Consolidated Balance Sheets and activities of those subsidiaries as Income (Loss) From Discontinued Operations in our Consolidated Statements of Income (Loss). For additional details, see Note 2, Asset Sales, Discontinued Operations and Impairment Charges, "Discontinued“Discontinued Operations."


                                     CMS-38



                                                          CMS Energy Corporation

NEW ACCOUNTING STANDARDS NOT YET EFFECTIVE: ”
New Accounting Standards Not Yet Effective:SFAS No. 157, Fair Value Measurements: Measurements:In September 2006, the FASB issued SFAS No. 157, effective for us January 1, 2008. The standard provides a revised definition of "fair value"“fair value” and gives guidance on how to measure the fair value of assets and liabilities. Under the standard, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly exchange between market participants. The standard does not expand the use of fair value in any new circumstances. However, additional disclosures will be required on the impact and reliability of fair value measurements reflected in our consolidated financial statements. The standard will also eliminate the existing prohibition of recognizing "day one"“day one” gains or losses on derivative instruments, and will generally require such gains and losses to be recognized through earnings. We are presently evaluating the impacts, if any, of implementing SFAS No. 157. We currently do not hold any derivatives that would involve day one gains or losses.
SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, Including an amendment to FASB Statement No. 115: 115:In February 2007, the FASB issued SFAS No. 159, effective
CMS-41
CMS Energy Corporation
for us January 1, 2008. This standard will give us the option to select certain financial instruments and other items, which otherwise are not required to be measured at fair value, and measure those items at fair value. If we choose to elect the fair value option for an item, we would recognize unrealized gains and losses associated with changes in the fair value of the item over time. The statement will also require disclosures for items for which the fair value option has been elected. We are presently evaluating whether we will choose to elect the fair value option for any financial instruments or other items.

2: ASSET SALES, DISCONTINUED OPERATIONS AND IMPAIRMENT CHARGES

ASSET SALES
FSP FIN 39-1,Amendment of FASB Interpretation No. 39: In MarchApril 2007, the FASB issued FSP FIN 39-1, effective for us January 1, 2008. This standard will permit us to offset the fair value of derivative instruments with cash collateral received or paid for those derivative instruments executed with the same counterparty under a master netting arrangement. As a result, we will be permitted to record one net asset or liability that represents the total net exposure of all derivative positions under a master netting arrangement. The decision to offset derivative positions under master netting arrangements remains an accounting policy choice. We presently record the net fair value of derivative assets and liabilities for those contracts held by CMS ERM that are subject to master netting arrangements, and separately record amounts for cash collateral received or paid for these instruments. Under this standard, as a result of offsetting the collateral amounts against the fair value of derivative assets and liabilities, both our total assets and total liabilities could be reduced. The standard is to be applied retrospectively by adjusting the financial statements for all periods presented. There will be no impact to earnings from adopting this standard.
EITF Issue 06-11, Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards:In June 2007, the FASB ratified EITF Issue 06-11, effective for us on a prospective basis beginning January 1, 2008. EITF 06-11 requires companies to recognize the income tax benefit realized from dividends or dividend equivalents that are charged to retained earnings and paid to employees for non-vested equity-classified employee share-based payment awards as an increase to additional paid-in capital. We do not believe that implementation of this standard would have a material effect on our financial statements.
2:Asset Sales, Discontinued Operations and Impairment Charges
Asset Sales
The impacts of our asset sales are included in Loss on asset sales, net and Income (Loss) from Discontinued Operations in our Consolidated Statements of Income (Loss). There were no asset sales for the six months ended June 30, 2006.
We completed the sale of a portfolio of our businesses in Argentina and our northern Michigan non-utility natural gas assets to Lucid Energy for gross cash proceeds of $130 million.million in March 2007. The Argentine assets sold
include our electric generating plant interests$301 million pretax loss on sale includes a $279 million loss in Argentinadiscontinued operations and our interesta $22 million loss in the TGM natural gas transportation and pipeline business in Argentina. The
Michigan assets sold include the Antrim natural gas processing plant, 155 miles
of associated gathering lines, and interests in three special purpose gas
transmission pipelines that total 110 miles.

continuing operations.
In connection with the sale of our Argentine and Michigan assets, we entered into agreements that grant Lucid Energy:

- -    
• an option to buy CMS Gas Transmission’s ownership interest in TGN, subject to the rights of other third parties,
• the right to a portion of proceeds that may be awarded and received by CMS Gas Transmission in connection with certain legal proceedings, and
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CMS Gas Transmission's ownership interest in TGN, subject
     to the rights of other third parties,

- -    the right to a portion of damages that may be awarded and received by CMS
     Gas Transmission in connection with certain legal proceedings, and

- -    Energy Corporation
the right to all of the proceeds that Enterprises will receive if it sells its stock interest in CMS Generation San Nicolas Company.
Under these agreements, we have essentially sold our rights to certain awards or proceeds that we may receive in the future. A portion of the consideration received in the sale has been allocated to these agreements. We have recorded $32 million as a deferred credit in Other Non-current Liabilities on our Consolidated Balance Sheets.

In March 2007, we
We also sold our interest in El Chocon, an Argentine hydroelectric generating business, CMS-39



                                                          CMS Energy Corporation

to Endesa, S.A. for gross cash proceeds of $50 million.

The impactsmillion in March 2007. We recorded a $34 million pretax gain in continuing operations.
We sold our ownership interest in SENECA and certain associated generating equipment to Petroleos de Venezuela, S.A., which is owned by the Bolivarian Republic of Venezuela, for gross cash proceeds of $106 million in April 2007. We recorded a $46 million pretax gain in discontinued operations.
We sold our asset sales areownership interest in businesses in the Middle East, Africa, and India to TAQA for $900 million in May 2007. Gross proceeds from the sale included $792 million in cash proceeds and TAQA’s assumption of $108 million in debt. Businesses included in Gainthe sale were Takoradi, Taweelah, Shuweihat, Jorf Lasfar, Jubail, and Neyveli. The $80 million pretax gain on asset sales, netsale includes a $96 million gain recorded in discontinued operations and Income (Loss) from Discontinued Operationsa $16 million loss recorded in our Consolidated Statements of
Income (Loss). There were no asset sales for the three months ended March 31,
2006.

For the three months ended March 31,continuing operations.
In June 2007, we sold CMS Energy Brasil S.A. to CPFL Energia S.A., a Brazilian utility, for $211 million, which included $201 million in cash proceeds and CPFL Energia S.A.’s assumption of a $10 million tax liability. We recorded a $3 million pretax gain in discontinued operations.
For the six months ended June 30, 2007, the following assetstable summarizes asset sales that did not meet the definition of, and therefore were not reported as, discontinued operations:
                     
In Millions  
          Pretax   After-tax  
Date sold   Business/Project   Gain (Loss)   Gain (Loss)  
 
March   El Chocon $ 34   $ 22  
March   TGM and Bay Area Pipeline (a)   (22 )   (14 )
May   Middle East, Africa and India businesses (b)   (16 )   (12 )
Various   Other   2     1  
 
    Total loss on asset sales $ (2 ) $ (3 )
 

                                                                     In Millions
- --------------------------------------------------------------------------------
                                                              Pretax   After-tax
                                                               Gain       Gain
Date sold               Business/Project                      (Loss)     (Loss)
- ---------               ----------------                      ------   ---------

March                   El Chocon                              $ 23       $15
March                   TGM and Bay Area Pipeline 
(a)           (11)       (7)
                                                               ----       ---
                        Total gain on asset sales              $ 12       $ 8
                                                               ====       ===
Included in the $130 million sale to Lucid Energy.
(b) Included in the $900 million sale to TAQA.


(a)  Included in the $130 million sale to Lucid Energy.

SUBSEQUENT ASSET SALES: In February 2007, we entered into an Agreement
Sale of Purchase and Sale with TAQA to sell our ownership interest in businesses in the
Middle East, Africa, and India for $900 million. Businesses included in the sale
are Taweelah, Shuweihat, Jorf Lasfar, Jubail, Neyveli, and Takoradi. We closed
on the sale in May 2007. The book value of these assets at March 31, 2007 was
approximately $682 million. After considering the effects of taxes, post-closing
adjustments, and closing costs, we anticipate a gain of approximately $50
million. The estimated gain is also subject to a number of adjustments that will
occur at or shortly after closing.

Nuclear Assets:In April 2007, we sold Palisades to Entergy for $380 million. The final purchase price wasis subject to various closing adjustments resulting in us receiving $361
million.such as working capital and capital expenditure adjustments and nuclear fuel usage and inventory adjustments. We have received $364 million as of June 2007; however, certain purchase price adjustments are not yet final. We also paid Entergy $30 million to assume ownership and responsibility for the Big Rock ISFSI. We entered into a 15-year power purchase agreement with
Entergy for 100 percentBecause of the plant's current electric output. For additional
details on sale of Palisades, we paid the NMC, the former operator of Palisades, $7 million in exit fees and forfeited our $5 million investment in the NMC.
Entergy assumed responsibility for the future decommissioning of Palisades and for storage and disposal of spent nuclear fuel located at Palisades and the Big Rock ISFSI seesites. At closing, we transferred $252 million
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CMS Energy Corporation
in decommissioning trust fund balances to Entergy. We are refunding estimated excess decommissioning funds of $189 million to our retail customers through credits applied from June 2007 through December 2008 and have recorded this obligation as a regulatory liability on our Consolidated Balance Sheets. Modification to the terms of the transaction allowed us immediate access to additional excess decommissioning trust funds of $122 million. We have proposed a plan to refund these excess decommissioning fund balances through credits to our retail customers’ bills. This plan is under review by the MPSC in our current electric rate case filing. We recorded this balance as a regulatory liability on our Consolidated Balance Sheets.
The MPSC order approving the Palisades transaction allows us to recover the book value of Palisades, which we estimated at $314 million. As a result, we are refunding proceeds in excess of book value of $66 million to our retail customers through credits applied from June 2007 through December 2008. The final proceeds in excess of the book value are subject to closing adjustments and review by the MPSC. The MPSC order deferred ruling on the recovery of transaction costs, including the NMC exit fees, and the $30 million payment to Entergy related to the Big Rock ISFSI until our next general rate case. We deferred these costs as a regulatory asset on our Consolidated Balance Sheets as recovery is probable.
In April 2007, the NRC issued an order approving the transfer of the Palisades operating license. Intervenors have filed petitions for reconsideration of the NRC orders approving the transfer of the Palisades and Big Rock licenses. The NRC did not alter or stay the prior order approving the license transfer. We believe that it is unlikely that the NRC will conduct further proceedings or alter its prior orders, but we cannot predict the outcome of the matter.
The following table summarizes the impacts of the Palisades and the Big Rock ISFSI transaction:
                         
In Millions  
    MPSC Order     Estimated     Total  
    Customer     Closing     Estimated  
Customer Benefits   Benefits Estimate     Adjustments     Benefits  
 
Purchase price   $ 380     $ (9 )   $ 371  
Less: Book value of Palisades     314       (14 )     300  
                   
Excess proceeds     66       5       71 (a)
Excess decommissioning trust                        
funds     189       122       311  
                   
Total customer benefits   $ 255     $ 127     $ 382  
                   
         
    Total  
    Estimated  
Deferred Costs   Costs  
 
NMC exit fee   $ 7  
Forfeiture of the NMC investment     5  
Selling expenses     16  
       
Total transaction costs     28  
Big Rock ISFSI operation and        
maintenance fee to Entergy     30  
       
Estimated regulatory asset   $ 58 (b)
       
(a) We deferred the estimated gain of $71 million as a regulatory liability.
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CMS Energy Corporation
(b) As of June 30, 2007, we have $56 million recorded as a regulatory asset for Palisades deferred costs of which $26 million relates to transaction costs. We estimate that we will incur an additional $2 million in selling expenses related to the Palisades transaction.
In the FERC’s February 2007 order regarding the Palisades transaction, the FERC granted our request to apply $11 million in FERC decommissioning trust fund balances for Palisades toward the Big Rock decommissioning shortfall, as described in Note 3, Contingencies, "Other Consumers'“Other Consumers’ Electric Utility Contingencies -–Nuclear Matters.” The Saleorder was contingent upon the NRC approving the transfer of Nuclear Assetsoperating licenses, which the NRC approved in April 2007. A clarification request was filed by a wholesale customer with the FERC. In July 2007, the FERC issued a clarification order requiring us to demonstrate that the fund did not have a surplus balance and the if any surplus exists that we submit a refund plan.
Palisades Power Purchase Agreement."

InAgreement:Entergy contracted to sell us 100 percent of the plant’s output up to its current annual average capacity of 798 MW under a 15-year power purchase agreement beginning in April 2007. We provided $30 million in security to Entergy for our power purchase agreement obligation in the form of a letter of credit. We estimate that capacity and energy payments under the Palisades power purchase agreement will be $180 million in 2007 and average $300 million per year thereafter.
Due to the Palisades power purchase agreement, the transaction is a sale and leaseback for accounting purposes. SFAS No. 98 specifies the accounting required for a seller’s sale and simultaneous leaseback involving real estate. We have continuing involvement with Palisades through security provided to Entergy for our power purchase agreement obligation and our DOE liability and other forms of involvement. As a result, we entered into a purchase and sale agreement with Petroleos de
Venezuela, S.A.,accounted for the Palisades plant, which is owned by the Bolivarian Republic of Venezuela,real estate asset subject to sell
our ownership interest in SENECAthe leaseback, as a financing for accounting purposes and certain associated generating equipment for
$106 million. We closednot a sale. As a financing, no gain on the sale in April 2007.of Palisades was recognized on the Consolidated Statements of Income (Loss). We accounted for the remaining non-real estate assets and liabilities associated with the transaction as a sale.
As a financing, the Palisades plant remains on our Consolidated Balance Sheets and we continue to depreciate it. We recorded the related proceeds as a finance obligation with payments recorded to interest expense and the finance obligation based on the amortization of the obligation over the life of the Palisades power purchase agreement. The book value of thesethe finance obligation was based on an allocation of the transaction proceeds to the fair values of the net assets at March 31,sold and fair value of the Palisades plant asset under the financing. As of June 30, 2007, the financing obligation was approximately $55$194 million. PENDING ASSET SALES: In April 2007, weWe estimate future payments of $13 million per year over the next five years.
Subsequent Asset Sales: We entered into an agreement to sell CMS
Energy Brasilour investment in GasAtacama to Endesa S.A. for $211gross cash proceeds of $80 million in July 2007. We closed on the sale of GasAtacama in August 2007.
Pending Asset Sales: We entered into an agreement to CPFL Energia S.A., a Brazilian utility.sell our investment Jamaica to AEI for gross cash proceeds of $14 million in June 2007. We expect to close on the sale by the end of 2007.
Discontinued Operations
In accordance with SFAS No. 144, our consolidated financial statements have been reclassified for all periods presented to reflect the second quarteroperations, assets and liabilities of 2007, subject
to approval by the Brazilian national regulatory agency. The book value of these
assets at March 31, 2007 was approximately $195 million, which includes a
cumulative net foreign currency translation loss of $63 million.

We also announced plans to conduct an auction to sell our GasAtacama combined
gas pipeline and power generation businesses in Argentina and Chile, and our
electric generating plant in Jamaica. We expect to complete the sale of these
businesses by the end of 2007.

Our pending asset sales are subject to the receipt of all necessary
governmental, lender and partner approvals. We plan to use the proceeds from the
pending asset sales to invest in our utility business and reduce parent company
debt.


                                     CMS-40



                                                          CMS Energy Corporation

The asset book values will vary between March 31, 2007 and each transaction's
closing date. Final book value is dependent upon the timing of closing, results
of operations for certain of the assets up to closing, and other factors.

DISCONTINUED OPERATIONS

Items classified as "held for sale" on our Consolidated Balance Sheets are
comprised of consolidated subsidiaries that meet the criteria of discontinued operations. The assets and liabilities of these subsidiaries have been classified as “Assets held for sale
under SFAS No. 144. At Marchsale” and “Liabilities held for sale” on our December 31, 2007, these subsidiaries2006 consolidated balance sheets. Subsidiaries classified as “held for sale” at December 31, 2006 include
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CMS Energy Corporation
our Argentine businesses, a majority of our Michigan non-utility gas businesses, CMS Energy Brasil S.A., SENECA, Takoradi,
SENECA, and certain associated holding companies. At December 31, 2006,June 30, 2007, there were no subsidiaries classified as “held for sale” due to the completion of these subsidiaries include our Argentine businesses soldsales in March 2007, a majoritythe first and second quarters of our Michigan non-utility businesses sold in March 2007, Takoradi, SENECA, and
certain associated holding companies.

2007.
The major classes of assets and liabilities "held“held for sale"sale” on our Consolidated
Balance Sheets are as follows:


                                                                     In Millions
                                              ----------------------------------
                                              March 31, 2007   December 31, 2006
                                              --------------   -----------------

Assets
   Cash                                            $ 39               $ 88
   Accounts receivable, net                          60                 80
   Notes receivable                                 106                110
   Property, plant and equipment, net                54                168
   Other                                             14                 23
                                                   ----               ----
Total assets                                       $273               $469
                                                   ====               ====
Liabilities
   Accounts payable                                $ 42               $ 66
   Minority interest                                 12                 14
   Other                                             42                 60
                                                   ----               ----
Total liabilities                                  $ 96               $140
                                                   ====               ====


CMS Energy Brasil S.A., is a consolidated subsidiary that meets the criteria of
held for sale under SFAS No. 144 subsequent to March 31, 2007. As a result, the
major classes of assets and liabilities of CMS Energy Brasil S.A. will be
classified as "held for sale" on our Consolidated Balance Sheets in the second
quarter of 2007.


                                     CMS-41




                                                          CMS Energy Corporation

The major classes of assets and liabilities of CMS Energy Brasil S.A. at March
31, 2007 and at December 31, 2006 Consolidated Balance Sheet are as follows:
                                                                     In Millions
                                              ----------------------------------
                                              March 31, 2007   December 31, 2006
                                              --------------   -----------------

Assets
   Cash                                            $ 21               $ 14
   Accounts receivable, net                          29                 25
   Goodwill                                          26                 25
   Investments                                       35                 33
   Property, plant and equipment, net                68                 65
   Other                                             30                 19
                                                   ----               ----
Total assets                                       $209               $181
                                                   ====               ====
Liabilities
   Accounts payable                                $ 17               $ 16
   Accrued taxes                                     13                 10
   Minority interest                                 27                 25
   Other                                             20                 12
                                                   ----               ----
Total liabilities                                  $ 77               $ 63
                                                   ====               ====
         
    In Millions  
 
Assets        
Cash   $ 102  
Accounts receivable, net     105  
Notes receivable     110  
Goodwill     25  
Investments     33  
Property, plant and equipment, net     233  
Other     43  
 
Total assets   $ 651  
 
         
Liabilities        
Accounts payable   $ 82  
Accrued taxes     30  
Minority interest     40  
Other     51  
 
Total liabilities   $ 203  
 
Our discontinued operations contain the activities of the subsidiaries classified as "held“held for sale"sale” as well as those disposed of duringfor the quartersix months ended June 30, 2007 and are a component of our Enterprises business segment. We reflect the following amounts in the Income (Loss) From Discontinued Operations line in our Consolidated Statements of Income (Loss):
                 
In Millions  
Three months ended June 30   2007     2006  
 
Revenues   $ 72     $ 178  
 
                 
Pretax income from discontinued operations   $ 153     $ 26  
Income tax expense     62 (a)     14  
 
Income From Discontinued Operations   $ 91 (b)   $ 12  
 
                 
In Millions  
Six months ended June 30   2007     2006  
 
Revenues   $ 235     $ 312  
 
                 
Pretax income (loss) from discontinued operations   $ (88 )   $ 34  
Income tax expense (benefit)     (1 )     13  
 
Income (Loss) From Discontinued Operations   $ (87 )(c)   $ 21  
 
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CMS Energy Corporation

                                                                     In Millions
                                                                 ---------------
Three months ended 
(a) Includes a $5 million additional charge related to foreign earnings repatriated in March 31                                       2007      2006
- ---------------------------                                      -----      ----

Revenues                                                         $  75      $507
                                                                 =====      ====
Discontinued operations:
   Pretax income (loss) from discontinued operations             $(248)     $  9
   Income tax expense (benefit)                                    (68)        1
                                                                 -----      ----
Income (Loss) From Discontinued Operations                       $(180)(a)  $  8
                                                                 =====      ====
2007. This adjustment is not material to first or second quarter results.
(b) Includes a gain on disposal of SENECA of $46 million ($33 million after-tax and after minority interest), a gain on disposal of our ownership interest in businesses in the Middle East, Africa, and India of $96 million ($62 million after-tax), and a gain on disposal of CMS Energy Brasil S.A. of $3 million ($2 million after-tax).
(c) Includes a loss on disposal of our Argentine and northern Michigan non-utility assets of $279 million ($171 million after-tax and after minority interest), a gain on disposal of SENECA of $46 million ($33 million after-tax and after minority interest), a gain on disposal of our ownership interest in businesses in the Middle East, Africa, and India of $96 million ($62 million after-tax), and a gain on disposal of CMS Energy Brasil S.A. of $3 million ($2 million after-tax).


(a)  Includes a loss on disposal of our Argentine and northern Michigan
     non-utility assets of $278 million ($171 million after-tax and minority
     interest).

Income (Loss) From Discontinued Operations includes a provision for anticipated closing costs and a portion of CMS Energy'sEnergy’s parent company interest expense. Interest expense of $3$7 million for the threesix months ended March 31,June 30, 2007 and $3$8 million for the threesix months ended March 31,June 30, 2006 has been allocated based on the net book value of the asset to be sold divided by CMS Energy'sEnergy’s total capitalization of each discontinued operation multiplied by CMS Energy'sEnergy’s interest expense.

IMPAIRMENT CHARGES

Impairment Charges
We record an asset impairment when we determine that the expected future cash flows from an asset would be insufficient to provide for recovery of the asset'sasset’s carrying value. An asset held-in-use is evaluated for impairment by calculating the undiscounted future cash flows expected to result from the use of the asset and its eventual disposition. If the undiscounted future cash flows are less than the carrying amount, we recognize an impairment loss. The impairment loss recognized is the amount by CMS-42


                                                          CMS Energy Corporation

which the carrying amount exceeds the fair value. We estimate the fair market value of the asset utilizing the best information available. This information includes quoted market prices, market prices of similar assets, and discounted future cash flow analyses. The assets written down include certain equity method and other investments.

There were no asset impairments recorded for the three months ended March 31,
2006. 
The table below summarizes our asset impairments for the threesix months ended March 31, 2007:

June 30, 2007. There were no asset impairments recorded for the six months ended June 30, 2006.
                 
            In Millions  
 
Six months ended June 30, 2007   Pretax     After-tax  
 
Asset impairments:                
Enterprises:                
TGN (a)   $ 215     $ 140  
GasAtacama (b)     36       23  
Jamaica (c)     22       14  
PowerSmith (d)     5       3  
Prairie State (e)     2       1  
 
Total asset impairments   $ 280     $ 181  
 

                                           In Millions
                                    ------------------
Three months ended March 31, 2007   Pretax   After-tax
- ---------------------------------   ------   ---------

Asset impairments:
   Enterprises:
   TGN 
(a)                           $215       $140
   Jamaica (b)                         22         14
   PowerSmith (c)                       5          3
                                     ----       ----
Total asset impairments              $242       $157
                                     ====       ====


(a)  In the first quarter of 2007, we recorded an impairment charge to recognize the reduction in fair value of our investment in TGN, a natural gas business in Argentina. The impairment included a cumulative net foreign currency translation loss of approximately $197 million. We will maintain our interest in TGN, which remains subject to a potential sale to the government of Argentina or some other disposition.
CMS-47
CMS Energy Corporation
(b) In the second quarter of 2007, we recorded an impairment charge to recognizereflect the reduction in fair value of our investment in TGN, a natural gas
     businessGasAtacama as determined in Argentina. The impairment included a cumulative net foreign
     currency translation loss of approximately $197 million. We will maintain
     our interest in TGN, which remains subject to a potential sale to the
     government of Argentina or some other disposition.

(b)negotiations.
(c) In the first quarter of 2007, we recorded an impairment charge to reflect the fair market value of our investment in an electric generating plant in Jamaica.

(c)
(d) In Marchthe first quarter of 2007, we recorded an impairment charge to reflect the fair value of our investment in PowerSmith.
(e) In the second quarter of 2007, we recorded an impairment charge to reflect our withdrawal from the co-development of Prairie State with Peabody Energy because it did not meet our investment criteria.
3: CONTINGENCIES
SEC ANDand DOJ INVESTIGATIONS: Investigations:During the period of May 2000 through January 2002, CMS MST engaged in simultaneous, prearranged commodity trading transactions in which energy commodities were sold and repurchased at the same price. These so
calledso-called round-trip trades had no impact on previously reported consolidated net income, earnings per share or cash flows, but had the effect of increasing operating revenues and operating expenses by equal amounts.
CMS Energy is cooperating with an investigation by the DOJ concerning round-trip trading, which the DOJ commenced in May 2002. CMS Energy is unable to predict the outcome of this matter and what effect, if any, this investigation will have on its business. In March 2004, the SEC approved a cease-and-desist order settling an administrative action against CMS Energy related to round-trip trading. The order did not assess a fine and CMS Energy neither admitted to nor denied the order'sorder’s findings. The settlement resolved the SEC investigation involving CMS Energy and CMS MST. Also in March 2004, the SEC filed an action against three former employees related to round-trip trading at CMS MST. One of the individuals has settled with the SEC. CMS Energy is currently advancing legal defense costs for the remaining two individuals in accordance with existing indemnification policies. Those two individuals filed a motion to dismiss the SEC action, which was denied.

SECURITIES CLASS ACTION LAWSUITS:
Securities Class Action Lawsuits: Beginning in May 2002, a number of complaints were filed against


                                     CMS-43



                                                          CMS Energy Corporation CMS Energy, Consumers and certain officers and directors of CMS Energy and its affiliates in the United States District Court for the Eastern District of Michigan. The cases were consolidated into a single lawsuit (the "Shareholder
Action"“Shareholder Action”), which generally seeks unspecified damages based on allegations that the defendants violated United States securities laws and regulations by making allegedly false and misleading statements about CMS Energy'sEnergy’s business and financial condition, particularly with respect to revenues and expenses recorded in connection with round-trip trading by CMS MST. In January 2005, the court granted a motion to dismiss Consumers and three of the individual defendants, but denied the motions to dismiss CMS Energy and the 13 remaining individual defendants. In March 2006, the court conditionally certified a class consisting of "all“all persons who purchased CMS Common Stock during the period of October 25, 2000 through and including May 17, 2002 and who were damaged thereby."” The court excluded purchasers of CMS Energy'sEnergy’s 8.75 percent Adjustable Convertible Trust Securities ("ACTS"(“ACTS”) from the class and, in response, a new class action lawsuit was filed on behalf of ACTS purchasers (the "ACTS Action"“ACTS Action”) against the same defendants named in the Shareholder Action. The settlement described in the following paragraph, if approved, will resolve both the Shareholder and ACTS Actions.
CMS-48
CMS Energy Corporation
On January 3, 2007, CMS Energy and other parties entered into a Memorandum of Understanding (the "MOU"“MOU”), subject to court approval, regarding settlement of the two class action lawsuits. The settlement was approved by a special committee of independent directors and by the full board of directors of CMS Energy. Both judged that it was in the best interests of shareholders to eliminate this business uncertainty. The MOU is expected to lead to a detailed
stipulation of settlement that will be presented to the assigned federal judge
and the affected class in the second quarter of 2007. Under the terms of the MOU, the litigation will be settled for a total of $200 million, including the cost of administering the settlement and any attorney fees the court awards. CMS Energy will make a payment of approximately $123 million plus an amount equivalent to interest on the outstanding unpaid settlement balance beginning on the date of preliminary approval ofby the court and running until the balance of the settlement funds is paid into a settlement account. In entering into the MOU, CMS Energy makes no admission of liability under the Shareholder Action and the ACTS Action. The parties executed a Stipulation and Agreement of Settlement dated May 22, 2007 (“Stipulation”) incorporating the terms of the MOU. On May 30, 2007, plaintiffs filed a “Motion for Order Preliminarily Approving Stipulation and Agreement of Settlement.” On June 7, 2007, the court entered a “Preliminary Order in Connection with Settlement Proceedings and Proposed Class Certification,” in which the court preliminarily approved the Stipulation and scheduled the settlement fairness hearing for September 6, 2007. In accordance with the Stipulation, CMS has paid approximately $1 million of the settlement amount to fund administrative expenses. The remaining $199 million and interest accruing thereon from the date of the June 7, 2007 order is payable ten business days after entry of the Order and Final Judgment following the September 6, 2007 hearing.
Out of the total settlement, CMS Energy'sEnergy’s insurers will pay approximately $77 million directly to the settlement account. CMS Energy took an approximate $123 million net pre-tax charge to 2006 earnings in the fourth quarter of 2006. In entering into the MOU,
CMS Energy makes no admission of liability under the Shareholder Action and the
ACTS Action. At March 31,June 30, 2007, we have a receivable of $77 million and a legal settlement liability of $200$199 million recorded on our Consolidated Balance Sheets.

GAS INDEX PRICE REPORTING INVESTIGATION: 
Gas Index Price Reporting Investigation:CMS Energy has notified appropriate regulatory and governmental agencies that some employees at CMS MST and CMS Field Services appeared to have provided inaccurate information regarding natural gas trades to various energy industry publications, which compile and report index prices. CMS Energy is cooperatingcooperated with an investigation by the DOJ regarding this matter. Although CMS Energy has not received any formal notification that the DOJ has completed its investigation, the DOJ’s last request for information occurred in November 2003, and CMS Energy completed its response to this request in May 2004. CMS Energy is unable to predict the outcome of the DOJ investigation and what effect, if any, the investigation will have on its business.
The CFTC filed a civil injunctive action against two former CMS Field Services employees in Oklahoma federal district court on February 1, 2005. The action alleges the two engaged in reporting false natural gas trade information, and seeks to enjoinprohibit these acts, compel compliance with the Commodities Exchange Act, and impose monetary penalties. Trial dates have been held in abeyance
pending settlement discussions. CMS Energy is currently advancing legal defense
costsThe court entered separate consent orders with respect to each of the two individuals, one dated April 18, 2007 and one dated June 25, 2007, resolving this litigation. The consent orders prohibit each of the individuals from engaging in accordancecertain activities and further provide civil monetary penalties in the amount of $100,000 for one individual and $25,000 for the other individual. Pursuant to agreements with existing indemnification
policies.


                                     CMS-44

each of the individuals, CMS has paid $95,000 of the $100,000 amount and $22,000 of the $25,000 amount, with the remaining amounts paid by the individuals themselves. These settlements put an end to CFTC enforcement actions relating to gas price reporting by individuals once employed at present or former CMS subsidiaries.
Katz Technology Litigation:In June 2007, Ronald A. Katz Technology Licensing, L.P. (“RAKTL”), filed a lawsuit in the United States District Court for the Eastern District of Michigan against CMS Energy and Consumers alleging patent infringement. RAKTL is claiming that automated customer service, bill payment services and gas leak reporting offered to our customers and accessed through toll free numbers infringe patents held by RAKTL. This case has been recently transferred to the U.S.
CMS-49
CMS Energy Corporation

BAY HARBOR: 
District Court for Central District of California where other similar cases against public utilities, banks and other entities involving these patents are pending. We obtained an opinion from patent counsel that our automated telephone systems do not infringe on RAKTL patents and that those patents may be invalid. We will defend ourselves vigorously against these claims but cannot predict their outcome.
Bay Harbor:As part of the development of Bay Harbor by certain subsidiaries of CMS Energy, which went forward under an agreement with the MDEQ, third parties constructed a golf course and a park over several abandoned CKD piles, left over from the former cement plant operation on the Bay Harbor site. Pursuant to the agreement with the MDEQ, a water collection system was constructed to recover seep water from one of the CKD piles and CMS Energy built a treatment plant to treat the seep water. In 2002, CMS Energy sold its interest in Bay Harbor, but retained its obligations under previous environmental indemnifications entered into at the inception of the project.
In September 2004, the MDEQ issued a notice of noncompliance after finding high-pH seep water in Lake Michigan adjacent to the property. The MDEQ also found higher than acceptable levels of heavy metals, including mercury, in the seep water.
In February 2005, the EPA executed an AOC to address problems at Bay Harbor, upon the consent of CMS Land Company (CMS Land) and CMS Capital, LLC, both subsidiaries of CMS Energy. Pursuant to the AOC, the EPA approved a Removal Action Work Plan in July 2005. Among other things, this plan calls for the installation of collection trenches to intercept high-pH CKD leachate flow to the lake. All collection systems contemplated in this work plan have been installed. Shoreline effectiveness monitoring is ongoing, and CMS Land is obligated to address any observed exceedances in pH. This may potentially include the augmentation of the collection system. In May 2006, the EPA approved a pilot carbon dioxide augmentation plan to augment the leachate recovery system by improving pH results in the Pine Court area of the collection system. The augmentation system was installed in June 2006.
In February 2006, CMS Land submitted to the EPA a proposed Remedial Investigation and Feasibility Study for the East Park CKD pile. The EPA approved a schedule for near-term activities, which includes consolidating certain CKD materials and installing collection trenches in the East Park leachate release area. In June 2006, the EPA approved an East Park CKD Removal Action Work Plan and Final Engineering Design for Consolidation. CMS Energy and the MDEQ have initiated negotiations of an AOC and to define a long-term remedy at East Park.
CMS Land has entered into various access, purchase and settlement agreements with several of the affected landowners at Bay Harbor, and entered into a confidential settlement with one landowner to resolve a lawsuit filed by that landowner. CMS has received demands for indemnification relating to claims and/or lawsuits filed by a property owner and a former business owner at Bay Harbor. CMS Land has purchased five unimproved lots and two lots with houses. At this time, CMS Land believes it has all necessary access arrangements to complete the remediation work required under the AOC.
CMS Energy recorded charges related to this matter in 2004, 2005, 2006 totaling $93 million. At March 31,June 30, 2007, CMS Energy has a liability of $48$44 million for its remaining obligations. We based the liability on 2006 discounted costs, using a discount rate of 4.7 percent and an inflation rate of 1 percent on annual operating and maintenance costs. We used the interest rate for 30-year U.S. Treasury securities for the discount rate. The undiscounted amount of the remaining obligation is $62$57 million. We expect to pay $18 million in 2007, $17 million in 2008, $3 million in 2009, and the remaining expenditures as part of long-term operating and maintenance costs. Any significant change in assumptions, such as an increase in the number of sites, different remediation techniques, nature and extent of contamination, inability to reach agreement with the MDEQ or EPA over remedial actions,
CMS-50
CMS Energy Corporation
and legal and regulatory requirements, could impact our estimate of remedial action costs and the timing of the expenditures. An adverse outcome of this matter could, depending on the size of any indemnification obligation or liability under environmental laws, have a potentially significant adverse effect on CMS Energy'sEnergy’s financial condition and liquidity and could negatively impact CMS Energy'sEnergy’s financial results. CMS Energy cannot predict the ultimate cost or outcome of this matter.


                                     CMS-45



                                                          CMS Energy Corporation

CONSUMERS' ELECTRIC UTILITY CONTINGENCIES

ELECTRIC ENVIRONMENTAL MATTERS: 
Consumers’ Electric Utility Contingencies
Electric Environmental Matters:Our operations are subject to environmental laws and regulations. Costs to operate our facilities in compliance with these laws and regulations generally have been recovered in customer rates.
Routine Maintenance Classification:The EPA has alleged that some utilities have incorrectly classified plant modifications as "routine maintenance"“routine maintenance” rather than seeking permits from the EPA to modify the plant from the EPA.plant. We have received and responded to information requests from the EPA on this subject. We believe that we have properly interpreted the requirements of "routine“routine maintenance."” If our interpretation is found to be incorrect, we may be required to install additional pollution controls at some or all of our coal-fired electric generating plants and potentially pay fines. Additionally, the viability of certain plants remaining in operation could be called into question.
Cleanup and Solid Waste:Under the Michigan Natural Resources and Environmental Protection Act, we expect that we will ultimately incur investigation and remedial action costs at a number of sites. We believe that these costs will be recoverable in rates under current ratemaking policies.
We are a potentially responsible party at several contaminated sites administered under the Superfund. Superfund liability is joint and several, meaning that many other creditworthy parties with substantial assets are potentially responsible with respect to the individual sites. Based on our experience, we estimate that our share of the total liability for the known Superfund sites will be between $1 million and $10 million. At March 31,June 30, 2007, we have recorded a liability for the minimum amount of our estimated probable Superfund liability in accordance with FIN 14. The timing of payments related to the remediation of our Superfund sites is uncertain. Any significant change in assumptions, such as different remediation techniques, nature and extent of contamination, and legal and regulatory requirements, could affect our estimate of remedial action costs and the timing of our remediation payments.
Ludington PCB:In October 1998, during routine maintenance activities, we identified PCB as a component in certain paint, grout, and sealant materials at Ludington. We removed and replaced part of the PCB material. Since proposing a plan to deal with the remaining materials, we have had several conversations with the EPA. The EPA has proposed a rule which would authorize continued use of such material in place, subject to certain restrictions. We are not able to predict when a final rule will be issued.
Electric Utility Plant Air Permit Issues:In April 2007, we received a Notice of Violation/Finding of Violation from the EPA alleging that fourteen of our utility boilers exceeded visible emission limits in their associated air permits. The utility boilers are located at the D.E. Karn/J.C. Weadock Generating Complex, the J.H. Campbell Plant, the BC Cobb Electric Generating Station and the JR Whiting Plant. We are preparing forpresently having discussions with the EPA regarding these allegations, but cannot predict the financial impact or outcome of this issue.

LITIGATION: 
Litigation:In 2003, a group of eight PURPA qualifying facilities (the plaintiffs), which sell power to us, filed a lawsuit in Ingham County Circuit Court. The lawsuit alleged that we incorrectly calculated the energy charge payments made pursuant to power purchase agreements with qualifying facilities.
CMS-51
CMS Energy Corporation
The judge deferred to the primary jurisdiction of the MPSC, dismissing the circuit court case without prejudice. In February 2005, the MPSC issued an order in the 2004 PSCR plan case concluding that we have been correctly administering the energy charge calculation methodology. The plaintiffs have appealed the MPSC order to the Michigan Court of Appeals. The plaintiffs also filed suit in the United


                                     CMS-46



                                                          CMS Energy Corporation States Court for the Western District of Michigan, which the judge subsequently dismissed on the basis that the pending state court litigation would fully resolve any federal issue before the courts. The plaintiffs then appealed the dismissal to the United States Court of Appeals, which held that the district court matter should be stayed rather than dismissed, pending the outcome of the state appeal. We cannot predict the outcome of these appeals.

CONSUMERS' ELECTRIC UTILITY RATE MATTERS

ELECTRIC
Consumers’ Electric Utility Rate Matters
Electric ROA:The Customer Choice Act allows electric utilities to recover their net Stranded Costs. In prior orders, the MPSC approved recovery of Stranded Costs incurred from 2002 through 2003 plus the cost of money through the period of collection. At March 31,June 30, 2007, we had a regulatory asset for Stranded Costs of $66$67 million on our Consolidated Balance Sheets. We collect these Stranded Costs through a surcharge on ROA customers. At March 31,June 30, 2007, alternative electric suppliers were providing 283302 MW of generation service to ROA customers, which represent a decrease of 193 percent of ROA load compared to March 31,June 30, 2006. This downward trend has affected negatively our ability to recover timely ourthese Stranded Costs. If downward ROA trends continue, it may require legislative or regulatory assistance to recover fully our Stranded Costs. However, the Customer
Choice Act allows electric utilities to recover their net Stranded Costs. It is difficult to predict future ROA customer trends and their effect on the timely recovery of Stranded Costs.

POWER SUPPLY COSTS: 
Power Supply Costs:To reduce the risk of high power supply costs during peak demand periods and to achieve our reserve margin target, we purchase electric capacity and energy contracts for the physical delivery of electricity primarily in the summer months and to a lesser degree in the winter months. We have purchased capacity and energy contracts covering the reserve margin requirements for 2007 and covering partially the estimated reserve margin requirements for 20072008 through 2010. As a result, we have an asset of $62
million for unexpired seasonal capacity and energy contracts at March 31, 2007.
As of March 31,June 30, 2007, we expect capacity costs for these primarily seasonal electric capacity and energy contracts to be $14$17 million for 2007.
CMS-52
CMS Energy Corporation
PSCR:The PSCR process allows recovery of reasonable and prudent power supply costs. The MPSC reviews these costs for reasonableness and prudency in annual plan proceedings and in plan reconciliation proceedings. The following table summarizes our PSCR reconciliation filings with the MPSC:
Power Supply Cost Recovery Reconciliation
PSCR Cost 
Net Under- of Power Description of Net
PSCR Year Date Filed Order Date recovery Sold Underrecovery
2005 Reconciliation March 2006 July 2007 $36 million $1.081 billion MPSC approved the recovery Sold             Underrecovery
- ---------       ----------  ----------  ------------  --------------  ------------------------

2005            March 2006    Pending   $39of our $36 million $1.086 billion  Underrecovery relatesunderrecovery, including the cost of money, related to
Reconciliation our commercial and industrial customers and
                                                                      includes the cost of
                                                                      money.

customers.
2006 Reconciliation March 2007 Pending   $115 $115 million  $1.492 $1.492 billion Underrecovery relates to
Reconciliation our increased METC costs and coal supply costs, increased bundled sales, and other cost increases beyond those included in the 2006 PSCR plan filings.
2007 PSCR Plan:In September 2006, we filed our 2007 PSCR plan with the MPSC. The plan sought


                                     CMS-47



                                                          CMS Energy Corporation authorization to incorporate our 2005 and 2006 PSCR underrecoveries into our 2007 PSCR monthly factor. In December 2006, the MPSC issued a temporary order allowing us to implement our 2007 PSCR monthly factor on January 1, 2007, as filed. The order also allowed us to continue to roll in prior year underrecoveries and overrecoveries in future PSCR plans.
Underrecoveries in power supply costs are included in Accrued power supply and gas revenue on our Consolidated Balance Sheets. We expect to recover fully all of our PSCR costs. When we are unable to collect these costs as they are incurred, there is a negative impact on our cash flows from electric utility operations. We cannot predict the outcome of these proceedings.

ELECTRIC RATE CASE: 
Electric Rate Case:In March 2007, we filed an application with the MPSC seeking an 11.25 percent authorized return on equity and an annual increase in revenues of $157 million as shown inmillion. In May 2007, we filed supplemental testimony with the following table:

MPSC to include transaction costs from the sale of Palisades. In July 2007, we filed an amended application with the MPSC to include the proposed purchase of the Zeeland power plant, the approval of an energy efficiency program, and to make other revisions.
In July 2007, we also filed a motion for partial and immediate rate relief, which seeks the following:

                                                         In Millions
                                                         -----------

Components • approval to remove the costs associated with Palisades,
• recovery of the proposed purchase of the Zeeland power plant,
• partial and immediate rate relief associated with 2007 capital investments, a $400 million equity infusion into Consumers, and general inflation on operation and maintenance expenses to 2007 levels, and
• approval of a plan for the distribution of $127 million of proceeds from the sale of Palisades to customers, effectively offsetting the partial and immediate relief for up to nine months.
CMS-53
CMS Energy Corporation
The following table summarizes the components of the final and interim requested increase in revenue:
                 
In Millions  
    Partial and        
Components of the increase in revenue   Immediate     Final  
 
Increase in base rates (a)   $ 77     $ 146  
Removal of Palisades from base rates     (169 )     (169 )
Elimination of Palisades base rate recovery credit from the PSCR (b)     167       167  
Surcharge for return on nuclear investments (c)     —       13  
             
Total requested increase in revenues at March 2007 filing     75       157  
Palisades transaction costs     —       28  
Zeeland power plant revenue requirements     84       92  
Energy Efficiency Program surcharge     —       5  
Palisades excess proceeds     (127 )     —  
             
Total requested increase in revenues   $ 32     $ 282  
             
(a) The increase in revenue
Reduction in base rates (a)                                 $(23)
Surcharge for return on nuclear investments relates to Clean Air Act-related and other utility expenditures, changes in the capital structure, and increased distribution system operation and maintenance costs including employee pension and health care costs.
(b)               13
Elimination of Palisades power purchase agreement costs in the PSCR are presently offset through a base rate recovery credit. The Palisades base rate recovery credit will be discontinued once Palisades’ costs are removed from base rates.
(c)       167
                                                            ----
   Total increase in revenues                               $157
                                                            ====
The nuclear surcharge is a proposal to earn a return on funds spent on Big Rock spent nuclear fuel storage, decommissioning, and site restoration expenditures until pending DOE litigation and future MPSC proceedings regarding this issue are concluded.


(a)  The reduction in base rates is due to the removal of Palisades related
     costs offset by Clean Air Act related and other utility expenditures,
     changes in the capital structure, and increased distribution system
     operation and maintenance costs including employee pension and health care
     costs.

(b)  The nuclear surcharge is a proposal to earn a return on funds spent on Big
     Rock spent nuclear fuel storage, decommissioning, and site restoration
     expenditures until pending DOE litigation and future MPSC proceedings
     regarding this issue are concluded.

(c)  Palisades power purchase agreement costs are currently offset through
     feedback in the PSCR related to Palisades base rate revenues via a base
     rate recovery credit. The Palisades base rate recovery credit will be
     discontinued once Palisades' costs are removed from base rates.

If approved as requested, the rate requests would go into effect in January 2008
and would apply to all retail electric customers. 
We cannot predict the amount or timing of any MPSC decision on the requests.

OTHER CONSUMERS' ELECTRIC UTILITY CONTINGENCIES

THE
Other Consumers’ Electric Utility Contingencies
The MCV PPA:The MCV Partnership, which leases and operates the MCV Facility, contracted to sell 1,240 MW of electricity to Consumers under a 35-year power purchase agreement beginning in 1990. We estimate that capacity and energy payments under the MCV PPA will be $620 million per year. The MCV PPA and the associated customer rates are unaffected by the November 2006 sale of our interest in the MCV Partnership.
Underrecoveries related to the MCV PPA:The cost that we incur under the MCV PPA exceeds the recovery amount allowed by the MPSC. We estimate cash underrecoveries of our capacity and fixed energy payments of $39 million in 2007 of which we have expensed $13$30 million during the threesix months ended March 31,June 30, 2007. However, we use savings from the RCP, after allocating a portion to CMS-48



                                                          CMS Energy Corporation

customers, to offset a portion of our capacity and fixed energy underrecoveries expense.
We recover from our customers the capacity and fixed energy charges based on availability, up to an availability cap of 88.7 percent as established in previous MPSC orders. The MCV Partnership has filed an application with the MPSC requesting the elimination of the 88.7 percent availability cap. We cannot predict the outcome of this matter.
RCP:In January 2005, we implemented the MPSC-approved RCP with modifications. The RCP allows us to recover the same amount of capacity and fixed energy charges from customers as approved
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in prior MPSC orders. However, we are able to dispatch the MCV Facility based on natural gas market prices. This results in fuel cost savings for the MCV Facility, which the MCV Partnership shares with us. The RCP also requires us to contributecontributions of $5 million annually to a renewable resources program. As of MarchJune 30, 2007, we have contributedcontributions of $12 million were made to the renewable resources program. The underlying RCP agreement between Consumers and the MCV Partnership extends through the term of the MCV PPA. However, either party may terminate that agreement under certain conditions. In January 2007, the Michigan Attorney General filed an appeal with the Michigan Supreme Court regarding the MPSC'sMPSC’s order approving the RCP. We cannot predictThe Supreme Court denied the outcome of
thisAttorney General’s request to further consider the matter.

Regulatory Out
Regulatory-out Provision in the MCV PPA:After September 15, 2007, we expect to claim relief under the regulatory outregulatory-out provision in the MCV PPA, thereby limiting our capacity and fixed energy payments to the MCV Partnership to the amounts that we collect from our customers. The MCV Partnership has notified us that it takes issue withopposes our intended exercise of the regulatory outregulatory-out provision. We believe that the provision is valid and fully effective, but cannot assure that itwe will prevail in the event of a dispute. If we are successful in exercising the regulatory outregulatory-out provision, the MCV Partnership may, under certain circumstances, have the right to terminate or reduce the amount of capacity sold under the MCV PPA from 1,240 MW to 806 MW, which could affect our reserve margin. Presently, we are in arbitration with the MCV Partnership regarding a dispute on the timing of MCV Partnership’s termination rights prescribed in the MCV PPA.
We anticipate that the MPSC will review our exercise of the regulatory
outregulatory-out provision and the likely consequences of such action in 2007. It is possible that in the event that the MCV Partnership ceases performance under the MCV PPA, prior orders could limit recovery of replacement power costs to the amounts that the MPSC authorized for recovery under the MCV PPA. Depending on the cost of replacement power, this could result in our costs exceeding the recovery amount allowed by the MPSC. We cannot predict the outcome of these matters.
To comply with a prior MPSC order, we made a filing in May 2007 with the MPSC, which asked the MPSC to make a determination regarding whether it wished to reconsider the amount of the MCV PPA payments that we recover from customers. We are unable to predict the outcome of this request.

THE SALE OF NUCLEAR ASSETS AND THE PALISADES POWER PURCHASE AGREEMENT: Sale of
Nuclear Assets: In April 2007, we sold Palisades to Entergy for $380 million.
The final purchase price was subject to various closing adjustments such as
working capital and capital expenditure adjustments and nuclear fuel usage and
inventory adjustments resulting in us receiving $361 million. We also paid
Entergy $30 million to assume ownership and responsibility for the Matters:Big Rock ISFSI. Because of the sale of Palisades, we will also pay the NMC, the former
operator of the Palisades plant, $7 million in exit fees and will forfeit our
investment in the NMC of $5 million.

Entergy will assume responsibility for the future decommissioning of the
Palisades plant and for storage and disposal of spent nuclear fuel located at
the Palisades and the Big Rock ISFSI sites. At closing, we transferred $252
million in decommissioning trust fund balances to Entergy.

The MPSC order approving the Palisades transaction allows us to recover the
estimated $314 million book value of the Palisades plant. As a result, we
estimate that we will credit excess proceeds of $66 million to our retail
customers through refunds applied over the remainder of 2007 and 2008. The MPSC
order deferred ruling on the recovery of $30 million in estimated transaction
costs, including the NMC exit fees, and the $30 million payment to Entergy
related to the Big Rock ISFSI until the next general rate case. We will defer
these costs as a regulatory asset on our Consolidated Balance Sheets as recovery
is probable.


                                     CMS-49



                                                          CMS Energy Corporation

In April 2007, the NRC, through its staff, issued an order approving the
transfer of the Palisades operating license. Subsequently, in April 2007, the
NRC issued an order requiring that certain intervenors be given, under a
protective order, information related to the buyer's financial capability. If,
after the review of the information, the intervenors wished to seek additional
proceedings on the license transfer, the NRC would consider the request. The NRC
did not alter or stay the prior order approving the license transfer. We believe
that it is unlikely that the NRC will conduct further proceedings, but we cannot
predict the outcome of the matter. These events did not hold up the closing of
the sale of Palisades.

The following table summarizes the estimated impacts of the Palisades and the
Big Rock ISFSI transactions:


                                                                        In Millions
- -----------------------------------------------------------------------------------
Customer Benefits (a)                        Deferred costs
- ---------------------                        --------------

Purchase price                      $380     NMC exit fee                       $ 7
   Less: Estimated book value of
         Palisades plant             314     Forfeiture of the NMC investment     5
                                    ----
Excess proceeds to be refunded to
   customers                          66 (b) Estimated selling expenses          18
                                             Big Rock ISFSI operation and
                                             maintenance fee to
Excess decommissioning trust
   funds to be refunded to
   customers                         189 (c) Entergy                             30
                                    ----                                        ---
   Total estimated customer
      refunds                       $255        Total regulatory asset          $60
                                    ====                                        ===


(a)  In the FERC's February 2007 order regarding the Palisades transaction, the
     FERC granted our request to apply $11 million in FERC decommissioning trust
     fund balances for the Palisades plant toward the Big Rock decommissioning
     shortfall, as described in "Big Rock Nuclear Plant Decommissioning" within
     this section. The order was contingent upon the NRC approving the transfer
     of operating licenses, which the NRC approved in April 2007. This
     determination is the subject of a clarification request filed by a
     wholesale customer with the FERC.

(b)  Final proceeds in excess of the book value are subject to closing
     adjustments and review by the MPSC.

(c)  In the MPSC's March 2007 order approving the Palisades transaction, the
     MPSC indicated that $189 million of MPSC jurisdictional decommissioning
     funds must be credited to our retail customers through refunds applied over
     the remainder of 2007 and 2008. Final disposition of these funds is subject
     to closing date balances and is subject to review by the MPSC. The
     remaining estimated $116 million of the MPSC jurisdictional decommissioning
     funds, which is subject to closing date reconciliation will be used to
     benefit our retail customers and is expected to be addressed in a separate
     filing made with the MPSC.

Palisades Power Purchase Agreement: Entergy contracted to sell us 100 percent of
the plant's output up to its current annual average capacity of 798 MW under a
15-year power purchase agreement beginning in April 2007. We provided $30
million in security to Entergy for our power purchase agreement obligation in
the form of a letter of credit. We estimate that capacity and energy payments
under the Palisades power purchase agreement will be $300 million per year.

Because of the Palisades power purchase agreement, the transaction is a sale and
leaseback for accounting purposes. SFAS No. 98 specifies the accounting required
for a seller's sale and simultaneous leaseback involving real estate. We will
have continuing involvement with the Palisades plant through security provided
to Entergy for our power purchase agreement obligation, our DOE liability, and
other forms of involvement. As a result, we will account for the Palisades
plant, which is


                                     CMS-50


                                                          CMS Energy Corporation

the real estate asset subject to the leaseback, as a financing for accounting
purposes and not a sale. We will account for the remaining non-real estate
assets and liabilities associated with the transaction as a sale.

As a financing, the Palisades plant will remain on our Consolidated Balance
Sheets and the related proceeds will be recorded as a financing obligation. The
value of the finance obligation is based on an allocation of the transaction
proceeds to the fair values of the net assets sold and fair value of the
Palisades plant assets under the financing.

BIG ROCK NUCLEAR PLANT DECOMMISSIONING: Decommissioning:The MPSC and the FERC regulate the recovery of costs to decommission the Big Rock nuclear plant.Rock. In December 2000, funding of the Big Rock trust fund stopped because the MPSC-authorized decommissioning surcharge collection period expired. In a March 2007 report to
the MPSC, we indicated that we have managed the decommissioning trust fund to
meet the annual NRC financial assurance requirements by withdrawing NRC
radiological decommissioning costs from the trust fund and initially funding
non-NRC greenfield costs out of corporate funds. In March 2006, we contributed
corporate funds of $16 million to the trust fund to support the NRC radiological
decommissioning costs. Excluding the additional nuclear fuel storage costs due
to the DOE's failure to accept spent nuclear fuel on schedule, we are projecting
theThe level of funds provided by the trust will fallfell short of the amount needed to complete decommissioning by an additional $36 million. This totaldecommissioning. As a result, we provided $50 million of $52
million, which arecorporate contributions for costs associated with NRC radiological and non-NRC greenfield decommissioning work are being funded outas of June 30, 2007. This amount excludes the $30 million payment to Entergy to assume ownership and responsibility for the Big Rock ISFSI and additional corporate funds.contributions for nuclear fuel storage costs of $55 million as of June 30, 2007, due to the DOE’s failure to accept spent nuclear fuel on schedule. We plan to seek recovery of expenditures that we have funded in future filings with the MPSC and have a $36$122 million regulatory asset recorded on our Consolidated Balance Sheets as of March 31,June 30, 2007.

Cost projections
Actual expenditures for Big Rock indicate a decommissioning cost of $389totaled $387 million as of March 2007, of which we have incurred $387 million. These amounts excludeJune 30, 2007. This total excludes the additional costs for spent nuclear fuel storage due to the DOE'sDOE’s failure to accept this spent nuclear fuel on schedule. They also exclude post September 11schedule as well as certain increased security costs that we are recovering through the security cost recovery provisions of Public Act 609 of 2002. These activities had no material
impact on consolidated net income. Any remaining Big Rock decommissioning costs
will initially be funded out of corporate funds.

NUCLEAR MATTERS: 
Nuclear Fuel Cost:We amortized nuclear fuel cost to fuel
expense based on the quantity of heat produced for electric generation. For
nuclear fuel used after April 6, 1983, we charged certain disposal costs to
nuclear fuel expense, recovered these costs through electric rates, and remitted
them to the DOE quarterly. We elected to deferdeferred payment for disposal of spent nuclear fuel burned before April 7, 1983. Our DOE liability is $154$156 million at March 31,June 30, 2007. This amount includes interest, which is payable upon the first delivery of spent nuclear fuel to the DOE. We have recovered, through electric
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CMS Energy Corporation
rates, the amount of this liability, excluding a portion of interest. In conjunction with the sale of Palisades and the Big Rock ISFSI, we retained this obligation and provided $155 million in security to Entergy for this obligation in the form of a letter of credit.
DOE Litigation:In 1997, a U.S. Court of Appeals decision confirmed that the DOE was to begin accepting deliveries of spent nuclear fuel for disposal by January 1998. Subsequent U.S. Court of Appeals litigation, in which we and other utilities participated, has not been successful in producing more specific relief for the DOE'sDOE’s failure to accept the spent nuclear fuel.
There are twoseveral court decisions that support the right of utilities to pursue damage claims in the United States Court of Claims against the DOE for failure to take delivery of spent nuclear fuel. Over 60 utilities have initiated
litigation in the United States Court of Claims. We filed our complaint in
December 2002. If our litigation against the DOE is successful, we plan to use any recoveries as reimbursement for the incurred costs of spent nuclear fuel storage during our ownership of Palisades


                                     CMS-51



                                                          CMS Energy Corporation and Big Rock. We can make no assurance that the litigation against the DOE will be successful. The sale of Palisades and the Big Rock ISFSI did not transfer the right to any recoveries from the DOE related to costs of spent nuclear fuel storage incurred during our ownership of Palisades and Big Rock.
In 2002, the site at Yucca Mountain, Nevada was designated for the development of a repository for the disposal of high-level radioactive waste and spent nuclear fuel. We expect that the DOE, in due course,ultimately, will submit a final license application to the NRC for the repository. The application and review process is estimated to take several years.

Insurance: We maintained nuclear insurance coverage on our nuclear plants until
Palisades and the Big Rock ISFSI were sold in April 2007. At Palisades, we
maintained nuclear property insurance from NEIL totaling $2.750 billion and
insurance that would partially cover the cost of replacement power during
certain prolonged accidental outages. Because NEIL is a mutual insurance
company, we could be subject to assessments of up to $30 million in any policy
year if insured losses in excess of NEIL's maximum policyholders surplus occur
at our, or any other member's, nuclear facility. NEIL's policies include
coverage for acts of terrorism.

At Palisades, we maintained nuclear liability insurance for third-party bodily
injury and off-site property damage resulting from a nuclear energy hazard for
up to approximately $10.761 billion, the maximum insurance liability limits
established by the Price-Anderson Act. Part of the Price-Anderson Act's
financial protection is a mandatory industry-wide program under which owners of
nuclear generating facilities could be assessed if a nuclear incident occurs at
any nuclear generating facility. The maximum assessment against us could be $101
million per occurrence, limited to maximum annual installment payments of $15
million.

We also maintained insurance under a program that covers tort claims for bodily
injury to nuclear workers caused by nuclear hazards. The policy contains a $300
million nuclear industry aggregate limit. Under a previous insurance program
providing coverage for claims brought by nuclear workers, we remain responsible
for a maximum assessment of up to $6 million. This requirement will end December
31, 2007.

Big Rock was insured for nuclear liability up to $544 million through nuclear
insurance and the NRC indemnity, and we maintained a nuclear property insurance
policy from NEIL.

Insurance policy terms, limits, and conditions are subject to change during the
year as we renew our policies.

CONSUMERS' GAS UTILITY CONTINGENCIES

GAS ENVIRONMENTAL MATTERS: 
Consumers’ Gas Utility Contingencies
Gas Environmental Matters:We expect to incur investigation and remediation costs at a number of sites under the Michigan Natural Resources and Environmental Protection Act, a Michigan statute that covers environmental activities including remediation. These sites include 23 former manufactured gas plant facilities. We operated the facilities on these sites for some part of their operating lives. For some of these sites, we have no current ownership or may own only a portion of the original site. In 2005, we estimated our remaining costs to be between $29 million and $71 million, based on 2005 discounted costs, using a discount rate of three percent. The discount rate represents a 10-year average of U.S. Treasury bond rates reduced for increases in the consumer price index. We expect to fund most of these costs through proceeds derived from a settlement with insurers and MPSC-approved rates. At March 31,June 30, 2007, we have a liability of $22$21 million, net of $60$61 million of expenditures incurred to date, CMS-52



                                                          CMS Energy Corporation

and a regulatory asset of $55$53 million. The timing of payments related to the remediation of our manufactured gas plant sites is uncertain. Any significant change in assumptions, such as an increase in the number of sites, different remediation techniques, nature and extent of contamination, and legal and regulatory requirements, could affect our estimate of remedial action costs and the timing of our remediation payments.

CONSUMERS' GAS UTILITY RATE MATTERS

GAS COST RECOVERY: 
Consumers’ Gas Utility Rate Matters
Gas Cost Recovery:The GCR process is designed to allow us to recover all of our purchased natural gas costs if incurred under reasonable and prudent policies and practices. The MPSC reviews these costs, policies, and practices for prudency in annual plan and reconciliation proceedings.
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CMS Energy Corporation
The following table summarizes our GCR reconciliation filings with the MPSC:
Gas Cost Recovery Reconciliation
Net Over- GCR Cost of
GCR Year Date Filed Order Date recovery of Gas Sold Description of Net Overrecovery
- --------    ----------   ----------   ----------   ------------   ---------------------------------
2005-2006 June 2006 April 2007   $3 $3 million   $1.8 $1.8 billion The net overrecovery includes $1 million interest income through March 2006, which resulted from a net underrecovery position during the majority of the GCR period.
                                                                  In
2006-2007 June 2007 the MPSC approved a
                                                                  settlement agreement, agreeing Pending $5 million $1.7 billion The total overrecovery amount reflects an overrecovery of $1 million plus $4 million in accrued interest owed to a $3 million net overrecovery
                                                                  amount.
customers.
Overrecoveries in cost of gas sold are included in Accrued rate refunds on our Consolidated Balance Sheets.
GCR plan for year 2005-2006:In November 2005, the MPSC issued an order for our 2005-2006 GCR Plan year, which resulted in approval of a settlement agreement and established a fixed price cap of $10.10 per mcf for the December 2005 through March 2006 billing period. We were able to maintain our GCR billing factor below the authorized level for that period. The order was appealed to the Michigan Court of Appeals by one intervenor. We are unable to predict the outcome of this proceeding.
GCR plan for year 2006-2007:In August 2006, the MPSC issued an order for our 2006-2007 GCR Plan year, which resulted in approval of a settlement agreement that allowed a base GCR ceiling factor of $9.48 per mcf for the 12-month period of April 2006 through March 2007. We were able to maintain our GCR billing factor below the authorized level for that period.
GCR plan for year 2007-2008:In December 2006, we filed an application with the MPSC seeking approval of a GCR plan for the 12-month period of April 2007 through March 2008. Our request proposed using a GCR factor consisting of:

     -    
• a base GCR ceiling factor of $8.47 per mcf, plus
• a quarterly GCR ceiling price adjustment contingent upon future events.
In June 2007, all parties signed a settlement agreement and filed the agreement with the MPSC for approval. All parties agreed to lower the ceiling on the quarterly adjustment mechanism from $3.50 per mcf to $3.00 per mcf.
Due to an increase in NYMEX gas prices compared to the plan, the base GCR ceiling factor of $8.47increased to $8.67 per mcf plus

     -    a quarterly GCRpursuant to the ceiling price adjustment contingent upon future
          events.


                                              CMS-53



                                                          CMS Energy Corporation

mechanism. The new base GCR ceiling factor was effective beginning July 2007.
In July 2007, the MPSC issued an order for our 2007-2008 GCR Plan year, which resulted in approval of the settlement agreement.
The GCR billing factor is adjusted monthly in order to minimize the over or underrecovery amounts in our annual GCR reconciliation. Our GCR billing factor for the month of MayAugust 2007 is $8.24$7.90 per mcf.
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CMS Energy Corporation
2007 GAS RATE CASE: Gas Rate Case:In February 2007, we filed an application with the MPSC seeking an 11.25 percent authorized return on equity along with an $88 million annual increase in our gas delivery and transportation rates, of which $17
million would be contributed to a low income energy efficiency fund.rates. We have proposed the use of a Revenue Decoupling and Conservation Incentive Mechanism for residential and general service rate classes, to help assure a reasonable
opportunitywhich partially separates the collection of fixed costs from gas sales and enhances the utility’s ability to recover its fixed costs regardless.
The MPSC Staff and intervenors filed testimony on July 20, 2007. In its testimony, the MPSC Staff recommended a 10.5 percent authorized return on equity with a $35 million annual increase in our gas delivery and transportation rates. The schedule established by the MPSC for processing this case could allow for a final order by the end of sales levels.

OTHER CONTINGENCIES

GAS INDEX PRICE REPORTING LITIGATION: 2007.
Other Contingencies
Gas Index Price Reporting Litigation:CMS Energy, CMS MST, CMS Field Services, Cantera Natural Gas, Inc. (the company that purchased CMS Field Services) and Cantera Gas Company are named as defendants in various lawsuits arising as a result of claimed inaccurate natural gas price reporting. Allegations include manipulation of NYMEX natural gas futures and options prices, price-fixing conspiracies, and artificial inflation of natural gas retail prices in California, Colorado, Kansas, Missouri, Tennessee, and Wisconsin. CMS MST has settled a master class action suit in California state court for $7 million. In March 2007, CMS Energy paid $7 million into a trust fund account following preliminary approval of the settlement by the judge. The settlement remains
subject tocourt entered a judgment, final order and decree dated June 12, 2007 granting final approval pending notice to members of the class who have an
opportunity to opt out of or object to the settlement.

action settlement with CMS MST.
In January 2007, CMS MST entered into a settlement agreement to collectively settle four class action suits originally filed in California federal courts for $700,000. On April 3, 2007, plaintiffs filed a motion for preliminary approval of this and other settlements. CMS Energy and the other CMS Energy defendants
will continue to defend themselves vigorously in allAn order was entered on May 3, 2007 granting preliminary approval of the remaining matters
but cannot predict their outcome.

ARGENTINA: settlement and CMS has made its $700,000 settlement payment.
Argentina:As part of its energy privatization incentives, Argentina directed CMS Gas Transmission to calculate tariffs in U.S. dollars, then convert them to pesos at the prevailing exchange rate, and to adjust tariffs every six months to reflect changes in inflation. Starting in early 2000, Argentina suspended the inflation adjustments.
In January 2002, the Republic of Argentina enacted the Public Emergency and Foreign Exchange System Reform Act. This law repealed the fixed exchange rate of one U.S. dollar to one Argentine peso, converted all dollar-denominated utility tariffs and energy contract obligations into pesos at the same one-to-one exchange rate, and directed the Government of Argentina to renegotiate such tariffs.
CMS Gas Transmission began arbitration proceedings against the Republic of Argentina (Argentina) under the auspices of the International Centre for the Settlement of Investment Disputes (ICSID) in mid-2001, citing breaches by Argentina of the Argentine-U.S. Bilateral Investment Treaty (BIT). In May 2005, an ICSID tribunal concluded, among other things, that Argentina'sArgentina’s economic emergency did not excuse Argentina from liability for violations of the BIT. The ICSID tribunal found in favor of CMS Gas Transmission, and awarded damages of U.S. $133 million, plus interest.
The ICSID Convention provides that either party may seek annulment of the award based upon five possible grounds specified in the Convention. Argentina'sArgentina’s Application for Annulment was formally registered by ICSID on September 27, 2005. In March 2007, the Annulment matter was heard before a panel in Paris, and the matter is now before the panel pending a decision.


                                              CMS-54

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CMS Energy Corporation
On December 28, 2005, certain insurance underwriters paid the sum of $75 million to CMS Gas Transmission in respect of their insurance obligations resulting from non-payment of the ICSID award. The payment, plus interest, is subject to repayment by CMS Gas Transmission in the event that the ICSID award is annulled. Pending the outcome of the annulment proceedings, CMS Energy has recorded the $75 million payment as a long-term deferred credit.

QUICKSILVER RESOURCES, INC.
Quicksilver Resources, Inc.:Quicksilver sued CMS MST for breach of contract in connection with a Contract for Sale and Purchase of natural gas, pursuant to which Quicksilver agreed to sell, and CMS MST agreed to buy, natural gas. Quicksilver believes that it is entitled to more payments for natural gas than it has received. CMS MST disagrees with Quicksilver'sQuicksilver’s analysis and believes that it has paid all amounts owed for delivery of gas pursuant to the contract. Quicksilver is seeking damages of up to approximately $126 million, plus prejudgment interest and attorney fees, which in our judgment is unsupported by
the facts.

fees.
The matter was tried before a jury intrial commenced on March 19, 2007. The jury made a finding that
CMS MST has breached the agreement withverdict awarded Quicksilver but found that Quicksilver
had failed to prove damages and accordingly awarded zero compensatory damages to
Quicksilver. However, the jury awardedbut $10 million in punitive damage against
CMS MST.damages. The jury found that CMS MST will opposebreached the contract and committed fraud but found no actual damage on account of either such claim.
On May 15, 2007, the trial court, ruling on motions to counter the entry of the judgment, vacated the jury award of punitive damages onbut held that the basis that
Texas law will not permit an awardcontract should be rescinded prospectively. The judicial rescission of punitive damages if no compensatory
damages have been awarded.the contract caused CMS Energy to record a charge in the second quarter of 2007 of approximately $24 million, net of tax. To preserve its appellate rights, CMS MST filed a motion to modify, correct or reform the judgment and a motion for a judgment contrary to the jury verdict with the trial court. The trial court dismissed these motions. CMS MST has scheduledfiled a datenotice of appeal with the Texas Court of Appeals.
Star Energy: In 2000, a Michigan trial judge granted Star Energy, Inc. and White Pine Enterprises, LLC a judgment in early Mayan action filed in 1999 that claimed Terra Energy Ltd., a former CMS Oil and Gas subsidiary, violated an oil and gas lease and other arrangements by failing to drill wells it had committed to drill. A jury then awarded the plaintiffs an $8 million award. The Court of Appeals reversed the damages award and granted Terra Energy Ltd. a new trial on damages only. The trial was set for August 2007, to consider motions to enter judgment bybut the opposing sides of the
litigation.parties reached a settlement before trial. As a result, CMS Energy cannot predictrecorded a charge in the ultimate outcomesecond quarter of this matter.

2007 of approximately $3 million, net of tax.
T.E.S. FILER CITY AIR PERMIT ISSUE:Filer City Air Permit Issue: In January 2007, we received a Notice of Violation from the EPA alleging that TEST.E.S. Filer City, a generating facility in which we have a 50 percent partnership interest, exceeded certain air permit limits. We are in discussions with the EPA with regard to these allegations, but cannot predict the financial impact or outcome of this issue.

OTHER: 
Other:In addition to the matters disclosed within this Note, Consumers and certain other subsidiaries of CMS Energy are parties to certain lawsuits and administrative proceedings before various courts and governmental agencies arising from the ordinary course of business. These lawsuits and proceedings may involve personal injury, property damage, contractual matters, environmental issues, federal and state taxes, rates, licensing, and other matters.
We have accrued estimated losses for certain contingencies discussed within this Note. Resolution of these contingencies is not expected to have a material adverse impact on our financial position, liquidity, or future results of operations.


                                              CMS-55

CMS-59
CMS Energy Corporation
FASB INTERPRETATION NO.Interpretation No. 45, GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS
FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS: Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others:The Interpretation requires the guarantor, upon issuance of a guarantee, to recognize a liability for the fair value of the obligation it undertakes in issuing the guarantee.
The following table describes our guarantees at March 31,June 30, 2007:
                         
In Millions
                    FIN 45
    Issue   Expiration   Maximum   Carrying
Guarantee Description   Date   Date   Obligation   Amount
 
Indemnifications from asset sales and other agreements (a)   Various   Indefinite   $ 1,495     $ 88 (b)
                         
Surety bonds and other indemnifications   Various   Indefinite     32     —
                         
Guarantees and put options (c)   Various   Various through September 2027     105       1  
 

                                                                                               In Millions
- ----------------------------------------------------------------------------------------------------------
                                                                                                   FIN 45
                                                                                      Maximum     Carrying
Guarantee Description                      Issue Date         Expiration Date        Obligation    Amount
- ---------------------                     ------------   -------------------------   ----------   --------

Indemnifications 
(a) The majority of this amount arises from routine provisions in stock and asset sales agreements under which we indemnify the purchaser for losses resulting from claims related to tax disputes, claims related to power purchase agreements and other agreements (a)                   October 1995   Indefinite                    $1,113        $ 1

Standby lettersthe failure of credit and loans title to the assets or stock sold by us to the purchaser.
(b)   Various        Various through May 2010          84         --

Surety bonds In the second quarter of 2007, we recorded $87 million of liabilities related to tax and other indemnifications Various        Indefinite                         9         --

Guaranteesfor completed asset sales.
(c) Maximum obligation includes $85 million related to the MCV Partnership’s non-performance under a steam and put options (c)            Various        Various through September        207          1
                                                         2027

Nuclear insurance retrospective
   premiums (d)                           Various        Indefinite                       137         --
electric power agreement with Dow. We sold our interests in the MCV Partnership and the FMLP. The sales agreement calls for the purchaser, an affiliate of GSO Capital Partners and Rockland Capital Energy Investments, to pay $85 million, subject to certain reimbursement rights, if Dow terminates an agreement under which the MCV Partnership provides it steam and electric power. This agreement expires in March 2016, subject to certain terms and conditions. The purchaser secured its reimbursement obligation with an irrevocable letter of credit of up to $85 million.


- ------------
(a)  The majority of this amount arises from routine provisions in stock and
     asset sales agreements under which we indemnify the purchaser for losses
     resulting from claims related to tax disputes and the failure of title to
     the assets or stock sold by us to the purchaser. We believe the likelihood
     of a loss for any remaining indemnifications to be remote.

(b)  Standby letters of credit include letters of credit issued under an amended
     credit agreement with Citicorp USA, Inc. The amended credit agreement is
     supported by a guaranty issued by certain subsidiaries of CMS Energy. At
     March 31, 2007, letters of credit issued on behalf of unconsolidated
     affiliates totaling $64 million were outstanding.

(c)  Maximum obligation includes $85 million related to the MCV Partnership's
     non-performance under a steam and electric power agreement with Dow. We
     sold our interests in the MCV Partnership and the FMLP. The sales agreement
     calls for the purchaser, an affiliate of GSO Capital Partners and Rockland
     Capital Energy Investments, to pay $85 million, subject to certain
     reimbursement rights, if Dow terminates an agreement under which the MCV
     Partnership provides it steam and electric power. This agreement expires in
     March 2016, subject to certain terms and conditions. The purchaser secured
     their reimbursement obligation with an irrevocable letter of credit of up
     to $85 million.

(d)  We maintained nuclear insurance coverage on our nuclear plants until
     Palisades and the Big Rock ISFSI were sold in April 2007. For more details
     on the sale of Palisades and Big Rock, see Note 3, Contingencies, "Other
     Consumers' Electric Utility Contingencies - The Sale of Nuclear Assets and
     the Palisades Power Purchase Agreement."


                                              CMS-56

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CMS Energy Corporation
The following table provides additional information regarding our guarantees:
Events That Would Require
Guarantee Description How Guarantee Arose               Would Require Performance
- ---------------------                 -----------------------------------   --------------------------------
Indemnifications from asset sales and other agreements Stock and asset sales agreements Findings of misrepresentation, and other agreements                                                     breach of warranties, tax claims and other specific events or circumstances

Standby letters of credit and loans   Credit agreement                      Non-payment by CMS Energy and
                                                                            Enterprises of obligations under
                                                                            the credit agreement

Surety bonds and other indemnifications Normal operating activity, permits Nonperformance
   indemnifications                   and licenses

Guarantees and put options Nonperformance
  Normal operating activity Nonperformance or non-payment by a subsidiary under a related contract
Agreement to provide power and MCV Partnership's nonperformance
                                      steam to Dow MCV Partnership’s
nonperformance or
non-payment under a
related contract
Guarantees and put options Bay Harbor remediation efforts Owners exercising put options requiring us to purchase property

Nuclear insurance retrospective       Normal operations of nuclear plants   Call by NEIL and Price-Anderson
   premiums                                                                 Act for nuclear incident
At March 31,June 30, 2007, certain contracts contained provisions allowing us to recover, from third parties, amounts paid under the guarantees. For example, if we are required to purchase a property under a put option agreement, we may sell the property to recover the amount paid under the option.
We enter into various agreements containing tax and other indemnification provisions in connection with a variety of transactions, including the sale of our interests in the MCV Partnership and the FMLP. In April 2007, we soldFMLP and the sale of our interest in Palisades and the Big Rock ISFSI to Entergy. As part of the
transaction, we entered into agreements containing tax and other indemnification
provisions.ISFSI. While we are unable to estimate the maximum potential obligation related to these indemnities, we consider the likelihood that we would be required to perform or incur significant losses related to these indemnities and the guarantees listed in the preceding tables to be remote.

Project Financing: We enter into various project-financing security arrangements
such as equity pledge agreements and share mortgage agreements to provide
financial or performance assurance to third parties on behalf of certain
unconsolidated affiliates. Expiration dates for these agreements vary from March
2015 to June 2020 or terminate upon payment or cancellation of the obligation.
Non-payment or other act of default by an unconsolidated affiliate would trigger
enforcement of the security. If we were required to perform under these
agreements, the maximum amount of our obligation under these agreements would be
equal to the value of the shares relinquished to the guaranteed party at the
time of default.

In May 2007, we sold our ownership interests in businesses in the Middle East,
Africa, and India to TAQA. TAQA has assumed all contingent obligations related
to our project-financing


                                     CMS-57


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CMS Energy Corporation

security agreements. For more details on the sale of our ownership interests to
TAQA, see Note 2, Asset Sales, Discontinued Operations
4:Financings and Impairment Charges.

4: FINANCINGS AND CAPITALIZATION

Capitalization
Long-term debt is summarized as follows:
                                                                In Millions
                                         ----------------------------------
                                         March 31, 2007   December 31, 2006
                                         --------------   -----------------

CMS ENERGY CORPORATION
   Senior notes                              $2,271             $2,271
   Other long-term debt                           1                  1
                                             ------             ------
      Total - CMS Energy Corporation          2,272              2,272
                                             ------             ------
CONSUMERS ENERGY COMPANY
   First mortgage bonds                       3,172              3,172
   Senior notes and other                       654                652
   Securitization bonds                         332                340
                                             ------             ------
      Total - Consumers Energy Company        4,158              4,164
                                             ------             ------
OTHER SUBSIDIARIES                              325                331
                                             ------             ------
TOTAL PRINCIPAL AMOUNTS OUTSTANDING           6,755              6,767
   Current amounts                             (710)              (551)
   Net unamortized discount                     (13)               (14)
                                             ------             ------
Total Long-term debt                         $6,032             $6,202
                                             ======             ======


REVOLVING CREDIT FACILITIES: 
                 
In Millions  
    June 30, 2007     December 31, 2006  
 
CMS Energy Corporation                
Senior notes   $ 2,011     $ 2,271  
Other long-term debt     —       1  
             
Total - CMS Energy Corporation     2,011       2,272  
             
Consumers Energy Company                
First mortgage bonds     3,171       3,172  
Senior notes and other     655       652  
Securitization bonds     325       340  
             
Total - Consumers Energy Company     4,151       4,164  
             
Other Subsidiaries     216       328  
             
Total principal amounts outstanding     6,378       6,764  
Current amounts     (960 )     (550 )
Net unamortized discount     (11 )     (14 )
 
                 
Total Long-term debt   $ 5,407     $ 6,200  
 
Financings:The following is a summary of significant long-term debt transactions during the six months ended June 30, 2007:
                                 
    Principal   Interest        
    (in millions)   Rate (%)   Retirement Date   Maturity Date
 
Debt Retirements:                                
CMS Energy                                
Senior notes   $ 260       8.90 %   June 2007   July 2008
Enterprises                                
CMS Generation Investment Co. IV Bank Loan     108     Variable   May 2007   December 2008
 
Total   $ 368                          
 
In July 2007, we issued $250 million of 6.55 percent senior notes due 2017 and $150 million floating rate senior notes due 2013. The floating rate senior notes bear interest at three-month LIBOR plus 95 basis points. We used the proceeds to redeem $361 million of our 7.5 percent senior notes due 2009 which were tendered in July at a premium of $10 million. The remaining $48 million of our 7.5 percent senior notes were called in July and will be redeemed in August 2007.
Revolving Credit Facilities:The following secured revolving credit facilities with banks are available at March 31,June 30, 2007:
                                                                               In Millions
- ------------------------------------------------------------------------------------------
                               Amount of    Amount       Outstanding
  Company    Expiration Date    Facility   Borrowed   Letters-of-Credit   Amount Available
- ----------   ---------------   ---------   --------   -----------------   ----------------

CMS Energy     May 18, 2010      $300         $--            $87                $213
Consumers     March 30, 2012      500          --             59                 441
                                 
                            In Millions
                    Outstanding    
        Amount of   Amount   Letters-of-   Amount
Company   Expiration Date   Facility   Borrowed   Credit   Available
 
CMS Energy   April 2, 2012   $ 300     $-   $ 3     $ 297  
Consumers   March 30, 2012     500       -     218       282  
 
We replaced our $300 million facility in April 2007 with a new $300 million credit facility that expiresin April 2, 2012.2007. Consumers
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CMS Energy Corporation
replaced its $500 million facility with a new $500 million credit facility in March 2007. The new facilities contain less restrictive covenants, and provide for lower fees and lower interest margins than the previous credit facilities.

DIVIDEND RESTRICTIONS: 
Dividend Restrictions:Under provisions of our senior notes indenture, at March
31,June 30, 2007, we had $400 millionpayment of unrestricted net assets available to pay common stock dividends.dividends was limited to $436 million. Our $300 million secured revolving credit facility restricted payments of dividends on our common stock during a 12-month period to $150 million. This restriction was removed with the new $300 million credit facility effective April 2, 2007.
Under the provisions of its articles of incorporation, at March 31,June 30, 2007, Consumers had $227$232 million of unrestricted retained earnings available to pay common stock dividends. The dividend restrictions in its CMS-58



                                                          CMS Energy Corporationsecured revolving credit facility were removed in March 2007. Provisions of the Federal Power Act and the Natural Gas Act effectively restrict dividends to the amount of Consumers'Consumers’ retained earnings. For the threesix months ended March 31,June 30, 2007, we received $94$135 million of common stock dividends from Consumers.

PREFERRED STOCK: 
Preferred Stock:In February 2007, our non-voting preferred subsidiary interest of $11 million was repurchased and redeemed for a cash payment of $32 million. The original $19 million addition to paid-in-capital was reversed and a $1 million redemption premium was charged to retained deficit.

CONTINGENTLY CONVERTIBLE SECURITIES: 
Contingently Convertible Securities:In MarchJune 2007, the $11.87 per share conversion trigger price contingency was met for our $250 million 4.50 percent contingently convertible preferred stock and the $12.81 per share conversion trigger price contingency was met for our $150 million 3.375 percent contingently convertible senior notes. As a result, these securities are convertible at the option of the security holders for the three months ending JuneSeptember 30, 2007, with the par value or principal payable in cash. As of AprilJuly 2007, none of the security holders have notified us of their intention to convert these securities.
Because the 3.375 percent senior notes are convertible on demand, they are classified as current liabilities.

CAPITAL LEASE OBLIGATIONS: 
Capital Lease Obligations:Our capital leases are comprised mainly of leased service vehicles, power purchase agreements,office furniture, and office furniture.gas pipeline capacity. At March 31,June 30, 2007, capital lease obligations totaled $64$63 million. SALE OF ACCOUNTS RECEIVABLE: We estimate future minimum lease payments to range between $10 million and $16 million per year over the next five years.
Sale of Accounts Receivable:Under a revolving accounts receivable sales program, Consumers sells certain accounts receivable to a wholly owned, consolidated, bankruptcy remote special purpose entity. In turn, the special purpose entity may sell an undivided interest in up to $325 million of the receivables. The special purpose entity sold $10 million ofno receivables at March
31,June 30, 2007 and $325 million of receivables at December 31, 2006. Consumers continues to service the receivables sold to the special purpose entity. The purchaser of the receivables has no recourse against Consumers'Consumers’ other assets for failure of a debtor to pay when due and no right to any receivables not sold. Consumers has neither recorded a gain or loss on the receivables sold nor retained an interest in the receivables sold.
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CMS Energy Corporation
Certain cash flows under Consumers'Consumers’ accounts receivable sales program are shown in the following table:
                                                                 In Millions
                                                             ---------------
Three months Ended March 31                                   2007     2006
- ---------------------------                                  ------   ------

Net cash flow as a result of accounts receivable financing   $ (315)  $ (325)
Collections from customers                                   $1,928   $1,817
                                                             ======   ======



                                     CMS-59



                                                          CMS Energy Corporation

                 
In Millions
Six months ended June 30   2007   2006
 
Net cash flow as a result of accounts receivable financing   $ (325 )   $ (325 )
Collections from customers   $ 3,432     $ 3,232  
 
5: EARNINGS PER SHARE

Earnings Per Share
The following table presents the basic and diluted earnings per share computations based on Loss
Income (Loss) from Continuing Operations:
                                                     In Millions, Except Per Share Amounts
                                                     -------------------------------------
Three Months Ended March 31                                       2007     2006
- ---------------------------                                      ------   ------

LOSS AVAILABLE TO COMMON STOCKHOLDERS
   Loss from Continuing Operations                               $  (31)  $  (32)
   Less Preferred Dividends and Redemption Premium                   (4)      (3)
                                                                 ------   ------
   Loss from Continuing Operations Available to
      Common Stockholders - Basic and Diluted                    $  (35)  $  (35)
                                                                 ======   ======
AVERAGE COMMON SHARES OUTSTANDING
    Weighted Average Shares - Basic and Diluted                   221.5    219.1

LOSS PER AVERAGE COMMON SHARE
   AVAILABLE TO COMMON STOCKHOLDERS
      Basic                                                      $(0.16)  $(0.16)
      Diluted                                                    $(0.16)  $(0.16)
                                                                 ======   ======
                 
In Millions, Except Per Share Amounts
Three Months Ended June 30   2007   2006
 
Income (Loss) Available to Common Stockholders                
Income (Loss) from Continuing Operations   $ (55 )   $ 63  
Less Preferred Dividends     (3 )     (3 )
     
Income (Loss) from Continuing Operations Available to Common Stockholders – Basic and Diluted   $ (58 )   $ 60  
     
Average Common Shares Outstanding                
Weighted Average Shares – Basic     222.6       219.6  
Add dilutive impact of Contingently Convertible Securities     —       8.6  
Add dilutive Stock Options and Warrants     —       1.4  
     
Weighted Average Shares – Diluted     222.6       229.6  
     
Income (Loss) Per Average Common Share Available to Common Stockholders                
Basic   $ (0.26 )   $ 0.27  
Diluted   $ (0.26 )   $ 0.26  
 
                 
In Millions, Except Per Share Amounts  
Six Months Ended June 30   2007   2006
 
Income (Loss) Available to Common Stockholders                
Income (Loss) from Continuing Operations   $ (88 )   $ 30  
Less Preferred Dividends and Redemption Premium     (7 )     (6 )
     
Income (Loss) from Continuing Operations Available to Common Stockholders – Basic and Diluted   $ (95 )   $ 24  
     
Average Common Shares Outstanding                
Weighted Average Shares – Basic     222.1       219.3  
Add dilutive impact of Contingently Convertible Securities     —       9.6  
Add dilutive Stock Options and Warrants     —       1.4  
     
Weighted Average Shares – Diluted     222.1       230.3  
     
Income (Loss) Per Average Common Share Available to Common Stockholders                
Basic   $ (0.43 )   $ 0.11  
Diluted   $ (0.43 )   $ 0.11  
 
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CMS Energy Corporation
Contingently Convertible Securities:For the three and six months ended March 31,June 30, 2007, we recorded a loss from continuing operations. Due to antidilution, there was no impact to diluted EPS from our contingently convertible securities. Assuming positive income from continuing operations, our contingently convertible securities dilute EPS to the extent that the conversion value, which is based on the average market price of our common stock, exceeds the principal or par value. Had there been positive income from continuing operations, our contingently convertible securities would have contributed an additional 19.120.6 million shares to the calculation of diluted EPS for the three months ended March 31,June 30, 2007 and 19.9 million shares for the six months ended June 30, 2007.
Stock Options, Warrants and Restricted Stock:For the three months ended March
31,June 30, 2007, due to antidilution, there was no impact to diluted EPS for 1.91.4 million shares of unvested restricted stock awards or for options and warrants to purchase 0.2 million shares of common stock. For the six months ended June 30, 2007, due to antidilution, there was no impact to diluted EPS for 1.4 million shares of unvested restricted stock awards or for options and warrants to purchase 0.4 million shares of common stock. For the three months ended March
31, 2006, due to antidilution, there was no impact to diluted EPS for 0.9
million shares of unvested restricted stock awards and for options and warrants
to purchase 0.5 million shares of common stock. 
An additional 1.40.9 million stock options at March 31,June 30, 2007 and 1.91.8 million stock options at March 31,June 30, 2006, were excluded from the diluted EPS calculation because the exercise price was greater than the average market price of our common stock. These stock options have the potential to dilute EPS in the future.
Convertible Debentures:For the three and six months ended March 31,June 30, 2007, due to antidilution, there was no impact to diluted EPS from our 7.75 percent convertible subordinated debentures. Using the if-converted method, the debentures would have:

     -    increased the numerator of diluted EPS by $2 million for the three
          months ended March 31, 2007, from an assumed reduction of interest
          expense, net of tax, and

     -    increased the denominator of diluted EPS by 4.2 million shares.

• increased the numerator of diluted EPS by $2 million for the three months ended June 30, 2007, and $4 million for the six months ended June 30, 2007, from an assumed reduction of interest expense, net of tax, and
• increased the denominator of diluted EPS by 4.2 million shares.
We can revoke the conversion rights if certain conditions are met.


                                     CMS-60



                                                          CMS Energy Corporation

6: FINANCIAL AND DERIVATIVE INSTRUMENTS

FINANCIAL INSTRUMENTS: Financial and derivative instruments
Financial Instruments:The carrying amounts of cash, short-term investments, and current liabilities approximate their fair values because of their short-term nature. We estimate the fair values of long-term financial instruments based on quoted market prices or, in the absence of specific market prices, on quoted market prices of similar instruments or other valuation techniques.
The cost and fair value of our long-term debt instruments including current maturities are as follows:
                                                                                     In Millions
                                   -------------------------------------------------------------
                                           March 31, 2007                December 31, 2006
                                   -----------------------------   -----------------------------
                                             Fair     Unrealized             Fair     Unrealized
                                    Cost     Value   Gain (Loss)    Cost     Value   Gain (Loss)
                                   ------   ------   -----------   ------   ------   -----------

Long-term debt                     $6,742   $7,028      $(286)     $6,753   $6,949      $(196)
Long-term debt - related parties      178      152         26         178      155         23
                                   ======   ======      =====      ======   ======      =====
                                                 
In Millions  
    June 30, 2007     December 31, 2006  
            Fair     Unrealized             Fair     Unrealized  
    Cost     Value     Gain (Loss)     Cost     Value     Gain (Loss)  
 
Long-term debt   $ 6,367     $ 6,501     $ (134 )   $ 6,750     $ 6,946     $ (196 )
Long-term debt - related parties     178       176       2       178       155       23  
 
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CMS Energy Corporation
The summary of our available-for-sale investment securities is as follows:
                                                                 
In Millions  
    June 30, 2007     December 31, 2006  
            Unrealized     Unrealized                     Unrealized     Unrealized     Fair  
    Cost     Gains     Losses     Fair Value     Cost     Gains     Losses     Value  
 
Nuclear decommissioning investments:                                                                
Equity securities   $ —     $ —     $ —     $ —     $ 140     $ 150     $ (4 )   $ 286  
Debt securities     —       —       —       —       307       4       (2 )     309  
SERP:                                                                
Equity securities     36       25       —       61       36       21       —       57  
Debt securities     11       —       —       11       13       —       —       13  
 

                                                                                                               In Millions
                                           -------------------------------------------------------------------------------
                                                       March 31, 2007                          December 31, 2006
                                           --------------------------------------   --------------------------------------
                                                  Unrealized   Unrealized    Fair          Unrealized   Unrealized    Fair
                                           Cost     Gains        Losses     Value   Cost     Gains        Losses     Value
                                           ----   ----------   ----------   -----   ----   ----------   ----------   -----

Nuclear decommissioning investments: (a)
   Equity securities                       $142      $149         $(4)       $287   $140      $150         $(4)       $286
   Debt securities                          228         2          (2)        228    307         4          (2)        309
SERP:
   Equity securities                         36        22          (1)         57     36        21          --          57
   Debt securities                           13        --          --          13     13        --          --          13
                                           ====      ====         ===        ====   ====      ====         ===        ====


(a)  In preparation for the sale of Palisades, these investments also held cash
     and cash equivalents totaling $91 million at March 31, 2007. In April 2007,
     we sold Palisades and the Big Rock ISFSI to Entergy. Accordingly, we
     transferred $252 million in trust fund assets to Entergy. For additional
     details on the sale of Palisades and the Big Rock ISFSI, see Note 3,
     Contingencies, "Other Consumers' Electric Utility Contingencies - The Sale
     of Nuclear Assets and the Palisades Power Purchase Agreement."

DERIVATIVE INSTRUMENTS: 
Derivative Instruments:In order to limit our exposure to certain market risks, we may enter into various risk management contracts, such as swaps, options, futures, and forward contracts. These contracts, used primarily to manage our exposure to changes in interest rates, commodity prices, and currency exchange rates, are classified as either non-trading or trading. We enter into these contracts using established policies and procedures, under the direction of both:

     -    an executive oversight committee consisting of senior management
          representatives, and

     -    a risk committee consisting of business unit managers.

• an executive oversight committee consisting of senior management representatives, and
• a risk committee consisting of business unit managers.
The contracts we use to manage market risks may qualify as derivative instruments that are subject to derivative and hedge accounting under SFAS No. 133. If a contract is a derivative, it is recorded on our consolidated balance sheet at its fair value. We then adjust the resulting asset or liability each quarter to


                                     CMS-61


                                                          CMS Energy Corporation reflect any change in the market value of the contract, a practice known as marking the contract to market. From time to time, we enter into cash flow hedges. If a derivative qualifies for cash flow hedge accounting treatment, the changes in fair value (gains or losses) are reported in AOCL; otherwise, the changes are reported in earnings.
For a derivative instrument to qualify for cash flow hedge accounting:

     -    the relationship between the derivative instrument and the forecasted
          transaction being hedged must be formally documented at inception,

     -    the derivative instrument must be highly effective in offsetting the
          hedged transaction's cash flows, and

     -    the forecasted transaction being hedged must be probable.

• the relationship between the derivative instrument and the forecasted transaction being hedged must be formally documented at inception,
• the derivative instrument must be highly effective in offsetting the hedged transaction’s cash flows, and
• the forecasted transaction being hedged must be probable.
If a derivative qualifies for cash flow hedge accounting treatment and gains or losses are recorded in AOCL, those gains or losses will be reclassified into earnings in the same period or periods the hedged forecasted transaction affects earnings. If a cash flow hedge is terminated early because it is determined that the forecasted transaction will not occur, any gain or loss recorded in AOCL at that date is recognized immediately in earnings. If a cash flow hedge is terminated early for other economic reasons, any gain or loss as of the termination date is deferred and then reclassified to earnings when the forecasted transaction affects earnings. The ineffective portion, if any, of all hedges is recognized in earnings.
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CMS Energy Corporation
To determine the fair value of our derivatives, we use information from external sources (i.e., quoted market prices and third-partythird party valuations), if available. For certain contracts, this information is not available and we use mathematical valuation models to value our derivatives. These models require various inputs and assumptions, including commodity market prices and volatilities, as well as interest rates and contract maturity dates. The cash returns we actually realize on these contracts may vary, either positively or negatively, from the results that we estimate using these models. As part of valuing our derivatives at market, we maintain reserves, if necessary, for credit risks arising from the financial condition of our counterparties.
The majority of our commodity purchase and sale contracts are not subject to derivative accounting under SFAS No. 133 because:

     -    they do not have a notional amount (that is, a number of units
          specified in a derivative instrument, such as MWh of electricity or
          bcf of natural gas),

     -    they qualify for the normal purchases and sales exception, or

     -    there is not an active market for the commodity.

• they do not have a notional amount (that is, a number of units specified in a derivative instrument, such as MWh of electricity or bcf of natural gas),
• they qualify for the normal purchases and sales exception, or
• there is not an active market for the commodity.
Our coal purchase contracts are not derivatives because there is not an active market for the coal we purchase. If an active market for coal develops in the future, some of these contracts may qualify as derivatives and the resulting mark-to-market impact on earnings could be material.
Derivative accounting is required for certain contracts used to limit our exposure to interest rate risk, commodity price risk, and foreign exchange risk. The following table summarizes our derivative instruments:


                                     CMS-62



                                                          CMS Energy Corporation

                                                 
In Millions
    June 30, 2007   December 31, 2006
                                            Unrealized
            Fair   Unrealized           Fair   Gain
Derivative Instruments   Cost   Value   Loss   Cost   Value   (Loss)
 
Interest rate risk contracts:                                                
Debt tender offer contract     —       (3 )     (3 )     —       —       —  
CMS ERM derivative contracts:                                                
Non-trading electric / gas contracts (a)     —       (1 )     (1 )     —       31       31  
Trading electric / gas contracts (b)     (8 )     (24 )     (16 )     (11 )     (68 )     (57 )
Derivative contracts associated with equity investments in:                                                
Shuweihat (c)     —       —       —       —       (14 )     (14 )
Taweelah (c)     —       —       —       (35 )     (11 )     24  
Jorf Lasfar (c)     —       —       —       —       (5 )     (5 )
Other     —       —       —       —       1       1  
 

                                                                      In Millions
                          -------------------------------------------------------
                                March 31, 2007 
(a) The fair value of CMS ERM’s non-trading electric and gas contracts has decreased significantly from December 31, 2006 --------------------------   --------------------------
                                  Fair    Unrealized           Fair    Unrealized
Derivative Instruments    Cost   Value   Gain (Loss)   Cost   Value   Gain (Loss)
- ----------------------    ----   -----   -----------   ----   -----   -----------
due to the termination of certain gas contracts. CMS ERM had recorded derivative contracts:
   Non-tradingassets, representing cumulative unrealized mark-to-market gains, associated with these contracts.
(b) The fair value of CMS ERM’s trading electric /and gas contracts --      34         34        --has increased significantly from December 31, 31
   Trading electric
      /2006 due to the termination of certain gas contracts      (9)    (68)       (59)      (11)    (68)       (57)
Derivative contractscontracts. CMS ERM had recorded derivative liabilities, representing cumulative unrealized mark-to-market losses, associated with these contracts.
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CMS Energy Corporation
(c) We sold our equity investments in:in Shuweihat, --     (14)       (14)       --     (14)       (14)
   Taweelah, (35)    (12)        23       (35)    (11)        24and Jorf Lasfar --      (4)        (4)       --      (5)        (5)
   Other                   --       1          1        --       1          1
in May 2007. As such, we no longer reflect our proportionate share of the fair value of the derivatives contracts held by these investments in our consolidated financial statements.
We record the fair value of the derivative contracts held by CMS ERM in either Price risk management assets or Price risk management liabilities on our Consolidated Balance Sheets. TheAt December 31, 2006, the fair value of derivative contracts associated with our equity investments iswas included in Investments -– Enterprises on our Consolidated Balance Sheets.
Interest Rate Risk Contracts:In June 2007, we announced a tender offer to repurchase certain of our senior notes. Under the terms of the offer, the holders of those notes had until July 2, 2007 to tender their notes in return for an agreed-upon tender price. This debt tender offer was a derivative instrument and changes in its fair value were recorded in earnings until the offer was settled on July 3, 2007.
CMS ERM CONTRACTS: Contracts:CMS ERM enters into and owns energy contracts that support CMS Energy'sEnergy’s ongoing operations. CMS ERM holds certain contracts for the future purchase and sale of natural gas that will result in physical delivery of the commodity at contractual prices. These forward contracts are generally long-term in nature and are classified as non-trading. CMS ERM also uses various financial instruments, including swaps, options, and futures, to manage commodity price risks associated with its forward purchase and sale contracts and with generation assets owned by CMS Energy or its subsidiaries. These financial contracts are classified as trading activities.
In accordance with SFAS No. 133, non-trading and trading contracts that qualify as derivatives are recorded at fair value on our Consolidated Balance Sheets. The resulting assets and liabilities are marked to market each quarter, and changes in fair value are recorded in earnings as a component of Operating Revenue. For trading contracts, these gains and losses are recorded net in accordance with EITF Issue No. 02-03. Contracts that do not meet the definition of a derivative are accounted for as executory contracts (that is, on an accrual basis).

DERIVATIVE CONTRACTS ASSOCIATED WITH EQUITY INVESTMENTS: At March 31,
Derivative Contracts Associated with Equity Investments:In May 2007, somewe sold our ownership interest in businesses in the Middle East, Africa, and India. Certain of our equity method investees, specifically Taweelah, Shuweihat, Jorf Lasfar,
and Jubail,these businesses held:

     -    
• interest rate contracts that hedged the risk associated with variable-rate debt, and
• foreign exchange contracts that hedged the foreign currency risk associated with payments to be made under operating and maintenance service agreements.
Before the risk associated with
          variable-rate debt, and

     -    foreign exchange contracts that hedged the foreign currency risk
          associated with payments to be made under operating and maintenance
          service agreements.

Wesale, we recorded our proportionate share of the change in fair value of these contracts in AOCL if the contracts qualified for cash flow hedge accounting; otherwise, we recorded our share in Earnings from Equity Method Investees.
At March 31, 2007, there was no ineffectiveness associated with anythe date of the contracts that qualify for cash flow hedge accounting.

In May 2007, we sold our ownership interest in businesses in the Middle East,
Africa, and India, including Taweelah, Shuweihat,


                                     CMS-63



                                                          CMS Energy Corporation

Jorf Lasfar, and Jubail. As a result of that sale, we will no longer recognize
gains or losses related to changes in the fair value of the derivative contracts
held by these equity method investees. At March 31, 2007, we had accumulated a cumulative net loss of $14$13 million, net of tax, in AOCL representing our proportionate share of mark-to-market gains and losses from cash flow hedges held by the equity method investees. At the date we closedAfter the sale, we reclassified this amount adjusted for any additional changes in fair value, was reclassified and recognized it in earnings as parta reduction of the sale. This amount comprisedgain on the total
amount we had recorded in AOCL related to derivative instruments.

Any changes in the fair value of these contracts recognized before the closing
did not affect the sales price of our interest in these equity method investees.sale. For additional details on the sale of our interest in these equity method investees, see Note 2, Asset Sales, Discontinued Operations and Impairment Charges.

FOREIGN EXCHANGE DERIVATIVES: In the past, we have used forward exchange and
option contracts to hedge the value of investments in foreign operations. These
contracts limited the risk from currency exchange rate movements because gains
and losses on such contracts offset losses and gains, respectively, on the
hedged investments. At March 31, 2007, we had no outstanding foreign exchange
contracts. However, the impact of previous hedges on our investments in foreign
operations is reflected in AOCL as a component of the foreign currency
translation adjustment on our Consolidated Balance Sheets. Gains or losses from
the settlement of these hedges are maintained in the foreign currency
translation adjustment until we sell or liquidate the hedged investments. At
March 31, 2007, our total foreign currency translation adjustment was a net loss
of $169 million, which included a net hedging loss of $22 million, net of tax,
related to the settlement of these contracts.

CREDIT RISK:
Credit Risk: Our swaps, options, and forward contracts contain credit risk, which is the risk that counterparties will fail to perform their contractual obligations. We reduce this risk through established credit policies. For each counterparty, we assess credit quality by using credit ratings, financial condition, and other available information. We then establish a credit limit for each counterparty based upon our evaluation of credit quality. We monitor the degree to which we are exposed to potential loss
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under each contract and take remedial action, if necessary.
CMS ERM enters into contracts primarily with companies in the electric and gas industry. This industry concentration may have an impact on our exposure to credit risk, either positively or negatively, based on how these counterparties are affected by similar changes in economic conditions, the weather, or other conditions. CMS ERM typically uses industry-standard agreements that allow for netting positive and negative exposures associated with the same counterparty, thereby reducing exposure. These contracts also typically provide for the parties to demand adequate assurance of future performance when there are reasonable grounds for doing so.
The following table illustrates our exposure to potential losses at March 31,June 30, 2007, if each counterparty within this industry concentration failed to perform its contractual obligations. This table includes contracts accounted for as financial instruments. It does not include trade accounts receivable, derivative contracts that qualify for the normal purchases and sales exception under SFAS No. 133, or other contracts that are not accounted for as derivatives.


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                                                          CMS Energy Corporation

                                         
In Millions
                            Net Exposure   Net Exposure
    Exposure                   from Investment   from Investment
    Before   Collateral   Net   Grade   Grade
    Collateral (a)   Held   Exposure   Companies   Companies (%)
 
CMS ERM   $ 1     $ —     $ 1     $ 1       100 %
 

                                                                 In Millions
- ----------------------------------------------------------------------------
                                                    Net         Net 
(a) Exposure Exposure                            Exposure from        from
            Before                               Investment      Investment
          Collateral   Collateral      Net         Grade           Grade
              (a)         Held      Exposure     Companies     Companies (%)
          ----------   ----------   --------   -------------   -------------

CMS ERM       $46          $ -         $46          $ -               0%
is reflected net of payables or derivative liabilities if netting arrangements exist.


(a)  Exposure is reflected net of payables or derivative liabilities if netting
     arrangements exist.

Based on our credit policies, our current exposures, and our credit reserves, we do not expect a material adverse effect on our financial position or future earnings as a result of counterparty nonperformance.

7: RETIREMENT BENEFITS

7 :Retirement Benefits
We provide retirement benefits to our employees under a number of different plans, including:

     -    a non-contributory, defined benefit Pension Plan,

     -    a cash balance Pension Plan for certain employees hired between July
          1, 2003 and August 31, 2005,

     -    a DCCP for employees hired on or after September 1, 2005,

     -    benefits to certain management employees under SERP,

     -    a defined contribution 401(k) Savings Plan,

     -    benefits to a select group of management under the EISP, and

     -    health care and life insurance benefits under OPEB.

• a non-contributory, defined benefit Pension Plan,
• a cash balance Pension Plan for certain employees hired between July 1, 2003 and August 31, 2005,
• a DCCP for employees hired on or after September 1, 2005,
• benefits to certain management employees under SERP,
• a defined contribution 401(k) Savings Plan,
• benefits to a select group of management under the EISP, and
• health care and life insurance benefits under OPEB.
Pension Plan:The Pension Plan includes funds for most of our current employees, the employees of our subsidiaries, and Panhandle, a former subsidiary. The Pension Plan'sPlan’s assets are not distinguishable by company.
In April 2007, we sold the Palisades nuclear plant to Entergy. Employees transferred to Entergy as a result of the sale no longer participate in our retirement benefit plans. In April 2007, we recorded a net reduction of $27 million in pension SFAS No. 158 regulatory assets with a corresponding decrease of $27 million in pension liabilities on our Consolidated Balance Sheets. We also recorded a net reduction of $15
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$15 million in OPEB regulatory SFAS No. 158 assets with a corresponding decrease of $15 million in OPEB liabilities. The following table shows the net adjustment:
                                        Pension   OPEB
                                        -------   ----

Plan liability transferred to Entergy     $44      $20
Trust assets transferred to Entergy        17        5
                                          ---      ---
Net adjustment                            $27      $15
                                          ===      ===
                 
    Pension     OPEB  
 
Plan liability transferred to Entergy   $ 44     $ 20  
Trust assets transferred to Entergy     17       5  
 
Net adjustment   $ 27     $ 15  
 
Beginning May 1, 2007, the CMS Energy Common Stock Fund willis no longer be an investment option available for new investments in the 401(k) Savings Plan and the employer'semployer’s match willis no longer be in CMS Energy Stock. Participants will have an opportunity to reallocate investments in the CMS Energy Stock Fund to other plan investment alternatives. Beginning November 1, 2007, any remaining shares in the CMS Energy Stock Fund will be sold and the sale proceeds will be reallocated to other plan investment options. At March 31,June 30, 2007, there were 109 million shares of CMS Energy Common Stock in the CMS Energy Stock Fund.


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                                                          CMS Energy Corporation

SFAS No. 158, Employers'Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans -— an amendment of FASB Statements No. 87, 88, 106, and 132(R):In September 2006, the FASB issued SFAS No. 158. Phase one of this standard required us to recognize the funded status of our defined benefit postretirement plans on our Consolidated Balance Sheets at December 31, 2006. Phase one was implemented in December 2006. Phase two of this standard requires that we change our plan measurement date from November 30 to December 31, effective December 31, 2008. We do not believe that implementation of phase two of this standard will have a material effect on our consolidated financial statements. We expect to adopt the measurement date provisions of SFAS No. 158 in 2008.
Costs:The following table recaps the costs, other changes in plan assets, and benefit obligations incurred in our retirement benefits plans:
                                                              In Millions
                                                -------------------------
                                                  Pension         OPEB
                                                -----------   -----------
Three Months Ended March 31                     2007   2006   2007   2006
- ---------------------------                     ----   ----   ----   ----

Service cost                                    $ 12   $ 12   $  6   $  6
Interest expense                                  22     21     17     16
Expected return on plan assets                   (20)   (22)   (16)   (14)
Amortization of:
   Net loss                                       11     11      6      5
   Prior service cost (credit)                     2      2     (2)    (3)
                                                ----   ----   ----   ----
Net periodic cost                                 27     24     11     10
Regulatory adjustment                             (4)    (3)    (2)    --
                                                ----   ----   ----   ----
Net periodic cost after regulatory adjustment   $ 23   $ 21   $  9   $ 10
                                                ====   ====   ====   ====
                                 
In Millions  
    Pension  
    Three Months Ended     Six Months Ended  
June 30   2007     2006     2007     2006  
 
Service cost   $ 13     $ 12     $ 25     $ 24  
Interest expense     21       21       43       42  
Expected return on plan assets     (20 )     (21 )     (40 )     (43 )
Amortization of:                                
Net loss     12       11       23       22  
Prior service cost     2       2       4       4  
     
Net periodic cost     28       25       55       49  
Regulatory adjustment     (4 )     (2 )     (8 )     (5 )
     
Net periodic cost after regulatory adjustment   $ 24     $ 23     $ 47     $ 44  
 
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In Millions  
    OPEB  
    Three Months Ended     Six Months Ended  
June 30   2007     2006     2007     2006  
 
Service cost   $ 6     $ 6     $ 12     $ 12  
Interest expense     18       16       35       32  
Expected return on plan assets     (15 )     (15 )     (31 )     (29 )
Amortization of:                                
Net loss     5       5       11       10  
Prior service credit     (3 )     (2 )     (5 )     (5 )
           
Net periodic cost     11       10       22       20  
Regulatory adjustment     (1 )     (1 )     (3 )     (1 )
           
Net periodic cost after regulatory adjustment   $ 10     $ 9     $ 19     $ 19  
 
8: INCOME TAXES

Income taxes
The principal components of deferred tax assets (liabilities) recognized on our Consolidated Balance Sheets both before and after the adoption of FIN 48 are as follows:
                                                   In Millions
                                           -------------------
                                           01/01/07   12/31/06
                                           --------   --------

Property                                    $(592)     $(790)
Securitized costs                            (177)      (177)
Employee benefits                              38         38
Gas inventories                              (168)      (168)
Tax loss and credit carryforwards             700        867
SFAS No. 109 regulatory liabilities, net      189        189
Foreign investments inflation indexing         86         86
Valuation allowances                         (216)      (116)
Other, net                                    103        106
                                            -----      -----
Net deferred tax assets (liabilities)       $ (37)     $  35
                                            =====      =====
                 
In Millions  
    January 1, 2007     December 31, 2006  
 
Property   $ (592 )   $ (790 )
Securitized costs     (177 )     (177 )
Employee benefits     38       38  
Gas inventories     (168 )     (168 )
Tax loss and credit carryforwards     700       867  
SFAS No. 109 regulatory liabilities, net     189       189  
Foreign investments inflation indexing     86       86  
Valuation allowances     (216 )     (116 )
Other, net     103       106  
       
Net deferred tax assets (liabilities)   $ (37 )   $ 35  
     
As a result of the implementation of FIN 48, we have identified additional uncertain tax benefits of $11 million as of January 1, 2007. Included in this amount is an increase in our valuation allowance of $100 million, decreases to tax reserves of $61 million and a decrease to deferred tax liabilities of $28 million. In addition, our equity method investment, Jorf Lasfar, in which we
held a 50 percent interest,


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                                                          CMS Energy Corporation

identified $26 million of uncertain tax benefits in its adoption of FIN 48 for
U.S. GAAP purposes. We have reflected our share of this amount, $13 million, as
a reduction to our beginning retained earnings balance and in our investment in
the subsidiary. Thus, our beginning retained earnings was reduced by $24 million
as a result of the adoption of FIN 48.

CMS Energy and its subsidiaries file a consolidated U.S. federal income tax return as well as unitary and combined income tax returns in several states. CMS Energy and its subsidiaries also file separate company income tax returns in several states. The only significant state tax paid by CMS Energy is in Michigan. However, since the Michigan Single Business Tax is not an income tax, it is not part of the FIN 48 analysis. For the U.S. federal income tax return, CMS Energy completed examinations by federal taxing authorities for its taxable years prior to 2002. The federal income tax returns for the years 2002 through 2005 are open under the statute of limitations.
We have reflected a net interest liability of $3 million related to our uncertain income tax positions on our Consolidated Balance Sheets as of January 1, 2007. We have not accrued any penalties with respect to uncertain tax benefits. We recognize accrued interest and penalties, where applicable, related to uncertain tax benefits as part of income tax expense.
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CMS Energy Corporation
As of the date of adoption of FIN 48, we had valuation allowances against certain U.S. and foreign deferred tax assets totaling $216 million and other uncertain tax positions of $31 million, resulting in total unrecognized benefits of $247 million. Of this amount, $217 million would result in a decrease in our effective tax rate, if recognized. We released $81 million of our valuation allowance in the first quarter of 2007, reducing our effective tax rate, due to the anticipated sales of our foreign investments, as reflected in our effectiveinvestments. During the second quarter we reduced deferred tax rate reconciliation.
Therefore, remaining uncertain tax benefits that would reduce our effective tax
rate beyond this quarter are $136 million.assets and related valuation allowances attributable to sold foreign assets by $63 million each. This reduction had no income impact. As we continue to market our foreign investments, it is reasonably possible that additional valuation allowance adjustments could be made. We are not in a position to estimate any additional
adjustment at this date, other than to state that we have no expectation of
reversing any of the $86 million valuation allowance attributable to the
inflation indexing of our Venezuelan investment. We are not expecting any other
material changes to our uncertain tax positionsmade over the next 12 months.
The actual income tax benefit on continuing operations differs from the amount computed by applying the statutory federal tax rate of 35 percent to loss before income taxes as follows:


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                                                          CMS Energy Corporation


                                                 In Millions
                                               -------------
Quarters ended March 31                         2007    2006
- -----------------------                        ------   ----

Loss before income taxes                       $(101)   $(60)
                                               -----    ----
Statutory federal income tax rate               x 35%   x 35%
                                               -----    ----
Expected income tax benefit                      (35)    (21)
Increase (decrease) in taxes from:
   Property differences                            5       6
   Income tax effect of foreign investments        2      (1)
   Indefinite deferral projects for U.S. tax      43      (8)
   Income tax credit amortization                 (1)     (1)
   Medicare Part D exempt income                  (2)     (2)
   Tax exempt income                              (1)     (1)
   Valuation allowance                           (81)     --
                                               -----    ----
Recorded income benefit                        $ (70)   $(28)
                                               -----    ----
Effective tax rate                                69%     47%
                                               =====    ====
                 
       In Millions  
 
Six Months Ended June 30   2007     2006  
 
Loss before income taxes   $ (192 )   $ (77 )
       
                 
Statutory federal income tax rate     x 35 %     x 35 %
       
Expected income tax benefit     (67 )     (27 )
Increase (decrease) in taxes from:                
Property differences     7       10  
Income tax effect of foreign investments     47       (17 )
Income tax credit amortization     (2 )     (2 )
Medicare Part D exempt income     (5 )     (3 )
Tax exempt income     (1 )     (2 )
Valuation allowance     (82 )     (2 )
Tax contingency reserves     (1 )     (15 )
IRS settlement/credit restoration     —       (49 )
       
Recorded income benefit   $ (104 )   $ (107 )
 
Effective tax rate     54 %     139 %
     
U.S. income taxes arewere not recorded on the undistributed earnings of foreign subsidiaries that havehad been or arewere intended to be reinvested indefinitely. Upon distribution, those earnings maywould likely be subject to both U.S. income taxes (adjusted for foreign tax credits or deductions) and withholding taxes payable to various foreign countries. During the first quarter of 2007, we announced we had signed agreements or plans to sell substantially all of our foreign assets or subsidiaries. These anticipated sales resulted in the recognition in 2007 of $63$71 million of U.S. income tax expense associated with the change in our determination of our permanent reinvestment of these undistributed earnings, with $43$46 million of this amount reflected in income from continuing operations and $20$25 million in discontinued operations. With this recognition, U.S. tax has
now been provided on all foreign undistributed earnings.

9:   ASSET RETIREMENT OBLIGATIONS

Asset Retirement Obligations
SFAS NO.No. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS: Accounting for Asset Retirement Obligations:This standard requires companies to record the fair value of the cost to remove assets at the end of their useful life, if there is a legal obligation to remove them. Fair value, to the extent possible, should include a market risk premium for unforeseeable circumstances. No market risk premium was included in our ARO fair value estimate
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CMS Energy Corporation
since a reasonable estimate could not be made. If a five percent market risk premium were assumed, our ARO liability would increase by $25$5 million.
If a reasonable estimate of fair value cannot be made in the period in which the ARO is incurred, such as for assets with indeterminate lives, the liability is to be recognized when a reasonable estimate of fair value can be made. Generally, electric and gas transmission and distribution assets have indeterminate lives. Retirement cash flows cannot be determined and there is a low probability of a retirement date. Therefore, no liability has been recorded for these assets or associated obligations related to potential future abandonment. Also, no liability has been recorded for assets that have insignificant cumulative disposal costs, such as substation batteries. The
measurement of the ARO liabilities
FASB Interpretation No. 47,Accounting for Palisades and Big Rock include use of
decommissioning studies that largely utilize third-party cost estimates.


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                                                          CMS Energy Corporation

FASB INTERPRETATION NO. 47, ACCOUNTING FOR CONDITIONAL ASSET RETIREMENT
OBLIGATIONS: Conditional Asset Retirement Obligations:This Interpretation clarified the term "conditional“conditional asset retirement obligation"obligation” as used in SFAS No. 143. The term refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event. We determined that abatement of asbestos included in our plant investments qualifies as a conditional ARO, as defined by FIN 47.
The following tables describe our assets that have legal obligations to be removed at the end of their useful life:
                     
June 30, 2007   In Millions  
    In Service         Trust  
ARO Description   Date     Long-Lived Assets   Fund  
 
Palisades-decommission plant site     1972     Palisades nuclear plant   $ 47 (a)
Big Rock-decommission plant site     1962     Big Rock nuclear plant     —  
JHCampbell intake/discharge water line     1980     Plant intake/discharge water line     —  
Closure of coal ash disposal areas   Various     Generating plants coal ash areas     —  
Closure of wells at gas storage fields   Various     Gas storage fields     —  
Indoor gas services equipment relocations   Various     Gas meters located inside structures     —  
Asbestos abatement     1973     Electric and gas utility plant     —  
Natural gas-fired power plant     1997     Gas fueled power plant     —  
Close gas treating plant and gas wells   Various     Gas transmission and storage     —  
 

March 31, 
(a) In April 2007, In Millions
- -----------------------------------------------------------------------------------------
                                In Service                                          Trust
ARO Description                    Date      Long-Lived Assets                       Fund
- ---------------                 ----------   ------------------------------------   -----

Palisades-decommission
   plant site                         1972we sold Palisades nuclear plant                 $604
Big Rock-decommission
   plant site                         1962and the Big Rock nuclear plant                     2
JHCampbell intake/discharge
   water line                         1980   Plant intake/discharge water line         --
ClosureISFSI to Entergy. The remaining balances represent $36 million of coal ash disposal
   areas                           Various   Generating plants coal ash areas          --
Closuredecommissioning trust funds held for final tax payments and $11 million of wells at gas
   storage fields                  Various   Gas storage fields                        --
Indoor gas services equipment
   relocations                     Various   Gas meters located inside structures      --
Asbestos abatement                    1973   Electricdecommissioning trust funds held until the FERC’s final decision on a customer clarification on a use of the funds, which we received in July 2007. For additional details on the sale of Palisades and gas utility plant            --
Natural gas-fired power plant         1997   Gas fueled power plant                    --
Close gas treating plant and
   gas wells                       Various   Gas transmission and storage              --

                                                                                             In Millions
- --------------------------------------------------------------------------------------------------------
                                     ARO                                                          ARO
                                  Liability                                        Cash flow   Liability
ARO Description                    12/31/06   Incurred   Settled (a)   Accretion   Revisions    3/31/07
- ---------------                   ---------   --------   -----------   ---------   ---------   ---------

Palisades - decommission           $401          $--         $--          $ 7         $ 2         $410the Big Rock - decommissionISFSI, see Note 2, --          --            1          --            3
JHCampbell intake line               --           --          --           --          --           --
Coal ash disposal areas              57           --          (1)           1          --           57
Wells at gas storage fields           1           --          --           --          --            1
Indoor gas services relocations       1           --          --           --          --            1
Asbestos abatement                   35           --          (1)           1          --           35
Natural gas-fired power plant         1           --          (1)          --          --           --
Close gas treating plantAsset Sales, Discontinued Operations and gas wells                          2           --          (1)          --          --            1
                                   ----          ---         ---          ---         ---         ----
   Total                           $500(a)       $--         $(4)         $10         $ 2         $508
                                   ====          ===         ===          ===         ===         ====
Impairment Charges, “Sale of Nuclear Assets.”


(a)  $2 million in ARO liabilities moved to Noncurrent liabilities held for sale
     on our Consolidated Balance Sheets at December 31, 2006. These AROs were
     subsequently settled as a result of the sale of our businesses in Argentina
     and our northern Michigan non-utility natural gas assets to Lucid Energy.
     Cash payments of $2 million are included in the Other current and
     non-current liabilities line in Net cash provided by operating activities
     in our Consolidated Statements of Cash Flows.

In April 2007, we sold Palisades to Entergy and paid Entergy to assume ownership
and responsibility for the Big Rock ISFSI. Our AROs related to Palisades and Big
Rock ISFSI ended with the sale and the related ARO liabilities will be removed
from our Consolidated Balance Sheets. We also expect to


                                     CMS-69

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CMS Energy Corporation

remove the Big Rock ARO related to the plant in the second quarter of 2007 due
to the completion of decommissioning.

                                                 
In Millions  
    ARO                                     ARO  
    Liability                             Cash flow     Liability  
ARO Description   12/31/06     Incurred     Settled (b)     Accretion     Revisions     6/30/07  
 
Palisades – decommission   $ 401     $ —     $ (410 )   $ 7     $ 2     $ —  
Big Rock – decommission     2       —       (3 )     1       —       —  
JHCampbell intake line     —       —       —       —       —       —  
Coal ash disposal areas     57       —       (1 )     2       —       58  
Wells at gas storage fields     1       —       —       —       —       1  
Indoor gas services relocations     1       —       —       —       —       1  
Asbestos abatement     35       —       (1 )     1       —     �� 35  
Natural gas-fired power plant     1       —       (1 )     —       —       —  
Close gas treating plant and gas wells     2       —       (1 )     —       —       1  
     
                                                 
Total   $ 500 (b)   $ —     $ (417 )   $ 11     $ 2     $ 96  
 
(b) $2 million in ARO liabilities moved to Noncurrent liabilities held for sale on our Consolidated Balance Sheets at December 31, 2006. These AROs were subsequently settled as a result of the sale of our businesses in Argentina and our northern Michigan non-utility natural gas assets to Lucid Energy. Cash payments of $3 million are included in the Other current and non-current liabilities line in Net cash provided by operating activities in our Consolidated Statements of Cash Flows. In April 2007, we sold Palisades to Entergy and paid Entergy to assume ownership and responsibility for the Big Rock ISFSI. Our AROs related to Palisades and the Big Rock ISFSI ended with the sale and the related ARO liabilities were removed from our Consolidated Balance Sheets. We also removed the Big Rock ARO related to the plant in the second quarter of 2007 due to the completion of decommissioning.
In October 2004, the MPSC initiated a generic proceeding to review SFAS No. 143, FERC Order No. 631, Accounting, Financial Reporting, and Rate Filing Requirements for Asset Retirement Obligations, and related accounting and ratemaking issues for MPSC-jurisdictional electric and gas utilities. In June 2007, the MPSC issued an order that requires:
• the MPSC Staff to advise the MPSC whether there are any FERC accounts, rules or procedures that should be adopted by reference or changed, and
• the use of a revised calculation for cost of removal estimates derived from applying SFAS No. 143, which includes the use of standard retirement units.
We will also be required to file a new gas depreciation study by August 2006,1, 2008, using 2007 removal costs as the ALJ issuedbasis for the calculation and a Proposalnew electric depreciation study by August 3, 2009, using 2008 removal costs as the basis for Decision that included recommendations that
the MPSC:

- -    adopt SFAS No. 143 and FERC Order No. 631 for accounting purposes but not
     for ratemaking purposes,

- -    consider adopting standardized retirement units for certain accounts,

- -    consider revising the method of determining cost of removal, and

- -    withhold approving blanket regulatory asset and regulatory liability
     accounting treatment related to ARO, stating that modifications to the
     MPSC's Uniform System of Accounts should precede any such accounting
     approval.

We consider the proceeding a clarification of accounting and reporting issues
that relate to all Michigan utilities. We cannot predict the outcome of the
proceeding.

calculation.
10:  EQUITY METHOD INVESTMENTSEquity Method Investments
     Where ownership is more than 20 percent but less than a majority, we account for certain investments in other companies, partnerships, and joint ventures by the equity method of accounting, in accordance with APB Opinion No. 18.accounting. Earnings from equity method investments were $19$17 million for the three months ended March
31,June 30, 2007 and $36$8 million for the three months ended March 31,June 30, 2006. Earnings from equity method investments were $36 million for the six months ended June 30, 2007 and $44 million for the six months ended June 30, 2006. The amount of consolidated retained earnings that represent undistributed earnings from these equity method investments were $6$22 million as of March 31, 2007 and $15
million asJune 30, 2007. As of March 31, 2006.June 30, 2006, distributions from our
CMS-74
CMS Energy Corporation
equity method investments exceeded earnings by $4 million. The most significant of these investments was our 50 percent interest in Jorf Lasfar, which was sold in May 2007.
Summarized financial informationIncome Statement Data for Jorf Lasfar is as follows:

Income Statement Data

                                 
                    In Millions  
    Three Months Ended     Six Months Ended  
June 30   2007 (a)     2006     2007 (a)     2006  
 
Operating revenue   $ 40     $ 113     $ 164     $ 234  
Operating expenses     30       79       113       158  
 
Operating income     10       34       51       76  
Other income (expense), net     17       (13 )     (19 )     (26 )
 
Net income   $ 27     $ 21     $ 32     $ 50  
 

                            In Millions
                     ------------------
JORF LASFAR          Three Months Ended
- -----------          ------------------
March 31 
(a) Jorf Lasfar was sold May 2, 2007. The financial information for the three and six months ended June 30, 2007 2006
- --------                 ----   ----

Operating revenue        $124   $118
Operating expense          83     78
                         ----   ----
Operating income           41     40
Other expense, net         36     15
                         ----   ----
Net income               $  5   $ 25
                         ====   ====
includes financial data through April 30, 2007.



                                     CMS-70



                                                          CMS Energy Corporation

11:  REPORTABLE SEGMENTS

Reportable Segments
Our reportable segments consist of business units organized and managed by the nature of products and services each provides. We evaluate performance based upon the net income of each segment. We operate principally in three reportable segments: electric utility, gas utility, and enterprises. "Other"“Other” includes corporate interest and other expenses and benefits.
The following tables show our financial information by reportable segment:
                                 
In Millions  
    Three Months Ended     Six Months Ended  
June 30   2007     2006     2007     2006  
 
Operating Revenue                                
Electric utility   $ 856     $ 791     $ 1,700     $ 1,520  
Gas utility     391       334       1,602       1,375  
Enterprises     68       91       198       215  
Other     4       3       8       6  
 
                                 
Total Operating Revenue   $ 1,319     $ 1,219     $ 3,508     $ 3,116  
 
                                 
Net Income (Loss) Available to Common Stockholders                                
Electric utility   $ 40     $ 37     $ 91     $ 66  
Gas utility     4       (3 )     61       34  
Enterprises     (33 )     (16 )     (231 )     (82 )
Discontinued operations     91       12       (87 )     21  
Other     (69 )     42       (16 )     6  
 
                                 
Total Net Income (Loss) Available to Common Stockholders   $ 33     $ 72     $ (182 )   $ 45  
         
CMS-75
CMS Energy Corporation
                 
In Millions  
    June 30, 2007     December 31, 2006  
 
Assets                
Electric utility (a)   $ 8,721     $ 8,516  
Gas utility (a)     4,068       3,950  
Enterprises (b)     463       1,947  
Other     1,438       958  
 
                 
Total Assets   $ 14,690     $ 15,371  
 

                                                            In Millions
                                                     ------------------
                                                     Three Months Ended
                                                     ------------------
March 31 
(a) Amounts include a portion of Consumers’ other common assets attributable to both the electric and gas utility businesses.
(b) There were no assets classified as held for sale at June 30, 2007 2006
- --------                                                ----     ----

Operating Revenue
   Electric utility                                    $  844   $  729
   Gas utility                                          1,211    1,041
   Enterprises                                            182      167
                                                       ------   ------
Total Operating Revenue                                $2,237   $1,937
                                                       ------   ------
Net Income (Loss) Available to Common Stockholders
   Electric utility                                    $   51   $   29
   Gas utility                                             57       37
   Enterprises                                           (187)     (58)
   Discontinued operations                               (180)       8
   Other                                                   44      (43)
                                                       ------   ------
Total Net Loss Available to Common Stockholders        $ (215)  $  (27)
                                                       ======   ======

                                                                     In Millions
                                              ----------------------------------
                                              March 31, 2007and $651 million at December 31, 2006
                                              --------------   -----------------

Assets
   Electric utility (a)                           $ 8,557           $ 8,516
   Gas utility (a)                                  3,410             3,950
   Enterprises (b)                                  2,313             2,339
   Other                                              997               566
                                                  -------           -------
Total Assets                                      $15,277           $15,371
                                                  =======           =======
2006.


(a)  Amounts include a portion of Consumers' other common assets attributable
2006 amounts have been reclassified to bothreflect CMS Capital results in the electricCorporate Interest and gas utility businesses.

(b)  Includes $273 million of assets classified as held for sale at March 31,
     2007 and $469 million at December 31, 2006.


                                     CMS-71
Other segment.
CMS-76
Consumers Energy Company

                            CONSUMERS ENERGY COMPANY
                      MANAGEMENT'S DISCUSSION AND ANALYSIS

Consumers Energy Company
Management’s Discussion and Analysis
In this MD&A, Consumers Energy, which includes Consumers Energy Company and all of its subsidiaries, is at times referred to in the first person as "we," "our"“we,” “our” or "us."“us.” This MD&A 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 Consumers Energy'sEnergy’s Form 10-K for the year ended December 31, 2006.

EXECUTIVE OVERVIEW

Consumers, a subsidiary of CMS Energy, a holding company, is a combination
electric
Forward-looking statements and gas utility company serving Michigan's Lower Peninsula. Our
customer base includes a mix of residential, commercial, and diversified
industrial customers.

We manage our business by the nature of services each provides and operate
principally in two business segments: electric utility and gas utility. Our
electric utility operations include the generation, purchase, distribution, and
sale of electricity. Our gas utility operations include the purchase,
transportation, storage, distribution, and sale of natural gas.

We earn our 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. Our businesses are
affected primarily by:

     -    weather, especially during the normal heating and cooling seasons,

     -    economic conditions,

     -    regulation and regulatory issues,

     -    energy commodity prices,

     -    interest rates, and

     -    our debt credit rating.

During the past several years, our business strategy has involved improving our
consolidated balance sheet and maintaining focus on our core strength: utility
operations and service.

In April 2007, we sold Palisades to Entergy for $380 million. The final purchase
price was subject to various closing adjustments resulting in us receiving $361
million. We also paid Entergy $30 million to assume ownership and responsibility
for the Big Rock Independent Spent Fuel Storage Installation (ISFSI). We entered
into a 15-year power purchase agreement with Entergy for 100 percent of the
plant's current electric output. The sale resulted in an immediate improvement
in our cash flow, a reduction in our nuclear operating and decommissioning risk,
and an improvement in our financial flexibility to support other utility
investments. The MPSC order approving the transaction requires that $255 million
be credited to our retail customers through refunds applied over the remainder
of 2007 and 2008.

Natural gas prices are volatile and have an impact on working capital and cash
flow. Although our natural gas costs are recoverable from our utility customers,
higher-priced natural gas stored as inventory requires additional liquidity due
to the lag in cost recovery.


                                      CE-1



                                                        Consumers Energy Company

In the future, we will continue to focus on:

     -    investing in our utility system to enable us to meet our customer
          commitments, comply with increasing environmental performance
          standards, and maintain adequate supply and capacity,

     -    growing earnings while controlling operating costs, and

     -    managing cash flow issues.

As we execute our strategy, we will need to overcome a sluggish Michigan economy
that has been hampered by negative developments in Michigan's automotive
industry and limited growth in the non-automotive sectors of the state's
economy. The return of ROA customer load has offset some of these negative
effects. At March 31, 2007, alternative electric suppliers were providing 283 MW
of generation service to ROA customers. This is 3 percent of our total
distribution load and represents a decrease of 19 percent of ROA load compared
to March 31, 2006.

FORWARD-LOOKING STATEMENTS AND INFORMATION

information
This Form 10-Q and other written and oral statements that we make contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Our intention with the use of words such as "may," "could,"
"anticipates," "believes," "estimates," "expects," "intends," "plans,"“may,” “could,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” and other similar words is to identify forward-looking statements that involve risk and uncertainty. We designed this discussion of potential risks and uncertainties to highlight important factors that may impact our business and financial outlook. We 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 our actual results to differ materially from the results anticipated in these statements. Such factors include our inability to predict and (or) control:
• the price of CMS Energy Common Stock, capital and financial market conditions, and the effect of such market conditions on the Pension Plan, interest rates, and access to the capital markets, including availability of financing to Consumers, CMS Energy, or any of their affiliates, and the energy industry,
• market perception of the energy industry, Consumers, CMS Energy, or any of their affiliates,
• credit ratings of Consumers, CMS Energy, or any of their affiliates,
• factors affecting utility and diversified energy operations, such as unusual weather conditions, catastrophic weather-related damage, unscheduled generation outages, maintenance or repairs, environmental incidents, or electric transmission or gas pipeline system constraints,
• national, regional, and local economic, competitive, and regulatory policies, conditions and developments,
• adverse regulatory or legal decisions, including those related to environmental laws and regulations, and potential environmental remediation costs associated with such decisions,
• potentially adverse regulatory treatment and (or) regulatory lag and receipt of timely regulatory orders concerning a number of significant questions presently before the MPSC including:
• recovery of Clean Air Act capital and operating costs and other environmental and safety-related expenditures,
• recovery of power supply and natural gas supply costs when fuel prices are increasing and (or) fluctuating,
CE - the price of CMS Energy Common Stock, capital and financial market
          conditions, and the effect of such market conditions on the Pension
          Plan, interest rates, and access to the capital markets, including
          availability of financing to Consumers, CMS Energy, or any of their
          affiliates, and the energy industry,

     -    market perception of the energy industry, Consumers, CMS Energy, or
          any of their affiliates,

     -    credit ratings of Consumers, CMS Energy, or any of their affiliates,

     -    factors affecting utility and diversified energy operations, such as
          unusual weather conditions, catastrophic weather-related damage,
          unscheduled generation outages, maintenance or repairs, environmental
          incidents, or electric transmission or gas pipeline system
          constraints,

     -    international, national, regional, and local economic, competitive,
          and regulatory policies, conditions and developments,

     -    adverse regulatory or legal decisions, including those related to
          environmental laws and regulations, and potential environmental
          remediation costs associated with such decisions,

     -    potentially adverse regulatory treatment and (or) regulatory lag
          concerning a number of significant questions presently before the MPSC
          including:


                                      CE-2

1
Consumers Energy Company
• timely recognition in rates of additional equity investments in Consumers,
• adequate and timely recovery of additional electric and gas rate-based investments,
• adequate and timely recovery of higher MISO energy and transmission costs,
• recovery of Stranded Costs incurred due to customers choosing alternative energy suppliers,
• recovery of Palisades sale-related costs,
• authorization of Zeeland power plant purchase costs, and
• impact of possible regulation or legislation regarding carbon dioxide and other greenhouse gas emissions,
• the effects on our ability to purchase capacity to serve our customers and fully recover the cost of these purchases, if we exercise our regulatory-out rights and the owners of the MCV Facility exercise their right to terminate the MCV PPA,
• our ability to exercise our regulatory-out rights as to the MCV PPA,
• our ability to recover Big Rock decommissioning funding shortfalls and nuclear fuel storage costs due to the DOE’s failure to accept spent nuclear fuel on schedule,
• federal regulation of electric sales and transmission of electricity, including periodic re-examination by federal regulators of our market-based sales authorizations in wholesale power markets without price restrictions,
• 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,
• our ability to collect accounts receivable from our customers,
• earnings volatility as a result of the GAAP requirement that we utilize mark-to-market accounting on certain energy commodity contracts and interest rate swaps, which may have, in any given period, a significant positive or negative effect on earnings, which could change dramatically or be eliminated in subsequent periods,
• the effect on our utility of the direct and indirect impacts of the continued economic downturn experienced by the Michigan economy,
• potential disruption or interruption of facilities or operations due to accidents, war, terrorism, or changing political environment, and the ability to obtain or maintain insurance coverage for such events,
• the outcome of pending litigation regarding the DOE liability for spent nuclear fuel storage during former ownership and operation of nuclear power plants,
• technological developments in energy production, delivery, and usage,
• achievement of capital expenditure and operating expense goals,
• changes in financial or regulatory accounting principles or policies,
• changes in domestic or foreign tax laws or new IRS or foreign governmental interpretations of existing or past tax laws,
• outcome, cost, and other effects of legal and administrative proceedings, settlements, investigations and claims,
• disruptions in the normal commercial insurance and surety bond markets that may increase costs or reduce traditional insurance coverage, particularly terrorism and sabotage insurance and performance bonds,
CE - recovery of Clean Air Act capital and operating costs and other
          environmental and safety-related expenditures,

     -    power supply and natural gas supply costs when fuel prices are
          increasing and (or) fluctuating,

     -    timely recognition in rates of additional equity investments in
          Consumers,

     -    adequate and timely recovery of additional electric and gas rate-based
          investments,

     -    adequate and timely recovery of higher MISO energy and transmission
          costs,

     -    recovery of Stranded Costs incurred due to customers choosing
          alternative energy suppliers,

     -    recovery of Palisades plant sale-related costs, and

     -    impact of possible regulation or legislation regarding carbon dioxide
          and other greenhouse gas emissions,

- -    the effects on our ability to purchase capacity to serve our customers and
     fully recover the cost of these purchases, if we exercise our regulatory
     out rights and the owners of the MCV Facility exercise their right to
     terminate the MCV PPA,

- -    federal regulation of electric sales and transmission of electricity,
     including periodic re-examination by federal regulators of our market-based
     sales authorizations in wholesale power markets without price restrictions,

- -    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 costs problems, or other
     developments,

- -    our ability to collect accounts receivable from our customers,

- -    earnings volatility as a result of the GAAP requirement that we utilize
     mark-to-market accounting on certain energy commodity contracts and
     interest rate swaps, which may have, in any given period, a significant
     positive or negative effect on earnings, which could change dramatically or
     be eliminated in subsequent periods,

- -    the effect on our electric utility of the direct and indirect impacts of
     the continued economic downturn experienced by our automotive and
     automotive parts manufacturing customers,

- -    potential disruption or interruption of facilities or operations due to
     accidents or terrorism, and the ability to obtain or maintain insurance
     coverage for such events,

- -    the outcome of pending litigation regarding the DOE liability for spent
     nuclear fuel storage during former ownership and operation of nuclear power
     plants,

- -    technological developments in energy production, delivery, and usage,

- -    achievement of capital expenditure and operating expense goals,

- -    changes in financial or regulatory accounting principles or policies,

- -    changes in tax laws or new IRS interpretations of existing or past tax
     laws,

- -    outcome, cost, and other effects of legal and administrative proceedings,
     settlements,


                                      CE-3

2
Consumers Energy Company

          investigations and claims,

     -    disruptions in the normal commercial insurance and surety bond markets
          that may increase costs or reduce traditional insurance coverage,
          particularly terrorism and sabotage insurance and performance bonds,

     -    other business or investment considerations that may be disclosed from
          time to time in Consumers' or CMS Energy's SEC filings, or in other
          publicly issued written documents, and

     -    other uncertainties that are difficult to predict, many of which are
          beyond our control.

• other business or investment considerations that may be disclosed from time to time in Consumers’ or CMS Energy’s SEC filings, or in other publicly issued written documents, and
• other uncertainties that are difficult to predict, many of which are beyond our control.
For additional information regarding these and other uncertainties, see the "Outlook"“Outlook” section included in this MD&A, Note 2,3, Contingencies, and Part II, Item 1A. Risk Factors.


                                      CE-4


Executive Overview
Consumers, a subsidiary of CMS Energy, a holding company, is a combination electric and gas utility company serving Michigan’s Lower Peninsula. Our customer base includes a mix of residential, commercial, and diversified industrial customers.
We manage our business by the nature of services each provides and operate principally in two business segments: electric utility and gas utility. Our electric utility operations include the generation, purchase, distribution, and sale of electricity. Our gas utility operations include the purchase, transportation, storage, distribution, and sale of natural gas.
We earn our 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. Our businesses are affected primarily by:
• weather, especially during the normal heating and cooling seasons,
• economic conditions,
• regulation and regulatory issues,
• energy commodity prices,
• interest rates, and
• our debt credit rating.
During the past several years, our business strategy has involved improving our consolidated balance sheet and maintaining focus on our core strength: utility operations and service.
In April 2007, we sold Palisades to Entergy for $380 million. The final purchase price is subject to various closing adjustments resulting in us receiving $364 million as of June 30, 2007. We also paid Entergy $30 million to assume ownership and responsibility for the Big Rock ISFSI. We entered into a 15-year power purchase agreement with Entergy for 100 percent of the plant’s current electric output. The sale resulted in an immediate improvement in our cash flow, a reduction in our nuclear operating and decommissioning risk, and an improvement in our financial flexibility to support other utility investments. The MPSC order approving the transaction requires that we refund $255 million to our retail customers through credits applied from June 2007 through December 2008. There are additional excess sales proceeds and decommissioning fund balances of $127 million above the amount in the MPSC order. The distribution of these additional amounts has not yet been addressed by the MPSC.
CE - 3
Consumers Energy Company

RESULTS OF OPERATIONS

After September 15, 2007, we expect to claim relief under the regulatory-out provision in the MCV PPA, thereby limiting our capacity and fixed energy payments to the MCV Partnership to the amounts that we collect from our customers. If we are successful in exercising the regulatory-out provision, the MCV Partnership may, under certain circumstances, have the right to terminate or reduce the amount of capacity sold under the MCV PPA, which could affect our need to build or purchase additional generating capacity.
We introduced our Balanced Energy Initiative, a comprehensive plan to meet customer energy needs over the next 20 years, in May 2007. The plan, as filed with the MPSC, is designed to meet the growing customer demand for electricity with energy efficiency, demand management, expanding the use of renewable energy, and developing new power plants to complement existing generating sources.
In May 2007, we entered an agreement to buy a 946 MW natural gas-fired power plant located in Zeeland, Michigan with Broadway Gen Funding LLC, an affiliate of LS Power Group, for $517 million. The purchase is subject to approvals from the MPSC and other regulatory bodies and is expected to close in early 2008.
In the future, we will continue to focus on:
• investing in our utility system to enable us to meet our customer commitments, comply with increasing environmental performance standards, and maintain adequate supply and capacity,
• growing earnings while controlling operating costs,
• managing cash flow issues, and
• principles of safe, efficient operations, customer value, fair and timely regulation, and consistent financial performance.
As we execute our strategy, we will need to overcome a sluggish Michigan economy that has been hampered by negative developments in Michigan’s automotive industry and limited growth in the non-automotive sectors of the state’s economy. The return of ROA customer load has offset some of these negative effects. At June 30, 2007, alternative electric suppliers were providing 302 MW of generation service to ROA customers. This is 3 percent of our total distribution load and represents a decrease of 3 percent of ROA load compared to June 30, 2006.
CE - 4
Consumers Energy Company
Results of Operations
NET INCOME AVAILABLE TO COMMON STOCKHOLDER
                                                                      In Millions
                                                             --------------------
Three months ended March 31                                  2007   2006   Change
- ---------------------------                                  ----   ----   ------

   Electric                                                  $ 51   $ 29    $ 22
   Gas                                                         57     37      20
   Other (Includes the MCV Partnership and FMLP interests)      4    (56)     60
                                                             ----   ----    ----
Net income available to common stockholder                   $112   $ 10    $102
                                                             ====   ====    ====
                         
    In Millions  
Three months ended June 30   2007     2006     Change  
 
Electric   $ 40     $ 37     $ 3  
Gas     4       (3 )     7  
Other (Includes the MCV Partnership and FMLP interests)     —       1       (1 )
 
                         
Net income available to common stockholder   $ 44     $ 35     $ 9  
 
For the three months ended March 31,June 30, 2007, net income available to our common stockholder was $112$44 million, compared to $10$35 million for the three months ended March 31,June 30, 2006. The increase primarily reflects lower nuclear operating and maintenance costs. The increase also reflects higher net income from our electric and gas utilities due to higher, weather-driven sales caused by favorable weather compared to 2006, and a gas rate increase authorized in November 2006. Partially offsetting these gains was a decrease in electric net income due to the sale of Palisades in April 2007. As a result of the sale of Palisades, electric revenue related to the recovery of Palisades and Big Rock costs has been used to offset costs incurred under our power purchase agreement with Entergy.
Specific changes to net income available to our common stockholder for 2007 versus 2006 are:
             
        In Millions
 
•   lower nuclear operating and maintenance costs,   $ 33  
•   increase in electric delivery revenue primarily due to favorable weather,     11  
•   increase in gas delivery revenue primarily due to the MPSC’s November 2006 gas rate order,     8  
•   increase in gas delivery revenue primarily due to favorable weather,     2  
•   decrease due to electric revenue being used to offset costs incurred under our power purchase agreement with Entergy,     (27 )
•   increase in income taxes, primarily due to the absence of IRS income tax benefits, and     (13 )
•   other net decreases.     (5 )
 
Total Change   $ 9  
 
CE - 5
Consumers Energy Company
                         
    In Millions  
Six months ended June 30   2007     2006     Change  
 
Electric   $ 91     $ 66     $ 25  
Gas     61       34       27  
Other (Includes the MCV Partnership and FMLP interests)     4       (55 )     59  
 
 
Net income available to common stockholder   $ 156     $ 45     $ 111  
 
For the six months ended June 30, 2007, net income available to our common stockholder was $156 million, compared to $45 million for the six months ended June 30, 2006. The increase primarily reflects the sale of our ownership interest in the MCV Partnership in late 2006. Accordingly, in 2007 we are no longer experiencing mark-to-market losses on certain long-term gas contracts and associated financial hedges at the MCV Partnership. The increase also reflects higher net income from our electric and gas utilities due to higher, weather-driven sales caused by colderfavorable weather compared to 2006, and a gas rate increase authorized in November 2006. Partially offsetting these gains are
higher operatingwas a decrease in electric net income due to the sale of Palisades in April 2007. As a result of the sale of Palisades, electric revenue related to the recovery of Palisades and maintenance expenses atBig Rock costs has been used to offset costs incurred under our gas utility.

power purchase agreement with Entergy.
Specific changes to net income available to our common stockholder for 2007 versus 2006 are:
                                                                     In Millions
                                                                     -----------

- -    decrease in losses from our ownership interest in the MCV
     Partnership primarily due to the absence, in 2007, of
     mark-to-market losses on certain long-term gas contracts and
     financial hedges,                                                   $ 57

- -    increase in gas delivery revenue primarily due to the MPSC's
     November 2006 gas rate order,                                         21

- -    increase in electric delivery revenue primarily due to colder
     weather, and                                                          15

- -    increase in gas delivery revenue primarily due to colder
     weather                                                                9
                                                                         ----
Total Change                                                             $102
                                                                         ====



                                      CE-5

             
        In Millions
 
•   decrease in losses from our ownership interest in the MCV Partnership primarily due to the absence, in 2007,
    of mark-to-market losses on certain long-term gas contracts and financial hedges,   $ 63  
•   increase in gas delivery revenue primarily due to the MPSC’s November 2006 gas rate order,     29  
•   lower nuclear operating and maintenance costs,     29  
•   increase in electric delivery revenue primarily due to favorable weather,     26  
•   increase in gas delivery revenue primarily due to favorable weather,     11  
•   decrease due to electric revenue being used to offset costs incurred under our power purchase agreement with Entergy,     (27 )
•   increase in income taxes, primarily due to the absence of IRS income tax benefits,     (12 )
•   increase in general taxes, and     (7 )
•   other net decreases.     (1 )
 
Total Change   $ 111  
 
CE - 6
Consumers Energy Company
ELECTRIC UTILITY RESULTS OF OPERATIONS
                                                                    In Millions
                                                           --------------------
March 31                                                   2007   2006   Change
- --------                                                   ----   ----   ------

Net Income for the three months ended                       $51    $29     $22
                                                            ===    ===     ===
Reasons for the change:
Electric deliveries                                                        $24
Other operating expenses, other income
   and non-commodity revenue                                                 9
General taxes                                                               (4)
Interest charges                                                             1
Income taxes                                                                (8)
                                                                           ---
Total change                                                               $22
                                                                           ===


ELECTRIC DELIVERIES: In
                         
            In Millions  
 
June 30   2007     2006     Change  
 
Three months ended   $ 40     $ 37     $ 3  
Six months ended   $ 91     $ 66     $ 25  
 
                 
    Three Months Ended     Six Months Ended  
Reasons for the change:   June 30, 2007 vs. 2006     June 30, 2007 vs. 2006  
 
Electric deliveries   $ 16     $ 40  
Palisades revenue to PSCR     (41 )     (41 )
Power supply costs and related revenue     (12 )     (12 )
Other operating expenses, other income, and non-commodity revenue     55       64  
General taxes     (3 )     (7 )
Interest charges     (7 )     (6 )
Income taxes     (5 )     (13 )
 
 
Total change   $ 3     $ 25  
 
Electric deliveries:For the first quarter ofthree months ended June 30, 2007, electric delivery revenues increased by $24$16 million overversus 2006, as deliveries to end-use customers were 9.5 billion kWh, an increase of 0.20.3 billion kWh or 23 percent versus 2006. The increase in electric deliveries wasfor the three months ended June 30, 2007 is primarily due to colderfavorable weather in the first
quarter of 2007 versus 2006 and resulted in an increase in electric delivery revenue of $17$13 million. Average temperaturesFor the six months ended June 30, 2007, electric delivery revenues increased $40 million versus 2006, as deliveries to end-use customers were 19.0 billion kWh, an increase of 0.5 billion kWh or 3 percent versus 2006. The increase in the first quarterelectric deliveries for six months ended June 30, 2007 is primarily due to favorable weather, which resulted in an increase in electric delivery revenue of 2007 were
3.8 degrees colder than the same period last year.

$30 million.
In the first quarter of 2006, we started collecting a surcharge that the MPSC authorized under Section 10d(4) of the Customer Choice Act. Due to timing
considerations, thisThis surcharge increased electric delivery revenue by $5$3 million infor the first quarter ofthree months ended June 30, 2007 and $8 million for the six months ended June 30, 2007 versus the same periods in 2006. The increase was primarily due to higher surcharge factors in 2007 versus the same period in 2006.
The Customer Choice Act allows all of our electric customers to buy electric generation service from us or from an alternative electric supplier. At March
31,June 30, 2007, alternative electric suppliers were providing 283302 MW of generation service to ROA customers. This amount represents a decrease of 193 percent compared to March 31,June 30, 2006. The return of former ROA customers to full-service rates increased electric delivery revenue less than $1 million for the three months ended June 30, 2007 and $2 million infor the first quarter ofsix months ended June 30, 2007 versus the same periods in 2006.
Palisades revenue to PSCR:For the three months and six months ended June 30, 2007, as a result of the sale of Palisades, electric revenue of $41 million related to the recovery of the Palisades and Big Rock costs has been used to offset costs incurred under our power purchase agreement with Entergy.
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Consumers Energy Company
Power supply costs and related revenue:For the three months and six months ended June 30, 2007, PSCR revenue decreased by $12 million versus 2006. OTHER OPERATING EXPENSES, OTHER INCOME AND NON-COMMODITY REVENUE: InThe decrease primarily reflects a reduction in amounts to be recovered under the first
quarter ofPSCR mechanism.
Other operating expenses, other income and non-commodity revenue:For the three months ended June 30, 2007, other operating expenses decreased $1$48 million, other income increased $6$10 million, and non-commodity revenue increased $2decreased $3 million versus 2006. For the six months ended June 30, 2007, other operating expenses decreased $49 million, other income increased $16 million, and non-commodity revenue decreased $1 million versus 2006.
The decrease in other operating expenses was primarily due to lower operating and maintenance expense, including reductions to certain workers'workers’ compensation and injuries and damages expense. These decreases were offset partially by higher depreciation amortization, and overheadamortization expense. Operating and maintenance expense decreased primarily due to the absence, in 2007, of costs incurred in 2006 related to a planned refueling outage at our Palisades, nuclear
plant, and lower overhead, line maintenance, and storm restoration costs. Also contributing to the decrease was the sale of Palisades in April 2007. Depreciation and amortization expense increased due to higher non-nuclear plant in service and greater amortization of certain regulatory assets. Overhead expense
increased primarily due to costs related to our voluntary separation program and
costs associated with our utility reorganization.

The
For the three months ended June 30, 2007, the increase in other income was primarily due to higher interest income. For the six months ended June 30, 2007, the increase in other income was primarily due to higher interest income and higher income associated with our Section 10d(4) Regulatory Asset. ThisThe increase on our Section 10d(4) Regulatory Asset reflects the absence, in 2007, of the impact of the MPSC'sMPSC’s final order in CE-6



                                                        Consumers Energy Company

this case. The increase in non-commodity revenue was primarily due to higher
revenue from customer late payment fees.

GENERAL TAXES: In
General taxes:For the first quarter ofthree months ended June 30, 2007, general tax expense increased
primarily due to higher property tax and sales and use tax expense, offset partially by lower MSBT expense. For the six months ended June 30, 2007, general tax expense versus 2006.

INTEREST CHARGES: Inincreased due to higher property tax and sales and use tax expense.
Interest charges:For the first quarter ofthree months and six months ended June 30, 2007, interest charges decreasedincreased primarily due to lower average debt levels and lower interest expense associated with potential customer refundsamounts to be refunded to customers as a result of the sale of Palisades. The MPSC order approving the Palisades power purchase agreement with Entergy directed us to record interest on the unrefunded balance.
Income taxes:For the three months ended June 30, 2007, income taxes increased versus 2006.

INCOME TAXES: In2006 primarily due to the first quarterabsence, in 2007, of the resolution of an IRS income tax audit which resulted in an income tax benefit primarily for the utilization or restoration of income tax credits. For the six months ended June 30, 2007, income taxes increased primarily due to higher earnings by the electric utility versus 2006. Partially offsetting
this increase is the absence, in 2007, of adjustments to certain deferred tax
balances. For additional details, see Note 7, Income Taxes.

GAS UTILITY RESULTS OF OPERATIONS
                                                                     In Millions
                                                            --------------------
March 31                                                    2007   2006   Change
- --------                                                    ----   ----   ------

Net Income for the three months ended                       $ 57    $37    $ 20
                                                            ====    ===    ====
Reasons for the change:
Gas deliveries                                                             $ 14
Gas rate increase                                                            33
Other gas revenue and other income                                            4
Operation and maintenance                                                   (13)
Depreciation and general taxes                                               (5)
Interest charges                                                             (2)
Income taxes                                                                (11)
                                                                           ----
Total change                                                               $ 20
                                                                           ----


GAS DELIVERIES: In
                         
            In Millions  
 
June 30   2007     2006     Change  
 
Three months ended   $ 4     $ (3 )   $ 7  
Six months ended   $ 61     $ 34     $ 27  
 
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Consumers Energy Company
                 
    Three Months Ended     Six Months Ended  
Reasons for the change:   June 30, 2007 vs. 2006     June 30, 2007 vs. 2006  
 
Gas deliveries   $ 3     $ 17  
Gas rate increase     12       45  
Gas wholesale and retail services, other gas revenues and other income     6       10  
Operation and maintenance     (7 )     (20 )
General taxes and depreciation     (1 )     (6 )
Interest charges     1       (1 )
Income taxes     (7 )     (18 )
     
 
Total change   $ 7     $ 27  
 
Gas deliveries:For the first quarter ofthree months ended June 30, 2007, gas delivery revenues increased by $14$3 million overversus 2006 as gas deliveries, including miscellaneous transportation to end-use customers, were 13746 bcf, an increase of 144 bcf or 11 percent versus
2006.9 percent. The increase in gas deliveries was primarily due to colderfavorable weather in the firstsecond quarter of 2007 versus 2006. Average temperatures
For the six months ended June 30, 2007, gas delivery revenues increased by $17 million over 2006 as gas deliveries, including miscellaneous transportation to end-use customers, were 183 bcf, an increase of 18 bcf or 10 percent. The increase in the first quarter of
2007 were 3.8 degrees colder than the same period last year.

GAS RATE INCREASE: gas deliveries was primarily due to favorable weather.
Gas rate increase:In November 2006, the MPSC issued an order authorizing an annual rate increase of $81 million. As a result of this order, gas revenues increased $33$12 million for the first quarter ofthree months ended June 30, 2007 versus 2006.

OTHER GAS REVENUE AND OTHER INCOME: Inand $45 million for the first quarter of 2007,six months ended June 30, 2007.
Gas wholesale and retail services, other gas revenuerevenues and other income increased $4 million versus 2006income:For the three and six months ended June 30, 2007, the increase was primarily due to higher pipeline capacity optimization revenue.

OPERATION AND MAINTENANCE: Ininterest income.
Operation and maintenance:For the first quarter ofthree months and six months ended June 30, 2007, operation and maintenance expenses increased versus 2006 primarily due to higher customer
service and overhead expense. Customer service expense increased primarily due to higher uncollectible accounts expense and contributions, beginning in November 2006 pursuant to a November 2006 MPSC order, to a fund that provides energy assistance to low-income customers. Overhead expense increased primarily
due to costs related to our voluntary


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                                                        Consumers Energy Company

separation program
General taxes and costs associated with our utility reorganization.

DEPRECIATION AND GENERAL TAXES: Indepreciation:For the first quarter ofthree months ended June 30, 2007, depreciation expense increased versus 2006 primarily due to higher plant in service. General
taxThe increase in general taxes reflects higher MSBT expense. For the six months ended June 30, 2007 depreciation expense also increased versus 2006 primarily due to higher plant in service. The increase in general taxes reflects higher property tax expense.

INTEREST CHARGES: Inexpense, offset partially by lower MSBT expense
Interest charges:For the first quarter ofthree months ended June 30, 2007, interest charges reflect lower average debt levels versus 2006. For the six months ended June 30, 2007, interest charges reflect higher interest on our GCR overrecovery balance and higher associated company interest, offset partially by lower average debt levels versus 2006.

INCOME TAXES: In
Income taxes:For the first quarter ofthree and six months ended June 30, 2007, income taxes increased versus 2006 primarily due to higher earnings by the gas utility.
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Consumers Energy Company
OTHER NONUTILITY RESULTS OF OPERATIONS
                                                                     In Millions
                                                            --------------------
March 31                                                    2007   2006   Change
- --------                                                    ----   ----   ------

                                                            ---    ----     ---
Net Income for the three months ended                        $4    $(56)    $60
                                                            ===    ====     ===


In
                         
    In Millions  
 
June 30   2007     2006     Change  
 
Three months ended   $ —     $ 1     $ (1 )
Six months ended   $ 4     $ (55 )   $ 59  
 
For the first quarter ofthree months ended June 30, 2007, net income from other nonutility operations was $4
million, an increase of $60decreased $1 million versus 2006. InThe decrease is due to the absence of a tax benefit, in 2007, associated with the resolution of an IRS income tax audit. Primarily offsetting this decrease was the sale, in late 2006, we soldof our ownership interest in the MCV Partnership. The change in earnings reflects the absence, in 2007, of a $57$6 million loss related to our ownership interest in the MCV Partnership. The loss in 2006 primarily reflects mark-to-market losses on certain long-term gas contracts and associated financial hedges.

CRITICAL ACCOUNTING POLICIES

For the six months ended June 30, 2007, net income from other nonutility operations was $4 million, an increase of $59 million versus 2006. In late 2006, we sold our ownership interest in the MCV Partnership. The change in earnings reflects the absence, in 2007, of a $63 million loss related to our ownership interest in the MCV Partnership. The loss in 2006 primarily reflects mark-to-market losses on certain long-term gas contracts and associated financial hedges. Partially offsetting this increase is the absence, in 2007, of a tax benefits associated with the resolution of an IRS income tax audit.
Critical Accounting Policies
The following accounting policies are important to an understanding of our results of operations and financial condition and should be considered an integral part of our MD&A. For additional accounting policies, see Note 1, Corporate Structure and Accounting Policies.

USE OF ESTIMATES AND ASSUMPTIONS

Use of Estimates and Assumptions
We use estimates and assumptions in preparing our consolidated financial statements that may affect reported amounts and disclosures. We use accounting estimates for asset valuations, depreciation, amortization, financial and derivative instruments, employee benefits, and contingencies. For example, we estimate the rate of return on plan assets and the cost of future health-care benefits to determine our annual pension and other postretirement benefit costs. Actual results may differ from estimated results due to factors such as changes in the regulatory environment, competition, regulatory decisions, and lawsuits.

CONTINGENCIES: 
Contingencies:We are involved in various regulatory and legal proceedings that arise in the ordinary course of our business. We record a liability for contingencies based upon our assessment that a loss is probable and the amount of loss can be reasonably estimated. We use the principles in SFAS No. 5 when recording estimated liabilities for contingencies. We consider many factors in making these assessments, including the history and specifics of each matter. We discuss significant contingencies in the "Outlook"“Outlook” section included in this MD&A.


                                      CE-8

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Consumers Energy Company

ACCOUNTING FOR FINANCIAL AND DERIVATIVE INSTRUMENTS AND MARKET RISK INFORMATION

FINANCIAL INSTRUMENTS: 
Accounting for Financial and Derivative Instruments and Market Risk Information
Financial Instruments:Debt and equity securities classified as available-for-sale are reported at fair value determined from quoted market prices. Debt and equity securities classified as held-to-maturity are reported
at cost. Unrealized gains or losses resulting from changes in fair value of certain available-for-sale debt and equity securities are reported, net of tax, in equity as part of AOCI. Unrealized gains or losses are excluded from earnings unless the related changes in fair value are determined to be other than temporary. Unrealized gains or losses on our nuclear decommissioning investments are reflected as regulatory liabilities on our Consolidated Balance Sheets. Realized gains or losses would not affect our consolidated earnings or cash
flows.

DERIVATIVE INSTRUMENTS: earnings.
Derivative Instruments:We account for derivative instruments in accordance with SFAS No. 133. Since the year ended December 31, 2006, there have been no significant changes in the amount or types of derivatives that we hold or to how we account for derivatives. For additional details on our derivatives, see Note 4,5, Financial and Derivative Instruments.
To determine the fair value of our derivatives, we use information from external sources (i.e., quoted market prices and third-partythird party valuations), if available. For certain contracts, this information is not available and we use mathematical valuation models to value our derivatives. These models require various inputs and assumptions, including commodity market prices and volatilities, as well as interest rates and contract maturity dates. Changes in forward prices or volatilities could significantly change the calculated fair value of our derivative contracts. The cash returns we actually realize on these contracts may vary, either positively or negatively, from the results that we estimate using these models. As part of valuing our derivatives at market, we maintain reserves, if necessary, for credit risks arising from the financial condition of our counterparties.

MARKET RISK INFORMATION: 
Market Risk Information:The following is an update of our risk sensitivities since December 31, 2006. These sensitivities indicate the potential loss in fair value, cash flows, or future earnings from our financial instruments, including our derivative contracts, assuming a hypothetical adverse change in market rates or prices of 10 percent. Changes in excess of the amounts shown in the sensitivity analyses could occur if changes in market rates or prices exceed the 10 percent shift used for the analyses.
Interest Rate Risk Sensitivity Analysis (assuming(assuming an increase in market interest rates of 10 percent):
                                                                                       In Millions
                                                                ----------------------------------
                                                                March 31, 2007   December 31, 2006
                                                                --------------   -----------------

Variable-rate financing - before tax annual earnings exposure        $  2               $  3
Fixed-rate financing - potential REDUCTION in fair value (a)          128                134
                 
    In Millions  
 
    June 30, 2007     December 31, 2006  
 
Variable-rate financing – before tax annual earnings exposure   $ 2     $ 3  
Fixed-rate financing – potentialreductionin fair value (a)     128       134  
 
(a) Fair value reduction could only be realized if we repurchased all of our fixed-rate financing.


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                                                        Consumers Energy Company

Commodity Price Risk Sensitivity Analysis (assuming(assuming an adverse change in market prices of 10 percent):
                                                                                       In Millions
                                                                ----------------------------------
                                                                March 31, 2007   December 31, 2006
                                                                --------------   -----------------

Potential REDUCTION in fair value of fixed fuel price
   contracts (a)                                                      $--                $1


(a)  In 2006, we entered into two contracts that fix the prices we pay for
     gasoline and diesel fuel used in our fleet vehicles and equipment through
     September 2007. These contracts are derivatives with an immaterial fair
     value at March 31, 2007.

                 
            In Millions  
 
    June 30, 2007     December 31, 2006  
 
Potentialreductionin fair value of fixed fuel price contracts   $ —     $ 1  
 
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Consumers Energy Company
Investment Securities Price Risk Sensitivity Analysis (assuming(assuming an adverse change in market prices of 10 percent):
                                                                                       In Millions
                                                                ----------------------------------
                                                                March 31, 2007   December 31, 2006
                                                                --------------   -----------------

Potential REDUCTION in fair value of available-for-sale
   equity securities (SERP investments and investment in CMS
   Energy common stock)                                               $6                 $6


We maintained trust funds, as required by the NRC, for the purpose of funding
certain costs of nuclear plant decommissioning through April 2007, the date of
the sale of Palisades. These funds were invested primarily in equity securities,
fixed-rate, fixed-income debt securities, and cash and cash equivalents, and
have been recorded at fair value on our Consolidated Balance Sheets. These
investments were exposed to price fluctuations in equity markets and changes in
interest rates. Because the accounting for nuclear plant decommissioning
recognized that costs were recovered through our electric rates, fluctuations in
equity prices or interest rates did not affect our consolidated earnings or cash
flows.

                 
    In Millions  
 
    June 30, 2007     December 31, 2006  
 
Potentialreductionin fair value of available-for-sale equity securities (SERP investments and investment in CMS Energy common stock)   $ 6     $ 6  
 
For additional details on market risk and derivative activities, see Note 4,5, Financial and Derivative Instruments. For additional details on nuclear plant
decommissioning at Big Rock and Palisades, see the "Other Electric Business
Uncertainties - Nuclear Matters" section included in this MD&A.

OTHER

Other
Other accounting policies important to an understanding of our results of operations and financial condition include:

     -    accounting for long-lived assets and equity method investments,

     -    accounting for the effects of industry regulation,

     -    accounting for pension and OPEB,

     -    accounting for asset retirement obligations,

     -    accounting for nuclear decommissioning costs, and

     -    accounting for related party transactions.

• accounting for long-lived assets and equity method investments,
• accounting for the effects of industry regulation,
• accounting for pension and OPEB,
• accounting for asset retirement obligations,
• accounting for nuclear decommissioning costs, and
• accounting for related party transactions.
These accounting policies were disclosed in our 2006 Form 10-K and there have been no subsequent material changes.


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                                                        Consumers Energy Company

CAPITAL RESOURCES AND LIQUIDITY

Capital Resources and Liquidity
Factors affecting our liquidity and capital requirements are:

     -    results of operations,

     -    capital expenditures,

     -    energy commodity and transportation costs,

     -    contractual obligations,

     -    regulatory decisions,

     -    debt maturities,

     -    credit ratings,

     -    working capital needs, and

     -    collateral requirements.

• results of operations,
• capital expenditures,
• energy commodity and transportation costs,
• contractual obligations,
• regulatory decisions,
• debt maturities,
• credit ratings,
• working capital needs, and
• collateral requirements.
During the summer months, we purchase natural gas and store it for resale primarily during the winter heating season. Although our prudent natural gas costs are recoverable from our customers, the amount paid for natural gas stored as inventory requires additional liquidity due to the lag in cost recovery. We
have credit agreements with our commodity suppliers containing terms that can
result in margin calls. While we currently have no outstanding margin calls
associated with our natural gas purchases, they may be required if agency
ratings are lowered or if market conditions become unfavorable relative to our
obligations to those parties.

Our current financial plan includes controlling operating expenses and capital expenditures and evaluating market conditions for financing opportunities, if needed.
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Consumers Energy Company
We believe the following items will be sufficient to meet our liquidity needs:

     -    our current level of cash and revolving credit facilities,

     -    our anticipated cash flows from operating and investing activities,
          and

     -    our ability to access secured and unsecured borrowing capacity in the
          capital markets, if necessary.

• our current level of cash and revolving credit facilities,
• our anticipated cash flows from operating and investing activities, and
• our ability to access secured and unsecured borrowing capacity in the capital markets, if necessary.
In the firstsecond quarter of 2007, Moody'sMoody’s and S&P affirmedupgraded our long-term credit ratings and revised theour rating outlook to positivestable from stable. Additionally, Fitch Ratings
upgraded credit ratings on certain of our securities.

CASH POSITION, INVESTING, AND FINANCING

positive.
Cash Position, Investing, and Financing
Our operating, investing, and financing activities meet consolidated cash needs. At March 31,June 30, 2007, we had $97 million$1.377 billion of consolidated cash, which includes $58$45 million of restricted cash.

SUMMARY OF CASH FLOWS:


                                                                    In Millions
                                                                   ------------
Three Months Ended March 31                                         2007   2006
- ---------------------------                                        -----   ----

Net cash provided by (used in):
   Operating activities                                            $ 371   $ 69
   Investing activities                                             (221)   (23)
                                                                   -----   ----
Net cash provided by operating and investing activities              150     46
   Financing activities                                             (148)    (9)
                                                                   -----   ----
Net Increase in Cash and Cash Equivalents                          $   2   $ 37
                                                                   =====   ====



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                                                        Consumers Energy Company

OPERATING ACTIVITIES: 
Summary of Cash Flows:
                 
    In Millions  
 
Six Months Ended June 30   2007     2006  
 
Net cash provided by (used in):                
Operating activities   $ 559     $ 274  
Investing activities     290       (214 )
     
Net cash provided by operating and investing activities     849       60  
Financing activities     446       (20 )
     
Net Increase in Cash and Cash Equivalents   $ 1,295     $ 40  
 
Operating Activities:For the threesix months ended March 31,June 30, 2007, net cash provided by operating activities was $371$559 million, an increase of $302$285 million versus 2006. This increase was primarily dueIn addition to increased earnings, the timing
of accounts payable,operating cash flow increased usage of gas inventory in storage, anddue to the absence in 2007 of tax payments made to the MCV Partnership gas supplier funds on deposit, partially offset
byparent related to the timing of accounts receivable. We experienced colder weather in the first
quarter of 2007 versus 2006. The timing of payments for increased natural gas
purchases to meet customer demand in the first quarter of 2007, coupled with the
absence ofIRS income tax audit, payments for higher priced gas made during the first quarterpart of 2006, increasedand the MCV Partnership gas supplier funds on deposit. Also increasing our operating cash flow. A mildflow was our increased usage of gas already in storage during 2007, as the milder winter in 2006 allowed us to accumulate more gas in our underground storage facilities. The increased usage
of gas already in storage during the first quarter of 2007 also increased our
operating cash flow. These increases were reduced partially by the timing of our collection of increased billings in the first quarter of 2007 due to recent regulatory actions and weather-driven demand.

INVESTING ACTIVITIES: demand and the absence in 2007 of additional payables to the parent related to the IRS income tax audit.
Investing Activities:For the threesix months ended March 31,June 30, 2007, net cash used
inprovided by investing activities was $221$290 million, an increase of $198$504 million versus 2006. This increase was due to proceeds from the sale of Palisades and proceeds from our nuclear decommissioning trust funds. This increase was partially offset by the absence in 2007 of $128 million of restricted cash released in February 2006 and an increase in capital expenditures.

FINANCING ACTIVITIES: 2006.
Financing Activities:For the threesix months ended March 31,June 30, 2007, net cash used
inprovided by financing activities was $148$446 million, an increase of $139$466 million versus 2006. This increase was primarily due to an increase in common stock dividends
to the parent and the absence of a cash infusioninfusions from the parent.

OBLIGATIONS AND COMMITMENTS

REVOLVING CREDIT FACILITY: 
Obligations and Commitments
Revolving Credit Facility:For details on our revolving credit facility, see Note 3,4, Financings and Capitalization.

DIVIDEND RESTRICTIONS: 
Dividend Restrictions:For details on dividend restrictions, see Note 3,4, Financings and Capitalization.

OFF-BALANCE SHEET ARRANGEMENTS:
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Consumers Energy Company
Off-Balance Sheet Arrangements: We enter into various arrangements in the normal course of business to facilitate commercial transactions with third parties. These arrangements include indemnifications, letters of credit and surety bonds.
We enter into agreements containing indemnifications standard in the industry and indemnifications specific to a transaction, such as the sale of a subsidiary. Indemnifications are usually agreements to reimburse other companies if those companies incur losses due to third-partythird party claims or breach of contract terms. Banks, on our behalf, issue letters of credit guaranteeing payment to a third-party.third party. Letters of credit substitute the bank'sbank’s credit for ours and reduce credit risk for the third-partythird party beneficiary. We monitor these obligations and believe it is unlikely that we would be required to perform or otherwise incur any material losses associated with these guarantees. For additional details on these arrangements, see Note 2,3, Contingencies, "Other“Other Contingencies - FASB Interpretation No. 45, Guarantor'sGuarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others."

SALE OF ACCOUNTS RECEIVABLE: ”
Sale of Accounts Receivable:Under a revolving accounts receivable sales program, we may sell up to $325 million of certain accounts receivable. The highly liquid and efficient market for securitized financial assets provides a lower cost source of funding compared to unsecured debt. For additional details, see Note 3,4, Financings and Capitalization.


                                     CE-12



                                                        Consumers Energy Company

OUTLOOK

Outlook
CORPORATE OUTLOOK
Our business strategy will focus on investing in our utility system to enable us to meet our customer commitments, comply with increasing environmental performance standards, and maintain adequate supply and capacity.

In the first quarter of 2007, we completed a reorganization of the company that
we announced in November 2006. The reorganization improves operating efficiency,
reliability, and customer service.

ELECTRIC BUSINESS OUTLOOK

GROWTH: 
Growth:In 2007, we expect electric deliveries to grow about one-half of one percent compared to 2006 levels. The outlook for 2007 assumes a small decline in industrial economic activity and normal weather conditions throughout the remainder of the year.
Over the next five years, we expect electric deliveries to grow at an average rate of about 1.5 percent per year. This outlook assumes a modestly growing customer base and a stabilizing Michigan economy after 2007. This growth rate includes both full-service sales and delivery service to customers who choose to buy generation service from an alternative electric supplier, but excludes transactions with other wholesale market participants and other electric utilities. This growth rate reflects a long-range expected trend of growth. Growth from year to year may vary from this trend due to customer response to the following:
• energy conservation measures,
• fluctuations in weather conditions, and
• changes in economic conditions, including utilization and expansion or contraction of manufacturing facilities.
CE - energy conservation measures,

     -    fluctuations in weather conditions, and

     -    changes in economic conditions, including utilization and expansion or
          contraction of manufacturing facilities.

ELECTRIC CUSTOMER REVENUE OUTLOOK: Our electric utility customer base includes a
mix of residential, commercial, and diversified industrial customers. In 2006,
Michigan's14
Consumers Energy Company
Electric Customer Revenue Outlook:Michigan’s economy has been hampered by automotive industry experienced manufacturing facility closures and restructurings. OurThe Michigan economy has also had limited growth in the non-automotive sector. Although our electric utility results are not dependent upon a single customer, or even a few customers, and customers in the automotive sector represented five percent of our total 2006 electric revenue.
Electric Reserve Margin:We cannot predict
the impact of current or possible future restructuring plans or possible future
actions by our industrial customers.

ELECTRIC RESERVE MARGIN: We are planning forhave a reserve margin of approximately 11 percent for summer 2007, or supply resources equal to 111 percent of projected firm summer peak load. Of the 2007 supply resources target of 111 percent, we expect 96 percent to comecomes from our electric generating plants and long-term power purchase contracts, and 15 percent to comecomes from other contractual arrangements. Our 15-year power purchase agreement with Entergy for 100 percent of the Palisades facility'sfacility’s current electric output will offset the reduction in the owned capacity represented by the sale of the Palisades
facility in April 2007. We have purchased capacity and energy contracts covering the reserve margin requirements for 2007 and covering partially the estimated reserve margin requirements for 20072008 through 2010. As a
result, we recognized an asset of $62 million for unexpired seasonal capacity
and energy contracts at March 31, 2007.


                                     CE-13



                                                        Consumers Energy Company

After September 15, 2007, we expect to exercise the regulatory outregulatory-out provision in the MCV PPA, resulting in a reduction in the amount paid to the MCV Partnership to equal the amount we are allowed to recover in the rate charged to customers. If we are successful in exercising this provision, the MCV Partnership may, under certain circumstances, have the right to terminate the MCV PPA, which could affect our reserve margin status. The MCV PPA represents 13 percent of our 2007 supply resources target.

ELECTRIC UTILITY PLANT OUTAGE: In September 2006, we removed from service unit
three of the J.H. Campbell electric generating plant, representing 765 MW of our
capacity. The scheduled outage was for installation of equipment necessary to
comply with environmental standards. We expected the unit to return to service
in March 2007. However, the outage extended to May 1, 2007 due to unanticipated
delays in construction due to labor shortages, the collapse of an outdoor crane
on unit three and problems with a major generator component that was refurbished
by the original equipment manufacturer. The MPSC allows for the recovery of
reasonable and prudent replacement power costs.

ELECTRIC TRANSMISSION EXPENSES: resources.
Electric Transmission Expenses:METC, which provides electric transmission service to us, increased substantially the transmission rates it charged us in 2006. The revenue collected by METC under those rates is subject to refund pending a FERC ruling. In January 2007, the parties filed a settlement agreement with the FERC. This settlement, if approved by the FERC, will result in a refund of 2006 transmission charges of $18 million and a corresponding reduction of our power supply costs. For additional details on power supply costs, see Note 2,3, Contingencies, "Electric“Electric Rate Matters -– Power Supply Costs."

21ST CENTURY ELECTRIC ENERGY PLAN: ”
21st Century Electric Energy Plan:In January 2007, the chairman of the MPSC proposed three major policy initiatives to the governor of Michigan. The initiatives involve the use of more renewable energy resources by all load-serving entities such as Consumers, the creation of an energy efficiency program, and a procedure for reviewing proposals to construct new generation facilities. The January proposal indicated that Michigan needs new base-load capacity by 2015 and recommends measures to make it easier to predict customer demand and revenues. The proposed initiatives will require changes to current legislation. We will continue to participate as the MPSC, legislature, and other stakeholders address future electric resource needs.

BALANCED ENERGY INITIATIVE: 
Balanced Energy Initiative:In May 2007, we filed a "Balanced“Balanced Energy Initiative"Initiative” with the MPSC providing a comprehensive energy resource plan to meet our projected short-term and long-term electric power requirements. The plan is responsive to the 21st Century Electric Energy Plan and assumes that Michigan will implement a state-wide energy efficiency program and a renewable energy portfolio standard. The filing requests the MPSC to rule that the Balanced Energy Initiative represents a reasonable and prudent plan for the acquisition of necessary electric utility resources.
As acknowledged in the 21st Century Electric Energy Plan, implementation of the Balanced Energy Initiative will require legislative repeal or significant reform of the Michigan customer choice law.Customer Choice Act. In addition, we endorse the 21st Century Electric Energy Plan recommendation to adopt a new, up-front certification policy for major power plant investments. Our filing requests the MPSC to find that the addition of 500 MW of gas-fired combined cycle generating capacity is reasonable and prudent. This addition could be in the form of the construction
of a new gas-fired generating plant to begin service in 2011, or in the form of
a purchase of an existing gas-fired facility. The filing also
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Consumers Energy Company
recommends construction of a new 750 MW clean coal generating facility on an existing Consumers site to begin operation in 2015. Ownership of 250 MW of the total capacity is assumed to be allocated to municipal entities or other interested parties, resulting in 500 MW dedicated to us.

PROPOSED RENEWABLE ENERGY LEGISLATION: our use.
Proposed Power Plant Purchase:In May 2007, we reached an agreement with Broadway Gen Funding LLC, an affiliate of LS Power Group, to buy a 946 MW gas-fired power plant located in Zeeland, Michigan for $517 million. The power plant will help meet the growing energy needs of our customers. We expect to close on the purchase in early 2008, subject to MPSC and other regulatory approvals and other closing conditions.
Proposed Renewable Energy Legislation:There are various bills introduced into
in the U.S. Congress and the Michigan legislature relating to mandatory renewable energy standards. If enacted, these bills generally would require electric utilities to acquire a certain percentage of their power from renewable sources or otherwise pay fees or purchase allowances in lieu of having the resources. We cannot predict whether any such bill will be enacted or in what form.


                                     CE-14



                                                        Consumers Energy Company

ELECTRIC BUSINESS UNCERTAINTIES
Several electric business trends or uncertainties may affect our financial condition and future results of operations. These trends or uncertainties have, or we reasonably expect could have, a material impact on revenues or income from continuing electric operations.

ELECTRIC ENVIRONMENTAL ESTIMATES: 
Electric Environmental Estimates:Our operations are subject to environmental laws and regulations. Costs to operate our facilities in compliance with these laws and regulations generally have been recovered in customer rates.
Clean Air Act:Compliance with the federal Clean Air Act and resulting regulations continues to be a significant focus for us. The Nitrogen Oxide State Implementation Plan requires significant reductions in nitrogen oxide emissions. To comply with the regulations, we expect to incur capital expenditures totaling $835 million. From 1998 to present, we have incurred $782 million in capital expenditures to comply with the federal Clean Air Act and resulting regulations and anticipate that the remaining $53 million of capital expenditures will be made in 2007 through 2011. These expenditures include installing selective catalytic reduction control technology on four of our coal-fired electric generating units. The key assumptions in the capital expenditure estimate include:

     -    construction commodity prices, especially construction material and
          labor,

     -    project completion schedules,

     -    cost escalation factor used to estimate future years' costs, and

     -    an AFUDC capitalization rate.

• construction commodity prices, especially construction material and labor,
• project completion schedules,
• cost escalation factor used to estimate future years’ costs, and
• an AFUDC capitalization rate.
Our current capital cost estimates include an escalation rate of 2.6 percent and an AFUDC capitalization rate of 7.8 percent. From 1998 to present, we have
incurred $760 million in capital expenditures to comply with the federal Clean
Air Act and resulting regulations and anticipate that the remaining $75 million
of capital expenditures will be made in 2007 through 2011.

In addition to modifying coal-fired electric generating plants, our compliance plan includes the use of nitrogen oxide emission allowances until all of the control equipment is operational in 2011. The nitrogen oxide emission allowance annual expense is projected to be $3$2 million per year, which we expect to recover from our customers through the PSCR process. The projected annual expense is based on market price forecasts and forecasts of regulatory provisions, known as progressive flow control, that restrict the usage in any given year of allowances banked from previous years. The allowances and their cost are accounted for as inventory. The allowance inventory is expensed at the rolling average cost as the electric generating plants emit nitrogen oxide.
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Consumers Energy Company
Clean Air Interstate Rule:In March 2005, the EPA adopted the Clean Air Interstate Rule that requires additional coal-fired electric generating plant emission controls for nitrogen oxides and sulfur dioxide. We plan to meet the nitrogen oxide requirements of this rule by year-round operation of our selective catalytic reduction control technology units, installation of low nitrogen oxide burners, and purchasing emission allowances. We plan to meet the sulfur dioxide requirements of this rule using sorbent injection, installation of flue gas desulfurization scrubbers and purchasing emission allowances. Our total cost for equipment installation is expected to reach approximately $700 million by 2015. Additional purchases of sulfur dioxide emission allowances in 2012 and 2013 will be needed for an estimated cost of $12 million per year, which we expect to recover from our customers through the PSCR process.
The Clean Air Interstate Rule was appealed to the U.S. Court of Appeals for the District of Columbia by a number of utilities and other companies. Final briefs are due September 5, 2007, with a decision expected in 2008. We cannot predict the outcome of these appeals.
Clean Air Mercury Rule:Also in March 2005, the EPA issued the Clean Air Mercury Rule, which requires initial reductions of mercury emissions from coal-fired electric generating plants by 2010 and further reductions by 2018. The Clean Air Mercury Rule was appealed to the U.S. Court of Appeals by a number of states and other entities. Final briefs were due July 13, 2007, with a decision expected in 2008. We cannot predict the outcome of these appeals.
In April 2006, Michigan'sMichigan’s governor announced a plan that would result in


                                     CE-15



                                                        Consumers Energy Company mercury emissions reductions of 90 percent by 2015. We are currently working with the MDEQ on the details of this rule; however, we have developed preliminary cost estimates and a mercury emissions reduction planscenario based on our best knowledge of control technology options and anticipatedinitially proposed requirements. Our
plan includes expenditures of approximately $550 million for mercury control
equipment and continuous emissions monitoring systems through 2014.

The following table compares the federal Clean Air Mercury Rule to the proposed state mercury rule:

                                         2010                         2015                         2018
                              --------------------------   --------------------------   -------------------------
State and Federal State Federal
Phase I Phase II Phase II
Federal Clean Air
Mercury Rule 30% reduction by 2010 with interstate trading of allowances

$9 million in emission allowance purchases 70% reduction by 2018 with interstate trading with interstate trading
                              of allowances                                             of allowances

                              $4 million in capital                                     $136

$17 million in capital plus $30$6 million annually in allowance purchases
Proposed State
Mercury Rule 30% reduction by 2010 without interstate trading of allowances 90% reduction by 2015 without interstate trading without interstate trading
                              of allowances                of allowances

                              $4 
$198 million in capital        $546 $343 million in capital 
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Consumers Energy Company
Routine Maintenance Classification:The EPA has alleged that some utilities have incorrectly classified plant modifications as “routine maintenance” rather than seeking permits from the EPA to modify the plant. We have received and responded to information requests from the EPA on this subject. We believe that we have properly interpreted the requirements of “routine maintenance.” If our interpretation is found to be incorrect, we may be required to install additional pollution controls at some or all of our coal-fired electric generating plants and potentially pay fines. Additionally, the viability of certain plants remaining in operation could be called into question.
Greenhouse gases:gases: Several legislative proposals have been introduced in the United States Congress that would require reductions in emissions of greenhouse gases, including carbon dioxide. On April 2, 2007, the U.S. Supreme Court ruled that the Clean Air Act gives the EPA the authority to regulate emissions of carbon dioxide and other greenhouse gases from automobiles. In its decision, the court ordered the EPA to revisit its contention that it has the discretion not to regulate greenhouse gas emissions from automobiles.
To the extent that greenhouse gas emission reduction rules come into effect, the mandatory emissions reduction requirements could have far-reaching and significant implications for the energy sector. We cannot estimate the effect of federal or state greenhouse gas policy on our future consolidated results of operations, cash flows, or financial position due to the uncertain nature of the policies at this time. However, we will continue to monitor greenhouse gas policy developments and assess and respond to their potential implications on our business operations.
Water:In March 2004, the EPA issued rules that govern electric generating plant cooling water intake systems. The rules require significant reduction in fish killed by operating equipment. EPA compliance options in the rule were challenged in court. In January 2007, the court rejected many of the compliance options favored by industry and remanded the bulk of the rule back to the EPA for reconsideration. The court'scourt’s ruling is expected to increase significantly the cost of complying with this rule. However, the cost to comply will not be known until the EPA'sEPA’s reconsideration is complete. At this time, the EPA has not established a schedule to address the court decision.
For additional details on electric environmental matters, see Note 2,3, Contingencies, "Electric“Electric Contingencies -— Electric Environmental Matters."


                                     CE-16



                                                        Consumers Energy Company

COMPETITION AND REGULATORY RESTRUCTURING: ”
Competition and Regulatory Restructuring:The Customer Choice Act allows all of our electric customers to buy electric generation service from us or from an alternative electric supplier. At March 31,June 30, 2007, alternative electric suppliers were providing 283302 MW of generation service to ROA customers. This is 3 percent of our total distribution load and represents a decrease of 193 percent of ROA load compared to March 31,June 30, 2006. In prior orders, the MPSC approved recovery ofWe recover Stranded Costs incurred from 2002 through 2003 through a surcharge applied to ROA customers. If downward ROA trends continue, it maywill extend the time it takes to recover fully our Stranded Costs. It is difficult to predict future ROA customer trends, which affect our ability to recover timely ourthese Stranded Costs.

ELECTRIC RATE CASE: 
Electric Rate Case:In March 2007, we filed an application with the MPSC seeking an 11.25 percent authorized return on equity and an annual increase in revenues of $157 million. The increase includesseeks recovery of the costs associated with increased plant investment, increased equity investment, and greater operation and maintenance expenses. In May 2007, we filed supplemental testimony with the MPSC to include transaction costs from the sale of Palisades. In July 2007, we filed an amended application with the MPSC to include the proposed purchase of the Zeeland power plant, the approval of an energy efficiency program, and to make other revisions. The revised application seeks an annual increase in revenues of $282 million.
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Consumers Energy Company
In July 2007, we also filed a $23 million basemotion for partial and immediate rate reduction,relief that seeks the additionremoval of costs associated with Palisades, the approval of partial and immediate rate relief for certain items, including the proposed purchase of the Zeeland power plant, and the approval of a $13plan to distribute $127 million surchargeof excess proceeds from the sale of Palisades to customers. The case schedule will allow for an MPSC order on our Zeeland request and on our request for partial and immediate rate relief by the return on investmentsend of 2007 and a final rate order in Big Rock,
and the elimination of $167 million Palisades base rate recovery credit in the
PSCR. If approved as requested, the rate requests would go into effect in
January 2008 and would apply to all retail electric customers.mid-2008. We cannot predict the amount or timing of any MPSC decision on the requests.
For additional details and material changes relating to the restructuring of the electric utility industry and electric rate matters, see Note 2,3, Contingencies, "Electric“Electric Rate Matters."

”
OTHER ELECTRIC BUSINESS UNCERTAINTIES

THE
The MCV PARTNERSHIP: Partnership:The MCV Partnership, which leases and operates the MCV Facility, contracted to sell electricity to Consumers for a 35-year period beginning in 1990.
Underrecoveries related to the MCV PPA:The cost that we incur under the MCV PPA exceeds the recovery amount allowed by the MPSC. As a result, we estimate cash underrecoveries of capacity and fixed energy payments of $39 million in 2007. However, we use the direct savings from the RCP, after allocating a portion to customers, to offset a portion of our capacity and fixed energy underrecoveries expense. After September 15, 2007, we expect to claim relief under the regulatory outregulatory-out provision in the MCV PPA, thereby limiting our capacity and fixed energy payments to the MCV Partnership to the amounts that we collect from our customers. This action would eliminate our underrecoveries of capacity and fixed energy payments.
The MCV Partnership has notified us that it takes issue withopposes our intended exercise of the regulatory outregulatory-out provision after September 15, 2007. We believe that the provision is valid and fully effective, but cannot assure that itwe will prevail in the event of a dispute. If we are successful in exercising the regulatory outregulatory-out provision, the MCV Partnership may, under certain circumstances, have the right to terminate or reduce the amount of capacity sold under the MCV PPA. If the MCV Partnership terminates the MCV PPA or reduces the amount of capacity sold under the MCV PPA, we would seek to replace the lost capacity to maintain an adequate electric reserve margin. This could involve entering into a new PPA and (or) entering into electric capacity contracts on the open market. We cannot predict our ability to enter into such contracts at a reasonable price. We are also unable to predict regulatory approval of the terms and conditions of such contracts, or that the MPSC would allow full recovery of our incurred costs.
To comply with a prior MPSC order, we made a filing in May 2007 with the MPSC, which asked the MPSC to make a determination regarding whether it wished to reconsider the amount of the MCV PPA payments that we recover from customers. Also, in May 2007, the MCV Partnership filed an application with the MPSC seeking approval to increase our recovery of costs incurred under the MCV PPA. We are unable to predict the outcome of this request.these requests. For


                                     CE-17



                                                        Consumers Energy Company additional details on the MCV Partnership, see Note 2,3, Contingencies, "Other“Other Electric Contingencies -— The MCV PPA."

NUCLEAR MATTERS: ”
Sale of Nuclear Assets:In April 2007, we sold Palisades to Entergy for $380 million. The final purchase price wasis subject to various closing adjustments resulting in us receiving $361 million.$364 million as of June 30, 2007. We also paid Entergy $30 million to assume ownership and responsibility for the Big Rock ISFSI. Because of the sale of Palisades, we will also paypaid the NMC, the former operator of the Palisades, plant, $7 million in exit fees and will forfeitforfeited our $5 million investment in the NMC of $5 million.

NMC.
The MPSC order approving the Palisades transaction allowsallowed us to recover the book value of the Palisades plant.Palisades. This will resultresults in us refunding estimated proceeds in excess proceedsof book value of $66 million being credited to our customers
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Consumers Energy Company
through refundscredits applied over the
remainder offrom June 2007 andthrough December 2008. FinalThe final proceeds in excess of the book value are subject to closing adjustments and review by the MPSC. The MPSC order deferred ruling on the recovery of $30 million in estimated transaction costs, including the NMC exit fees, and the $30 million payment to Entergy related to the Big Rock ISFSI until the next general rate case.
Entergy will assumeassumed responsibility for the future decommissioning of the plantPalisades and for storage and disposal of spent nuclear fuel located at the Palisades and the Big Rock ISFSI sites. We transferred $252 million in trust fund assets to Entergy. EstimatedWe are refunding estimated excess decommissioning funds of $189 million will be credited to our retail customers through refundscredits applied overfrom June 2007 through December 2008. Access to additional decommissioning fund balances above the remainderestimates in the MPSC order resulted in excess decommissioning funds of 2007$122 million. We have proposed a plan to refund these balances to our retail customers and 2008.
Final disposition of these fundsthis plan is subject to closing date balances and is
subject tounder review by the MPSC. The disposition of the remaining decommissioning
funds is subject to review by the MPSC.

MPSC in our current electric rate case filing.
As part of the transaction, Entergy will sell us 100 percent of the plant'splant’s output up to its current annual average capacity of 798 MW under a 15-year power purchase agreement. Because of the Palisades power purchase agreement the
transaction is a lease for accounting purposes. Due toand our continuing involvement with the Palisades assets, we will account for the disposal of Palisades plant as a financing for accounting purposes and not a sale. This will resultresulted in the recognition of a finance obligation.

obligation of $197 million.
For additional details on the sale of Palisades and the Big Rock ISFSI, see Note 2, Contingencies, "Other Electric Contingencies - The Sale of Nuclear Assets and
the Palisades Power Purchase Agreement."

Asset Sales.
GAS BUSINESS OUTLOOK

GROWTH: 
Growth:In 2007, we project gas deliveries will decline slightly, on a weather-adjusted basis, from 2006 levels due to continuing conservation and overall economic conditions in the state of Michigan. Over the next five years, we expect gas deliveries to decline by less than one-half of one percent annually. Actual gas deliveries in future periods may be affected by:

     -    fluctuations in weather conditions,

     -    use by independent power producers,

     -    competition in sales and delivery,

     -    changes in gas commodity prices,

     -    Michigan economic conditions,

     -    the price of competing energy sources or fuels,

     -    gas consumption per customer,

     -    improvements in gas appliance efficiency, and

     -    use of a Revenue Decoupling and Conservation Incentive mechanism.


                                     CE-18



                                                        Consumers Energy Company

• fluctuations in weather conditions,
• use by independent power producers,
• competition in sales and delivery,
• changes in gas commodity prices,
• Michigan economic conditions,
• the price of competing energy sources or fuels,
• gas consumption per customer,
• improvements in gas appliance efficiency, and
• use of a Revenue Decoupling and Conservation Incentive mechanism.
GAS BUSINESS UNCERTAINTIES
Several gas business trends or uncertainties may affect our future financial results and financial condition. These trends or uncertainties could have a material impact on future revenues or income from gas operations.

GAS ENVIRONMENTAL ESTIMATES: 
Gas Environmental Estimates:We expect to incur investigation and remedial action costs at a number of sites, including 23 former manufactured gas plant sites. For additional details, see Note 2,3, Contingencies, "Gas“Gas Contingencies -— Gas Environmental Matters."

GAS COST RECOVERY: ”
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Consumers Energy Company
Gas Cost Recovery:The GCR process is designed to allow us to recover all of our purchased natural gas costs if incurred under reasonable and prudent policies and practices. The MPSC reviews these costs, policies, and practices for prudency in annual plan and reconciliation proceedings. For additional details on gas cost recovery, see Note 2,3, Contingencies, "Gas“Gas Rate Matters -– Gas Cost Recovery."

GAS DEPRECIATION: We are required to file”
Gas Depreciation:In June 2007, the MPSC issued its final order in the generic ARO accounting case and modified the filing requirement for our next gas depreciation case with
the MPSC withincase. The original filing requirement date was changed from 90 days after the MPSC issuance of this order to no later than August 1, 2008. Additionally, we have been ordered to use 2007 data and prepare a final order incost of removal depreciation study with five alternatives using the pending
case related to ARO accounting. We cannot predict when the MPSC will issue a
final order in the ARO accounting case.

MPSC’s prescribed methods.
If a final order in our next gas depreciation case is not issued concurrently with a final order in a general gas rate case, the MPSC may incorporate the results of the depreciation case into general gas rates through use of a surcharge mechanism (which may be either positive or negative).
2007 GAS RATE CASE: Gas Rate Case:In February 2007, we filed an application with the MPSC seeking an 11.25 percent authorized return on equity along with an $88 million annual increase in our gas delivery and transportation rates, of which $17
million would be contributed to a low income energy efficiency fund.rates. We have proposed the use of a Revenue Decoupling and Conservation Incentive Mechanism for residential and general service rate classes, to help assure a reasonable
opportunitywhich partially separates the collection of fixed costs from gas sales and enhances the utility’s ability to recover its fixed costs regardless of sales levels.

OTHER OUTLOOK

RULES REGARDING BILLING PRACTICES:.
The MPSC Staff and intervenors filed testimony on July 20, 2007. In December 2006,its testimony, the MPSC issued proposed
rule changes to residential customer billing standardsStaff recommended a 10.5 percent authorized return on equity with a $35 million annual increase in our gas delivery and practices. These
changes, if adopted, would provide additional protection to low-income customers
during the winter heating season that will be defined as November 1 through
March 31, extend the time between billing date and due date from 17 days to 22
days, and eliminate estimated metering readings unless actual readings are not
feasible. We are presently evaluating the impacts of these proposed rules and
are working with other Michigan utilities in providing comments totransportation rates. The schedule established by the MPSC regardingfor processing this case could allow for a final order by the proposed rule changes.

LITIGATION AND REGULATORY INVESTIGATION: end of 2007.
OTHER OUTLOOK
Litigation and Regulatory Investigation:CMS Energy is the subject of various investigations as a result of round-trip trading transactions by CMS MST, including an investigation by the DOJ. For additional details regarding this investigation and litigation, see Note 2,3, Contingencies.

PENSION REFORM: 
Michigan Business Tax Act:In August 2006,July 2007, the PresidentMichigan governor signed into lawSenate Bill 94, the Pension
ProtectionMichigan Business Tax Act, which imposes a business income tax of 2006.4.95 percent and a modified gross receipts tax of 0.8 percent. The bill reformsprovides for a number of tax credits and incentives, geared towards those companies investing and employing in Michigan. The Michigan Business Tax, which is effective January 1, 2008, replaces the funding rulesstate’s current Single Business Tax that expires on December 31, 2007. We are currently evaluating the impact this new tax will have on us. We do not expect an increase to our State tax liability. Absent any State legislative or regulatory action, however, we may need to record a material non-cash deferred tax charge for employer-provided
pension plans, effectivethis new tax.
Implementation of New Accounting Standards
SFAS No. 158, Employers’ Accounting for plan years beginning after 2007. As a resultDefined Benefit Pension and Other Postretirement Plans - - an amendment of this bill, we expect to reduce our contributions to the Pension Plan over the
next 10 years by a present value amount of $53 million.


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                                                        Consumers Energy Company

IMPLEMENTATION OF NEW ACCOUNTING STANDARDS

SFAS NO. 158, EMPLOYERS' ACCOUNTING FOR DEFINED BENEFIT PENSION AND OTHER
POSTRETIREMENT PLANS - AN AMENDMENT OF FASB STATEMENTS NO.Statements No. 87, 88, 106, ANDand 132(R):In September 2006, the FASB issued SFAS No. 158. Phase one of this standard required us to recognize the funded status of our defined benefit postretirement plans on our Consolidated Balance Sheets at December 31, 2006. Phase one was implemented in December 2006. Phase two of this standard requires that we change our plan measurement date from November 30 to December 31, effective December 31, 2008. We do not believe
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Consumers Energy Company
that implementation of phase two of this standard will have a material effect on our consolidated financial statements. We expect to adopt the measurement date provisions of SFAS No. 158 in 2008.
FIN 48, ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES: Accounting for Uncertainty in Income Taxes:We adopted the provisions of FIN 48 on January 1, 2007. This interpretation provides a two-step approach for the recognition and measurement of uncertain tax positions taken, or expected to be taken, by a company on its income tax returns. The first step is to evaluate the tax position to determine if, based on management'smanagement’s best judgment, it is greater than 50 percent likely that we will sustain the tax position. The second step is to measure the appropriate amount of the benefit to recognize. This is done by estimating the potential outcomes and recognizing the greatest amount that has a cumulative probability of at least 50 percent. FIN 48 requires interest and penalties, if applicable, to be accrued on differences between tax positions recognized in our consolidated financial statements and the amount claimed, or expected to be claimed, on the tax return.
As a result of the implementation of FIN 48, we have identified additional uncertain tax benefits of $5 million as of January 1, 2007. Included in this amount is an increase in our valuation allowance of $7 million, increases to tax reserves of $55 million and a decrease to deferred tax liabilities of $57 million.
Consumers joins in the filing of a consolidated U.S. federal income tax return as well as unitary and combined income tax returns in several states. Consumers and its subsidiaries also file separate company income tax returns in several states. The only significant state tax paid by Consumers or any of its subsidiairessubsidiaries is in Michigan. However, since the Michigan Single Business Tax is not an income tax, it is not part of the FIN 48 analysis. The IRS has completed its audits for all the consolidated federal returns, of which Consumers is a member, for years through 2001. The federal income tax returns for the years 2002 through 2005 are open under the statute of limitations.
We have reflected a net interest liability of $1 million related to our uncertain income tax positions on our Consolidated Balance Sheets as of January 1, 2007. We have not accrued any penalties with respect to uncertain tax benefits. We recognize accrued interest and penalties, where applicable, related to uncertain tax benefits as part of income tax expense.
As of the date of adoption of FIN 48, we had valuation allowances against certain deferred tax assets totaling $22 million and other net uncertain tax positions of $55 million, resulting in total uncertain benefits of $77 million. Of this amount, $24 million would result in a decrease in our effective tax rate, if recognized. We are not expecting any material changes to our uncertain tax positions over the next 12 months.


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                                                        Consumers Energy Company

NEW ACCOUNTING STANDARDS NOT YET EFFECTIVE

New Accounting Standards Not Yet Effective
SFAS NO.No. 157, FAIR VALUE MEASUREMENTS: Fair Value Measurements:In September 2006, the FASB issued SFAS No. 157, effective for us January 1, 2008. The standard provides a revised definition of "fair value"“fair value” and gives guidance on how to measure the fair value of assets and liabilities. Under the standard, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly exchange between market participants. The standard does not expand the use of fair value in any new circumstances. However, additional disclosures will be required on the impact and reliability of fair value measurements reflected in our consolidated financial statements. The standard will also eliminate the existing prohibition of recognizing "day one"“day one” gains or losses on derivative instruments, and will generally require such gains and losses to be recognized through earnings. We are presently evaluating the impacts, if any, of implementing SFAS No. 157. We currently do not hold any derivatives that would involve day one gains or losses.
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Consumers Energy Company
SFAS NO.No. 159, THE FAIR VALUE OPTION FOR FINANCIAL ASSETS AND FINANCIAL
LIABILITIES, INCLUDING AN AMENDMENT TOThe Fair Value Option for Financial Assets and Financial Liabilities, Including an amendment to FASB STATEMENT NO.Statement No. 115:In February 2007, the FASB issued SFAS No. 159, effective for us January 1, 2008. This standard will give us the option to select certain financial instruments and other items, which otherwise are not required to be measured at fair value, and measure those items at fair value. If we choose to elect the fair value option for an item, we would recognize unrealized gains and losses associated with changes in the fair value of the item over time. The statement will also require disclosures for items for which the fair value option has been elected. We are presently evaluating whether we will choose to elect the fair value option for any financial instruments or other items.


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                            CONSUMERS ENERGY COMPANY
                        CONSOLIDATED STATEMENTS OF INCOME
                                   (UNAUDITED)


                                                                               In Millions
                                                                        ------------------
                                                                        Three Months Ended
                                                                        ------------------
March 31                                                                   2007     2006
- --------                                                                  ------   ------

OPERATING REVENUE                                                         $2,055   $1,782

OPERATING EXPENSES   Fuel for electric generation                             88      172
                     Fuel costs mark-to-market at the MCV Partnership         --      156
                     Purchased and interchange power                         307      110
                     Purchased power - related parties                        19       18
                     Cost of gas sold                                        935      816
                     Other operating expenses                                220      215
                     Maintenance                                              57       71
                     Depreciation and amortization                           156      152
                     General taxes                                            64       65
                                                                          ------   ------
                                                                           1,846    1,775
                                                                          ------   ------

OPERATING INCOME                                                             209        7

OTHER INCOME         Interest and dividends                                   11       10
(DEDUCTIONS)         Regulatory return on capital expenditures                 8        3
                     Other income                                              7        4
                     Other expense                                            (3)      (3)
                                                                          ------   ------
                                                                              23       14
                                                                          ------   ------

INTEREST CHARGES     Interest on long-term debt                               59       72
                     Interest on long-term debt - related parties              2        1
                     Other interest                                            1        3
                     Capitalized interest                                     (3)      (2)
                                                                          ------   ------
                                                                              59       74
                                                                          ------   ------

INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY
   OBLIGATIONS, NET                                                          173      (53)

MINORITY OBLIGATIONS, NET                                                     --      (72)
                                                                          ------   ------

INCOME BEFORE INCOME TAXES                                                   173       19

INCOME TAX EXPENSE                                                            60        9
                                                                          ------   ------

NET INCOME                                                                   113       10

PREFERRED STOCK DIVIDENDS                                                      1       --
                                                                          ------   ------

NET INCOME AVAILABLE TO COMMON STOCKHOLDER                                $  112   $   10
                                                                          ======   ======


THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.


                                      CE-22



                            CONSUMERS ENERGY COMPANY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                   (UNAUDITED)


                                                                     In Millions
                                                              ------------------
                                                              Three Months Ended
                                                              ------------------
March 31                                                         2007    2006
- --------                                                        -----   -----

CASH FLOWS FROM OPERATING ACTIVITIES
Net income                                                      $ 113   $  10
   Adjustments to reconcile net income to net cash
      provided by operating activities
         Depreciation and amortization (includes nuclear
            decommissioning of $1 per period)                     156     152
         Deferred income taxes and investment tax credit            9     (51)
         Fuel costs mark-to-market at the MCV Partnership          --     156
         Minority obligations, net                                 --     (72)
         Regulatory return on capital expenditures                 (8)     (3)
         Capital lease and other amortization                       9       9
         Changes in assets and liabilities:
            Increase in accounts receivable, notes
               receivable and accrued revenue                    (448)   (212)
            Decrease (increase) in accrued power supply and
               gas revenue                                         27     (26)
            Decrease in inventories                               504     366
            Increase (decrease) in accounts payable                20    (120)
            Decrease in accrued expenses                          (53)    (85)
            Decrease in the MCV Partnership gas supplier
               funds on deposit                                    --     (90)
            Decrease (increase) in other current and
               non-current assets                                  57      (4)
            Increase (decrease) in other current and
               non-current liabilities                            (15)     39
                                                                -----   -----

         Net cash provided by operating activities                371      69
                                                                -----   -----

CASH FLOWS FROM INVESTING ACTIVITIES
   Capital expenditures (excludes assets placed under
      capital lease)                                             (218)   (125)
   Cost to retire property                                         (5)    (19)
   Restricted cash and restricted short-term investments           (1)    128
   Investments in nuclear decommissioning trust funds              (1)    (17)
   Proceeds from nuclear decommissioning trust funds                2       4
   Maturity of the MCV Partnership restricted investment
      securities held-to-maturity                                  --      28
   Purchase of the MCV Partnership restricted investment
      securities held-to-maturity                                  --     (26)
   Other investing                                                  2       4
                                                                -----   -----
         Net cash used in investing activities                   (221)    (23)
                                                                -----   -----

CASH FLOWS FROM FINANCING ACTIVITIES
   Retirement of long-term debt                                    (8)   (136)
   Payment of common stock dividends                              (94)    (40)
   Payment of capital and finance lease obligations                (2)     (3)
   Stockholder's contribution, net                                 --     200
   Payment of preferred stock dividends                            (1)     --
   Decrease in notes payable, net                                 (42)    (27)
   Debt issuance and financing costs                               (1)     (3)
                                                                -----   -----
         Net cash used in financing activities                   (148)     (9)
                                                                -----   -----

Net Increase in Cash and Cash Equivalents                           2      37
Cash and Cash Equivalents, Beginning of Period                     37     416
                                                                -----   -----
Cash and Cash Equivalents, End of Period                        $  39   $ 453
                                                                =====   =====


THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.


                                      CE-23



                            CONSUMERS ENERGY COMPANY
                           CONSOLIDATED BALANCE SHEETS

EITF Issue 06-11, Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards:In June 2007, the FASB ratified EITF Issue 06-11, effective for us on a prospective basis beginning January 1, 2008. EITF 06-11 requires companies to recognize the income tax benefit realized from dividends or dividend equivalents that are charged to retained earnings and paid to employees
for non-vested equity-classified employee share-based payment awards as an increase to additional paid-in capital. We do not believe that implementation of this standard would have a material effect on our financial statements.
CE - 23
Consumers Energy Company
Consolidated Statements of Income
(Unaudited)
                                 
                    In Millions  
    Three Months Ended     Six Months Ended  
June 30   2007     2006     2007     2006  
 
Operating Revenue   $ 1,247     $ 1,138     $ 3,302     $ 2,920  
                                 
Earnings from Equity Method Investees     —       1       —       1  
                                 
Operating Expenses                                
Fuel for electric generation     88       172       176       344  
Fuel costs mark-to-market at the MCV Partnership     —       42       —       198  
Purchased and interchange power     365       134       672       244  
Purchased power - related parties     20       19       39       37  
Cost of gas sold     261       223       1,196       1,039  
Other operating expenses     198       220       418       435  
Maintenance     45       79       102       150  
Depreciation and amortization     117       116       273       268  
General taxes     51       56       115       121  
     
      1,145       1,061       2,991       2,836  
 
                                 
Operating Income     102       78       311       85  
                                 
Other Income (Deductions)                                
Interest and dividends     20       16       31       26  
Regulatory return on capital expenditures     7       7       15       10  
Other income     9       10       16       14  
Other expense     —       (1 )     (3 )     (4 )
     
      36       32       59       46  
 
                                 
Interest Charges                                
Interest on long-term debt     59       74       118       146  
Interest on long-term debt - related parties     —       —       2       1  
Other interest     14       5       15       8  
Capitalized interest     (1 )     (3 )     (4 )     (5 )
     
      72       76       131       150  
 
                                 
Income (Loss) Before Income Taxes and Minority Obligations, Net     66       34       239       (19 )
                                 
Minority Obligations, Net     —       (3 )     —       (75 )
     
                                 
Income Before Income Taxes     66       37       239       56  
                                 
Income Tax Expense     22       1       82       10  
     
                                 
Net Income     44       36       157       46  
                                 
Preferred Stock Dividends     —       1       1       1  
     
                                 
Net Income Available to Common Stockholder   $ 44     $ 35     $ 156     $ 45  
 
The accompanying notes are an integral part of these statements.
CE-24
Consumers Energy Company
Consolidated Statements of Cash Flows
(Unaudited)
                 
    In Millions  
    Six Months Ended  
June 30   2007     2006  
 
Cash Flows from Operating Activities                
Net income   $ 157     $ 46  
Adjustments to reconcile net income to net cash provided by operating activities                
Depreciation and amortization (includes nuclear decommissioning of $2 and $3)     273       268  
Deferred income taxes and investment tax credit     (14 )     (260 )
Fuel costs mark-to-market at the MCV Partnership     —       198  
Minority obligations, net     —       (75 )
Regulatory return on capital expenditures     (15 )     (10 )
Gain on sale of assets     (2 )     —  
Capital lease and other amortization     20       18  
Earnings from equity method investees     —       (1 )
Changes in assets and liabilities:                
Decrease (increase) in accounts receivable, notes receivable and accrued revenue     (181 )     15  
Decrease (increase) in accrued power supply and gas revenue     41       (21 )
Decrease in inventories     197       91  
Increase in accounts payable     13       147  
Increase (decrease) in accrued taxes     18       (202 )
Increase (decrease) accrued expenses     (16 )     62  
Decrease in the MCV Partnership gas supplier funds on deposit     —       (100 )
Decrease in other current and non-current assets     98       53  
Increase (decrease) in other current and non-current liabilities     (30 )     45  
     
 
Net cash provided by operating activities     559       274  
 
                 
Cash Flows from Investing Activities                
Capital expenditures (excludes assets placed under capital lease)     (373 )     (310 )
Cost to retire property     (5 )     (31 )
Restricted cash and restricted short-term investments     12       128  
Investments in nuclear decommissioning trust funds     (1 )     (18 )
Proceeds from nuclear decommissioning trust funds     317       13  
Proceeds from sale of assets     338       —  
Maturity of the MCV Partnership restricted investment securities held-to-maturity     —       118  
Purchase of the MCV Partnership restricted investment securities held-to-maturity     —       (118 )
Other investing     2       4  
     
 
Net cash provided by (used in) investing activities     290       (214 )
 
                 
Cash Flows from Financing Activities                
Retirement of long-term debt     (17 )     (144 )
Payment of common stock dividends     (135 )     (40 )
Payment of capital and finance lease obligations     (8 )     (5 )
Stockholder’s contribution, net     650       200  
Payment of preferred stock dividends     (1 )     (1 )
Decrease in notes payable     (42 )     (27 )
Debt issuance and financing costs     (1 )     (3 )
     
 
Net cash provided by (used in) financing activities     446       (20 )
 
                 
Net Increase in Cash and Cash Equivalents     1,295       40  
                 
Cash and Cash Equivalents, Beginning of Period     37       416  
     
                 
Cash and Cash Equivalents, End of Period   $ 1,332     $ 456  
 
The accompanying notes are an integral part of these statements.
CE-25
Consumers Energy Company
Consolidated Balance Sheets
ASSETS
                                                                         In Millions
                                                           -------------------------
                                                             March 31
                                                               2007      December 31
                                                           (Unaudited)       2006
                                                           -----------   -----------

PLANT AND PROPERTY   Electric                                $ 8,583       $ 8,504
(AT COST)            Gas                                       3,283         3,273
                     Other                                        15            15
                                                             -------       -------
                                                              11,881        11,792
                     Less accumulated depreciation,
                        depletion, and amortization            5,073         5,018
                                                             -------       -------
                                                               6,808         6,774
                     Construction work-in-progress               751           639
                                                             -------       -------
                                                               7,559         7,413
                                                             -------       -------

INVESTMENTS          Stock of affiliates                          33            36
                     Other                                         5             5
                                                             -------       -------
                                                                  38            41
                                                             -------       -------

CURRENT ASSETS       Cash and cash equivalents at
                        cost, which approximates market           39            37
                     Restricted cash at cost, which
                        approximates market                       58            57
                     Accounts receivable, notes
                        receivable, and accrued
                        revenue, less allowances of $14
                        in 2007 and $14 in 2006                  849           435
                     Accrued power supply and gas
                        revenue                                  129           156
                     Accounts receivable - related
                        parties                                    5             5
                     Inventories at average cost
                        Gas in underground storage               619         1,129
                        Materials and supplies                    86            81
                        Generating plant fuel stock              106           105
                     Deferred property taxes                     131           150
                     Regulatory assets - postretirement
                        benefits                                  19            19
                     Prepayments and other                        49            50
                                                             -------       -------
                                                               2,090         2,224
                                                             -------       -------

NON-CURRENT ASSETS   Regulatory assets
                        Securitized costs                        502           514
                        Postretirement benefits                1,111         1,131
                        Customer Choice Act                      179           190
                        Other                                    506           497
                     Nuclear decommissioning trust funds         606           602
                     Other                                       188           233
                                                             -------       -------
                                                               3,092         3,167
                                                             -------       -------
TOTAL ASSETS                                                 $12,779       $12,845
                                                             =======       =======


THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.


                                      CE-24


STOCKHOLDER'S
                 
    In Millions  
    June 30        
    2007     December 31  
    (Unaudited)     2006  
 
Plant and Property (at cost)                
Electric   $ 7,842     $ 8,504  
Gas     3,302       3,273  
Other     16       15  
     
      11,160       11,792  
Less accumulated depreciation, depletion, and amortization     3,910       5,018  
     
      7,250       6,774  
Construction work-in-progress     326       639  
     
      7,576       7,413  
 
                 
Investments                
Stock of affiliates     32       36  
Other     —       5  
     
      32       41  
 
                 
Current Assets                
Cash and cash equivalents at cost, which approximates market     1,332       37  
Restricted cash at cost, which approximates market     45       57  
Accounts receivable, notes receivable, and accrued revenue, less allowances of $15 in 2007 and $14 in 2006     584       435  
Accrued power supply and gas revenue     115       156  
Accounts receivable - related parties     5       5  
Inventories at average cost                
Gas in underground storage     922       1,129  
Materials and supplies     74       81  
Generating plant fuel stock     104       105  
Deferred income taxes     18       —  
Deferred property taxes     116       150  
Regulatory assets - postretirement benefits     19       19  
Prepayments and other     43       50  
     
      3,377       2,224  
 
                 
Non-current Assets                
Regulatory assets                
Securitized costs     491       514  
Postretirement benefits     1,048       1,131  
Customer Choice Act     170       190  
Other     503       497  
Nuclear decommissioning trust funds     47       602  
Other     116       233  
     
      2,375       3,167  
     
Total Assets   $ 13,360     $ 12,845  
 
The accompanying notes are an integral part of these statements.
CE-26
STOCKHOLDER’S INVESTMENT AND LIABILITIES
                                                                         In Millions
                                                           -------------------------
                                                             March 31
                                                               2007      December 31
                                                           (Unaudited)       2006
                                                           -----------   -----------

CAPITALIZATION       Common stockholder's equity
                        Common stock, authorized 125.0
                           shares; outstanding
                           84.1 shares for all periods       $   841       $   841
                     Paid-in capital                           1,832         1,832
                     Accumulated other comprehensive
                        income                                    14            15
                     Retained earnings                           283           270
                                                             -------       -------
                                                               2,970         2,958

                     Preferred stock                              44            44

                     Long-term debt                            3,962         4,127
                     Non-current portion of capital
                        lease obligations                         52            42
                                                             -------       -------
                                                               7,028         7,171
                                                             -------       -------

CURRENT              Current portion of long-term debt
LIABILITIES             and capital leases                       202            44
                     Notes payable - related parties              --            42
                     Accounts payable                            442           421
                     Accrued revenue for refund                    5            37
                     Accounts payable - related parties           17            18
                     Accrued interest                             47            62
                     Accrued taxes                               343           295
                     Deferred income taxes                        15            11
                     Other                                       124           184
                                                             -------       -------
                                                               1,195         1,114
                                                             -------       -------

NON-CURRENT          Deferred income taxes                       794           847
LIABILITIES          Regulatory liabilities
                        Regulatory liabilities for cost
                           of removal                          1,200         1,166
                        Income taxes, net                        547           539
                        Other regulatory liabilities             240           249
                     Postretirement benefits                   1,002           993
                     Asset retirement obligations                507           497
                     Deferred investment tax credit               61            62
                     Other                                       205           207
                                                             -------       -------
                                                               4,556         4,560
                                                             -------       -------

Commitments and Contingencies (Notes 2, 3, and 4)

TOTAL STOCKHOLDER'S INVESTMENT AND LIABILITIES               $12,779       $12,845
                                                             =======       =======



                                      CE-25



                            CONSUMERS ENERGY COMPANY
             CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
                                   (UNAUDITED)


                                                                  In Millions
                                                           ------------------
                                                           Three Months Ended
                                                           ------------------
March 31                                                     2007       2006
- --------                                                   -------     ------

COMMON STOCK         At beginning and end of period (a)     $  841     $  841
                                                            ------     ------
OTHER PAID-IN        At beginning of period                  1,832      1,632
CAPITAL              Stockholder's contribution                 --        200
                                                            ------     ------
                        At end of period                     1,832      1,832
                                                            ------     ------
ACCUMULATED OTHER    Retirement benefits liability
COMPREHENSIVE           At beginning of period and end
INCOME                     of period                            (8)        (2)
                                                            ------     ------

                     Investments
                        At beginning of period                  23         18
                        Unrealized loss on investments
                           (b)                                  (1)        (2)
                                                            ------     ------
                           At end of period                     22         16
                                                            ------     ------
                     Derivative instruments
                        At beginning of period                  --         56
                        Unrealized loss on derivative
                           instruments (b)                      --        (10)
                        Reclassification adjustments
                           included in net income (b)           --         (2)
                                                            ------     ------
                           At end of period                     --         44
                                                            ------     ------
                     Total Accumulated Other
                        Comprehensive Income                    14         58
                                                            ------     ------

RETAINED EARNINGS    At beginning of period                    270        233
                     Adjustment to initially apply
                        FIN 48                                  (5)        --
                     Net income                                113         10
                     Cash dividends declared -
                        Common Stock                           (94)       (40)
                     Cash dividends declared - Preferred
                        Stock                                   (1)        --
                                                            ------     ------
                        At end of period                       283        203
                                                            ------     ------
TOTAL COMMON STOCKHOLDER'S EQUITY                           $2,970     $2,934
                                                            ======     ======


THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.


                                      CE-26


                                                                  In Millions
                                                           ------------------
                                                           Three Months Ended
                                                           ------------------
March 31                                                      2007   2006
- --------                                                      ----   ----

(a) Number of shares of common stock outstanding was
    84,108,789 for all periods presented.

(b) Disclosure of Other Comprehensive Income:

    Investments
       Unrealized loss on investments, net of tax of
          $(1) in 2007 and $(1) in 2006                       $ (1)  $ (2)

    Derivative instruments
       Unrealized loss on derivative instruments, net of
          tax of $-- in 2007 and $(5) in 2006                   --    (10)
       Reclassification adjustments included in net
          income, net of tax benefit of $-- in 2007 and
          $(1) in 2006                                          --     (2)
    Net income                                                 113     10
                                                              ----   ----
    Total Comprehensive Income                                $112   $ (4)
                                                              ====   ====
                 
    In Millions  
    June 30        
    2007     December 31  
    (Unaudited)     2006  
 
Capitalization                
Common stockholder’s equity                
Common stock, authorized 125.0 shares; outstanding 84.1 shares for all periods   $ 841     $ 841  
Paid-in capital     2,482       1,832  
Accumulated other comprehensive income     14       15  
Retained earnings     286       270  
     
                 
      3,623       2,958  
                 
Preferred stock     44       44  
                 
Long-term debt     3,705       4,127  
Non-current portion of capital leases and finance lease obligations     232       42  
     
      7,604       7,171  
 
                 
Current Liabilities                
Current portion of long-term debt, capital leases, and finance leases     465       44  
Notes payable — related parties     —       42  
Accounts payable     429       421  
Accrued rate refunds     20       37  
Accounts payable — related parties     23       18  
Accrued interest     63       62  
Accrued taxes     368       295  
Deferred income taxes     —       11  
Regulatory liabilities     194       —  
Other     116       184  
     
      1,678       1,114  
 
                 
Non-current Liabilities                
Deferred income taxes     801       847  
Regulatory liabilities                
Regulatory liabilities for cost of removal     1,216       1,166  
Income taxes, net     551       539  
Other regulatory liabilities     234       249  
Postretirement benefits     970       993  
Asset retirement obligations     95       497  
Deferred investment tax credit     60       62  
Other     151       207  
     
      4,078       4,560  
     
                 
Commitments and Contingencies (Notes 3, 4, and 5)                
                 
Total Stockholder’s Investment and Liabilities   $ 13,360     $ 12,845  
 
CE-27























                        (PAGE INTENTIONALLY LEFT BLANK)






                                      CE-28
Consumers Energy Company

                            CONSUMERS ENERGY COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

Consolidated Statements of Common Stockholder’s Equity
(Unaudited)
                                 
                    In Millions  
    Three Months Ended     Six Months Ended  
June 30   2007     2006     2007     2006  
 
Common Stock                                
At beginning and end of period (a)   $ 841     $ 841     $ 841     $ 841  
 
                                 
Other Paid-in Capital                                
At beginning of period     1,832       1,832       1,832       1,632  
Stockholder’s contribution     650       —       650       200  
     
At end of period     2,482       1,832       2,482       1,832  
 
                                 
Accumulated Other Comprehensive Income                                
Retirement benefits liability                                
At beginning and end of period     (8 )     (2 )     (8 )     (2 )
     
                                 
Investments                                
At beginning of period     22       16       23       18  
Unrealized loss on investments (b)     —       —       (1 )     (2 )
     
At end of period     22       16       22       16  
     
                                 
Derivative instruments                                
At beginning of period     —       44       —       56  
Unrealized loss on derivative instruments (b)     —       (4 )     —       (14 )
Reclassification adjustments included in net income (b)     —       (1 )     —       (3 )
     
At end of period     —       39       —       39  
     
                                 
Total Accumulated Other Comprehensive Income     14       53       14       53  
 
                                 
Retained Earnings                                
At beginning of period     283       203       270       233  
Adjustment to initially apply FIN 48     —       —       (5 )     —  
Net income     44       36       157       46  
Cash dividends declared - Common Stock     (41 )     —       (135 )     (40 )
Cash dividends declared - Preferred Stock     —       (1 )     (1 )     (1 )
     
At end of period     286       238       286       238  
     
                                 
Total Common Stockholder’s Equity   $ 3,623     $ 2,964     $ 3,623     $ 2,964  
 
The accompanying notes are an integral part of these statements.
CE-28
                                 
                    In Millions  
    Three Months Ended     Six Months Ended  
June 30   2007     2006     2007     2006  
 
(a) Number of shares of common stock outstanding was 84,108,789 for all periods presented.                                
                                 
(b) Disclosure of Comprehensive Income:                                
                                 
Investments                                
Unrealized loss on investments, net of tax benefit of $-, $-, $(1), $(1), respectively   $ —     $ —     $ (1 )   $ (2 )
                                 
Derivative instruments                                
Unrealized loss on derivative instruments, net of tax benefit of $-, $(2), $-, $(7), respectively     —       (4 )     —       (14 )
Reclassification adjustments included in net income, net of tax benefit of $-, $-, $-, $(1), respectively     —       (1 )     —       (3 )
                                 
Net income     44       36       157       46  
     
                                 
Total Comprehensive Income   $ 44     $ 31     $ 156     $ 27  
     
CE-29
Consumers Energy Company
Consumers Energy Company
Notes to Consolidated Financial Statements
(Unaudited)
These interim Consolidated Financial Statements have been prepared by Consumers in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. As such, certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. Certain prior year amounts have been reclassified to conform to the presentation in the current year. In management'smanagement’s opinion, the unaudited information contained in this report reflects all adjustments of a normal recurring nature necessary to assure the fair presentation of financial position, results of operations and cash flows for the periods presented. The Notes to Consolidated Financial Statements and the related Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and related Notes contained in the Consumers'Consumers’ Form 10-K for the year ended December 31, 2006. Due to the seasonal nature of Consumers'Consumers’ operations, the results as presented for this interim period are not necessarily indicative of results to be achieved for the fiscal year.
1: CORPORATE STRUCTURE AND ACCOUNTING POLICIES

CORPORATE STRUCTURE: Corporate Structure and Accounting Policies
Corporate Structure:Consumers, a subsidiary of CMS Energy, a holding company, is a combination electric and gas utility company serving Michigan'sMichigan’s Lower Peninsula. Our customer base includes a mix of residential, commercial, and diversified industrial customers. We manage our business by the nature of services each provides and operate principally in two business segments: electric utility and gas utility.

PRINCIPLES OF CONSOLIDATION: 
Principles of Consolidation:The consolidated financial statements include Consumers, and all other entities in which we have a controlling financial interest or are the primary beneficiary, in accordance with FIN 46(R). We use the equity method of accounting for investments in companies and partnerships that are not consolidated, where we have significant influence over operations and financial policies, but are not the primary beneficiary. We eliminate intercompany transactions and balances.

USE OF ESTIMATES: 
Use of Estimates:We prepare our consolidated financial statements in conformity with U.S. GAAP. We are required to make estimates using assumptions that may affect the reported amounts and disclosures. Actual results could differ from those estimates.
We record estimated liabilities for contingencies in our consolidated financial statements when it is probable that a loss will be incurred in the future as a result of a current event, and when the amount can be reasonably estimated. For additional details, see Note 2,3, Contingencies.

REVENUE RECOGNITION POLICY: 
Revenue Recognition Policy:We recognize revenues from deliveries of electricity and natural gas, and the storage of natural gas when services are provided. We record sales tax on a net basis and exclude it from revenues.

RECLASSIFICATIONS: 
Reclassifications:We have reclassified certain prior year amounts for comparative purposes. These reclassifications did not affect consolidated net income for the periods presented.



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NEW ACCOUNTING STANDARDS NOT YET EFFECTIVE: 
Other Income and Other Expense:The following tables show the components of Other income and Other expense:
                                 
In Millions  
    Three Months Ended     Six Months Ended  
June 30   2007     2006     2007     2006  
 
Other income                                
Electric restructuring return   $ —     $ 1     $ 1     $ 2  
Return on stranded and security costs     2       2       3       3  
Nitrogen oxide allowance sales     —       6       —       6  
Gain on stock     —       —       4       1  
Gain on investment     4       —       4       —  
Gain on asset sales, net     2       —       2       —  
All other     1       1       2       2  
 
                                 
Total other income   $ 9     $ 10     $ 16     $ 14  
 
                                 
In Millions  
    Three Months Ended     Six Months Ended  
June 30   2007     2006     2007     2006  
 
Other expense                                
Civic and political expenditures   $ —     $ —     $ (1 )   $ (1 )
Donations     —       —       —       (1 )
All other     —       (1 )     (2 )     (2 )
 
                                 
Total other expense   $ —     $ (1 )   $ (3 )   $ (4 )
 
New Accounting Standards Not Yet Effective:SFAS No. 157, Fair Value Measurements:In September 2006, the FASB issued SFAS No. 157, effective for us January 1, 2008. The standard provides a revised definition of "fair value"“fair value” and gives guidance on how to measure the fair value of assets and liabilities. Under the standard, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly exchange between market participants. The standard does not expand the use of fair value in any new circumstances. However, additional disclosures will be required on the impact and reliability of fair value measurements reflected in our consolidated financial statements. The standard will also eliminate the existing prohibition of recognizing "day one"“day one” gains or losses on derivative instruments, and will generally require such gains and losses to be recognized through earnings. We are presently evaluating the impacts, if any, of implementing SFAS No. 157. We currently do not hold any derivatives that would involve day one gains or losses.
SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, Including an amendment to FASB Statement No. 115:In February 2007, the FASB issued SFAS No. 159, effective for us January 1, 2008. This standard will give us the option to select certain financial instruments and other items, which otherwise are not required to be measured at fair value, and measure those items at fair value. If we choose to elect the fair value option for an item, we would recognize unrealized gains and losses associated with changes in the fair value of the item over time. The statement will also require disclosures for items for which the fair value option has been elected. We are presently evaluating whether we will choose to elect the fair value option for any financial instruments or other items.
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EITF Issue 06-11, Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards: In June 2007, the FASB ratified EITF Issue 06-11, effective for us on a prospective basis beginning January 1, 2008. EITF 06-11 requires companies to recognize the income tax benefit realized from dividends or dividend equivalents that are charged to retained earnings and paid to employees for non-vested equity-classified employee share-based payment awards as an increase to additional paid-in capital. We do not believe that implementation of this standard would have a material effect on our financial statements.
2: CONTINGENCIES

Asset Sales
Gross cash proceeds from the sale of assets totaled $338 million through June 30, 2007. The sale of assets resulted in a $2 million gain on our Consolidated Statements of Income.
Sale of Nuclear Assets:In April 2007, we sold Palisades to Entergy for $380 million. The final purchase price is subject to various closing adjustments such as working capital and capital expenditure adjustments and nuclear fuel usage and inventory adjustments. We have received $364 million as of June 2007; however, certain purchase price adjustments are not yet final. We also paid Entergy $30 million to assume ownership and responsibility for the Big Rock ISFSI. Because of the sale of Palisades, we paid the NMC, the former operator of Palisades, $7 million in exit fees and forfeited our $5 million investment in the NMC.
Entergy assumed responsibility for the future decommissioning of Palisades and for storage and disposal of spent nuclear fuel located at Palisades and the Big Rock ISFSI sites. At closing, we transferred $252 million in decommissioning trust fund balances to Entergy. We are refunding estimated excess decommissioning funds of $189 million to our retail customers through credits applied from June 2007 through December 2008 and have recorded this obligation as a regulatory liability on our Consolidated Balance Sheets. Modification to the terms of the transaction allowed us immediate access to additional excess decommissioning trust funds of $122 million. We have proposed a plan to refund these excess decommissioning fund balances through credits to our retail customers’ bills. This plan is under review by the MPSC in our current electric rate case filing. We recorded this balance as a regulatory liability on our Consolidated Balance Sheets.
The MPSC order approving the Palisades transaction allows us to recover the book value of Palisades, which we estimated at $314 million. As a result, we are refunding proceeds in excess of book value of $66 million to our retail customers through credits applied from June 2007 through December 2008. The final proceeds in excess of the book value are subject to closing adjustments and review by the MPSC. The MPSC order deferred ruling on the recovery of transaction costs, including the NMC exit fees, and the $30 million payment to Entergy related to the Big Rock ISFSI until our next general rate case. We deferred these costs as a regulatory asset on our Consolidated Balance Sheets as recovery is probable.
In April 2007, the NRC issued an order approving the transfer of the Palisades operating license. Intervenors have filed petitions for reconsideration of the NRC orders approving the transfer of the Palisades and Big Rock licenses. The NRC did not alter or stay the prior order approving the license transfer. We believe that it is unlikely that the NRC will conduct further proceedings or alter its prior orders, but we cannot predict the outcome of the matter.
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The following table summarizes the impacts of the Palisades and the Big Rock ISFSI transaction:
                         
In Millions  
    MPSC Order     Estimated     Total  
    Customer Benefits     Closing     Estimated  
Customer Benefits   Estimate     Adjustments     Benefits  
 
Purchase price   $ 380     $ (9 )   $ 371  
Less: Book value of Palisades     314       (14 )     300  
                   
Excess proceeds     66       5       71 (a)
Excess decommissioning trust funds     189       122       311  
                   
Total customer benefits   $ 255     $ 127     $ 382  
                   
         
    Total  
    Estimated  
Deferred Costs   Costs  
 
NMC exit fee   $ 7  
Forfeiture of the NMC investment     5  
Selling expenses     16  
       
Total transaction costs     28  
Big Rock ISFSI operation and maintenance fee to Entergy     30  
       
Estimated regulatory asset   $ 58 (b)
       
(a) We deferred the estimated gain of $71 million as a regulatory liability.
(b) As of June 30, 2007, we have $56 million recorded as a regulatory asset for Palisades deferred costs of which $26 million relates to transaction costs. We estimate that we will incur an additional $2 million in selling expenses related to the Palisades transaction.
In the FERC’s February 2007 order regarding the Palisades transaction, the FERC granted our request to apply $11 million in FERC decommissioning trust fund balances for Palisades toward the Big Rock decommissioning shortfall, as described in Note 3, Contingencies, “Other Electric Contingencies – Nuclear Matters.” The order was contingent upon the NRC approving the transfer of operating licenses, which the NRC approved in April 2007. A clarification request was filed by a wholesale customer with the FERC. In July 2007, the FERC issued a clarification order requiring us to demonstrate that the fund did not have a surplus balance and if any surplus exists that we submit a refund plan.
Palisades Power Purchase Agreement:Entergy contracted to sell us 100 percent of the plant’s output up to its current annual average capacity of 798 MW under a 15-year power purchase agreement beginning in April 2007. We provided $30 million in security to Entergy for our power purchase agreement obligation in the form of a letter of credit. We estimate that capacity and energy payments under the Palisades power purchase agreement will be $180 million in 2007 and average $300 million per year thereafter.
Due to the Palisades power purchase agreement, the transaction is a sale and leaseback for accounting purposes. SFAS No. 98 specifies the accounting required for a seller’s sale and simultaneous leaseback involving real estate. We have continuing involvement with Palisades through security provided to
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Entergy for our power purchase agreement obligation and our DOE liability and other forms of involvement. As a result, we accounted for the Palisades plant, which is the real estate asset subject to the leaseback, as a financing for accounting purposes and not a sale. As a financing, no gain on the sale of Palisades was recognized on the Consolidated Statements of Income. We accounted for the remaining non-real estate assets and liabilities associated with the transaction as a sale.
As a financing, the Palisades plant remains on our Consolidated Balance Sheets and we continue to depreciate it. We recorded the related proceeds as a finance obligation with payments recorded to interest expense and the finance obligation based on the amortization of the obligation over the life of the Palisades power purchase agreement. The value of the finance obligation was based on an allocation of the transaction proceeds to the fair values of the net assets sold and fair value of the Palisades plant asset under the financing. As of June 30, 2007, the financing obligation was $194 million. We estimate future payments of $13 million per year over the next five years.
3:Contingencies
SEC ANDand DOJ INVESTIGATIONS: Investigations:During the period of May 2000 through January 2002, CMS MST engaged in simultaneous, prearranged commodity trading transactions in which energy commodities were sold and repurchased at the same price. These so called round-trip trades had no impact on previously reported consolidated net income, earnings per share or cash flows, but had the effect of increasing operating revenues and operating expenses by equal amounts.
CMS Energy is cooperating with an investigation by the DOJ concerning round-trip trading, which the DOJ commenced in May 2002. CMS Energy is unable to predict the outcome of this matter and what effect, if any, this investigation will have on its business. In March 2004, the SEC approved a cease-and-desist order settling an administrative action against CMS Energy related to round-trip trading. The order did not assess a fine and CMS Energy neither admitted to nor denied the order'sorder’s findings. The settlement resolved the SEC investigation involving CMS Energy and CMS MST. Also in March 2004, the SEC filed an action against three former employees related to round-trip trading at CMS MST. One of the individuals has settled with the SEC. CMS Energy is currently advancing legal defense costs for the remaining two individuals in accordance with existing indemnification policies. Those two individuals filed a motion to dismiss the SEC action, which was denied.


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                                                        Consumers Energy Company

SECURITIES CLASS ACTION LAWSUITS:
Securities Class Action Lawsuits: Beginning in May 2002, a number of complaints were filed against CMS Energy, Consumers and certain officers and directors of CMS Energy and its affiliates in the United States District Court for the Eastern District of Michigan. The cases were consolidated into a single lawsuit (the "Shareholder Action"“Shareholder Action”), which generally seeks unspecified damages based on allegations that the defendants violated United States securities laws and regulations by making allegedly false and misleading statements about CMS Energy'sEnergy’s business and financial condition, particularly with respect to revenues and expenses recorded in connection with round-trip trading by CMS MST. In January 2005, the court granted a motion to dismiss Consumers and three of the individual defendants, but denied the motions to dismiss CMS Energy and the 13 remaining individual defendants. In March 2006, the court conditionally certified a class consisting of "all“all persons who purchased CMS Common Stock during the period of October 25, 2000 through and including May 17, 2002 and who were damaged thereby."” The court excluded purchasers of CMS Energy'sEnergy’s 8.75 percent Adjustable Convertible Trust Securities ("ACTS"(“ACTS”) from the class and, in response, a new class action lawsuit was filed on behalf of ACTS purchasers (the "ACTS Action"“ACTS Action”) against the same defendants named in the Shareholder Action. The settlement described in the following paragraph, if approved, will resolve both the Shareholder and ACTS Actions.
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On January 3, 2007, CMS Energy and other parties entered into a Memorandum of Understanding (the "MOU"“MOU”), subject to court approval, regarding settlement of the two class action lawsuits. The settlement was approved by a special committee of independent directors and by the full board of directors of CMS Energy. Both judged that it was in the best interests of shareholders to eliminate this business uncertainty. The MOU is expected to lead to a detailed
stipulation of settlement that will be presented to the assigned federal judge
and the affected class in the second quarter of 2007. Under the terms of the MOU, the litigation will be settled for a total of $200 million, including the cost of administering the settlement and any attorney fees the court awards. CMS Energy will make a payment of approximately $123 million plus an amount equivalent to interest on the outstanding unpaid settlement balance beginning on the date of preliminary approval of the court and running until the balance of the settlement funds is paid into a settlement account. In entering the MOU, CMS Energy makes no admission of liability under the Shareholder Action and the ACTS Action.
The parties executed a Stipulation and Agreement of Settlement dated May 22, 2007 (“Stipulation”) incorporating the terms of the MOU. On May 30, 2007, plaintiffs filed a “Motion for Order Preliminarily Approving Stipulation and Agreement of Settlement.” On June 7, 2007, the court entered a “Preliminary Order in Connection with Settlement Proceedings and Proposed Class Certification,” in which the court preliminarily approved the Stipulation and scheduled the settlement fairness hearing for September 6, 2007. In accordance with the Stipulation, CMS has paid approximately $1 million of the settlement amount to fund administrative expenses. The remaining $199 million and interest accruing thereon from the date of the June 7, 2007 order is payable ten business days after entry of the Order and Final Judgment following the September 6, 2007 hearing.
Out of the total settlement, CMS Energy'sEnergy’s insurers will pay approximately $77 million directly to the settlement account. CMS Energy took an approximate $123 million net pre-tax charge to 2006 earnings in the fourth quarter of 2006. In entering into the MOU,At June 30, 2007, CMS Energy makes no admissionhas a receivable of $77 million and a legal settlement liability underof $199 million recorded on its Consolidated Balance Sheets.
Katz Technology Litigation:In June 2007, Ronald A. Katz Technology Licensing, L.P. (“RAKTL”), filed a lawsuit in the Shareholder ActionUnited States District Court for the Eastern District of Michigan against CMS Energy and Consumers alleging patent infringement. RAKTL is claiming that automated customer service, bill payment services and gas leak reporting offered to our customers and accessed through toll free numbers infringe patents held by RAKTL. This case has been recently transferred to the ACTS Action.

U.S.
District Court for Central District of California where other similar cases against public utilities, banks and other entities involving these patents are pending. We obtained an opinion from patent counsel that our automated telephone systems do not infringe on RAKTL patents and that those patents may be invalid. We will defend ourselves vigorously against these claims but cannot predict their outcome.
ELECTRIC CONTINGENCIES

ELECTRIC ENVIRONMENTAL MATTERS: 
Electric Environmental Matters:Our operations are subject to environmental laws and regulations. Costs to operate our facilities in compliance with these laws and regulations generally have been recovered in customer rates.
Routine Maintenance Classification:The EPA has alleged that some utilities have incorrectly classified plant modifications as "routine maintenance"“routine maintenance” rather than seeking permits from the EPA to modify the plant from the EPA.plant. We have received and responded to information requests from the EPA on this subject. We believe that we have properly interpreted the requirements of "routine“routine maintenance."” If our interpretation is found to be incorrect, we may be required to install additional pollution controls at some or all of our coal-fired electric generating plants and potentially pay fines. Additionally, the viability of certain plants remaining in operation could be called into question.
Cleanup and Solid Waste:Under the Michigan Natural Resources and Environmental Protection Act, we expect that we will ultimately incur investigation and remedial action costs at a number of sites. We believe that these costs will be recoverable in rates under current ratemaking policies.


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                                                        Consumers Energy Company

We are a potentially responsible party at several contaminated sites administered under the Superfund. Superfund liability is joint and several, meaning that many other creditworthy parties with substantial assets are potentially responsible with respect to the individual sites. Based on our experience, we estimate that our share of the total liability for the known Superfund sites will be between $1 million and $10 million. At March 31,June 30, 2007, we have recorded a liability for the minimum amount of our
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estimated probable Superfund liability in accordance with FIN 14. The timing of payments related to the remediation of our Superfund sites is uncertain. Any significant change in assumptions, such as different remediation techniques, nature and extent of contamination, and legal and regulatory requirements, could affect our estimate of remedial action costs and the timing of our remediation payments.
Ludington PCB:In October 1998, during routine maintenance activities, we identified PCB as a component in certain paint, grout, and sealant materials at Ludington. We removed and replaced part of the PCB material. Since proposing a plan to deal with the remaining materials, we have had several conversations with the EPA. The EPA has proposed a rule which would authorize continued use of such material in place, subject to certain restrictions. We are not able to predict when a final rule will be issued.
Electric Utility Plant Air Permit Issues:In April 2007, we received a Notice of Violation/Finding of Violation from the EPA alleging that fourteen of our utility boilers exceeded visible emission limits in their associated air permits. The utility boilers are located at the D.E. Karn/J.C. Weadock Generating Complex, the J.H. Campbell Plant, the BC Cobb Electric Generating Station and the JR Whiting Plant. We are preparing forpresently having discussions with the EPA regarding these allegations, but cannot predict the financial impact or outcome of this issue.

LITIGATION: 
Litigation:In 2003, a group of eight PURPA qualifying facilities (the plaintiffs), which sell power to us, filed a lawsuit in Ingham County Circuit Court. The lawsuit alleged that we incorrectly calculated the energy charge payments made pursuant to power purchase agreements with qualifying facilities. The judge deferred to the primary jurisdiction of the MPSC, dismissing the circuit court case without prejudice. In February 2005, the MPSC issued an order in the 2004 PSCR plan case concluding that we have been correctly administering the energy charge calculation methodology. The plaintiffs have appealed the MPSC order to the Michigan Court of Appeals. The plaintiffs also filed suit in the United States Court for the Western District of Michigan, which the judge subsequently dismissed on the basis that the pending state court litigation would fully resolve any federal issue before the courts. The plaintiffs then appealed the dismissal to the United States Court of Appeals, which held that the district court matter should be stayed rather than dismissed, pending the outcome of the state appeal. We cannot predict the outcome of these appeals.


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                                                        Consumers Energy Company

ELECTRIC RATE MATTERS

ELECTRIC
Electric ROA:The Customer Choice Act allows electric utilities to recover their net Stranded Costs. In prior orders, the MPSC approved recovery of Stranded Costs incurred from 2002 through 2003 plus the cost of money through the period of collection. At March 31,June 30, 2007, we had a regulatory asset for Stranded Costs of $66$67 million on our Consolidated Balance Sheets. We collect these Stranded Costs through a surcharge on ROA customers. At March 31,June 30, 2007, alternative electric suppliers were providing 283302 MW of generation service to ROA customers, which represent a decrease of 193 percent of ROA load compared to March 31,June 30, 2006. This downward trend has affected negatively our ability to recover timely ourthese Stranded Costs. If downward ROA trends continue, it may require legislative or regulatory assistance to recover fully our Stranded Costs. However, the Customer
Choice Act allows electric utilities to recover their net Stranded Costs. It is difficult to predict future ROA customer trends and their effect on the timely recovery of Stranded Costs.

POWER SUPPLY COSTS: 
Power Supply Costs:To reduce the risk of high power supply costs during peak demand periods and to achieve our reserve margin target, we purchase electric capacity and energy contracts for the physical delivery of electricity primarily in the summer months and to a lesser degree in the winter months. We have purchased capacity and energy contracts covering the reserve margin requirements for 2007 and
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covering partially the estimated reserve margin requirements for 20072008 through 2010. As a result, we have an asset of $62
million for unexpired seasonal capacity and energy contracts at March 31, 2007.
As of March 31,June 30, 2007, we expect capacity costs for these primarily seasonal electric capacity and energy contracts to be $14$17 million for 2007.
PSCR:The PSCR process allows recovery of reasonable and prudent power supply costs. The MPSC reviews these costs for reasonableness and prudency in annual plan proceedings and in plan reconciliation proceedings. The following table summarizes our PSCR reconciliation filings with the MPSC:
Power Supply Cost Recovery Reconciliation
PSCR Cost 
Net Under- of Power Description of Net
PSCR Year Date Filed Order Date recovery Sold Underrecovery
2005 Reconciliation March 2006 July 2007 $36 million $1.081 billion MPSC approved the recovery Sold                      Underrecovery
- ---------             ----------   ----------   ------------   --------------   -----------------------------------------

2005 Reconciliation   March 2006     Pending    $ 39of our $36 million $1.086 billion   Underrecovery relatesunderrecovery, including the cost of money, related to our commercial and industrial customers and includes the
                                                                                cost of money.

customers.
2006 Reconciliation March 2007 Pending    $115 $115 million   $1.492 $1.492 billion Underrecovery relates to our increased METC costs and coal supply costs, increased bundled sales, and other cost increases beyond those included in the 2006 PSCR plan filings.
2007 PSCR Plan:In September 2006, we filed our 2007 PSCR plan with the MPSC. The plan sought authorization to incorporate our 2005 and 2006 PSCR underrecoveries into our 2007 PSCR monthly factor. In December 2006, the MPSC issued a temporary order allowing us to implement our 2007 PSCR monthly factor on January 1, 2007, as filed. The order also allowed us to continue to roll in prior year underrecoveries and overrecoveries in future PSCR plans.


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                                                        Consumers Energy Company

Underrecoveries in power supply costs are included in Accrued power supply and gas revenue on our Consolidated Balance Sheets. We expect to recover fully all of our PSCR costs. When we are unable to collect these costs as they are incurred, there is a negative impact on our cash flows from electric utility operations. We cannot predict the outcome of these proceedings.

ELECTRIC RATE CASE: 
Electric Rate Case:In March 2007, we filed an application with the MPSC seeking an 11.25 percent authorized return on equity and an annual increase in revenues of $157 million as shown inmillion. In May 2007, we filed supplemental testimony with the following table:

MPSC to include transaction costs from the sale of Palisades. In July 2007, we filed an amended application with the MPSC to include the proposed purchase of the Zeeland power plant, the approval of an energy efficiency program, and to make other revisions.
In July 2007, we also filed a motion for partial and immediate rate relief, which seeks the following:

                                                         In Millions
                                                         -----------

Components • approval to remove the costs associated with Palisades,
• recovery of the proposed purchase of the Zeeland power plant,
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• partial and immediate rate relief associated with 2007 capital investments, a $400 million equity infusion into Consumers, and general inflation on operation and maintenance expenses to 2007 levels, and
• approval of a plan for the distribution of $127 million of proceeds from the sale of Palisades to customers, effectively offsetting the partial and immediate relief for up to nine months.
The following table summarizes the components of the final and interim requested increase in revenue:
                 
In Millions  
    Partial and        
Components of the increase in revenue   Immediate     Final  
 
Increase in base rates (a)   $ 77     $ 146  
Removal of Palisades from base rates     (169 )     (169 )
Elimination of Palisades base rate recovery credit from the PSCR (b)     167       167  
Surcharge for return on nuclear investments (c)     —       13  
             
Total requested increase in revenues at March 2007 filing     75       157  
Palisades transaction costs     —       28  
Zeeland power plant revenue requirements     84       92  
Energy Efficiency Program surcharge     —       5  
Palisades excess proceeds     (127 )     —  
             
Total requested increase in revenues   $ 32     $ 282  
 
(a) The increase in revenue
Reduction in base rates (a)                                 $(23)
Surcharge for return on nuclear investments relates to Clean Air Act-related and other utility expenditures, changes in the capital structure, and increased distribution system operation and maintenance costs including employee pension and health care costs.
(b)               13
Elimination of Palisades power purchase agreement costs in the PSCR are presently offset through a base rate recovery credit. The Palisades base rate recovery credit will be discontinued once Palisades’ costs are removed from base rates.
(c)       167
                                                            ----
   Total increase in revenues                               $157
                                                            ====
The nuclear surcharge is a proposal to earn a return on funds spent on Big Rock spent nuclear fuel storage, decommissioning, and site restoration expenditures until pending DOE litigation and future MPSC proceedings regarding this issue are concluded.


(a)  The reduction in base rates is due to the removal of Palisades related
     costs offset by Clean Air Act related and other utility expenditures,
     changes in the capital structure, and increased distribution system
     operation and maintenance costs including employee pension and health care
     costs.

(b)  The nuclear surcharge is a proposal to earn a return on funds spent on Big
     Rock spent nuclear fuel storage, decommissioning, and site restoration
     expenditures until pending DOE litigation and future MPSC proceedings
     regarding this issue are concluded.

(c)  Palisades power purchase agreement costs are currently offset through
     feedback in the PSCR related to Palisades base rate revenues via a base
     rate recovery credit. The Palisades base rate recovery credit will be
     discontinued once Palisades' costs are removed from base rates.

If approved as requested, the rate requests would go into effect in January 2008
and would apply to all retail electric customers. 
We cannot predict the amount or timing of any MPSC decision on the requests.
OTHER ELECTRIC CONTINGENCIES

THE
The MCV PPA:The MCV Partnership, which leases and operates the MCV Facility, contracted to sell 1,240 MW of electricity to Consumers under a 35-year power purchase agreement beginning in 1990. We estimate that capacity and energy payments under the MCV PPA will be $620 million per year. The MCV PPA and the associated customer rates are unaffected by the November 2006 sale of our interest in the MCV Partnership.
Underrecoveries related to the MCV PPA:The cost that we incur under the MCV PPA exceeds the recovery amount allowed by the MPSC. We estimate cash underrecoveries of our capacity and fixed energy payments of $39 million in 2007 of which we have expensed $13$30 million during the threesix months ended March 31,June 30, 2007. However, we use savings from the RCP, after allocating a portion to customers, to offset a portion of our capacity and fixed energy underrecoveries expense.
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We recover from our customers the capacity and fixed energy charges based on availability, up to an availability cap of 88.7 percent as established in previous MPSC orders. The MCV Partnership has filed an application with the MPSC requesting the elimination of the 88.7 percent availability cap. We cannot predict the outcome of this matter.
RCP:In January 2005, we implemented the MPSC-approved RCP with modifications. The RCP allows us to recover the same amount of capacity and fixed energy charges from customers as approved


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                                                        Consumers Energy Company in prior MPSC orders. However, we are able to dispatch the MCV Facility based on natural gas market prices. This results in fuel cost savings for the MCV Facility, which the MCV Partnership shares with us. The RCP also requires us to
contributecontributions of $5 million annually to a renewable resources program. As of MarchJune 30, 2007, we have contributedcontributions of $12 million were made to the renewable resources program. The underlying RCP agreement between Consumers and the MCV Partnership extends through the term of the MCV PPA. However, either party may terminate that agreement under certain conditions. In January 2007, the Michigan Attorney General filed an appeal with the Michigan Supreme Court regarding the MPSC'sMPSC’s order approving the RCP. We cannot predictThe Supreme Court denied the outcome of thisAttorney General’s request to further consider the matter.

Regulatory Out
Regulatory-out Provision in the MCV PPA:After September 15, 2007, we expect to claim relief under the regulatory outregulatory-out provision in the MCV PPA, thereby limiting our capacity and fixed energy payments to the MCV Partnership to the amounts that we collect from our customers. The MCV Partnership has notified us that it takes issue withopposes our intended exercise of the regulatory outregulatory-out provision. We believe that the provision is valid and fully effective, but cannot assure that itwe will prevail in the event of a dispute. If we are successful in exercising the regulatory outregulatory-out provision, the MCV Partnership may, under certain circumstances, have the right to terminate or reduce the amount of capacity sold under the MCV PPA from 1,240 MW to 806 MW, which could affect our reserve margin. Presently, we are in arbitration with the MCV Partnership regarding a dispute on the timing of MCV Partnership’s termination rights prescribed in the MCV PPA.
We anticipate that the MPSC will review our exercise of the regulatory
outregulatory-out provision and the likely consequences of such action in 2007. It is possible that in the event that the MCV Partnership ceases performance under the MCV PPA, prior orders could limit recovery of replacement power costs to the amounts that the MPSC authorized for recovery under the MCV PPA. Depending on the cost of replacement power, this could result in our costs exceeding the recovery amount allowed by the MPSC. We cannot predict the outcome of these matters.
To comply with a prior MPSC order, we made a filing in May 2007 with the MPSC, which asked the MPSC to make a determination regarding whether it wished to reconsider the amount of the MCV PPA payments that we recover from customers. We are unable to predict the outcome of this request.

THE SALE OF NUCLEAR ASSETS AND THE PALISADES POWER PURCHASE AGREEMENT: Sale of
Nuclear Assets: In April 2007, we sold Palisades to Entergy for $380 million.
The final purchase price was subject to various closing adjustments such as
working capital and capital expenditure adjustments and nuclear fuel usage and
inventory adjustments resulting in us receiving $361 million. We also paid
Entergy $30 million to assume ownership and responsibility for the Matters:Big Rock ISFSI. Because of the sale of Palisades, we will also pay the NMC, the former
operator of the Palisades plant, $7 million in exit fees and will forfeit our
investment in the NMC of $5 million.

Entergy will assume responsibility for the future decommissioning of the
Palisades plant and for storage and disposal of spent nuclear fuel located at
the Palisades and the Big Rock ISFSI sites. At closing, we transferred $252
million in decommissioning trust fund balances to Entergy.

The MPSC order approving the Palisades transaction allows us to recover the
estimated $314 million book value of the Palisades plant. As a result, we
estimate that we will credit excess proceeds of $66 million to our retail
customers through refunds applied over the remainder of 2007 and 2008. The MPSC
order deferred ruling on the recovery of $30 million in estimated transaction
costs, including the NMC exit fees, and the $30 million payment to Entergy
related to the Big Rock ISFSI until the next general rate case. We will defer
these costs as a regulatory asset on our Consolidated Balance Sheets as recovery
is probable.

In April 2007, the NRC, through its staff, issued an order approving the
transfer of the Palisades operating license. Subsequently, in April 2007, the
NRC issued an order requiring that certain intervenors be given, under a
protective order, information related to the buyer's financial capability. If,


                                      CE-35




                                                        Consumers Energy Company

after the review of the information, the intervenors wished to seek additional
proceedings on the license transfer, the NRC would consider the request. The NRC
did not alter or stay the prior order approving the license transfer. We believe
that it is unlikely that the NRC will conduct further proceedings, but we cannot
predict the outcome of the matter. These events did not hold up the closing of
the sale of Palisades.

The following table summarizes the estimated impacts of the Palisades and the
Big Rock ISFSI transactions:


                                                                                                             In Millions
- ------------------------------------------------------------------------------------------------------------------------
Customer Benefits (a)                                                     Deferred costs
- ---------------------                                                     ----------------------------------------

Purchase price                                                   $380     NMC exit fee                               $ 7
   Less: Estimated book value of Palisades plant                  314     Forfeiture of the NMC investment             5
                                                                 ----
Excess proceeds to be refunded to customers                        66(b)  Estimated selling expenses                  18
Excess decommissioning trust funds to be refunded to customers    189(c)  Big Rock ISFSI operation and maintenance
                                                                          fee to Entergy                              30
                                                                 ----                                                ---
   Total estimated customer refunds                              $255     Total regulatory asset                     $60
                                                                 ====                                                ===


(a)  In the FERC's February 2007 order regarding the Palisades transaction, the
     FERC granted our request to apply $11 million in FERC decommissioning trust
     fund balances for the Palisades plant toward the Big Rock decommissioning
     shortfall, as described in "Big Rock Nuclear Plant Decommissioning" within
     this section. The order was contingent upon the NRC approving the transfer
     of operating licenses, which the NRC approved in April 2007. This
     determination is the subject of a clarification request filed by a
     wholesale customer with the FERC.

(b)  Final proceeds in excess of the book value are subject to closing
     adjustments and review by the MPSC.

(c)  In the MPSC's March 2007 order approving the Palisades transaction, the
     MPSC indicated that $189 million of MPSC jurisdictional decommissioning
     funds must be credited to our retail customers through refunds applied over
     the remainder of 2007 and 2008. Final disposition of these funds is subject
     to closing date balances and is subject to review by the MPSC. The
     remaining estimated $116 million of the MPSC jurisdictional decommissioning
     funds, which is subject to closing date reconciliation will be used to
     benefit our retail customers and is expected to be addressed in a separate
     filing made with the MPSC.

Palisades Power Purchase Agreement: Entergy contracted to sell us 100 percent of
the plant's output up to its current annual average capacity of 798 MW under a
15-year power purchase agreement beginning in April 2007. We provided $30
million in security to Entergy for our power purchase agreement obligation in
the form of a letter of credit. We estimate that capacity and energy payments
under the Palisades power purchase agreement will be $300 million per year.

Because of the Palisades power purchase agreement, the transaction is a sale and
leaseback for accounting purposes. SFAS No. 98 specifies the accounting required
for a seller's sale and simultaneous leaseback involving real estate. We will
have continuing involvement with the Palisades plant through security provided
to Entergy for our power purchase agreement obligation, our DOE liability, and
other forms of involvement. As a result, we will account for the Palisades
plant, which is the real estate asset subject to the leaseback, as a financing
for accounting purposes and not a sale. We will account for the remaining
non-real estate assets and liabilities associated with the transaction as a


                                      CE-36



                                                        Consumers Energy Company

sale.

As a financing, the Palisades plant will remain on our Consolidated Balance
Sheets and the related proceeds will be recorded as a financing obligation. The
value of the finance obligation is based on an allocation of the transaction
proceeds to the fair values of the net assets sold and fair value of the
Palisades plant assets under the financing.

BIG ROCK NUCLEAR PLANT DECOMMISSIONING: Decommissioning:The MPSC and the FERC regulate the recovery of costs to decommission the Big Rock nuclear plant.Rock. In December 2000, funding of the Big Rock trust fund stopped because the MPSC-authorized decommissioning surcharge collection period expired. In a March 2007 report to
the MPSC, we indicated that we have managed the decommissioning trust fund to
meet the annual NRC financial assurance requirements by withdrawing NRC
radiological decommissioning costs from the trust fund and initially funding
non-NRC greenfield costs out of corporate funds. In March 2006, we contributed
corporate funds of $16 million to the trust fund to support the NRC radiological
decommissioning costs. Excluding the additional nuclear fuel storage costs due
to the DOE's failure to accept spent nuclear fuel on schedule, we are projecting
theThe level of funds provided by the trust will fallfell short of the amount needed to complete decommissioning by an additional $36 million. This totaldecommissioning. As a result, we provided $50 million of $52
million, which arecorporate contributions for costs associated with NRC radiological and non-NRC greenfield decommissioning work are being funded outas of June 30, 2007. This amount excludes the $30 million payment to Entergy to assume ownership and responsibility for the Big Rock ISFSI and additional corporate funds.contributions for nuclear fuel storage costs of $55 million as of June 30, 2007, due to the DOE’s failure to accept spent nuclear fuel on schedule. We plan to seek recovery of expenditures that
CE-39
Consumers Energy Company
we have funded in future filings with the MPSC and have a $36$122 million regulatory asset recorded on our Consolidated Balance Sheets as of March 31,June 30, 2007.

Cost projections
Actual expenditures for Big Rock indicate a decommissioning cost of $389totaled $387 million as of March 2007, of which we have incurred $387 million. These amounts excludeJune 30, 2007. This total excludes the additional costs for spent nuclear fuel storage due to the DOE'sDOE’s failure to accept this spent nuclear fuel on schedule. They also exclude post September 11schedule as well as certain increased security costs that we are recovering through the security cost recovery provisions of Public Act 609 of 2002. These activities had no material
impact on consolidated net income. Any remaining Big Rock decommissioning costs
will initially be funded out of corporate funds.

NUCLEAR MATTERS: 
Nuclear Fuel Cost:We amortized nuclear fuel cost to fuel
expense based on the quantity of heat produced for electric generation. For
nuclear fuel used after April 6, 1983, we charged certain disposal costs to
nuclear fuel expense, recovered these costs through electric rates, and remitted
them to the DOE quarterly. We elected to deferdeferred payment for disposal of spent nuclear fuel burned before April 7, 1983. Our DOE liability is $154$156 million at March 31,June 30, 2007. This amount includes interest, which is payable upon the first delivery of spent nuclear fuel to the DOE. We have recovered, through electric rates, the amount of this liability, excluding a portion of interest. In conjunction with the sale of Palisades and the Big Rock ISFSI, we retained this obligation and provided $155 million in security to Entergy for this obligation in the form of a letter of credit.
DOE Litigation:In 1997, a U.S. Court of Appeals decision confirmed that the DOE was to begin accepting deliveries of spent nuclear fuel for disposal by January 1998. Subsequent U.S. Court of Appeals litigation, in which we and other utilities participated, has not been successful in producing more specific relief for the DOE'sDOE’s failure to accept the spent nuclear fuel.
There are twoseveral court decisions that support the right of utilities to pursue damage claims in the United States Court of Claims against the DOE for failure to take delivery of spent nuclear fuel. Over 60 utilities have initiated
litigation in the United States Court of Claims. We filed our complaint in
December 2002. If our litigation against the DOE is successful, we plan to use any recoveries as reimbursement for the incurred costs of spent nuclear fuel storage during our ownership of Palisades


                                      CE-37



                                                        Consumers Energy Company and Big Rock. We can make no assurance that the litigation against the DOE will be successful. The sale of Palisades and the Big Rock ISFSI did not transfer the right to any recoveries from the DOE related to costs of spent nuclear fuel storage incurred during our ownership of Palisades and Big Rock.
In 2002, the site at Yucca Mountain, Nevada was designated for the development of a repository for the disposal of high-level radioactive waste and spent nuclear fuel. We expect that the DOE, in due course,ultimately, will submit a final license application to the NRC for the repository. The application and review process is estimated to take several years.

Insurance: We maintained nuclear insurance coverage on our nuclear plants until
Palisades and the Big Rock ISFSI were sold in April 2007. At Palisades, we
maintained nuclear property insurance from NEIL totaling $2.750 billion and
insurance that would partially cover the cost of replacement power during
certain prolonged accidental outages. Because NEIL is a mutual insurance
company, we could be subject to assessments of up to $30 million in any policy
year if insured losses in excess of NEIL's maximum policyholders surplus occur
at our, or any other member's, nuclear facility. NEIL's policies include
coverage for acts of terrorism.

At Palisades, we maintained nuclear liability insurance for third-party bodily
injury and off-site property damage resulting from a nuclear energy hazard for
up to approximately $10.761 billion, the maximum insurance liability limits
established by the Price-Anderson Act. Part of the Price-Anderson Act's
financial protection is a mandatory industry-wide program under which owners of
nuclear generating facilities could be assessed if a nuclear incident occurs at
any nuclear generating facility. The maximum assessment against us could be $101
million per occurrence, limited to maximum annual installment payments of $15
million.

We also maintained insurance under a program that covers tort claims for bodily
injury to nuclear workers caused by nuclear hazards. The policy contains a $300
million nuclear industry aggregate limit. Under a previous insurance program
providing coverage for claims brought by nuclear workers, we remain responsible
for a maximum assessment of up to $6 million. This requirement will end December
31, 2007.

Big Rock was insured for nuclear liability up to $544 million through nuclear
insurance and the NRC indemnity, and we maintained a nuclear property insurance
policy from NEIL.

Insurance policy terms, limits, and conditions are subject to change during the
year as we renew our policies.

GAS CONTINGENCIES

GAS ENVIRONMENTAL MATTERS: 
Gas Environmental Matters:We expect to incur investigation and remediation costs at a number of sites under the Michigan Natural Resources and Environmental Protection Act, a Michigan statute that covers environmental activities including remediation. These sites include 23 former manufactured gas plant facilities. We operated the facilities on these sites for some part of their operating lives. For some of these sites, we have no current ownership or may own only a portion of the original site. In 2005, we estimated our remaining costs to be between $29 million and $71 million, based on 2005 discounted costs, using a discount rate of three percent. The discount rate represents a 10-year average of U.S. Treasury bond rates reduced for increases in the consumer price index. We expect to fund most of these costs through proceeds derived from a settlement with insurers and MPSC-approved rates. At March 31,June 30, 2007, we have a liability of $22$21 million, net of $60$61 million of expenditures incurred to date, and a regulatory asset of $55$53 million. The timing of payments related to the remediation of our


                                      CE-38


                                                        Consumers Energy Company manufactured gas plant sites is uncertain. Any significant change in assumptions, such as an increase in the number of sites, different remediation techniques, nature and extent of contamination, and legal and regulatory requirements, could affect our estimate of remedial action costs and the timing of our remediation payments.
CE-40
Consumers Energy Company
GAS RATE MATTERS

GAS COST RECOVERY: 
Gas Cost Recovery:The GCR process is designed to allow us to recover all of our purchased natural gas costs if incurred under reasonable and prudent policies and practices. The MPSC reviews these costs, policies, and practices for prudency in annual plan and reconciliation proceedings.
The following table summarizes our GCR reconciliation filings with the MPSC:
Gas Cost Recovery Reconciliation
Net Over- GCR Cost 
GCR Year Date Filed Order Date recovery of Gas Cost Recovery Reconciliation
- ---------------------------------------------------------------------------------------
                                       Net Over-    GCR Cost of       Sold Description of GCR Year    Date Filed   Order Date    recovery      Gas Sold        Net Overrecovery
- --------    ----------   ----------   ----------   ------------   ---------------------
2005-2006 June 2006 April 2007   $3 $3 million   $1.8 $1.8 billion The net overrecovery includes $1 million interest income through March 2006, which resulted from a net underrecovery position during the majority of the GCR period. In 
2006-2007 June 2007 the
                                                                  MPSC approved a
                                                                  settlement agreement,
                                                                  agreeing Pending $5 million $1.7 billion The total overrecovery amount reflects an overrecovery of $1 million plus $4 million in accrued interest owed to a $3
                                                                  million net
                                                                  overrecovery amount.
customers. 
Overrecoveries in cost of gas sold are included in Accrued rate refunds on our Consolidated Balance Sheets.
GCR plan for year 2005-2006:In November 2005, the MPSC issued an order for our 2005-2006 GCR Plan year, which resulted in approval of a settlement agreement and established a fixed price cap of $10.10 per mcf for the December 2005 through March 2006 billing period. We were able to maintain our GCR billing factor below the authorized level for that period. The order was appealed to the Michigan Court of Appeals by one intervenor. We are unable to predict the outcome of this proceeding.
GCR plan for year 2006-2007:In August 2006, the MPSC issued an order for our 2006-2007 GCR Plan year, which resulted in approval of a settlement agreement that allowed a base GCR ceiling factor of $9.48 per mcf for the 12-month period of April 2006 through March 2007. We were able to maintain our GCR billing factor below the authorized level for that period.
GCR plan for year 2007-2008:In December 2006, we filed an application with the MPSC seeking approval of a GCR plan for the 12-month period of April 2007 through March 2008. Our request proposed using a GCR factor consisting of:

     -    
• a base GCR ceiling factor of $8.47 per mcf, plus
• a quarterly GCR ceiling price adjustment contingent upon future events.
In June 2007, all parties signed a settlement agreement and filed the agreement with the MPSC for approval. All parties agreed to lower the ceiling on the quarterly adjustment mechanism from $3.50 per mcf to $3.00 per mcf.
CE-41
Consumers Energy Company
Due to an increase in NYMEX gas prices compared to the plan, the base GCR ceiling factor of $8.47increased to $8.67 per mcf plus

     -    a quarterly GCRpursuant to the ceiling price adjustment contingent upon future
          events.

mechanism. The new base GCR ceiling factor was effective beginning July 2007.
In July 2007, the MPSC issued an order for our 2007-2008 GCR Plan year, which resulted in approval of the settlement agreement.
The GCR billing factor is adjusted monthly in order to minimize the over or underrecovery amounts in our annual GCR reconciliation. Our GCR billing factor for the month of MayAugust 2007 is $8.24$7.90 per mcf.


                                         CE-39



                                                        Consumers Energy Company

2007 GAS RATE CASE: Gas Rate Case:In February 2007, we filed an application with the MPSC seeking an 11.25 percent authorized return on equity along with an $88 million annual increase in our gas delivery and transportation rates, of which $17
million would be contributed to a low income energy efficiency fund.rates. We have proposed the use of a Revenue Decoupling and Conservation Incentive Mechanism for residential and general service rate classes, to help assure a reasonable
opportunitywhich partially separates the collection of fixed costs from gas sales and enhances the utility’s ability to recover its fixed costs regardless.
The MPSC Staff and intervenors filed testimony on July 20, 2007. In its testimony, the MPSC Staff recommended a 10.5 percent authorized return on equity with a $35 million annual increase in our gas delivery and transportation rates. The schedule established by the MPSC for processing this case could allow for a final order by the end of sales levels.

2007.
OTHER CONTINGENCIES

OTHER: 
Other:In addition to the matters disclosed within this Note, we are party to certain lawsuits and administrative proceedings before various courts and governmental agencies arising from the ordinary course of business. These lawsuits and proceedings may involve personal injury, property damage, contractual matters, environmental issues, federal and state taxes, rates, licensing, and other matters.
We have accrued estimated losses for certain contingencies discussed within this Note. Resolution of these contingencies is not expected to have a material adverse impact on our financial position, liquidity, or future results of operations.
FASB INTERPRETATION NO.Interpretation No. 45, GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS
FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS: Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others:The Interpretation requires the guarantor, upon issuance of a guarantee, to recognize a liability for the fair value of the obligation it undertakes in issuing the guarantee.
The following table describes our guarantees at March 31,June 30, 2007:
                                                                                    In Millions
- -----------------------------------------------------------------------------------------------
                                                                                        FIN 45
                                                             Expiration     Maximum    Carrying
Guarantee Description                          Issue Date       Date      Obligation    Amount
- ---------------------                         ------------   ----------   ----------   --------

Surety bonds and other indemnifications       Various          Various       $  1         --
Guarantee                                     January 1987   March 2016        85         --
Nuclear insurance retrospective premiums(a)   Various        Indefinite       137         --


(a)  We maintained nuclear insurance coverage on our nuclear plants until
     Palisades and the Big Rock ISFSI were sold in April 2007. For more details
     on the sale of Palisades and Big Rock, see Note 2, Contingencies, "Other
     Electric Contingencies - The Sale of Nuclear Assets and the Palisades Power
     Purchase Agreement."


                                         CE-40

                                 
In Millions  
                            FIN 45  
            Expiration     Maximum     Carrying  
Guarantee Description   Issue Date     Date     Obligation     Amount  
 
Surety bonds and other indemnifications   Various   Various   $ 1       —  
Guarantee   January 1987   March 2016     85       —  
 
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Consumers Energy Company
The following table provides additional information regarding our guarantees:
Events That Would Require
Guarantee Description How Guarantee Arose Performance
- ---------------------             --------------------------   --------------------------------
Surety bonds and other indemnifications Normal operating activity, Nonperformance
indemnifications                  permits and licenses Nonperformance
Guarantee Agreement to provide power MCV Partnership's nonperformance
                                  and steam to Dow MCV Partnership’s nonperformance or non-payment under a related contract

Nuclear insurance retrospective   Normal operations of         Call by NEIL and Price-Anderson
premiums                          nuclear plants               Act for nuclear incident
At March 31,June 30, 2007, only our guarantee to provide power and steam to Dow contained provisions allowing us to recover, from third parties, amounts paid under the guarantees.
We sold our interests in the MCV Partnership and the FMLP. The sales agreement calls for the purchaser, an affiliate of GSO Capital Partners and Rockland Capital Energy Investments, to pay Consumers $85 million, subject to certain reimbursement rights, if Dow terminates an agreement under which the MCV Partnership provides it steam and electric power. This agreement expires in March 2016, subject to certain terms and conditions. The purchaser secured their reimbursement obligation with an irrevocable letter of credit of up to $85 million.
We enter into various agreements containing tax and other indemnification provisions in connection with a variety of transactions, including the sale of our interests in the MCV Partnership and the FMLP. In April 2007, we soldFMLP and the sale of our interest in Palisades and the Big Rock ISFSI to Entergy. As part of the
transaction, we entered into agreements containing tax and other indemnification
provisions.ISFSI. While we are unable to estimate the maximum potential obligation related to these indemnities, we consider the likelihood that we would be required to perform or incur significant losses related to these indemnities and the guarantees listed in the preceding tables to be remote.

3: FINANCINGS AND CAPITALIZATION

4:Financings and Capitalization
Long-term debt is summarized as follows:
                                                                     In Millions
                                              ----------------------------------
                                              March 31, 2007   December 31, 2006
                                              --------------   -----------------

First mortgage bonds                              $3,172            $3,172
Senior notes and other                               654               652
Securitization bonds                                 332               340
                                                  ------            ------
   Principal amounts outstanding                   4,158             4,164
   Current amounts                                  (190)              (31)
   Net unamortized discount                           (6)               (6)
   Total Long-term debt                           $3,962            $4,127
                                                  ======            ======



                                         CE-41
                 
In Millions  
    June 30, 2007     December 31, 2006  
 
First mortgage bonds   $ 3,171     $ 3,172  
Senior notes and other     655       652  
Securitization bonds     325       340  
Principal amounts outstanding     4,151       4,164  
Current amounts     (440 )     (31 )
Net unamortized discount     (6 )     (6 )
 
                 
Total Long-term debt   $ 3,705     $ 4,127  
 
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Consumers Energy Company

REVOLVING CREDIT FACILITY: 
Revolving Credit Facility:The following secured revolving credit facility with banks is available at March 31,June 30, 2007:
                                                                              In Millions
- -----------------------------------------------------------------------------------------
                              Amount of    Amount       Outstanding
 Company    Expiration Date    Facility   Borrowed   Letters-of-Credit   Amount Available
 -------    ---------------   ---------   --------   -----------------   ----------------

Consumers    March 30, 2012      $500        $--            $59                $441
                                         
In Millions
                            Outstanding    
            Amount of   Amount   Letters-of-   Amount
Company   Expiration Date   Facility   Borrowed   Credit   Available
 
Consumers   March 30, 2012   $ 500     $ —     $ 218     $ 282  
 
We replaced our $500 million facility in March 2007 with a new $500 million credit facility that expires in March 2012.2007. The new facility contains less restrictive covenants, and provides for lower fees and lower interest margins than the previous credit facilities.

DIVIDEND RESTRICTIONS: 
Dividend Restrictions:Under the provisions of our articles of incorporation, at March 31,June 30, 2007, we had $227$232 million of unrestricted retained earnings available to pay common stock dividends. The dividend restrictions in our secured revolving credit facility were removed in March 2007. Provisions of the Federal Power Act and the Natural Gas Act effectively restrict dividends to the amount of our retained earnings. For the threesix months ended March 31,June 30, 2007, we paid $94$135 million in common stock dividends to CMS Energy.

CAPITAL LEASE OBLIGATIONS: 
Capital Lease Obligations:Our capital leases are comprised mainly of leased service vehicles, power purchase agreements,office furniture, and office furniture.gas pipeline capacity. At March 31,June 30, 2007, capital lease obligations totaled $64$63 million. SALE OF ACCOUNTS RECEIVABLE: We estimate future minimum lease payments to range between $10 million and $16 million per year over the next five years.
Sale of Accounts Receivable:Under a revolving accounts receivable sales program, we sell certain accounts receivable to a wholly owned, consolidated, bankruptcy remote special purpose entity. In turn, the special purpose entity may sell an undivided interest in up to $325 million of the receivables. The special purpose entity sold $10 million ofno receivables at March 31,June 30, 2007 and $325 million of receivables at December 31, 2006. We continue to service the receivables sold to the special purpose entity. The purchaser of the receivables has no recourse against our other assets for failure of a debtor to pay when due and no right to any receivables not sold. We have neither recorded a gain or loss on the receivables sold nor retained an interest in the receivables sold.
Certain cash flows under our accounts receivable sales program are shown in the following table:
                                                                  In Millions
                                                             ----------------
Three months Ended March 31                                    2007      2006
- ---------------------------                                   ------   ------

Net cash flow as a result of accounts receivable financing    $ (315)  $ (325)
Collections from customers                                    $1,928   $1,817
                                                              ======   ======



                                      CE-42

                 
In Millions  
Six months ended June 30   2007     2006  
 
Net cash flow as a result of accounts receivable financing   $ (325 )   $ (325 )
Collections from customers   $ 3,432     $ 3,232  
 
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Consumers Energy Company

4:   FINANCIAL AND DERIVATIVE INSTRUMENTS

FINANCIAL INSTRUMENTS: 
5:Financial and Derivative Instruments
Financial Instruments:The carrying amounts of cash, short-term investments, and current liabilities approximate their fair values because of their short-term nature. We estimate the fair values of long-term financial instruments based on quoted market prices or, in the absence of specific market prices, on quoted market prices of similar instruments or other valuation techniques.
The cost and fair value of our long-term debt instruments including current maturities are as follows:
                                                                     In Millions
                     -----------------------------------------------------------
                              March 31, 2007               December 31, 2006
                     ----------------------------   ----------------------------
                                Fair   Unrealized             Fair    Unrealized
                      Cost     Value      Gain       Cost     Value      Gain
                     ------   ------   ----------   ------   ------   ----------

Long-term debt       $4,152   $4,145       $7       $4,158   $4,111       $47
                                                 
In Millions
    June 30, 2007   December 31, 2006
            Fair   Unrealized           Fair   Unrealized
    Cost   Value   Gain   Cost   Value   Gain
 
Long-term debt   $ 4,145     $ 4,044     $ 101     $ 4,158     $ 4,111     $ 47  
 
The summary of our available-for-sale investment securities is as follows:
                                                                 
In Millions
    June 30, 2007   December 31, 2006        
            Unrealized   Unrealized   Fair           Unrealized   Unrealized   Fair
    Cost   Gains   Losses   Value   Cost   Gains   Losses   Value
 
Common stock of CMS Energy (a)   $ 8     $ 24     $ —     $ 32     $ 10     $ 26     $ —     $ 36  
Nuclear decommissioning investments:                                                                
Equity securities     —       —       —       —       140       150       (4 )     286  
Debt securities     —       —       —       —       307       4       (2 )     309  
SERP:                                                                
Equity securities     18       10       —       28       17       9       —       26  
Debt securities     5       —       —       5       6       —       —       6  
 

                                                                                                                In Millions
                                        -----------------------------------------------------------------------------------
                                                   March 31, 
(a) At June 30, 2007, we held 1.8 million shares and at December 31, 2006, -----------------------------------------   ---------------------------------------
                                                  Unrealized   Unrealized    Fair          Unrealized   Unrealized    Fair
                                           Cost      Gains       Losses     Value   Cost      Gains       Losses     Value
                                           ----   ----------   ----------   -----   ----   ----------   ----------   ------

Common stockwe held 2.2 million shares of CMS Energy (a)             $  8      $ 25          $--       $ 33   $ 10      $ 26         $--        $ 36
Nuclear decommissioning investments: (b)
   Equity securities                        142       149           (4)       287    140       150          (4)        286
   Debt securities                          228         2           (2)       228    307         4          (2)        309
SERP:
   Equity securities                         17         9           --         26     17         9          --          26
   Debt securities                            6        --           --          6      6        --          --           6
Common Stock.


(a)  At March 31, 2007, we held 1.8 million shares and at December 31, 2006, we
     held 2.2 million shares of CMS Energy Common Stock.

(b)  In preparation for the sale of Palisades, these investments also held cash
     and cash equivalents totaling $91 million at March 31, 2007. In April 2007,
     we sold Palisades and the Big Rock ISFSI to Entergy. Accordingly, we
     transferred $252 million in trust fund assets to Entergy. For additional
     details on the sale of Palisades and the Big Rock ISFSI, see Note 2,
     Contingencies, "Other Electric Contingencies - The Sale of Nuclear Assets
     and the Palisades Power Purchase Agreement."

DERIVATIVE INSTRUMENTS:
Derivative Instruments: In order to limit our exposure to certain market risks, we may enter into various risk management contracts, such as swaps, options, futures, and forward contracts. These contracts, used primarily to manage our exposure to changes in interest rates and commodity prices, are entered into for purposes other than trading. We enter into these contracts using established policies and procedures, under the direction of both:

     -    an executive oversight committee consisting of senior management
          representatives, and

     -    a risk committee consisting of business unit managers.


                                     CE-43



                                                        Consumers Energy Company

• an executive oversight committee consisting of senior management representatives, and
• a risk committee consisting of business unit managers.
The contracts we use to manage market risks may qualify as derivative instruments that are subject to derivative and hedge accounting under SFAS No. 133. If a contract is a derivative, it is recorded on our consolidated balance sheet at its fair value. We then adjust the resulting asset or liability each quarter to reflect any change in the market value of the contract, a practice known as marking the contract to market. From time to time, we enter into cash flow hedges. If a derivative qualifies for cash flow hedge accounting treatment, the changes in fair value (gains or losses) are reported in AOCI; otherwise, the changes are reported in earnings.
CE-45
Consumers Energy Company
For a derivative instrument to qualify for cash flow hedge accounting:

     -    the relationship between the derivative instrument and the forecasted
          transaction being hedged must be formally documented at inception,

     -    the derivative instrument must be highly effective in offsetting the
          hedged transaction's cash flows, and

     -    the forecasted transaction being hedged must be probable.

• the relationship between the derivative instrument and the forecasted transaction being hedged must be formally documented at inception,
• the derivative instrument must be highly effective in offsetting the hedged transaction’s cash flows, and
• the forecasted transaction being hedged must be probable.
If a derivative qualifies for cash flow hedge accounting treatment and gains or losses are recorded in AOCI, those gains or losses will be reclassified into earnings in the same period or periods the hedged forecasted transaction affects earnings. If a cash flow hedge is terminated early because it is determined that the forecasted transaction will not occur, any gain or loss recorded in AOCI at that date is recognized immediately in earnings. If a cash flow hedge is terminated early for other economic reasons, any gain or loss as of the termination date is deferred and then reclassified to earnings when the forecasted transaction affects earnings. The ineffective portion, if any, of all hedges is recognized in earnings.
To determine the fair value of our derivatives, we use information from external sources (i.e., quoted market prices and third-partythird party valuations), if available. For certain contracts, this information is not available and we use mathematical valuation models to value our derivatives. These models require various inputs and assumptions, including commodity market prices and volatilities, as well as interest rates and contract maturity dates. The cash returns we actually realize on these contracts may vary, either positively or negatively, from the results that we estimate using these models. As part of valuing our derivatives at market, we maintain reserves, if necessary, for credit risks arising from the financial condition of our counterparties.
The majority of our commodity purchase and sale contracts are not subject to derivative accounting under SFAS No. 133 because:

     -    they do not have a notional amount (that is, a number of units
          specified in a derivative instrument, such as MWh of electricity or
          bcf of natural gas),

     -    they qualify for the normal purchases and sales exception, or

     -    there is not an active market for the commodity.

• they do not have a notional amount (that is, a number of units specified in a derivative instrument, such as MWh of electricity or bcf of natural gas),
• they qualify for the normal purchases and sales exception, or
• there is not an active market for the commodity.
Our coal purchase contracts are not derivatives because there is not an active market for the coal we purchase. If an active market for coal develops in the future, some of these contracts may qualify as derivatives and the resulting mark-to-market impact on earnings could be material.
Derivative accounting is required for certain contracts used to limit our exposure to commodity price risk. At March 31,June 30, 2007, the fair value of these derivative contracts was immaterial.


                                      CE-44

CE-46
Consumers Energy Company

5:   RETIREMENT BENEFITS

6:Retirement Benefits
We provide retirement benefits to our employees under a number of different plans, including:

     -    a non-contributory, defined benefit Pension Plan,

     -    a cash balance Pension Plan for certain employees hired between July
          1, 2003 and August 31, 2005,

     -    a DCCP for employees hired on or after September 1, 2005,

     -    benefits to certain management employees under SERP,

     -    a defined contribution 401(k) Savings Plan,

     -    benefits to a select group of management under the EISP, and

     -    health care and life insurance benefits under OPEB.

• a non-contributory, defined benefit Pension Plan,
• a cash balance Pension Plan for certain employees hired between July 1, 2003 and August 31, 2005,
• a DCCP for employees hired on or after September 1, 2005,
• benefits to certain management employees under SERP,
• a defined contribution 401(k) Savings Plan,
• benefits to a select group of management under the EISP, and
• health care and life insurance benefits under OPEB.
Pension Plan:The Pension Plan includes funds for most of our current employees, the employees of our subsidiaries, and Panhandle, a former subsidiary. The Pension Plan'sPlan’s assets are not distinguishable by company.
In April 2007, we sold the Palisades nuclear plant to Entergy. Employees transferred to Entergy as a result of the sale no longer participate in our retirement benefit plans. In April 2007, we recorded a net reduction of $27 million in pension SFAS No. 158 regulatory assets with a corresponding decrease of $27 million in pension liabilities on our Consolidated Balance Sheets. We also recorded a net reduction of $15 million in OPEB regulatory SFAS No. 158 assets with a corresponding decrease of $15 million in OPEB liabilities. The following table shows the net adjustment:
                                                                  Pension   OPEB
                                                                  -------   ----

Plan liability transferred to Entergy                               $44      $20
Trust assets transferred to Entergy                                  17        5
                                                                    ---      ---
Net adjustment                                                      $27      $15
                                                                    ===      ===
                 
    Pension   OPEB
 
Plan liability transferred to Entergy   $ 44     $ 20  
Trust assets transferred to Entergy     17       5  
 
Net adjustment   $ 27     $ 15  
 
Beginning May 1, 2007, the CMS Energy Common Stock Fund willis no longer be an investment option available for new investments in the401(k) Savings Plan and the employer'semployer’s match willis no longer be in CMS Energy Stock. Participants will have an opportunity to reallocate investments in the CMS Energy Stock Fund to other plan investment alternatives. Beginning November 1, 2007, any remaining shares in the CMS Energy Stock Fund will be sold and the sale proceeds will be reallocated to other plan investment options. At March 31,June 30, 2007, there were 109 million shares of CMS Energy Common Stock in the CMS Energy Stock Fund.
SFAS No. 158, Employers'Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans -— an amendment of FASB Statements No. 87, 88, 106, and 132(R):In September 2006, the FASB issued SFAS No. 158. Phase one of this standard required us to recognize the funded status of our defined benefit postretirement plans on our Consolidated Balance Sheets at December 31, 2006. Phase one was implemented in December 2006. Phase two of this standard requires that we change our plan measurement date from November 30 to December 31, effective December 31, 2008. We do not believe that implementation of phase two of this standard will have a material effect on our consolidated financial statements. We expect to adopt the measurement date provisions of SFAS No. 158 in 2008.


                                      CE-45



                                                        Consumers Energy Company

Costs:The following table recaps the costs, other changes in plan assets, and benefit obligations incurred in our retirement benefits plans:
                                                              In Millions
                                                -------------------------
                                                 Pension         OPEB
                                                -----------   -----------
Three Months Ended March 31                     2007   2006   2007   2006
                                                ----   ----   ----   ----

Service cost                                    $ 12   $ 12   $  6   $  6
Interest expense                                  20     19     17     16
Expected return on plan assets                   (19)   (20)   (16)   (14)
Amortization of:

   Net loss                                       11     10      6      5
   Prior service cost (credit)                     2      2     (2)    (3)
                                                ----   ----   ----   ----
Net periodic cost                                 26     23     11     10
Regulatory adjustment                             (4)    (3)    (2)    --
                                                ----   ----   ----   ----
Net periodic cost after regulatory adjustment   $ 22   $ 20   $  9   $ 10
                                                ====   ====   ====   ====


6:   ASSET RETIREMENT OBLIGATIONS

CE-47
Consumers Energy Company
                                 
In Millions  
    Pension  
    Three Months Ended     Six Months Ended  
June 30   2007     2006     2007     2006  
 
Service cost   $ 11     $ 11     $ 23     $ 23  
Interest expense     21       20       41       39  
Expected return on plan assets     (19 )     (20 )     (38 )     (40 )
Amortization of:                                
Net loss     11       10       22       20  
Prior service cost     2       2       4       4  
     
Net periodic cost     26       23       52       46  
Regulatory adjustment     (4 )     (2 )     (8 )     (5 )
     
Net periodic cost after regulatory adjustment   $ 22     $ 21     $ 44     $ 41  
 
                                 
In Millions  
    OPEB  
    Three Months Ended     Six Months Ended  
June 30   2007     2006     2007     2006  
 
Service cost   $ 7     $ 6     $ 13     $ 12  
Interest expense     18       16       35       32  
Expected return on plan assets     (15 )     (15 )     (31 )     (29 )
Amortization of:                                
Net loss     5       5       11       10  
Prior service credit     (3 )     (2 )     (5 )     (5 )
     
Net periodic cost     12       10       23       20  
Regulatory adjustment     (1 )     (1 )     (3 )     (1 )
     
Net periodic cost after regulatory adjustment   $ 11     $ 9     $ 20     $ 19  
 
7:Asset Retirement Obligations
SFAS NO.No. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS: Accounting for Asset Retirement Obligations:This standard requires companies to record the fair value of the cost to remove assets at the end of their useful life, if there is a legal obligation to remove them. Fair value, to the extent possible, should include a market risk premium for unforeseeable circumstances. No market risk premium was included in our ARO fair value estimate since a reasonable estimate could not be made. If a five percent market risk premium were assumed, our ARO liability would increase by $25$5 million.
If a reasonable estimate of fair value cannot be made in the period in which the ARO is incurred, such as for assets with indeterminate lives, the liability is to be recognized when a reasonable estimate of fair value can be made. Generally, gas transmission and electric and gas distribution assets have indeterminate lives. Retirement cash flows cannot be determined and there is a low probability of a retirement date. Therefore, no liability has been recorded for these assets or associated obligations related to potential future abandonment. Also, no liability has been recorded for assets that have insignificant cumulative disposal costs, such as substation batteries. The
measurement of the ARO liabilities
FASB Interpretation No. 47,Accounting for Palisades and Big Rock include use of
decommissioning studies that largely utilize third-party cost estimates.

FASB INTERPRETATION NO. 47, ACCOUNTING FOR CONDITIONAL ASSET RETIREMENT
OBLIGATIONS: Conditional Asset Retirement Obligations:This Interpretation clarified the term "conditional“conditional asset retirement obligation"obligation�� as used in SFAS No. 143. The
CE-48
Consumers Energy Company
term refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event. We determined that abatement of asbestos included in our plant investments qualifies as a conditional ARO, as defined by FIN 47.


                                     CE-46



                                                        Consumers Energy Company

The following tables describe our assets that have legal obligations to be removed at the end of their useful life:
                     
June 30, 2007           In Millions  
 
ARO Description   Date     Long-Lived Assets   Fund  
 
Palisades — decommission plant site     1972     Palisades nuclear plant   $ 47 (a)
Big Rock – decommission plant site     1962     Big Rock nuclear plant     —  
JHCampbell intake/discharge water line     1980     Plant intake/discharge water line     —  
Closure of coal ash disposal areas   Various   Generating plants coal ash areas     —  
Closure of wells at gas storage fields   Various   Gas storage fields     —  
Indoor gas services equipment relocations   Various   Gas meters located inside structures     —  
Asbestos abatement     1973     Electric and gas utility plant     —  
 

March 31, 
(a) In April 2007, In Millions
- -----------------------------------------------------------------------------------------------------
                                            In Service                                          Trust
ARO Description                                   Date             Long-Lived Assets             Fund
- ---------------                             ----------   ------------------------------------   -----
we sold Palisades - decommission plant site               1972   Palisades nuclear plant                 $604and the Big Rock - decommission plant site                1962ISFSI to Entergy. The remaining balances represent $36 million of decommissioning trust funds held for final tax payments and $11 million of decommissioning trust funds held until the FERC’s final decision on a customer clarification on a use of the funds, which we received in July 2007. For additional details on the sale of Palisades and the Big Rock nuclear plantISFSI, see Note 2, JHCampbell intake/discharge waterAsset Sales.
                                                 
In Millions  
    ARO                                     ARO  
    Liability                             Cash flow     Liability  
ARO Description   12/31/06     Incurred     Settled (b)     Accretion     Revisions     6/30/07  
 
Palisades – decommission   $ 401     $ —     $ (410 )   $ 7     $ 2     $ —  
Big Rock – decommission     2       —       (3 )     1       —       —  
JHCampbell intake line     —       —       —       —       —       —  
Coal ash disposal areas     57       —       (1 )     2       —       58  
Wells at gas storage fields     1       —       —       —       —       1  
Indoor gas services relocations     1       —       —       —       —       1  
Asbestos abatement     35       —       (1 )     1       —       35  
     
Total   $ 497     $ —     $ (415 )   $ 11     $ 2     $ 95  
 
(b) Cash payments of $3 million are included in the Other current and non-current liabilities line 1980   Plant intake/discharge water line         --
Closurein Net cash provided by operating activities in our Consolidated Statements of coal ash disposal areas             Various   Generating plants coal ash areas          --
Closure of wells at gas storage fields         Various   Gas storage fields                        --
Indoor gas services equipment relocations      Various   Gas meters located inside structures      --
Asbestos abatement                                1973   ElectricCash Flows. In April 2007, we sold Palisades to Entergy and gas utility plant            --

                                                                                             In Millions
- --------------------------------------------------------------------------------------------------------
                                     ARO                                                          ARO
                                  Liability                                        Cash flow   Liability
ARO Description                    12/31/06   Incurred   Settled (a)   Accretion   Revisions    3/31/07
- ---------------                   ---------   --------   -----------   ---------   ---------   ---------

Palisades - decommission             $401        $--         $--          $ 7         $ 2         $410paid Entergy to assume ownership and responsibility for the Big Rock - decommission                 2         --          --            1          --            3
JHCampbell intake line                 --         --          --           --          --           --
Coal ash disposal areas                57         --          (1)           1          --           57
Wells at gas storage fields             1         --          --           --          --            1
Indoor gas services relocations         1         --          --           --          --            1
Asbestos abatement                     35         --          (1)           1          --           35
                                     ----        ---         ---          ---         ---         ----
   Total                             $497        $--         $(2)         $10         $ 2         $507
                                     ====        ===         ===          ===         ===         ====
ISFSI. Our AROs related to Palisades and the Big Rock ISFSI ended with the sale and the related ARO liabilities were removed from our Consolidated Balance Sheets. We also removed the Big Rock ARO related to the plant in the second quarter of 2007 due to the completion of decommissioning.


(a)  These cash payments are included in the Other current and non-current
     liabilities line in Net cash provided by operating activities in our
     Consolidated Statements of Cash Flows.

In April 2007, we sold Palisades to Entergy and paid Entergy to assume ownership
and responsibility for the Big Rock ISFSI. Our AROs related to Palisades and Big
Rock ISFSI ended with the sale and the related ARO liabilities will be removed
from our Consolidated Balance Sheets. We also expect to remove the Big Rock ARO
related to the plant in the second quarter of 2007 due to the completion of
decommissioning.

CE-49
Consumers Energy Company
In October 2004, the MPSC initiated a generic proceeding to review SFAS No. 143, FERC Order No. 631, Accounting, Financial Reporting, and Rate Filing Requirements for Asset Retirement Obligations, and related accounting and ratemaking issues for MPSC-jurisdictional electric and gas utilities. In June 2007, the MPSC issued an order that requires:
• the MPSC Staff to advise the MPSC whether there are any FERC accounts, rules or procedures that should be adopted by reference or changed, and
• the use of a revised calculation for cost of removal estimates derived from applying SFAS No. 143, which includes the use of standard retirement units.
We will also be required to file a new gas depreciation study by August 2006,1, 2008, using 2007 removal costs as the ALJ issuedbasis for the calculation and a Proposalnew electric depreciation study by August 3, 2009, using 2008 removal costs as the basis for Decision that included recommendations that
the MPSC:

     -    adopt SFAS No. 143 and FERC Order No. 631 for accounting purposes but
          not for ratemaking purposes,

     -    consider adopting standardized retirement units for certain accounts,

     -    consider revising the method of determining cost of removal, and


                                      CE-47



                                                        Consumers Energy Company

     -    withhold approving blanket regulatory asset and regulatory liability
          accounting treatment related to AROs, stating that modifications to
          the MPSC's Uniform System of Accounts should precede any such
          accounting approval.

We consider the proceeding a clarification of accounting and reporting issues
that relate to all Michigan utilities. We cannot predict the outcome of the
proceeding.

7: INCOME TAXES

calculation.
8:income taxes
The principal components of deferred tax assets (liabilities) recognized on our Consolidated Balance Sheets both before and after the adoption of FIN 48 are as follows:
                                                 In Millions
                                         -------------------
                                         01/01/07   12/31/06
                                         --------   --------

Property                                  $(725)     $(814)
Securitized costs                          (177)      (177)
Gas inventories                            (168)      (168)
Employee benefits                            36         36
SFAS No. 109 regulatory liability, net      189        189
Nuclear decommissioning                      57         57
Tax loss and credit carryforwards           178        209
Valuation allowances                        (22)       (15)
Other, net                                 (176)      (175)
                                          -----      -----
Net deferred tax liabilities              $(808)     $(858)
                                          =====      =====
                 
In Millions  
    January 1,     December  
    2007     31, 2006  
 
Property   $ (725 )   $ (814 )
Securitized costs     (177 )     (177 )
Gas inventories     (168 )     (168 )
Employee benefits     36       36  
SFAS No. 109 regulatory liability, net     189       189  
Nuclear decommissioning     57       57  
Tax loss and credit carryforwards     178       209  
Valuation allowances     (22 )     (15 )
Other, net     (176 )     (175 )
     
Net deferred tax liabilities   $ (808 )   $ (858 )
 
As a result of the implementation of FIN 48, we have identified additional uncertain tax benefits of $5 million as of January 1, 2007. Included in this amount is an increase in our valuation allowance of $7 million, increases to tax reserves of $55 million and a decrease to deferred tax liabilities of $57 million.
Consumers joins in the filing of a consolidated U.S. federal income tax return as well as unitary and combined income tax returns in several states. Consumers and its subsidiaries also file separate company income tax returns in several states. The only significant state tax paid by Consumers or any of its subsidiaries is in Michigan. However, since the Michigan Single Business Tax is not an income tax, it is not part of the FIN 48 analysis. The IRS has completed its audits for all the consolidated federal returns, of which Consumers is a member, for years through 2001. The federal income tax returns for the years 2002 through 2005 are open under the statute of limitations.
CE-50
Consumers Energy Company
We have reflected a net interest liability of $1 million related to our uncertain income tax positions on our Consolidated Balance Sheets as of January 1, 2007. We have not accrued any penalties with respect to uncertain tax benefits. We recognize accrued interest and penalties, where applicable, related to uncertain tax benefits as part of income tax expense.
As of the date of adoption of FIN 48, we had valuation allowances against certain deferred tax assets totaling $22 million and other net uncertain tax positions of $55 million, resulting in total uncertain benefits of $77 million. Of this amount, $24 million would result in a decrease in our effective tax rate, CE-48



                                                        Consumers Energy Company

if recognized. We are not expecting any material changes to our uncertain tax positions over the next 12 months.
The actual income tax expense differs from the amount computed by applying the statutory federal tax rate of 35 percent to income before income taxes as follows:
                                                                    In Millions
                                                                    -----------
Quarters Ended March 31                                             2007   2006
- -----------------------                                             ----   ----

Net income                                                          $113   $ 10
Income tax expense                                                    60      9
                                                                    ----   ----

Income before income taxes                                           173     19
Statutory federal income tax rate                                    x35%   x35%
                                                                    ----   ----

Expected income tax expense                                           61      7
Increase (decrease) in taxes from:
   Property differences                                                5      6
   Fair market value charitable donation                              (2)    --
   Tax exempt income                                                  (1)    (1)
   Medicare Part D exempt income                                      (2)    (1)
   Income tax credit amortization                                     (1)    (1)
   Other, net                                                         --     (1)
                                                                    ----   ----
Recorded income tax expense                                         $ 60   $  9
                                                                    ====   ====

Effective tax rate                                                    35%    47%
                                                                    ====   ====



                                     CE-49


                                                        Consumers Energy Company

8:   REPORTABLE SEGMENTS

                 
In Millions  
Six Months Ended June 30   2007     2006  
 
Income before income taxes   $ 239     $ 56  
     
                 
Statutory federal income tax rate     x 35 %     x 35 %
     
Expected income tax expense     84       20  
Increase (decrease) in taxes from:                
Property differences     9       10  
IRS Settlement/Credit Restoration     —       (18 )
Fair market value charitable donation     (2 )     —  
Tax exempt income     (1 )     (2 )
Medicare Part D exempt income     (5 )     (3 )
Income tax credit amortization     (2 )     (2 )
Valuation Allowance     —       5  
Other, net     (1 )     —  
     
Recorded income tax expense   $ 82     $ 10  
 
Effective tax rate     34 %     18 %
 
CE-51
9:Reportable Segments
Our reportable segments consists of business units organized and managed by the nature of the products and services each provides. We evaluate performance based upon the net income of each segment. We operate principally in two segments: electric utility and gas utility.
The following tables show our financial information by reportable segment:
                                 
In Millions  
    Three Months Ended     Six Months Ended  
June 30   2007     2006     2007     2006  
 
Operating revenue                                
Electric   $ 856     $ 791     $ 1,700     $ 1,520  
Gas     391       334       1,602       1,375  
Other     —       13       —       25  
     
 
Total Operating Revenue   $ 1,247     $ 1,138     $ 3,302     $ 2,920  
 
Net income available to common stockholder                                
Electric   $ 40     $ 37     $ 91     $ 66  
Gas     4       (3 )     61       34  
Other     —       1       4       (55 )
     
 
Total Net Income Available to Common Stockholder   $ 44     $ 35     $ 156     $ 45  
 
                 
In Millions  
    June 30, 2007     December 31, 2006  
 
Assets                
Electric (a)   $ 8,721     $ 8,516  
Gas (a)     4,068       3,950  
Other     571       379  
     
                 
Total Assets   $ 13,360     $ 12,845  
 

                                                       In Millions
                                                   ---------------
Three Months Ended March 31                         2007     2006
- ---------------------------                        ------   ------

Operating Revenue
   Electric                                        $  844   $  729
   Gas                                              1,211    1,041
   Other                                               --       12
                                                   ------   ------
Total Operating Revenue                            $2,055   $1,782
                                                   ======   ======
Net Income Available 
(a) Amounts include a portion of our other common assets attributable to Common Stockholder
   Electric                                        $   51   $   29
   Gas                                                 57       37
   Other                                                4      (56)
                                                   ------   ------
Total Net Income Available to Common Stockholder   $  112   $   10
                                                   ======   ======

                                         In Millions
                  ----------------------------------
                  March 31, 2007   December 31, 2006
                  --------------   -----------------

Assets
   Electric (a)       $ 8,557           $ 8,516
   Gas (a)              3,410             3,950
   Other                  812               379
                      -------           -------
Total Assets          $12,779           $12,845
                      =======           =======


(a)  Amounts include a portion of our other common assets attributable to both the electric and gas utility businesses.CE-52
Item 3. Quantitative and gas utility businesses.


                                      CE-50



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Qualitative Disclosures About Market Risk
CMS ENERGY
Quantitative and Qualitative Disclosures about Market Risk is contained in PART I: CMS Energy Corporation's Management'sCorporation’s Management’s Discussion and Analysis, which is incorporated by reference herein.
CONSUMERS
Quantitative and Qualitative Disclosures about Market Risk is contained in PART I: Consumers Energy Company's Management'sCompany’s Management’s Discussion and Analysis, which is incorporated by reference herein.

ITEM
Item 4. CONTROLS AND PROCEDURES

Controls and Procedures
CMS ENERGY
Disclosure Controls and Procedures: CMS Energy'sEnergy’s management, with the participation of its CEO and CFO, has evaluated the effectiveness of its disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, CMS Energy'sEnergy’s CEO and CFO have concluded that, as of the end of such period, its disclosure controls and procedures are effective.
Internal Control Over Financial Reporting: There has been one change in CMS
Energy's internal control over financial reporting (as such term is defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the last fiscal
quarter. This change concerns the restoration of the common dividend, which has
been evaluated as effective. There have not been any other changes in CMS Energy'sEnergy’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
CONSUMERS
Disclosure Controls and Procedures: Consumers'Consumers’ management, with the participation of its CEO and CFO, has evaluated the effectiveness of its disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, Consumers'Consumers’ CEO and CFO have concluded that, as of the end of such period, its disclosure controls and procedures are effective.
Internal Control Over Financial Reporting: There have not been any changes in Consumers'Consumers’ internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
PART II. OTHER INFORMATION

ITEM
Item 1. LEGAL PROCEEDINGS

Legal Proceedings
The discussion below is limited to an update of developments that have occurred in various judicial and administrative proceedings, many of which are more fully described in CMS Energy'sEnergy’s and Consumers'Consumers’ Forms 10-K for the year ended December 31, 2006.2006 and Form 10-Q for the quarter ended March 31, 2007. Reference is also made to the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, in particular, Note 3, Contingencies, for CMS Energy CO-1

and Note 2,3, Contingencies, for Consumers, included herein for additional information regarding various pending administrative and judicial proceedings involving rate, operating, regulatory and environmental matters.
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CMS ENERGY
GAS INDEX PRICE REPORTING LITIGATION
Texas-Ohio Energy, Inc. filed a putative class action lawsuit in the United States District Court for the Eastern District of California in November 2003 against a number of energy companies engaged in the sale of natural gas in the United States (including CMS Energy). The complaint alleged defendants entered into a price-fixing scheme by engaging in activities to manipulate the price of natural gas in California. The complaint alleged violations of the federal Sherman Act, the California Cartwright Act, and the California Business and Professions Code relating to unlawful, unfair and deceptive business practices. The complaint sought both actual and exemplary damages for alleged overcharges, attorneys'attorneys’ fees and injunctive relief regulating defendants'defendants’ future conduct relating to pricing and price reporting. In April 2004, a Nevada Multidistrict Litigation (MDL) Panel ordered the transfer of the Texas-Ohio case to a pending MDL matter in the Nevada federal district court that at the time involved seven complaints originally filed in various state courts in California. These complaints make allegations similar to those in the Texas-Ohio case regarding price reporting, although none contain a federal Sherman Act claim. In November 2004, those seven complaints, as well as a number of others that were originally filed in various state courts in California and subsequently transferred to the MDL proceeding, were remanded back to California state court. The Texas-Ohio case remained in Nevada federal district court, and defendants, with CMS Energy joining, filed a motion to dismiss. The court issued an order granting the motion to dismiss on April 8, 2005 and entered a judgment in favor of the defendants on April 11, 2005. Texas-Ohio has appealed the dismissal to the Ninth Circuit Court of Appeals.
Three federal putative class actions, Fairhaven Power Company v. Encana Corp. et al., Utility Savings & Refund Services LLP v. Reliant Energy Resources Inc. et al., and Abelman Art Glass v. Encana Corp. et al., all of which make allegations similar to those in the Texas-Ohio case regarding price manipulation and seek similar relief, were originally filed in the United States District Court for the Eastern District of California in September 2004, November 2004 and December 2004, respectively. The Fairhaven and Abelman Art Glass cases also include claims for unjust enrichment and a constructive trust. The three complaints were filed against CMS Energy and many of the other defendants named in the Texas-Ohio case. In addition, the Utility Savings case names CMS MST and Cantera Resources Inc. (Cantera Resources Inc. is the parent of Cantera Natural Gas, LLC. and CMS Energy is required to indemnify Cantera Natural Gas, LLC and Cantera Resources Inc. with respect to these actions.)
The Fairhaven, Utility Savings and Abelman Art Glass cases have been transferred to the MDL proceeding, where the Texas-Ohio case was pending. Pursuant to stipulation by the parties and court order, defendants were not required to respond to the Fairhaven, Utility Savings and Abelman Art Glass complaints until the court ruled on defendants'defendants’ motion to dismiss in the Texas-Ohio case. Plaintiffs subsequently filed a consolidated class action complaint alleging violations of federal and California antitrust laws. Defendants filed a motion to dismiss, arguing that the consolidated complaint should be dismissed for the same reasons as the Texas-Ohio case. The court issued an order granting the motion to dismiss on December 19, 2005 and entered judgment in favor of defendants on December 23, 2005. Plaintiffs have appealed the dismissal to the Ninth Circuit Court of Appeals. California-based plaintiffs in the pending Ninth Circuit Court of Appeals cases (Texas-Ohio, Fairhaven, Abelman Art Glass and Utility Savings) have entered into a settlement agreement dated January 10, 2007 to collectively settle their claims against all CMS Energy defendants for the payment of $700,000. Plaintiffs filed a motion for preliminary approval of this and other settlements with various defendants on April 3, 2007. An order was entered on May 3, 2007 granting preliminary approval of the settlement, and CMS has wire transferred its $700,000 settlement payment.
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Commencing in or about February 2004, 15 state law complaints containing allegations similar to those made in the Texas-Ohio case, but generally limited to the California Cartwright Act and unjust enrichment, were filed in various California state courts against many of the same defendants named in the federal price manipulation cases discussed above. In addition to CMS Energy, CMS MST is named in all of the 15 state law complaints. Cantera Gas Company and Cantera Natural Gas, LLC (erroneously sued as Cantera Natural Gas, Inc.) are named in all but one complaint.
In February 2005, these 15 separate actions, as well as nine other similar actions that were filed in California state court but do not name CMS Energy or any of its former or current subsidiaries, were ordered coordinated with pending coordinated proceedings in the San Diego Superior Court. The 24 state court complaints involving price reporting were coordinated as Natural Gas Antitrust Cases V. Plaintiffs in Natural Gas Antitrust Cases V were ordered to file a consolidated complaint, but a consolidated complaint was filed only for the two putative class action lawsuits. Pursuant to a ruling dated August 23, 2006, CMS Energy, Cantera Gas Company and Cantera Natural Gas, LLC were dismissed as defendants in the master class action and the thirteen non-class actions, due to lack of personal jurisdiction. CMS MST remains a defendant in all of these actions. CMS MST has settled a master class action suit in California state court for $7 million. In March 2007, CMS Energy paid $7 million into a trust fund account following preliminary approval of the settlement by the judge. The settlement remains subject tocourt entered a judgment, final order and decree dated June 12, 2007 granting final approval pending notice to membersthe class action settlement with CMS MST. Certain of the class, who have an opportunity to opt out of or object toindividual cases filed in the settlement.

     California State Court remain pending.
Samuel D. Leggett, et al v. Duke Energy Corporation, et al, a class action complaint brought on behalf of retail and business purchasers of natural gas in Tennessee, was filed in the Chancery Court of Fayette County, Tennessee in January 2005. The complaint contains claims for violations of the Tennessee Trade Practices Act based upon allegations of false reporting of price information by defendants to publications that compile and publish indices of natural gas prices for various natural gas hubs. The complaint seeks statutory full consideration damages and attorneys fees and injunctive relief regulating defendants'defendants’ future conduct. The defendants include CMS Energy, CMS MST and CMS Field Services. On August 10, 2005, certain defendants, including CMS MST, filed a motion to dismiss and CMS Energy and CMS Field Services filed a motion to dismiss for lack of personal jurisdiction. Defendants attempted to remove the case to federal court, but it was remanded to state court by a federal judge. On February 2, 2007, the state court granted defendants'defendants’ motion to dismiss the complaint. Plaintiffs filed a notice of appeal on April 4, 2007.
J.P. Morgan Trust Company, in its capacity as Trustee of the FLI Liquidating Trust, filed an action in Kansas state court in August 2005 against a number of energy companies, including CMS Energy, CMS MST and CMS Field Services. The complaint alleges various claims under the Kansas Restraint of Trade Act relating to reporting false natural gas trade information to publications that report trade information. Plaintiff is seeking statutory full consideration damages for its purchases of natural gas between January 1, 2000 and December 31, 2001. The case was removed to the United States District Court for the District of Kansas on September 8, 2005 and transferred to the MDL proceeding on October 13, 2005. A motion to remand the case back to Kansas state court was denied on April 21, 2006. The court initially issued an order granting the motion to dismiss on December 18, 2006, but later reversed the ruling on reconsideration and entered judgment in favor of
defendants on January 4, 2007.

     has now denied the defendants’ motion to dismiss.
On November 20, 2005, CMS MST was served with a summons and complaint which named CMS Energy, CMS MST and CMS Field Services as defendants in a putative class action filed in Kansas state court, Learjet, Inc., et al. v. Oneok, Inc., et al. Similar to the other actions that have been filed, the complaint alleges that during the putative class period, January 1, 2000 through October 31, 2002, defendants engaged in a scheme to violate the Kansas Restraint of Trade Act by knowingly reporting false or inaccurate information to the publications, thereby affecting the market price of natural gas. Plaintiffs,
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who allege they purchased natural gas from defendants and others for their facilities, are seeking statutory full consideration damages consisting of the full consideration paid by plaintiffs for natural gas. On December 7, 2005, the case was removed to the United States District Court for the District of Kansas and later that month a motion was filed to transfer the case to the MDL proceeding. On January 6, 2006, plaintiffs filed a motion to remand the case to Kansas state court. On January 23, 2006, a conditional transfer order transferring the case to the MDL proceeding was issued. On February 7, 2006, plaintiffs filed an opposition to the conditional transfer order.order and on June 20, 2006 the MDL Panel issued an order transferring the case to the MDL proceeding. The court issued an order dated August 3, 2006 denying the motion to remand the case to Kansas state court. Defendants have filed a motion to dismiss, which remains pending.
Breckenridge Brewery of Colorado, LLC and BBD Acquisition Co. v. Oneok, Inc., et al., a class action complaint brought on behalf of retail direct purchasers of natural gas in Colorado, was filed in Colorado state court in May 2006. Defendants, including CMS Energy, CMS Field Services, and CMS MST, are alleged to have violated the Colorado Antitrust Act of 1992 in connection with their natural gas price reporting activities. Plaintiffs are seeking full refund damages. The case was removed to the United States District Court for the District of Colorado on June 12, 2006, and a conditional transfer order transferring the case to the MDL proceeding was entered on June 27, 2006.
Plaintiffs are seeking to have2006, and an order transferring the case remandedto the MDL proceeding was entered on October 17, 2006. The court issued an order dated December 4, 2006 denying the motion to remand the case back to Colorado state court. Defendants have filed a motion to dismiss, which remains pending.
On October 30, 2006, CMS Energy and CMS MST were each served with a summons and complaint which named CMS Energy, CMS MST and CMS Field Services as defendants in an action filed in Missouri state court, titled Missouri Public Service Commission v. Oneok, Inc. The Missouri Public Service Commission purportedly is acting as an assignee of six local distribution companies, and it alleges that from at least January 2000 through at least October 2002, defendants knowingly reported false natural gas prices to publications that compile and publish indices of natural gas prices, and engaged in wash sales. The complaint contains claims for violation of the Missouri Anti-Trust Law, fraud and unjust enrichment. Defendants removed the case to Missouri federal court and then transferred it to the Nevada MDL proceeding. A second action, Heartland Regional Medical Center, et al. v. Oneok, Inc., et al., was filed in Missouri state court in March 2007 alleging violations of Missouri anti-trust laws. The second action is denoted as a class action. Defendants also removed this case to Missouri federal court, and it has been conditionally transferred to the Nevada MDL proceeding.
A class action complaint, Arandell Corp., et al v. XCEL Energy Inc., et al, was filed on or about December 15, 2006 in Wisconsin state court on behalf of Wisconsin commercial entities that purchased natural gas between January 1, 2000 and October 31, 2002. Defendants, including CMS Energy, CMS ERM and Cantera Gas Company, LLC, are alleged to have violated Wisconsin'sWisconsin’s Anti-Trust statute by conspiring to manipulate natural gas prices. Plaintiffs are seeking full consideration damages, plus exemplary damages in an amount equal to three times the actual damages, and attorneys'attorneys’ fees. The action was removed to Wisconsin federal district court and CMS entered a special appearance for purpose of filing a motion to dismiss all the CMS defendants on the ground of lack of personal jurisdiction. The court denied plaintiffs’ motion to remand the case back to Wisconsin state court, and the case has been transferred to the Nevada MDL proceeding.
CMS Energy and the other CMS defendants will defend themselves vigorously against these matters but cannot predict their outcome.
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QUICKSILVER RESOURCES, INC.
On November 1, 2001, Quicksilver sued CMS MST in the Texas State Court in Fort Worth, Texas for breach of contract in connection with a Base Contract for Sale and Purchase of natural gas, pursuant to which Quicksilver agreed to sell, and CMS MST agreed to buy, natural gas. Quicksilver contended that a special provision in the contract requires CMS MST to pay Quicksilver 50 percent of the difference between $2.47/MMBtu and the index price each month. CMS MST disagrees with Quicksilver'sQuicksilver’s interpretation of the special provision and contends that it has paid all monies owed for delivery of gas pursuant to the contract. Quicksilver is seeking damages of approximately $126 million, plus prejudgment interest and attorneys' fees, which in CMS Energy's judgment is unsupported by
the facts.


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     The matter was tried before a jury inattorneys’ fees.
Trial commenced on March 19, 2007. The jury made a finding
that CMS MST has breached the agreement withverdict awarded Quicksilver but found that
Quicksilver had failed to prove damages and accordingly awarded zero compensatory damages to Quicksilver. However, the jury awardedbut $10 million in punitive damages against CMS MST.damages. The jury found that CMS MST will opposebreached the contract and committed fraud but found no actual damage on account of either such claim.
On May 15, 2007, the trial court, ruling on motions to counter the entry of the judgment, vacated the jury award of punitive damages onbut held that the basis that Texas law will not permit an awardcontract should be rescinded prospectively. The judicial rescission of punitive damages
if no compensatory damages have been awarded.the contract caused CMS Energy to record a charge in the second quarter of 2007 of approximately $24 million, net of tax. To preserve its appellate rights, CMS MST filed a motion to modify, correct or reform the judgment and a motion for a judgment contrary to the jury verdict with the trial court. The trial court dismissed these motions. CMS MST has scheduledfiled a date in early May to consider motions to enter judgment bynotice of appeal with the opposing sidesTexas Court of the litigation.

Appeals.
CMS ENERGY AND CONSUMERS
SECURITIES CLASS ACTION LAWSUITS
Beginning in May 2002, a number of complaints were filed against CMS Energy, Consumers and certain officers and directors of CMS Energy and its affiliates in the United States District Court for the Eastern District of Michigan. The cases were consolidated into a single lawsuit (the "Shareholder
Action"“Shareholder Action”), which generally seeks unspecified damages based on allegations that the defendants violated United States securities laws and regulations by making allegedly false and misleading statements about CMS Energy'sEnergy’s business and financial condition, particularly with respect to revenues and expenses recorded in connection with round-trip trading by CMS MST. In January 2005, the court granted a motion to dismiss Consumers and three of the individual defendants, but denied the motions to dismiss CMS Energy and the 13 remaining individual defendants. In March 2006, the court conditionally certified a class consisting of "all“all persons who purchased CMS Common Stock during the period of October 25, 2000 through and including May 17, 2002 and who were damaged thereby."” The court excluded purchasers of CMS Energy'sEnergy’s 8.75 percent Adjustable Convertible Trust Securities ("ACTS"(“ACTS”) from the class and, in response, a new class action lawsuit was filed on behalf of ACTS purchasers (the "ACTS Action"“ACTS Action”) against the same defendants named in the Shareholder Action. The settlement described below,in the following paragraph, if approved, will resolve both the Shareholder and ACTS Actions.
On January 3, 2007, CMS Energy and other parties entered into a Memorandum of Understanding (the "MOU"“MOU”), subject to court approval, regarding settlement of the two class action lawsuits. The settlement was approved by a special committee of independent directors and by the full board of directors of CMS Energy. Both judged that it was in the best interests of shareholders to eliminate this business uncertainty. The MOU is expected to lead to a detailed
stipulation of settlement that will be presented to the assigned federal judge
and the affected class in the second quarter of 2007. Under the terms of the MOU, the litigation will be settled for a total of $200 million, including the cost of administering the settlement and any attorney fees the court awards. CMS Energy will make a payment of approximately $123 million plus an amount equivalent to interest on the outstanding unpaid settlement balance beginning on the date of preliminary approval ofby the court and
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running until the balance of the settlement funds is paid into a settlement account. Out of the total
settlement, CMS Energy's insurers will pay approximately $77 million directly to
the settlement account. CMS Energy took an approximately $123 million pre-tax
charge to 2006 earnings in the fourth quarter of 2006. In entering into the MOU, CMS Energy makes no admission of liability under the Shareholder Action and the ACTS Action. The parties executed a Stipulation and Agreement of Settlement dated May 22, 2007 (“Stipulation”) incorporating the terms of the MOU. On May 30, 2007, plaintiffs filed a “Motion for Order Preliminarily Approving Stipulation and Agreement of Settlement.” On June 7, 2007, the court entered a “Preliminary Order in Connection with Settlement Proceedings and Proposed Class Certification,” in which the court preliminarily approved the Stipulation and scheduled the settlement fairness hearing for September 6, 2007. In accordance with the Stipulation, CMS has paid approximately $1 million of the settlement amount to fund administrative expenses. The remaining $199 million and interest accruing thereon from the date of the June 7, 2007 order is payable ten business days after entry of the Order and Final Judgment following the September 6, 2007 hearing.
ENVIRONMENTAL MATTERS
CMS Energy and Consumers, as well as their subsidiaries and affiliates are subject to various federal, state and local laws and regulations relating to the environment. Several of these companies have been named parties to various actions involving environmental issues. Based on their present knowledge and subject to future legal and factual developments, they believe it is unlikely that these actions, individually or in total, will have a material adverse effect on their financial condition or future results of operations. CO-5

For additional information, see both CMS Energy'sEnergy’s and Consumers'Consumers’ Forms 10-K for the year ended December 31, 2006 -— ITEM 7. MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS and ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA --— NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

ITEM
Item 1A. RISK FACTORS

Risk Factors
Other than discussed below, there have been no material changes to the Risk Factors as previously disclosed in CMS Energy'sEnergy’s Form 10-K and Consumers'Consumers’ Form 10-K for the year ended December 31, 2006.

RISK RELATED TO CMS ENERGY

     CMS ENERGY HAS MADE SUBSTANTIAL INTERNATIONAL INVESTMENTS THAT ARE SUBJECT
TO POSSIBLE NATIONALIZATION, EXPROPRIATION OR INABILITY TO CONVERT CURRENCY.2006 and Form 10-Q for the quarter ended March 31, 2007.
Risks Related to CMS Energy has recently completed asset sales of substantially all of its
international assets. Its remaining international assets located in Argentina,
Chile and Jamaica are subject to sale that is expected toConsumers
CMS Energy and Consumers may be completed later
this year. Therefore, CMS Energy's international exposure is reduced
significantly.

RISKS RELATED TO CMS ENERGY AND CONSUMERS

     CMS ENERGY AND CONSUMERS MAY BE ADVERSELY AFFECTED BY REGULATORY
INVESTIGATIONS REGARDING "ROUND-TRIP" TRADING BYadversely affected by regulatory investigations regarding “round-trip” trading by CMS MST AS WELL AS CIVIL
LAWSUITS REGARDING PRICING INFORMATION THATas well as civil lawsuits regarding pricing information that CMS MST ANDand CMS FIELD SERVICES
PROVIDED TO MARKET PUBLICATIONS.

     Field Services provided to market publications.
As a result of round-trip trading transactions (simultaneous, prearranged commodity trading transactions in which energy commodities were sold and repurchased at the same price) at CMS MST, CMS Energy is under investigation by the DOJ. CMS Energy received subpoenas in 2002 and 2003 from U.S. Attorneys'Attorneys’ Offices regarding investigations of those trades. CMS Energy responded to those subpoenas in 2003 and 2004.
In March 2004, the SEC approved a cease-and-desist order settling an administrative action against CMS Energy relating to round-trip trading. The order did not assess a fine and CMS Energy neither admitted nor denied the order'sorder’s findings.
CMS Energy has notified appropriate regulatory and governmental agencies that some employees at CMS MST and CMS Field Services appeared to have provided inaccurate information regarding natural gas trades to various energy industry publications which compile and report index prices. CMS Energy is cooperatinghas cooperated with an ongoing investigation by the DOJ regarding this matter. Although CMS Energy has not received any formal notification that the DOJ has completed its investigation, the DOJ’s last request for
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information occurred in November 2003, and CMS Energy completed its response to this request in May 2004. CMS Energy is unable to predict the outcome of the DOJ investigation and what effect, if any, the investigation will have on CMS Energy. The CFTC filed a civil injunctive action against two former CMS Field Services employees in Oklahoma federal district court on February 1, 2005. The action alleges the two engaged in reporting false natural gas trade information, and seeks to enjoin these acts, compel compliance with the Commodities Exchange Act, and impose monetary penalties. Trial dates have been held in abeyance pending settlement discussions. CMS Energy is currently advancing legal defense costs to the two individuals in accordance with existing indemnification policies. CO-6

The court entered separate consent orders with respect to each of the two individuals, one dated April 18, 2007 and one dated June 25, 2007, resolving this litigation. The consent orders enjoin each of the individuals from engaging in certain activities and further provide civil monetary penalties in the amount of $100,000 for one individual and $25,000 for the other individual. Pursuant to agreements with each of the individuals, CMS has paid $95,000 of the $100,000 amount and $22,000 of the $25,000 amount, with the remaining amounts paid by the individuals themselves. These settlements put an end to CFTC enforcement actions relating to gas price reporting by individuals once employed at present or former CMS subsidiaries.
CMS Energy, CMS MST, CMS Field Services, Cantera Natural Gas, Inc. (the company that purchased CMS Field Services) and Cantera Gas Company are named as defendants in various lawsuits arising as a result of false natural gas price reporting. Allegations include manipulation of NYMEX natural gas futures and options prices, price-fixing conspiracies, and artificial inflation of natural gas retail prices in California, Colorado, Kansas, Missouri, Tennessee, and Wisconsin. In September 2006, CMS MST reached an agreement in principle to settle a master class action suit in California for $7 million, pending approval by the trial Court. The court entered an order granting preliminary approval of the settlement, and CMS MST has paid the $7 million settlement amount. The court entered a judgment, final order and decree dated June 12, 2007 granting final approval to the class action settlement with CMS MST.
CMS Energy and the other CMS Energy defendants will defend themselves vigorously against all of these matters, but cannot predict the outcome of the DOJ investigations and the lawsuits. It is possible that the outcome in one or more of the investigations or the lawsuits could adversely affect CMS Energy'sEnergy’s and Consumers'Consumers’ financial condition, liquidity or results of operations.
CMS ENERGY AND CONSUMERS COULD INCUR SIGNIFICANT CAPITAL EXPENDITURES TO
COMPLY WITH ENVIRONMENTAL STANDARDS AND FACE DIFFICULTY IN RECOVERING THESE
COSTS ON A CURRENT BASIS.

     Energy and Consumers could incur significant capital expenditures to comply with environmental standards and face difficulty in recovering these costs on a current basis.
CMS Energy, Consumers, and their subsidiaries are subject to costly and increasingly stringent environmental regulations. They expect that the cost of future environmental compliance, especially compliance with clean air and water laws, will be significant.
In 1998, the EPA issued regulations requiring the State of Michigan to further limit nitrogen oxide emissions at coal-fired electric generating plants. The EPA and State of Michigan regulations require Consumers to make significant capital expenditures estimated to be $835 million. As of March 2007,From 1998 to present, Consumers has incurred $760$782 million in capital expenditures to comply with these regulations and anticipates that the remaining $75$53 million of capital expenditures will be made in 2007 through 2011. In addition to modifying coal-fired electric plants, Consumers'Consumers’ compliance plan includes the use of nitrogen oxide emission allowances until all of the control equipment is operational in 2011. The nitrogen oxide emission allowance annual expense is projected to be $3$2 million per year, which Consumers expects to recover from customers through the PSCR process.
In March 2005, the EPA adopted the Clean Air Interstate Rule that requires additional coal-fired electric plant emission controls for nitrogen oxides and sulfur dioxide. Consumers plans to meet the nitrogen
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oxide requirements of this rule by year-round operation of its selective catalytic reduction control technology units, installation of low nitrogen oxide burners, and purchasing emission allowances. Consumers plans to meet the sulfur dioxide requirements of this rule using sorbent injection, installation of flue gas desulfurization scrubbers and purchasing emission allowances. Consumers'Consumers’ total cost for equipment installation is expected to reach approximately $700 million by 2015. Additional purchases of sulfur dioxide emission allowances in 2012 and 2013 will be needed for an estimated cost of $12 million per year, which Consumers expects to recover from customers through the PSCR process.
The Clean Air Interstate Rule was appealed to the U.S. Court of Appeals for the District of Columbia by a number of utilities and other companies. Final briefs are due September 5, 2007, with a decision expected in 2008. We cannot predict the outcome of these appeals.
Also in March 2005, the EPA issued the Clean Air Mercury Rule, which requires initial reductions of mercury emissions from coal-fired electric generating plants by 2010 and further reductions by 2018. The Clean Air Mercury Rule was appealed to the U.S. Court of Appeals by a number of states and other entities. Final briefs are due July 13, 2007, with a decision expected in 2008. We cannot predict the outcome of these appeals.
In April 2006, Michigan'sMichigan’s governor announced a plan that would result in mercury emissions reductions of 90 percent by 2015. Consumers is currently working with the MDEQ on the details of these rules; however, Consumers has developed preliminary cost estimates and a mercury emissions reduction planscenario based on its best knowledge of control technology options and anticipatedinitially proposed requirements. Consumers' planThe scenario includes expenditures of close to $550approximately $541 million for mercury control equipment and continuous emissions monitoring systems through 2014.


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The EPA has alleged that some utilities have incorrectly classified plant modifications as “routine maintenance” rather than seeking permits from the EPA to modify the plant. We have received and responded to information requests from the EPA on this subject. We believe that we have properly interpreted the requirements of “routine maintenance.” If our interpretation is found to be incorrect, we may be required to install additional pollution controls at some or all of our coal-fired electric generating plants and potentially pay fines. Additionally, the viability of certain plants remaining in operation could be called into question.
Several legislative proposals have been introduced in the United States Congress that would require reductions in emissions of greenhouse gases, including carbon dioxide. CMS Energy and Consumers cannot predict whether any of
these proposals will be enacted, or the specific requirements of any of these
proposals and their effect on future operations and financial results. On April 2, 2007, the U.S. Supreme Court ruled that the Clean Air Act gives the EPA the authority to regulate emissions of carbon dioxide and other greenhouse gases from automobiles. In its decision, the court ordered the EPA to revisit its contention that it has the discretion not to regulate greenhouse gas emissions from automobiles.
To the extent that greenhouse gas emission reduction rules come into effect, the mandatory emissions reduction requirements could have far-reaching and significant implications for the energy sector. CMS Energy and ConsumersWe cannot estimate the potential effect of federal or state greenhouse gas policy on theirour future consolidated results of operations, cash flows, or financial position due to the uncertain nature of the policies at this time. However, CMS
Energy and Consumerswe will continue to monitor greenhouse gas policy developments and assess and respond to their potential implications on theirour business operations.
In March 2004, the EPA issued rules that govern electric generating plant cooling water intake systems. The rules require significant reduction in fish killed by operating equipment. EPA compliance options in the rule were challenged in court. In January 2007, the court rejected many of the compliance options favored by industry and remanded the bulk of the rule back to the EPA for reconsideration. The court'scourt’s ruling is expected to increase significantly the cost of complying with this rule. However, the cost to
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comply will not be known until the EPA'sEPA’s reconsideration is complete. At this time, the EPA has not established a schedule to address the court decision.
CMS Energy expects to collect fully from its customers, through the ratemaking process, these and other required environmental expenditures. However, if these expenditures are not recovered from customers in Consumers'Consumers’ rates, CMS Energy and/or Consumers may be required to seek significant additional financing to fund these expenditures, which could strain their cash resources.

     CONSUMERS' OWNERSHIP OF A NUCLEAR GENERATING FACILITY CREATES RISK RELATING
TO NUCLEAR ENERGY.

     On April 11, 2007, Consumers completed
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
At the sale of its Palisades nuclear
plant to Entergy. As a result, Consumers no longer owns any nuclear facilities
and therefore does not have any risks associated with the ownership of nuclear
generating facilities.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

None.


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ITEM 6. EXHIBITS

(31)(a) CMS Energy Corporation's certificationAnnual Meeting of Shareholders held on May 18, 2007, the CMS Energy shareholders voted upon two proposals, as follows:
• Ratification of the appointment of PricewaterhouseCoopers as the independent registered public accounting firm to audit CMS Energy’s financial statements for the year ending December 31, 2007, with a vote of 189,632,261 shares in favor, 514,080 against and 1,398,076 abstentions; and
• Election of eleven members to the Board of Directors. The votes for individual nominees were as follows:
CMS ENERGY
                         
Number of Votes:   For     Withheld     Total  
 
Merribel S. Ayres     188,462,076       3,081,472       191,543,548  
Jon E. Barfield     187,975,657       3,567,891       191,543,548  
Richard M. Gabrys     188,359,020       3,184,528       191,543,548  
David W. Joos     187,694,718       3,848,830       191,543,548  
Philip R. Lochner, Jr.     187,076,155       4,467,393       191,543,548  
Michael T. Monahan     188,487,448       3,056,100       191,543,548  
Joseph F. Paquette, Jr.     187,545,097       3,998,451       191,543,548  
Percy A. Pierre     186,432,736       5,110,812       191,543,548  
Kenneth L. Way     188,442,527       3,101,021       191,543,548  
Kenneth Whipple     187,651,272       3,892,276       191,543,548  
John B. Yasinsky     186,486,918       5,056,630       191,543,548  
CONSUMERS
Consumers did not solicit proxies for the matters submitted to votes at the contemporaneous May 18, 2007 Consumers’ Annual Meeting of Shareholders. All 84,108,789 shares of Consumers Common Stock were voted in favor of electing the above-named individuals as directors of Consumers and in favor of the
CO-9
remaining proposals for Consumers. None of the CEO441,599 shares of Consumers Preferred Stock were voted at the Annual Meeting.
Item 5. Other Information
A Shareholder who wishes to submit a proposal for consideration at the CMS Energy 2008 Annual Meeting pursuant to Section
        302the applicable rules of the Sarbanes-Oxley Act of 2002

(31)(b)SEC must send the proposal to reach CMS Energy’s Corporate Secretary on or before December 13, 2007. In any event, if CMS Energy Corporation's certificationhas not received written notice of any matter to be proposed at that meeting by February 26, 2008, the CFO pursuant to Section
        302holders of the Sarbanes-Oxley Act of 2002

(31)(c) Consumers Energy Company's certification of the CEO pursuant to Section
        302 of the Sarbanes-Oxley Act of 2002

(31)(d) Consumers Energy Company's certification of the CFO pursuant to Section
        302 of the Sarbanes-Oxley Act of 2002

(32)(a)proxies may use their discretionary voting authority on such matter. The proposals should be addressed to: Corporate Secretary, CMS Energy Corporation's certifications pursuant to Section 906 of the
        Sarbanes-Oxley Act of 2002

(32)(b) ConsumersCorporation, One Energy Company's certifications pursuant to Section 906 of the
        Sarbanes-Oxley Act of 2002


                                      CO-9

Plaza, Jackson, MI 49201.
Item 6. Exhibits
(31)(a) CMS Energy Corporation’s certification of the CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(31)(b) CMS Energy Corporation’s certification of the CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(31)(c) Consumers Energy Company’s certification of the CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(31)(d) Consumers Energy Company’s certification of the CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(32)(a) CMS Energy Corporation’s certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(32)(b) Consumers Energy Company’s certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
CO-10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature for each undersigned company shall be deemed to relate only to matters having reference to such company or its subsidiary.

                                        CMS ENERGY CORPORATION
                                        (Registrant)


Dated: May 3, 2007                      By: /s/ Thomas J. Webb
                                            ------------------------------------
                                            Thomas J. Webb
                                            Executive Vice President and
                                            Chief Financial Officer


                                        CONSUMERS ENERGY COMPANY
                                        (Registrant)


Dated: May 3, 2007                      By: /s/ Thomas J. Webb
                                            ------------------------------------
                                            Thomas J. Webb
                                            Executive Vice President and
                                            Chief Financial Officer


                                      CO-10

	CMS ENERGY CORPORATION (Registrant)
Dated:August 2, 2007	By:	/s/ Thomas J. Webb
		Thomas J. Webb Executive Vice President and Chief Financial Officer

	CONSUMERS ENERGY COMPANY (Registrant)
Dated:August 2, 2007	By:	/s/ Thomas J. Webb
		Thomas J. Webb Executive Vice President and Chief Financial Officer
~~CO-11~~
Peabody ~~Energy.....................~~ Energy		Peabody Energy Corporation, a non-affiliated company
Pension ~~Plan.......................~~ Plan		The trusteed, non-contributory, defined benefit pension plan of Panhandle, Consumers and CMS Energy ~~PowerSmith.........................~~
PowerSmith		A 124 MW natural gas power plant located in Oklahoma City, Oklahoma, in which CMS Generation holds a 6.25% limited partner ownership interest Price-Anderson Act................. Price Anderson Act, enacted in 1957 as an amendment to the Atomic Energy Act of 1954, as revised and extended over the years. This act stipulates between nuclear licensees and the U.S. government the insurance, financial responsibility, and legal liability for nuclear accidents. PSCR...............................
PSCR		Power supply cost recovery ~~PURPA..............................~~
PURPA		Public Utility Regulatory Policies Act of 1978 ~~Quicksilver........................~~

Quicksilver		Quicksilver Resources, Inc., a non-affiliated company ~~RCP................................~~

RCP		Resource Conservation Plan ~~ROA................................~~
ROA		Retail Open Access

S~~&P................................~~ &P		Standard & ~~Poor's~~Poor’s Ratings Group, a division of The McGraw-Hill Companies, Inc. ~~SEC................................~~
SEC		U.S. Securities and Exchange Commission
Section 10d(4) Regulatory ~~Asset....~~ Asset		Regulatory asset as described in Section 10d(4) of the Customer Choice Act, as amended ~~Securitization.....................~~
Securitization		A financing method authorized by statute and approved by the MPSC which allows a utility to sell its right to receive a portion of the rate payments received from its customers for the repayment of Securitization bonds issued by a special purpose entity affiliated with such utility ~~SENECA.............................~~
SENECA		Sistema Electrico del Estado Nueva Esparta C.A., a former subsidiary of ~~Enterprises SERP...............................~~ CMS International Ventures
SERP		Supplemental Executive Retirement Plan ~~SFAS...............................~~
SFAS		Statement of Financial Accounting Standards
SFAS No. ~~5.........................~~ 5		SFAS No. 5, ~~"Accounting~~“Accounting for ~~Contingencies"~~ Contingencies”
SFAS No. ~~87........................~~ 87		SFAS No. 87, ~~"Employers'~~“Employers’ Accounting for ~~Pensions"~~ Pensions”
SFAS No. ~~88........................~~ 88		SFAS No. 88, ~~"Employers'~~“Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination ~~Benefits"~~ Benefits”
SFAS No. ~~98........................~~ 98		SFAS No. 98, ~~"Accounting~~“Accounting for ~~Leases"~~ Leases”
SFAS No. ~~106.......................~~ 106		SFAS No. 106, ~~"Employers'~~“Employers’ Accounting for Postretirement Benefits Other Than ~~Pensions"~~ Pensions”
SFAS No. ~~109.......................~~ 109		SFAS No. 109, ~~"Accounting~~“Accounting for Income ~~Taxes"~~ Taxes”
SFAS No. ~~115.......................~~ 115		SFAS No. 115, ~~"Accounting~~“Accounting for Certain Investments in Debt and Equity ~~Securities"~~ Securities”
SFAS No. 132(R)~~....................~~		SFAS No. 132 (revised 2003), ~~"Employers'~~“Employers’ Disclosures about Pensions and Other Postretirement ~~Benefits"~~ Benefits”
SFAS No. ~~133.......................~~ 133		SFAS No. 133, ~~"Accounting~~“Accounting for Derivative Instruments and Hedging Activities, as amended and ~~interpreted"~~ interpreted”
SFAS No. ~~143.......................~~ 143		SFAS No. 143, ~~"Accounting~~“Accounting for Asset Retirement ~~Obligations"~~ Obligations”

SFAS No. ~~144.......................~~ 144		SFAS No. 144, ~~"Accounting~~“Accounting for the Impairment or Disposal of Long-Lived ~~Assets"~~ Assets”
SFAS No. ~~157.......................~~ 157		SFAS No. 157, ~~"Fair~~“Fair Value ~~Measurement"~~ Measurement”
SFAS No. ~~158.......................~~ 158		SFAS No. 158, ~~"Employers'~~“Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans -– an amendment of FASB Statements No. 87, 88, 106, and 132(R)" ”
SFAS No. ~~159.......................~~ 159		SFAS No. 159, ~~"The~~“The Fair Value Option for Financial Assets and Financial Liabilities, Including an amendment to FASB Statement No. ~~115" Shuweihat..........................~~ 115”
Shuweihat		A power and desalination plant in which CMS Generation held a 20 percent interest
Stranded ~~Costs.....................~~ Costs		Costs incurred by utilities in order to serve their customers in a regulated monopoly environment, which may not be recoverable in a competitive environment because of customers leaving their systems and ceasing to pay for their costs. These costs could include owned and purchased generation and regulatory assets. ~~Superfund..........................~~
Superfund		Comprehensive Environmental Response, Compensation and Liability Act ~~Takoradi...........................~~

Takoradi		A 200 MW open-cycle combustion turbine crude oil power plant located in Ghana, in which CMS Generation owned a 90 percent interest ~~TAQA...............................~~
TAQA		Abu Dhabi National Energy Company, a subsidiary of Abu Dhabi Water and Electricity Authority ~~Taweelah...........................~~
Taweelah		Al Taweelah A2, a power and desalination plant of Emirates CMS Power Company, in which CMS Generation held a 40 percent interest ~~TGM................................~~
TGM		A natural gas transportation and pipeline business located in Argentina, in which CMS International Ventures owned a 20 percent interest ~~TGN................................~~
TGN		A natural gas transportation and pipeline business located in Argentina, in which CMS Gas Transmission owns a 23.54 percent interest ~~Trunkline..........................~~
Trunkline		CMS Trunkline Gas Company, LLC, formerly a subsidiary of CMS Panhandle Holdings, LLC

Zeeland		A 946 MW gas-fired power plant located in Zeeland, Michigan

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

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

Commission	Registrant; State of Incorporation;	IRS Employer
File Number	Address; and Telephone Number	Identification No. ~~- ----------- ----------------------------------------- ------------------~~


1-9513	CMS ENERGY CORPORATION	38-2726431 (A
	(A Michigan Corporation)
	One Energy Plaza, Jackson, Michigan 49201
	(517) 788-0550

1-5611	CONSUMERS ENERGY COMPANY	38-0442310 (A
	(A Michigan Corporation)
	One Energy Plaza, Jackson, Michigan 49201
	(517) 788-0550


CMS Energy Common Stock, $.01 par value ~~224,497,687 CONSUMERS ENERGY COMPANY,~~		224,580,202
Consumers Energy Company, $10 par value, privately held by CMS Energy Corporation		84,108,789

	Page ~~--------~~
Glossary ~~............................................................~~		3

PART I -— FINANCIAL INFORMATION

Item 1. Financial Statements
CMS Energy Corporation
Consolidated Statements of Income (Loss) ~~......................~~	CMS - 29 33
Consolidated Statements of Cash Flows ~~.........................~~	CMS - 31 35
Consolidated Balance Sheets ~~...................................~~	CMS - 32 36
Consolidated Statements of Common ~~Stockholders'~~Stockholders’ Equity ~~........~~	CMS - 34 38
Notes to Consolidated Financial Statements (Unaudited):
1. Corporate Structure and Accounting Policies ~~...............~~	CMS - 37 39
2. Asset Sales, Discontinued Operations and Impairment Charges ~~................................................~~	CMS - 39 42
3. Contingencies ~~.............................................~~	CMS - 43 48
4. Financings and Capitalization ~~.............................~~	CMS - 58 62
5. Earnings Per Share ~~........................................~~	CMS - 60 64
6. Financial and Derivative Instruments ~~......................~~	CMS - 61 65
7. Retirement Benefits ~~.......................................~~	CMS - 65 69
8. Income Taxes ~~..............................................~~	CMS - 66 71
9. Asset Retirement Obligations ~~..............................~~	CMS - 68 72
10. Equity Method Investments ~~.................................~~	CMS - 70 74
11. Reportable Segments ~~.......................................~~	CMS - 71 75
Consumers Energy Company
Consolidated Statements of Income ~~.............................~~	CE - 22 24
Consolidated Statements of Cash Flows ~~.........................~~	CE - 23 25
Consolidated Balance Sheets ~~...................................~~	CE - 24 26
Consolidated Statements of Common ~~Stockholder's~~Stockholder’s Equity ~~........~~	CE - 26 28
Notes to Consolidated Financial Statements (Unaudited):
1. Corporate Structure and Accounting Policies ~~............... CE - 29 2. Contingencies .............................................~~	CE - 30
2. Asset Sales	CE - 32
3. Contingencies	CE - 34
4. Financings and Capitalization ~~.............................~~	CE - ~~41 4.~~43
5. Financial and Derivative Instruments ~~...................... CE - 43 5. Retirement Benefits .......................................~~	CE - 45
6. Retirement Benefits	CE - 47
7. Asset Retirement Obligations ~~.............................. CE - 46 7. Income Taxes ..............................................~~	CE - 48
8. ~~Reportable Segments .......................................~~ Income Taxes	CE - 50
9. Reportable Segments	CE - 52

		Page
Item 2. ~~Management's~~Management’s Discussion and Analysis of Financial Condition and Results of Operations
CMS Energy Corporation ~~Executive Overview............................................. CMS - 1~~
Forward-Looking Statements and ~~Information.....................~~ Information		CMS - 2 1
Executive Overview		CMS - 3
Results of ~~Operations..........................................~~ Operations		CMS - 5 6
Critical Accounting ~~Policies...................................~~ Policies		CMS - 11 15
Capital Resources and ~~Liquidity................................~~ Liquidity		CMS - ~~15 Outlook........................................................~~ 19
Outlook		CMS - 17 21
Implementation of New Accounting ~~Standards.....................~~ Standards		CMS - 26 31
New Accounting Standards Not Yet ~~Effective.....................~~ Effective		CMS - 27 32
Consumers Energy Company ~~Executive Overview............................................. CE - 1~~
Forward-Looking Statements and ~~Information.....................~~ Information		CE - 2 1
Executive Overview		CE - 3
Results of ~~Operations..........................................~~ Operations		CE - 5
Critical Accounting ~~Policies...................................~~Policies		CE - 8 10
Capital Resources and ~~Liquidity................................~~Liquidity		CE - ~~11 Outlook........................................................~~12
Outlook		CE - 13 14
Implementation of New Accounting ~~Standards.....................~~Standards		CE - 20 21
New Accounting Standards Not Yet ~~Effective.....................~~Effective		CE - 21 22

Item 3. Quantitative and Qualitative Disclosures about Market ~~Risk...........................................................~~ Risk		CO - 1
Item 4. Controls and ~~Procedures...................................~~ Procedures		CO - 1

PART II -— OTHER INFORMATION

Item 1. Legal ~~Proceedings........................................~~ Proceedings		CO - 1
Item 1A. Risk ~~Factors.............................................~~ Factors		CO - 6
Item 2. Unregistered Sales of Equity Securities and Use of ~~Proceeds.......................................................~~ Proceeds		CO - 8 9
Item 3. Defaults Upon Senior ~~Securities..........................~~ Securities		CO - 8 9
Item 4. Submission of Matters to a Vote of Security ~~Holders......~~ Holders		CO - 8 9
Item 5. Other ~~Information........................................~~Information		CO - 8 10
Item 6. ~~Exhibits................................................. CO - 9 Signatures........................................................~~Exhibits		CO - 10
Signatures		CO - 11
302 Certification of CMS Energy Corporation's CEO
302 Certification of CMS Energy Corporation's CFO
302 Certification of Consumers Energy Company's CEO
302 Certification of Consumers Energy Company's CFO
Section 906 Certifications for CMS Energy Corporation
Section 906 Certifications of Consumers Energy Company

AEI		Ashmore Energy International, a non-affiliated company
AFUDC		Allowance for Funds Used During Construction ~~ALJ................................~~
ALJ		Administrative Law Judge ~~AOC................................~~
AOC		Administrative Order on Consent ~~AOCL...............................~~
AOCL		Accumulated Other Comprehensive Loss ~~APB................................~~
APB		Accounting Principles Board APB Opinion No. 18................. APB Opinion No. 18, "The Equity Method of Accounting for Investments in Common Stock" ARO................................
ARO		Asset retirement obligation

Bay ~~Harbor.........................~~ Harbor		A residential/commercial real estate area located near Petoskey, Michigan. In 2002, CMS Energy sold its interest in Bay Harbor. ~~bcf................................~~
bcf		One billion cubic feet of gas
Big ~~Rock...........................~~ Rock		Big Rock Point nuclear power plant ~~CEO................................~~
Big Rock ISFSI		Big Rock Independent Spent Fuel Storage Installation
Broadway Gen Funding LLC		Broadway Gen Funding LLC, an unaffiliated limited liability company

CEO		Chief Executive Officer ~~CFO................................~~
CFO		Chief Financial Officer ~~CFTC...............................~~
CFTC		Commodity Futures Trading Commission ~~CKD................................~~
CKD		Cement Kiln Dust
Clean Air ~~Act......................~~ Act		Federal Clean Air Act, as amended
CMS ~~Energy.........................~~ Energy		CMS Energy Corporation, the parent of Consumers and Enterprises
CMS Energy Common Stock or common ~~stock...........................~~ stock		Common stock of CMS Energy, par value $.01 per share
CMS ~~ERM............................~~ ERM		CMS Energy Resource Management Company, formerly CMS MST, a subsidiary of Enterprises
CMS Field ~~Services.................~~ Services		CMS Field Services, Inc., formerly a wholly owned subsidiary of CMS Gas ~~Transmission. The sale of this subsidiary closed in July 2003.~~ Transmission
CMS Gas ~~Transmission...............~~ Transmission		CMS Gas Transmission Company, a wholly owned subsidiary of Enterprises
CMS ~~Generation.....................~~ Generation		CMS Generation Co., a formerly wholly owned subsidiary of Enterprises
CMS International ~~Ventures.........~~ Ventures		CMS International Ventures LLC, a subsidiary of Enterprises
CMS ~~MST............................~~ MST		CMS Marketing, Services and Trading Company, a wholly owned subsidiary of
		Enterprises, whose name was changed to CMS ERM effective January 2004 ~~Consumers..........................~~
Consumers		Consumers Energy Company, a subsidiary of CMS Energy
Customer Choice ~~Act................~~ Act		Customer Choice and Electricity Reliability Act, a Michigan statute enacted in June 2000 ~~DCCP...............................~~

DCCP		Defined Company Contribution Plan
Detroit ~~Edison.....................~~ Edison		The Detroit Edison Company, a non-affiliated company ~~DFD................................ Duke/Fluor Daniel, a non-affiliated company~~

DIG		Dearborn Industrial Generation, LLC, ~~an indirect~~a wholly owned subsidiary of CMS Energy ~~DOE................................~~
DOE		U.S. Department of Energy ~~DOJ................................~~
DOJ		U.S. Department of Justice ~~Dow................................~~
Dow		The Dow Chemical Company, a non-affiliated company ~~EISP...............................~~

EISP		Executive Incentive Separation Plan ~~EITF...............................~~
EITF		Emerging Issues Task Force
EITF Issue No. ~~02-03...............~~ 02-03		Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities
El ~~Chocon..........................~~ Chocon		The 1,200 MW hydro power plant located in Argentina, in which CMS Generation held a 17.2 percent ownership interest ~~Entergy............................~~
Entergy		Entergy Corporation, a non-affiliated company ~~Enterprises........................~~
Enterprises		CMS Enterprises Company, a subsidiary of CMS Energy ~~EPA................................~~
EPA		U.S. Environmental Protection Agency ~~EPS................................~~
EPS		Earnings per share
Exchange ~~Act.......................~~ Act		Securities Exchange Act of 1934, as amended ~~FASB...............................~~

FASB		Financial Accounting Standards Board ~~FERC...............................~~
FERC		Federal Energy Regulatory Commission
FIN ~~14.............................~~ 14		FASB Interpretation No. 14, Reasonable Estimation of ~~the~~ Amount of a Loss
FIN 46(R)~~..........................~~		Revised FASB Interpretation No. 46, Consolidation of Variable Interest Entities
FIN ~~47.............................~~ 47		FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations
FIN ~~48.............................~~ 48		FASB Interpretation No. 48, Uncertainty in Income Taxes ~~FMLP...............................~~
FMLP		First Midland Limited Partnership, a partnership that holds a lessor interest in the MCV Facility ~~GAAP...............................~~
FSP FIN 39-1		FASB Staff Position on FASB Interpretation No. 39-1, Amendment of FASB Interpretation No. 39

GAAP		Generally Accepted Accounting Principles ~~GasAtacama.........................~~
GasAtacama		GasAtacama Holding Limited, a limited liability partnership that manages GasAtacama S.A., which includes an integrated natural gas pipeline and electric generating plant located in Argentina and Chile and Atacama Finance Company ~~GCR................................~~
GCR		Gas cost recovery ~~IRS................................~~

IRS		Internal Revenue Service ~~ISFSI..............................~~
ISFSI		Independent Spent Fuel Storage Installation

Jamaica		Jamaica Private Power Company, Limited, a diesel-fueled electric generating plant located in Jamaica, in which CMS Generation owns a 42 percent interest
Jorf ~~Lasfar........................~~ Lasfar		The 1,356 MW coal-fueled power plant in Morocco ~~Jubail.............................~~

Jubail		A 240 MW natural gas cogeneration power plant located in Saudi Arabia, in which CMS Generation owned a 25 percent interest ~~kWh................................~~

kWh		Kilowatt-hour (a unit of energy equal to one thousand watt hours)

LS Power Group		LS Power Group, a non-affiliated company
Lucid ~~Energy.......................~~ Energy		Lucid Energy LLC, a non-affiliated company
Ludington		Ludington pumped storage plant, jointly owned by Consumers and Detroit Edison ~~mcf................................~~

mcf		One thousand cubic feet of gas
MCV ~~Facility.......................~~ Facility		A natural gas-fueled, combined-cycle cogeneration facility operated by the MCV Partnership
MCV ~~Partnership....................~~ Partnership		Midland Cogeneration Venture Limited Partnership
MCV ~~PPA............................~~ PPA		The Power Purchase Agreement between Consumers and the MCV Partnership with a 35-year term commencing in March 1990, as amended, and as interpreted by the Settlement Agreement dated as of January 1, 1999 between the MCV Partnership and Consumers
MD~~&A............................... Management's~~&A		Management’s Discussion and Analysis ~~MDEQ...............................~~
MDEQ		Michigan Department of Environmental Quality ~~MDL................................~~
MDL		Multidistrict Litigation ~~METC...............................~~
METC		Michigan Electric Transmission Company, LLC, a non-affiliated company ~~MISO...............................~~
MISO		Midwest Independent Transmission System Operator, Inc. ~~MMBtu..............................~~
MMBtu		Million British Thermal Units ~~Moody's............................ Moody's~~
Moody’s		Moody’s Investors Service, Inc. ~~MPSC...............................~~
MPSC		Michigan Public Service Commission ~~MSBT...............................~~
MSBT		Michigan Single Business Tax ~~MW.................................~~
MW		Megawatt (a unit of power equal to one million watts) ~~MWh................................~~
MWh		Megawatt hour (a unit of energy equal to one million watt hours) NEIL............................... Nuclear Electric Insurance Limited, an industry mutual insurance company owned by member utility companies Neyveli............................

Neyveli		CMS Generation Neyveli Ltd, a 250 MW lignite-fired power station located in Neyveli, Tamil Nadu, India, in which CMS International Ventures held a 50 percent interest ~~NMC................................~~
NMC		Nuclear Management Company LLC, formed in 1999 by Northern States Power Company (now Xcel Energy Inc.), Alliant Energy, Wisconsin Electric Power Company, and Wisconsin Public Service Company to operate and manage nuclear generating facilities owned by the utilities ~~NRC................................~~
NRC		Nuclear Regulatory Commission ~~NYMEX..............................~~
NYMEX		New York Mercantile Exchange ~~OPEB...............................~~

OPEB		Postretirement benefit plans other than pensions for retired employees ~~Palisades..........................~~

Palisades		Palisades nuclear power plant ~~Panhandle..........................~~

Panhandle		Panhandle Eastern Pipe Line Company, including its subsidiaries Trunkline, Pan Gas Storage, Panhandle Storage, and Panhandle ~~Holdings. Panhandle was~~Holdings, a former wholly owned subsidiary of CMS Gas ~~Transmission. The sale of this subsidiary closed in June 2003. PCB................................~~ Transmission
PCB		Polychlorinated biphenyl
	•		the price of CMS Energy Common Stock, capital and financial market conditions, and the effect of such market conditions on the Pension Plan, interest rates, and access to the capital markets, including availability of financing to CMS Energy, Consumers, or any of their affiliates, and the energy industry,

	•		market perception of the energy industry, CMS Energy, Consumers, or any of their affiliates,

	•		credit ratings of CMS Energy, Consumers, or any of their affiliates,

	•		the ability of CMS affiliates, with interests in the DIG power plant, to effectively restructure power supply agreements on a timely basis,

	•		factors affecting utility and diversified energy operations, such as unusual weather conditions, catastrophic weather-related damage, unscheduled generation outages, maintenance or repairs, environmental incidents, or electric transmission or gas pipeline system constraints,

	•		national, regional, and local economic, competitive, and regulatory policies, conditions and developments,

	•		adverse regulatory or legal decisions, including those related to environmental laws and regulations, and potential environmental remediation costs associated with such decisions, including but not limited to Bay Harbor,

	•		potentially adverse regulatory treatment and (or) regulatory lag and receipt of timely regulatory orders concerning a number of significant questions presently before the MPSC including:

	•		timely recognition in rates of additional equity investments in Consumers,

	•		adequate and timely recovery of additional electric and gas rate-based investments,

	•		adequate and timely recovery of higher MISO energy and transmission costs,

	•		recovery of Stranded Costs incurred due to customers choosing alternative energy suppliers,

	•		recovery of Palisades plant sale-related costs,

	•		authorization of Zeeland power plant purchase costs, and

	•		impact of possible regulation or legislation regarding carbon dioxide and other greenhouse gas emissions,
	•		the effects on our ability to purchase capacity to serve our customers and fully recover the cost of these purchases, if Consumers exercises its regulatory-out rights and the owners of the MCV Facility exercise their right to terminate the MCV PPA,

	•		the ability of Consumers to exercise its regulatory-out rights as to the MCV PPA,

	•		the ability of Consumers to recover Big Rock decommissioning funding shortfalls and nuclear fuel storage costs due to the DOE’s failure to accept spent nuclear fuel on schedule,

	•		federal regulation of electric sales and transmission of electricity, including periodic re-examination by federal regulators of the market-based sales authorizations in wholesale power markets without price restrictions,

	•		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,

	•		our ability to collect accounts receivable from our customers,

	•		earnings volatility as a result of the GAAP requirement that we utilize mark-to-market accounting on certain energy commodity contracts and interest rate swaps, which may have, in any given period, a significant positive or negative effect on earnings, which could change dramatically or be eliminated in subsequent periods,

	•		the effect on our utility of the direct and indirect impacts of the continued economic downturn experienced by the Michigan economy,

	•		potential disruption or interruption of facilities or operations due to accidents, war, terrorism, or changing political environment, and the ability to obtain or maintain insurance coverage for such events,

	•		the outcome of pending litigation regarding the DOE liability for spent nuclear fuel storage during former ownership and operation of nuclear power plants,

	•		technological developments in energy production, delivery, and usage,
	•		achievement of capital expenditure and operating expense goals,

	•		changes in financial or regulatory accounting principles or policies,

	•		changes in domestic or foreign tax laws, or new IRS or foreign governmental interpretations of existing or past tax laws,

	•		outcome, cost, and other effects of legal and administrative proceedings, settlements, investigations and claims, including claims, damages, and fines resulting from round-trip trading and inaccurate commodity price reporting, including the outcome of investigations by the DOJ regarding round-trip trading and price reporting,

	•		disruptions in the normal commercial insurance and surety bond markets that may increase costs or reduce traditional insurance coverage, particularly terrorism and sabotage insurance and performance bonds,

	•		other business or investment considerations that may be disclosed from time to time in CMS Energy’s or Consumers’ SEC filings, or in other publicly issued written documents, and

	•		other uncertainties that are difficult to predict, many of which are beyond our control.
	•		weather, especially during the normal heating and cooling seasons,

	•		economic conditions, primarily in Michigan,

	•		regulation and regulatory issues that affect our electric and gas utility operations,

	•		energy commodity prices,

	•		interest rates, and

	•		our debt credit rating.
	•		a portfolio of our businesses in Argentina and our northern Michigan non-utility natural gas assets to Lucid Energy for ~~per share amounts) ------------------------ Three months ended~~$130 million in March 312007,

	•		our ownership interest in El Chocon, an Argentine hydroelectric generating business, to Endesa, S.A. for $50 million in March 2007,

	•		our ownership interest in SENECA and certain associated generating equipment to Petroleos de Venezuela, S.A. for $106 million in April 2007,

	•		our ownership interest in businesses in the Middle East, Africa, and India to TAQA for $900 million in May 2007,
	•		CMS Energy Brasil S.A. to CPFL Energia S.A., a Brazilian utility, for $211 million in June 2007, ~~2006 Change - --------------------------- ---- ---- ------~~ ~~~~Net Loss Available~~and~~

	•		our investment in GasAtacama to Common Stockholders $ (215) $ (27) $ (188) Basic Loss Per Share $(0.97) $(0.12) $(0.85) Diluted Loss Per Share $(0.97) $(0.12) $(0.85) ------ ------ ------ Electric Utility $ 51 $ 29 $ 22 Gas Utility 57 37 20 Enterprises (IncludesEndesa S.A. for $80 million in August 2007.