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Income Taxes
 12 Months Ended
Dec. 31, 2011
Income Taxes

13: INCOME TAXES

CMS Energy and its subsidiaries file a consolidated U.S. federal income tax return and a unitary Michigan income tax return. Income taxes are allocated based on each company's separate taxable income in accordance with the CMS Energy tax sharing agreement.

Presented in the following table is the difference between actual income tax expense on continuing operations, excluding noncontrolling interests, and income tax expense computed by applying the statutory U.S. federal income tax rate:

 

In Millions, Except Tax Rate   

Years Ended December 31

      2011        2010        2009   

CMS ENERGY, INCLUDING CONSUMERS

      

Income from continuing operations before income taxes

    $ 604      $ 587      $ 324   

Income tax expense at statutory rate

      211        205        114   

Increase (decrease) in income taxes from:

       

MCIT law change, net of federal benefit1

     (32 )      -        -   

State and local income taxes, net of federal benefit

      21        26        21   

Income tax credit amortization

      (4 )      (4 )      (4 ) 

Medicare Part D exempt income, net of law change2

     (6 )      (6 )      (6 ) 

Plant basis differences

      (1 )      2        1   

Tax credits, net

      (1 )      (3 )      (9 ) 

Valuation allowance

      1        1        2   

Other, net

      2        3        (4 ) 

Income tax expense

    $ 191      $ 224      $ 115   

Effective tax rate

      31.6 %      38.2 %      35.5 % 

CONSUMERS

      

Income from continuing operations before income taxes

    $ 734      $ 688      $ 456   

Income tax expense at statutory rate

      257        241        160   

Increase (decrease) in income taxes from:

       

State and local income taxes, net of federal benefit

      24        26        19   

Income tax credit amortization

      (4 )      (4 )      (4 ) 

Medicare Part D exempt income

      (6 )      (9 )      (6 ) 

Plant basis differences

      (1 )      2        1   

Tax credits, net

      (1 )      (3 )      (7 ) 

Other, net

      (2 )      1        -   

Income tax expense

    $ 267      $ 254      $ 163   

Effective tax rate

      36.4 %      36.9 %      35.7 % 

 

1 

CMS Energy's effective tax rate for the year ended December 31, 2011 was reduced due to a one-time non-cash reduction in tax expense resulting from a change in Michigan tax law. In May 2011, Michigan enacted the MCIT, effective January 1, 2012. The MCIT, a simplified six percent corporate income tax, will replace the MBT, which is a complex multi-part business tax. Both the MBT and the MCIT are income taxes for financial reporting purposes, for which deferred income tax assets and liabilities are recorded. CMS Energy and Consumers remeasured their Michigan deferred income tax assets and liabilities at June 30, 2011 to reflect this change in law. Unlike the MBT, the MCIT does not allow future tax deductions to offset the book-tax differences that existed upon enactment of the tax. Due primarily to the elimination of these future tax deductions, Consumers has eliminated $128 million of net deferred tax assets associated with its utility book-tax temporary differences, recognizing a $128 million regulatory asset (not including the effects of income tax gross-ups), and in addition to the amounts related to Consumers, CMS Energy eliminated $32 million of net deferred tax liabilities associated with its non-utility book-tax temporary differences, recognizing a $32 million deferred income tax benefit.

 

2 

For the year ended December 31, 2010, CMS Energy recognized deferred tax expense of $3 million to reflect the enactment of the Health Care Acts. The law change prospectively repealed the tax deduction for the portion of the health care costs reimbursed by the Medicare Part D subsidy for taxable years beginning after December 31, 2012. Consumers has recorded a regulatory asset of $98 million at December 31, 2011 to reflect the expected recovery of additional future income taxes.

Presented in the following table are the significant components of income tax expense on continuing operations:

 

Years Ended December 31

    2011     2010     2009  
     In Millions  

CMS ENERGY, INCLUDING CONSUMERS

      

Current income taxes

      

Federal

    $ 2      $ (21 )    $ (12 ) 

State and local

      24        26        17   
  

 

 

    

 

 

    

 

 

  
   $ 26      $ 5      $ 5   
  

 

 

    

 

 

    

 

 

  

Deferred income taxes

      

Federal

    $ 207      $ 210      $ 86   

State and local

      11        13        28   

MCIT law change

      (49 )      —        —   
  

 

 

    

 

 

    

 

 

  
   $ 169      $ 223      $ 114   
  

 

 

    

 

 

    

 

 

  

Deferred income tax credit, net

      (4 )      (4 )      (4 ) 
  

 

 

    

 

 

    

 

 

  

Tax expense

    $ 191      $ 224      $ 115   
  

 

 

    

 

 

    

 

 

  

CONSUMERS

      

Current income taxes

      

Federal

    $ 74      $ (17 )    $ 72   

State and local

      32        25        24   
  

 

 

    

 

 

    

 

 

  
   $ 106      $ 8      $ 96   
  

 

 

    

 

 

    

 

 

  

Deferred income taxes

       

Federal

    $ 159      $ 236      $ 66   

State and local

      6        14        5   
  

 

 

    

 

 

    

 

 

  
   $ 165      $ 250      $ 71   
  

 

 

    

 

 

    

 

 

  

Deferred income tax credit, net

      (4 )      (4 )      (4 ) 
  

 

 

    

 

 

    

 

 

  

Tax expense

    $ 267      $ 254      $ 163   
  

 

 

    

 

 

    

 

 

  

 

Presented in the following table are the principal components of deferred income tax assets (liabilities) recognized:

 

In Millions   

December 31

      2011        2010   

CMS ENERGY, INCLUDING CONSUMERS

    

Employee benefits

    $ (126 )    $ (76 ) 

Gas inventory

      (155 )      (177 ) 

Plant, property, and equipment

      (1,668 )      (1,382 ) 

Regulatory tax liability

      70        162   

Reserves and accruals

      86        101   

Securitized costs

      (96 )      (120 ) 

Tax loss and credit carryforwards

      806        996   

Other

      92        (103 ) 
   $ (991 )    $ (599 ) 

Less valuation allowance

      (20 )      (19 ) 

Total net deferred income tax liabilities

    $ (1,011 )    $ (618 ) 

Deferred tax assets, net of valuation reserves

    $ 1,034      $ 1,240   

Deferred tax liabilities

      (2,045 )      (1,858 ) 

Total net deferred income tax liabilities

    $ (1,011 )    $ (618 ) 

CONSUMERS

    

Employee benefits

    $ (158 )    $ (110 ) 

Gas inventory

      (155 )      (177 ) 

Plant, property, and equipment

      (1,742 )      (1,464 ) 

Regulatory tax liability

      70        162   

Reserves and accruals

      44        45   

Securitized costs

      (96 )      (120 ) 

Tax loss and credit carryforwards

      67        281   

Other

      81        (115 ) 
   $ (1,889 )    $ (1,498 ) 

Less valuation allowance

      (1 )      -   

Total net deferred income tax liabilities

    $ (1,890 )    $ (1,498 ) 

Deferred tax assets, net of valuation reserves

    $ 261      $ 488   

Deferred tax liabilities

      (2,151 )      (1,986 ) 

Total net deferred income tax liabilities

    $ (1,890 )    $ (1,498 ) 

Deferred tax assets and liabilities are recognized for the estimated future tax effect of temporary differences between the tax basis of assets or liabilities and the reported amounts on CMS Energy's and Consumers' consolidated financial statements. Deferred tax assets and liabilities are classified as current or non-current according to the classification of the related assets or liabilities. Deferred tax assets and liabilities not related to assets or liabilities are classified according to the expected reversal date of the temporary differences.

 

Presented in the following table are the tax loss and credit carryforwards at December 31, 2011:

 

In Millions  
      Gross Amount      Tax Attribute      Expiration  

CMS ENERGY, INCLUDING CONSUMERS

        

Federal net operating loss carryforward

      $        1,403         $        491         2023 – 2031   

Local net operating loss carryforwards

      439         4         2023 – 2031   

State capital loss carryforward

      26         2         2014 – 2015   

Alternative minimum tax credits

      269         269         No expiration   

General business credits

      40         40         2012 – 2031   

Total tax attributes

               $        806            

CONSUMERS

        

Federal net operating loss carryforward

      $           134         $          47         2023 – 2031   

State capital loss carryforward

      10         1         2014 – 2015   

Alternative minimum tax credits

      5         5         No expiration   

General business credits

      14         14         2012 – 2031   

Total tax attributes

               $          67            

CMS Energy has provided a valuation allowance of $2 million for the local tax loss carryforward, a valuation allowance of $2 million for the state capital loss carryforward, and a valuation allowance of $2 million for general business credits. Consumers has provided a valuation allowance of $1 million for the state capital loss carryforward. CMS Energy and Consumers expect to utilize fully tax loss and credit carryforwards for which no valuation has been provided. It is reasonably possible that further adjustments will be made to the valuation allowances within one year.

Presented in the following table is a reconciliation of the beginning and ending amount of uncertain tax benefits:

 

In Millions  

Years Ended December 31

      2011        2010        2009   

CMS ENERGY, INCLUDING CONSUMERS

      

Balance at beginning of period

      $        4        $        62        $        65   

Reductions for prior year tax positions

      (1 )      (58 )      (6 ) 

Additions for prior year tax positions

      1        -        2   

Additions for current year tax positions

      -        -        1   

Balance at end of period

      $        4        $        4        $        62   

CONSUMERS

      

Balance at beginning of period

      $        3        $        57        $        55   

Reductions for prior year tax positions

      -        (54 )      (1 ) 

Additions for prior year tax positions

      1        -        2   

Additions for current year tax positions

      -        -        1   

Balance at end of period

      $        4        $          3        $        57   

CMS Energy, including Consumers, had uncertain tax benefits of $4 million at December 31, 2011 and 2010 and $8 million at December 31, 2009 that, if recognized, would affect the annual effective tax rate in future years. Consumers had uncertain tax benefits of $4 million at December 31, 2011 and $3 million at December 31, 2010 and 2009 that, if recognized, would affect the annual effective tax rate in future years.

CMS Energy and Consumers recognize accrued interest and penalties, where applicable, as part of income tax expense. CMS Energy, including Consumers, recognized no interest for the year ended December 31, 2011 and less than $1 million for each of the years ended December 31, 2010 and 2009. In 2010, CMS Energy settled with the IRS and, as a result, paid $6 million of accrued interest in December 2010. At that time, a remaining accrued interest balance of $3 million was eliminated. Consumers recognized no interest for the year ended December 31, 2011 and less than $1 million for each of the years ended December 31, 2010 and 2009. Upon settlement with the IRS in 2010, Consumers paid $4 million to CMS Energy and eliminated a remaining accrued interest balance of $1 million.

 

In November 2010, the IRS concluded its audit of CMS Energy and its subsidiaries, and proposed changes of $132 million to taxable income for the years ended December 31, 2002 through December 31, 2007. Of this amount, $82 million resulted in an adjustment to the existing net operating loss carryforward; the remaining $50 million increased taxable income. Most of the adjustments related to the timing of deductions, not the disallowance of deductions. CMS Energy accepted the proposed adjustments to taxable income, which resulted in the payment of $15 million of tax and accrued interest. The tax adjustments were allocated based on the companies' separate taxable income, in accordance with CMS Energy's tax sharing agreement. The impact to net income was less than $1 million.

In December 2010, the IRS began its audit of CMS Energy and its subsidiaries' 2008 and 2009 federal tax returns. The IRS also is auditing CMS Energy's research and development tax credit claims for 2001 through 2009. These credits are part of CMS Energy's overall general business credit carryforwards. It is reasonably possible that, within the next twelve months, a settlement will be reached with the IRS on CMS Energy's research and development tax credit claim. The total claimed credit for these years is $21 million.

The amount of income taxes paid is subject to ongoing audits by federal, state, local, and foreign tax authorities, which can result in proposed assessments. CMS Energy's and Consumers' estimate of the potential outcome for any uncertain tax issue is highly judgmental. CMS Energy and Consumers believe that their accrued tax liabilities at December 31, 2011 were adequate for all years.

Consumers Energy Company [Member]
  
Income Taxes

13: INCOME TAXES

CMS Energy and its subsidiaries file a consolidated U.S. federal income tax return and a unitary Michigan income tax return. Income taxes are allocated based on each company's separate taxable income in accordance with the CMS Energy tax sharing agreement.

Presented in the following table is the difference between actual income tax expense on continuing operations, excluding noncontrolling interests, and income tax expense computed by applying the statutory U.S. federal income tax rate:

 

In Millions, Except Tax Rate   

Years Ended December 31

      2011        2010        2009   

CMS ENERGY, INCLUDING CONSUMERS

      

Income from continuing operations before income taxes

    $ 604      $ 587      $ 324   

Income tax expense at statutory rate

      211        205        114   

Increase (decrease) in income taxes from:

       

MCIT law change, net of federal benefit1

     (32 )      -        -   

State and local income taxes, net of federal benefit

      21        26        21   

Income tax credit amortization

      (4 )      (4 )      (4 ) 

Medicare Part D exempt income, net of law change2

     (6 )      (6 )      (6 ) 

Plant basis differences

      (1 )      2        1   

Tax credits, net

      (1 )      (3 )      (9 ) 

Valuation allowance

      1        1        2   

Other, net

      2        3        (4 ) 

Income tax expense

    $ 191      $ 224      $ 115   

Effective tax rate

      31.6 %      38.2 %      35.5 % 

CONSUMERS

      

Income from continuing operations before income taxes

    $ 734      $ 688      $ 456   

Income tax expense at statutory rate

      257        241        160   

Increase (decrease) in income taxes from:

       

State and local income taxes, net of federal benefit

      24        26        19   

Income tax credit amortization

      (4 )      (4 )      (4 ) 

Medicare Part D exempt income

      (6 )      (9 )      (6 ) 

Plant basis differences

      (1 )      2        1   

Tax credits, net

      (1 )      (3 )      (7 ) 

Other, net

      (2 )      1        -   

Income tax expense

    $ 267      $ 254      $ 163   

Effective tax rate

      36.4 %      36.9 %      35.7 % 

 

1 

CMS Energy's effective tax rate for the year ended December 31, 2011 was reduced due to a one-time non-cash reduction in tax expense resulting from a change in Michigan tax law. In May 2011, Michigan enacted the MCIT, effective January 1, 2012. The MCIT, a simplified six percent corporate income tax, will replace the MBT, which is a complex multi-part business tax. Both the MBT and the MCIT are income taxes for financial reporting purposes, for which deferred income tax assets and liabilities are recorded. CMS Energy and Consumers remeasured their Michigan deferred income tax assets and liabilities at June 30, 2011 to reflect this change in law. Unlike the MBT, the MCIT does not allow future tax deductions to offset the book-tax differences that existed upon enactment of the tax. Due primarily to the elimination of these future tax deductions, Consumers has eliminated $128 million of net deferred tax assets associated with its utility book-tax temporary differences, recognizing a $128 million regulatory asset (not including the effects of income tax gross-ups), and in addition to the amounts related to Consumers, CMS Energy eliminated $32 million of net deferred tax liabilities associated with its non-utility book-tax temporary differences, recognizing a $32 million deferred income tax benefit.
 

2 

For the year ended December 31, 2010, CMS Energy recognized deferred tax expense of $3 million to reflect the enactment of the Health Care Acts. The law change prospectively repealed the tax deduction for the portion of the health care costs reimbursed by the Medicare Part D subsidy for taxable years beginning after December 31, 2012. Consumers has recorded a regulatory asset of $98 million at December 31, 2011 to reflect the expected recovery of additional future income taxes.

Presented in the following table are the significant components of income tax expense on continuing operations:

 

Years Ended December 31

    2011     2010     2009  
     In Millions  

CMS ENERGY, INCLUDING CONSUMERS

      

Current income taxes

      

Federal

    $ 2      $ (21 )    $ (12 ) 

State and local

      24        26        17   
  

 

 

    

 

 

    

 

 

  
   $ 26      $ 5      $ 5   
  

 

 

    

 

 

    

 

 

  

Deferred income taxes

      

Federal

    $ 207      $ 210      $ 86   

State and local

      11        13        28   

MCIT law change

      (49 )      —        —   
  

 

 

    

 

 

    

 

 

  
   $ 169      $ 223      $ 114   
  

 

 

    

 

 

    

 

 

  

Deferred income tax credit, net

      (4 )      (4 )      (4 ) 
  

 

 

    

 

 

    

 

 

  

Tax expense

    $ 191      $ 224      $ 115   
  

 

 

    

 

 

    

 

 

  

CONSUMERS

      

Current income taxes

      

Federal

    $ 74      $ (17 )    $ 72   

State and local

      32        25        24   
  

 

 

    

 

 

    

 

 

  
   $ 106      $ 8      $ 96   
  

 

 

    

 

 

    

 

 

  

Deferred income taxes

       

Federal

    $ 159      $ 236      $ 66   

State and local

      6        14        5   
  

 

 

    

 

 

    

 

 

  
   $ 165      $ 250      $ 71   
  

 

 

    

 

 

    

 

 

  

Deferred income tax credit, net

      (4 )      (4 )      (4 ) 
  

 

 

    

 

 

    

 

 

  

Tax expense

    $ 267      $ 254      $ 163   
  

 

 

    

 

 

    

 

 

  

 

Presented in the following table are the principal components of deferred income tax assets (liabilities) recognized:

 

In Millions   

December 31

      2011        2010   

CMS ENERGY, INCLUDING CONSUMERS

    

Employee benefits

    $ (126 )    $ (76 ) 

Gas inventory

      (155 )      (177 ) 

Plant, property, and equipment

      (1,668 )      (1,382 ) 

Regulatory tax liability

      70        162   

Reserves and accruals

      86        101   

Securitized costs

      (96 )      (120 ) 

Tax loss and credit carryforwards

      806        996   

Other

      92        (103 ) 
   $ (991 )    $ (599 ) 

Less: valuation allowance

      (20 )      (19 ) 

Total net deferred income tax liabilities

    $ (1,011 )    $ (618 ) 

Deferred tax assets, net of valuation reserves

    $ 1,034      $ 1,240   

Deferred tax liabilities

      (2,045 )      (1,858 ) 

Total net deferred income tax liabilities

    $ (1,011 )    $ (618 ) 

CONSUMERS

    

Employee benefits

    $ (158 )    $ (110 ) 

Gas inventory

      (155 )      (177 ) 

Plant, property, and equipment

      (1,742 )      (1,464 ) 

Regulatory tax liability

      70        162   

Reserves and accruals

      44        45   

Securitized costs

      (96 )      (120 ) 

Tax loss and credit carryforwards

      67        281   

Other

      81        (115 ) 
   $ (1,889 )    $ (1,498 ) 

Less: valuation allowance

      (1 )      -   

Total net deferred income tax liabilities

    $ (1,890 )    $ (1,498 ) 

Deferred tax assets, net of valuation reserves

    $ 261      $ 488   

Deferred tax liabilities

      (2,151 )      (1,986 ) 

Total net deferred income tax liabilities

    $ (1,890 )    $ (1,498 ) 

Deferred tax assets and liabilities are recognized for the estimated future tax effect of temporary differences between the tax basis of assets or liabilities and the reported amounts on CMS Energy's and Consumers' consolidated financial statements. Deferred tax assets and liabilities are classified as current or non-current according to the classification of the related assets or liabilities. Deferred tax assets and liabilities not related to assets or liabilities are classified according to the expected reversal date of the temporary differences.

 

Presented in the following table are the tax loss and credit carryforwards at December 31, 2011:

 

In Millions  
      Gross Amount      Tax Attribute      Expiration  

CMS ENERGY, INCLUDING CONSUMERS

        

Federal net operating loss carryforward

      $        1,403         $        491         2023 – 2031   

Local net operating loss carryforwards

      439         4         2023 – 2031   

State capital loss carryforward

      26         2         2014 – 2015   

Alternative minimum tax credits

      269         269         No expiration   

General business credits

      40         40         2012 – 2031   

Total tax attributes

               $        806            

CONSUMERS

        

Federal net operating loss carryforward

      $           134         $          47         2023 – 2031   

State capital loss carryforward

      10         1         2014 – 2015   

Alternative minimum tax credits

      5         5         No expiration   

General business credits

      14         14         2012 – 2031   

Total tax attributes

               $          67            

CMS Energy has provided a valuation allowance of $2 million for the local tax loss carryforward, a valuation allowance of $2 million for the state capital loss carryforward, and a valuation allowance of $2 million for general business credits. Consumers has provided a valuation allowance of $1 million for the state capital loss carryforward. CMS Energy and Consumers expect to utilize fully tax loss and credit carryforwards for which no valuation has been provided. It is reasonably possible that further adjustments will be made to the valuation allowances within one year.

Presented in the following table is a reconciliation of the beginning and ending amount of uncertain tax benefits:

 

In Millions  

Years Ended December 31

      2011        2010        2009   

CMS ENERGY, INCLUDING CONSUMERS

      

Balance at beginning of period

      $        4        $        62        $        65   

Reductions for prior year tax positions

      (1 )      (58 )      (6 ) 

Additions for prior year tax positions

      1        -        2   

Additions for current year tax positions

      -        -        1   

Balance at end of period

      $        4        $        4        $        62   

CONSUMERS

      

Balance at beginning of period

      $        3        $        57        $        55   

Reductions for prior year tax positions

      -        (54 )      (1 ) 

Additions for prior year tax positions

      1        -        2   

Additions for current year tax positions

      -        -        1   

Balance at end of period

      $        4        $          3        $        57   

CMS Energy, including Consumers, had uncertain tax benefits of $4 million at December 31, 2011 and 2010 and $8 million at December 31, 2009 that, if recognized, would affect the annual effective tax rate in future years. Consumers had uncertain tax benefits of $4 million at December 31, 2011 and $3 million at December 31, 2010 and 2009 that, if recognized, would affect the annual effective tax rate in future years.

CMS Energy and Consumers recognize accrued interest and penalties, where applicable, as part of income tax expense. CMS Energy, including Consumers, recognized no interest for the year ended December 31, 2011 and less than $1 million for each of the years ended December 31, 2010 and 2009. In 2010, CMS Energy settled with the IRS and, as a result, paid $6 million of accrued interest in December 2010. At that time, a remaining accrued interest balance of $3 million was eliminated. Consumers recognized no interest for the year ended December 31, 2011 and less than $1 million for each of the years ended December 31, 2010 and 2009. Upon settlement with the IRS in 2010, Consumers paid $4 million to CMS Energy and eliminated a remaining accrued interest balance of $1 million.

 

In November 2010, the IRS concluded its audit of CMS Energy and its subsidiaries, and proposed changes of $132 million to taxable income for the years ended December 31, 2002 through December 31, 2007. Of this amount, $82 million resulted in an adjustment to the existing net operating loss carryforward; the remaining $50 million increased taxable income. Most of the adjustments related to the timing of deductions, not the disallowance of deductions. CMS Energy accepted the proposed adjustments to taxable income, which resulted in the payment of $15 million of tax and accrued interest. The tax adjustments were allocated based on the companies' separate taxable income, in accordance with CMS Energy's tax sharing agreement. The impact to net income was less than $1 million.

In December 2010, the IRS began its audit of CMS Energy and its subsidiaries' 2008 and 2009 federal tax returns. The IRS also is auditing CMS Energy's research and development tax credit claims for 2001 through 2009. These credits are part of CMS Energy's overall general business credit carryforwards. It is reasonably possible that, within the next twelve months, a settlement will be reached with the IRS on CMS Energy's research and development tax credit claim. The total claimed credit for these years is $21 million.

The amount of income taxes paid is subject to ongoing audits by federal, state, local, and foreign tax authorities, which can result in proposed assessments. CMS Energy's and Consumers' estimate of the potential outcome for any uncertain tax issue is highly judgmental. CMS Energy and Consumers believe that their accrued tax liabilities at December 31, 2011 were adequate for all years.