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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

CMS Energy Corporation:  Yes T     No o   Consumers Energy Company:  Yes T     No o

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).

CMS Energy Corporation:  Yes T     No o   Consumers Energy Company:  Yes T     No o

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

CMS Energy Corporation:

Large accelerated filer T   Accelerated filer o   Non-Accelerated filer o   Smaller reporting company o

(Do not check if a smaller reporting company)

Consumers Energy Company:

Large accelerated filer o   Accelerated filer o   Non-Accelerated filer T   Smaller reporting company o

(Do not check if a smaller reporting company)

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

CMS Energy Corporation:  Yes o    No T   Consumers Energy Company:  Yes o    No T

Indicate the number of shares outstanding of each of the issuer’s classes of common stock at April 8, 2013:

CMS Energy Corporation:

Consumers Energy Company:

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CMS Energy Corporation

Consumers Energy Company

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

March 31, 2013

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GLOSSARY

Certain terms used in the text and financial statements are defined below.

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FILING FORMAT

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

This report should be read in its entirety.  No one section of this report deals with all aspects of the subject matter of this report.  This report should be read in conjunction with the consolidated financial statements and related notes and with MD&A included in the 2012 Form 10-K.

FORWARD-LOOKING STATEMENTS AND INFORMATION

This Form 10-Q and other written and oral statements that CMS Energy and Consumers make may contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995.  The use of “might,” “may,” “could,” “should,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “projects,” “forecasts,” “predicts,” “assumes,” and other similar words is intended to identify forward-looking statements that involve risk and uncertainty.  This discussion of potential risks and uncertainties is designed to highlight important factors that may impact CMS Energy’s and Consumers’ businesses and financial outlook.  CMS Energy and Consumers have no obligation to update or revise forward-looking statements regardless of whether new information, future events, or any other factors affect the information contained in the statements.  These forward-looking statements are subject to various factors that could cause CMS Energy’s and Consumers’ actual results to differ materially from the results anticipated in these statements.  These factors include, but are not limited to, the following, all of which are potentially significant:

·                 the impact of regulation by the MPSC or FERC and other applicable governmental proceedings and regulations, including any associated impact on electric or gas rates or rate structures;

·                 potentially adverse regulatory treatment or failure to receive timely regulatory orders affecting Consumers that are or could come before the MPSC, FERC, MISO, or other governmental authorities;

·                 the adoption of federal or state laws or regulations or changes in applicable laws, rules, regulations, principles, or practices, or in their interpretation, including those related to energy policy and ROA, the environment, regulation or deregulation, health care reforms (including the Health Care Acts), taxes, accounting matters, and other business issues that could have an impact on CMS Energy’s or Consumers’ businesses or financial results, including laws or regulations regarding climate change and air emissions and potential effects of the Dodd-Frank Act and related regulations on CMS Energy, Consumers, or any of their affiliates;

·                 potentially adverse regulatory or legal interpretations or decisions regarding environmental matters, or delayed regulatory treatment or permitting decisions that are or could come before the MDEQ, EPA, and/or U.S. Army Corps of Engineers, and potential environmental remediation costs associated with these interpretations or decisions, including those that may affect Bay Harbor or Consumers’ RMRR classification under NSR regulations;

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·                 changes in energy markets, including availability and price of electric capacity and the timing and extent of changes in commodity prices and availability of coal, natural gas, natural gas liquids, electricity, oil, and certain related products;

·                 the price of CMS Energy common stock, the credit ratings of CMS Energy and Consumers, capital and financial market conditions, and the effect of these market conditions on CMS Energy’s and Consumers’ interest costs and access to the capital markets, including availability of financing to CMS Energy, Consumers, or any of their affiliates;

·                 the investment performance of the assets of CMS Energy’s and Consumers’ pension and benefit plans and the discount rates used in calculating the plans’ obligations, and the resulting impact on future funding requirements;

·                 the impact of the economy, particularly in Michigan, and potential future volatility in the financial and credit markets on CMS Energy’s, Consumers’, or any of their affiliates’ revenues, ability to collect accounts receivable from customers, or cost and availability of capital;

·                 changes in the economic and financial viability of CMS Energy’s and Consumers’ suppliers, customers, and other counterparties and the continued ability of these third parties, including third parties in bankruptcy, to meet their obligations to CMS Energy and Consumers;

·                 population changes in the geographic areas where CMS Energy and Consumers conduct business;

·                 national, regional, and local economic, competitive, and regulatory policies, conditions, and developments;

·                 loss of customer demand for electric generation supply to alternative energy suppliers;

·                 federal regulation of electric sales and transmission of electricity, including periodic re-examination by federal regulators of CMS Energy’s and Consumers’ market-based sales authorizations in wholesale power markets without price restrictions;

·                 the impact of credit markets, economic conditions, and any new banking regulations on EnerBank;

·                 the availability, cost, coverage, and terms of insurance, the stability of insurance providers, and the ability of Consumers to recover the costs of any insurance from customers;

·                 the effectiveness of CMS Energy’s and Consumers’ risk management policies, procedures, and strategies, including strategies to hedge risk related to future prices of electricity, natural gas, and other energy-related commodities;

·                 factors affecting development of electric generation projects and distribution infrastructure replacement and expansion projects, including those related to project site identification, construction material pricing, availability of qualified construction personnel, permitting, and government approvals;

·                 factors affecting operations, such as costs and availability of personnel, equipment, and materials, unusual weather conditions, catastrophic weather-related damage, scheduled or unscheduled equipment outages, maintenance or repairs, environmental incidents, and electric transmission and distribution or gas pipeline system constraints;

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·                 potential disruption to, interruption of, or other impacts on facilities, utility infrastructure, or operations due to accidents, explosions, physical disasters, war, or terrorism, and the ability to obtain or maintain insurance coverage for these events;

·                 changes or disruption in fuel supply, including but not limited to rail or vessel transport of coal and pipeline transport of natural gas;

·                 potential costs, lost revenues, or other consequences resulting from misappropriation of assets or sensitive information, corruption of data, or operational disruption in connection with a cyber attack or other cyber incident;

·                 technological developments in energy production, storage, delivery, usage, and metering, including Smart Energy and the success of its implementation;

·                 the impact of CMS Energy’s and Consumers’ integrated business software system and its operation on their activities, including utility customer billing and collections;

·                 adverse consequences resulting from any past or future assertion of indemnity or warranty claims associated with assets and businesses previously owned by CMS Energy or Consumers, including claims resulting from attempts by foreign or domestic governments to assess taxes on past operations or transactions;

·                 the outcome, cost, and other effects of legal or administrative proceedings, settlements, investigations, or claims;

·                 restrictions imposed by various financing arrangements and regulatory requirements on the ability of Consumers and other subsidiaries of CMS Energy to transfer funds to CMS Energy in the form of cash dividends, loans, or advances;

·                 earnings volatility resulting from the application of fair value accounting to certain energy commodity contracts or interest rate contracts;

·                 changes in financial or regulatory accounting principles or policies, including a possible future requirement to comply with International Financial Reporting Standards, which differ from GAAP in various ways, including the present lack of special accounting treatment for regulated activities; and

·                 other matters that may be disclosed from time to time in CMS Energy’s and Consumers’ SEC filings, or in other publicly issued documents.

For additional details regarding these and other uncertainties, see Part I – Item 1. Consolidated Financial Statements (Unaudited) – Notes to the Unaudited Consolidated Financial Statements – Note 1, Regulatory Matters and Note 2, Contingencies and Commitments; Part I – Item 2. MD&A – Outlook; and Part II – Item 1A. Risk Factors.

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CMS Energy Corporation

Consumers Energy Company

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This MD&A is a combined report of CMS Energy and Consumers.

EXECUTIVE OVERVIEW

CMS Energy is an energy company operating primarily in Michigan.  It is the parent holding company of several subsidiaries, including Consumers, an electric and gas utility, and CMS Enterprises, primarily a domestic independent power producer.  Consumers’ electric utility operations include the generation, purchase, distribution, and sale of electricity, and Consumers’ gas utility operations include the purchase, transmission, storage, distribution, and sale of natural gas.  Consumers’ customer base consists of a mix of residential, commercial, and diversified industrial customers.  CMS Enterprises, through its subsidiaries and equity investments, owns and operates power generation facilities.

CMS Energy and Consumers manage their businesses by the nature of services each provides.  CMS Energy operates principally in three business segments:  electric utility; gas utility; and enterprises, its non-utility investments and operations.  Consumers operates principally in two business segments:  electric utility and gas utility.

CMS Energy and Consumers earn revenue and generate cash from operations by providing electric and natural gas utility services; electric distribution and generation; gas transmission, storage, and distribution; and other energy-related services.  Their businesses are affected primarily by:

·                 regulation and regulatory matters;

·                 economic conditions;

·                 weather;

·                 energy commodity prices;

·                 interest rates; and

·                 CMS Energy’s and Consumers’ securities’ credit ratings.

CMS Energy’s business strategy emphasizes the key elements depicted below:

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SAFE, EXCELLENT OPERATIONS

The safety of employees, customers, and the general public remains a priority of CMS Energy and Consumers.  Accordingly, CMS Energy and Consumers have worked to integrate a set of safety principles into their business operations and culture.  These principles include complying with applicable safety, health, and security regulations and implementing programs and processes aimed at continually improving safety and security conditions.  From 2006 to 2012, Consumers achieved a 76 percent reduction in the annual number of recordable safety incidents.

CUSTOMER VALUE

Consumers is undertaking a number of initiatives that reflect its intensified customer focus.  Consumers’ planned investments in reliability are aimed at improving safety, reducing customer outage frequency, reducing repetitive outages, and increasing customer satisfaction.  Also, in order to minimize increases in customer rates, Consumers has undertaken several initiatives to reduce costs through a voluntary separation plan, accelerated pension funding, health-care cost sharing, negotiated labor agreements, information system efficiencies, and productivity improvement programs.  Consumers considers these and other aspects of its customer value initiative to be important to its success.

UTILITY INVESTMENT

Consumers expects to make capital investments of about $7 billion from 2013 through 2017.  Consumers has limited its capital investment program to those investments it believes are needed to provide safe, reliable, and efficient service to its customers.  Consumers’ capital investment program is expected to result in annual rate base growth of five to seven percent while allowing Consumers to maintain sustainable customer base rate increases (excluding PSCR and GCR charges) at or below the rate of inflation.

Among the key components of Consumers’ investment program are projects that will enhance customer value.  Consumers’ planned base capital investments of $3.2 billion comprise $2.1 billion of electric utility projects to improve reliability and increase capacity and $1.1 billion of gas utility projects to increase capacity and deliverability and enhance pipeline integrity.  An additional $1.4 billion of planned reliability investments at Consumers are aimed at reducing outages and improving customer satisfaction; these investments comprise $0.7 billion at the electric utility to strengthen circuits and substations, replace poles, and upgrade the Ludington pumped-storage plant, and $0.7 billion at the gas utility to replace mains and enhance transmission and storage systems.  Consumers also expects to spend $1.1 billion on environmental investments needed to comply with state and federal laws and regulations.

In December 2012, Consumers announced plans to build a 700-MW gas-fueled plant at its Thetford complex in Genesee County, Michigan and filed an air permit application with the MDEQ for the proposed plant.  Construction of the plant, at an estimated cost of $750 million, is contingent upon obtaining a certificate of necessity from the MPSC and environmental permits.  Consumers expects the plant to be operational in 2017.

Renewable energy projects are another major component of Consumers’ planned capital investments.  Consumers expects to spend $0.3 billion on renewable energy investments, under an MPSC-approved renewable energy plan, from 2013 through 2017.  The 2008 Energy Law requires that at least ten percent of Consumers’ electric sales volume come from renewable energy sources by 2015, and it includes requirements for specific capacity additions.  Consumers has historically included renewable resources as part of its portfolio, with about eight percent of its present power supply coming from such renewable sources as hydropower, landfill gas, biomass, and wind.

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Consumers’ Smart Energy program, with an estimated total project capital cost of $0.8 billion, also represents a major capital investment.  The full-scale deployment of advanced metering infrastructure began in August 2012 and is planned to continue through 2019.  Consumers has spent $0.2 billion through 2012 on its Smart Energy program, and expects to spend an additional $0.3 billion, following a phased approach, from 2013 through 2017.

REGULATION

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

·                 Electric Rate Case:  Consumers filed a new general electric rate case with the MPSC in September 2012, seeking an annual rate increase of $148 million, based on a 10.5 percent authorized return on equity.  In January 2013, Consumers supplemented its electric rate case application to reflect changes to its environmental compliance and generation outage plans, which reduced its requested annual rate increase to $145 million.

In this filing, Consumers requested authority to recover new investment in system reliability, environmental compliance, and technology enhancements.  Costs associated with these investments represent 85 percent of the total annual rate increase requested.  The filing also seeks approval of several rate adjustment mechanisms, including a mechanism that would reconcile annually Consumers’ actual nonfuel revenues with the revenues approved by the MPSC, and a mechanism that would allow recovery in 2014 of an additional $82 million associated with incremental 2014 capital investments, subject to reconciliation.

In March 2013, Consumers self-implemented an annual rate increase of $110 million out of its requested $145 million, subject to refund with interest.

·                 Gas Rate Case:  In February 2013, Consumers filed an application with the MPSC seeking an annual rate increase of $49 million, based on a 10.5 percent authorized return on equity.  The filing requested authority to recover new investments in customer reliability, deliverability, safety, and system enhancements.  Costs associated with these investments represent 120 percent of the total annual rate increase requested; this amount is offset partially by reductions in the revenue requirement associated with working capital.

The filing also seeks approval of several rate adjustment mechanisms, including a mechanism that would reconcile annually Consumers’ actual nonfuel revenues with the revenues approved by the MPSC, and a mechanism that would allow recovery of an additional $70 million associated with additional capital investments in the period July 2014 through December 2015, subject to reconciliation.

·                 Gas Revenue Decoupling Mechanism:  In December 2012, the MPSC approved Consumers’ first reconciliation of the gas revenue decoupling mechanism, in which Consumers requested recovery of $16 million from customers for the period June 2010 through May 2011.  The MPSC authorized recovery of the full amount over a three-month period that began in February 2013.  The gas revenue decoupling mechanism, authorized by the MPSC in its 2009 order in Consumers’ gas rate case and extended through April 2012, allowed Consumers to adjust future gas rates to the degree that actual average weather-adjusted sales per customer differed from the rate order.

Consumers filed its final reconciliation of the gas revenue decoupling mechanism in August 2012, requesting recovery of $17 million from customers for the period June 2011

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through April 2012.  At March 31, 2013, Consumers had an $18 million regulatory asset recorded for gas revenue decoupling for the period June 2010 through April 2012.

The 2008 Energy Law limits alternative electric supply to ten percent of Consumers’ weather-adjusted retail sales of the preceding calendar year.  At March 31, 2013, Consumers’ electric deliveries under the ROA program were at the ten percent limit.  In February 2013, a bill was introduced to the Michigan Senate that, if enacted, would revise the 2008 Energy Law and allow customers on the ROA program waiting list to switch their service to an alternative electric supplier.  Presently, the proportion of Consumers’ electric deliveries under the ROA program and on the ROA waiting list is 25 percent.  The revision also proposes an increase in the cap of six percentage points per year from 2014 through 2016.  Consumers is unable to predict the outcome of this legislative proposal.

Environmental regulation is another area of importance for CMS Energy and Consumers, and they are monitoring numerous legislative and regulatory initiatives, including initiatives to regulate greenhouse gases, and related litigation.

In 2012, the EPA published its final MACT emission standards for electric generating units, based on Section 112 of the Clean Air Act, calling the final rule MATS.  Although numerous parties, including the State of Michigan, have sought to extend the deadline of MATS, it is expected to take effect in 2015.  Consumers has received from the MDEQ a one-year extension for MATS and the Michigan Mercury Rule for ten of its coal-fueled units, allowing them to run as presently configured until April 2016.  CMS Energy and Consumers are continuing to assess the impact and cost associated with these standards.

FINANCIAL PERFORMANCE

For the three months ended March 31, 2013, CMS Energy’s net income available to common stockholders was $144 million, and diluted EPS were $0.53.  This compares with net income available to common stockholders of $67 million and diluted EPS of $0.25 for the three months ended March 31, 2012.  The main factors contributing to CMS Energy’s improved performance in 2013 were increased gas deliveries and the absence, in 2013, of the write-off of Consumers’ electric revenue decoupling mechanism regulatory asset in 2012.

Consumers’ utility operations are seasonal.  The consumption of electric energy typically increases in the summer months, due primarily to the use of air conditioners and other cooling equipment, while peak demand for natural gas occurs in the winter due to colder temperatures and the resulting use of natural gas as heating fuel.  A more detailed discussion of the factors affecting CMS Energy’s and Consumers’ performance can be found in the Results of Operations section that follows this Executive Overview.

CMS Energy and Consumers believe that economic conditions in Michigan are improving.  Although Michigan’s economy continues to be affected by the recession and its impact on the state’s automotive industry and by high unemployment rates, there are indications that the recession has eased in Michigan.  Consumers expects its electric sales to increase annually by about 0.5 to 1.0 percent on average through 2017, driven largely by the continued rise in industrial production.  Excluding the impacts of energy efficiency programs, Consumers expects its electric sales to increase by about 1.0 to 1.5 percent annually through 2017.  Consumers is projecting that its gas sales will remain stable through 2017.  This outlook reflects growth in gas demand offset by energy efficiency and conservation.

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

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Consumers expects to continue to have sufficient capacity to fund its investment-based growth plans.  CMS Energy also expects its sources of liquidity to remain sufficient to meet its cash requirements.  CMS Energy and Consumers will continue to monitor developments in the financial and credit markets, as well as government policy responses to those developments, for potential implications for their businesses and their future financial needs.

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RESULTS OF OPERATIONS

CMS ENERGY CONSOLIDATED RESULTS OF OPERATIONS

Presented in the following table are specific after-tax changes to net income available to common stockholders for 2013 versus 2012:

CONSUMERS ELECTRIC UTILITY RESULTS OF OPERATIONS

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Electric deliveries and rate increases:  For the three months ended March 31, 2013, electric delivery revenues increased $80 million compared with 2012.  This increase reflected the absence, in 2013, of a $59 million charge to write off Consumers’ electric decoupling regulatory asset, a $16 million increase in deliveries, and a $5 million increase in other revenues.  Deliveries to end-use customers, excluding deliveries to Consumers’ largest customer, which is on an economic development rate, were 8.9 billion kWh in 2013, an increase of 0.2 billion kWh, or two percent, compared with 2012.

Maintenance and other operating expenses:  For the three months ended March 31, 2013, maintenance and other operating expenses decreased $4 million compared with 2012, due primarily to the absence, in 2013, of funding related to a low-income assistance program, resulting from a Michigan law change.

Depreciation and amortization:  For the three months ended March 31, 2013, depreciation and amortization expense increased $11 million compared with 2012, due primarily to increased plant in service and an increase in depreciation rates that took effect in June 2012.

Income taxes:  For the three months ended March 31, 2013, income taxes increased $27 million compared with 2012, due to higher electric utility earnings.

CONSUMERS GAS UTILITY RESULTS OF OPERATIONS

Gas deliveries and rate increases:  For the three months ended March 31, 2013, gas delivery revenues increased $55 million compared with 2012.  This increase reflected $50 million of higher customer deliveries, due primarily to colder weather in 2013 and mild weather in 2012, and a $5 million increase in other revenues.  Deliveries to end-use customers were 132 bcf in 2013, an increase of 26 bcf, or 25 percent, compared with 2012.

Maintenance and other operating expenses:  For the three months ended March 31, 2013, maintenance and other operating expenses decreased $7 million compared with 2012, due primarily to the absence, in 2013, of funding related to a low-income assistance program, resulting from a Michigan law change.

Depreciation and amortization:  For the three months ended March 31, 2013, depreciation and amortization expense decreased $3 million compared with 2012, due primarily to decreased depreciation rates that took effect in January 2013.

Income taxes:  For the three months ended March 31, 2013, income taxes increased $24 million compared with 2012, due to higher gas utility earnings.

ENTERPRISES RESULTS OF OPERATIONS

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For the three months ended March 31, 2013, net income of the enterprises segment decreased $1 million compared with 2012, due primarily to the absence of a 2012 Michigan Business Tax benefit.

CORPORATE INTEREST AND OTHER RESULTS OF OPERATIONS

For the three months ended March 31, 2013, corporate interest and other net expenses increased $1 million compared with 2012, due primarily to an increase in interest expense, reflecting increased borrowings.

DISCONTINUED OPERATIONS

For the three months ended March 31, 2013, loss from discontinued operations was less than $1 million.

For the three months ended March 31, 2012, income from discontinued operations was $7 million, reflecting the elimination of a liability associated with a prior asset sale.

CASH POSITION, INVESTING, AND FINANCING

At March 31, 2013, CMS Energy had $615 million of consolidated cash and cash equivalents, which included $29 million of restricted cash and cash equivalents.  At March 31, 2013, Consumers had $383 million of consolidated cash and cash equivalents, which included $28 million of restricted cash and cash equivalents.

OPERATING ACTIVITIES

Presented in the following table are specific components of net cash provided by operating activities for the three months ended March 31, 2013 and 2012:

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For the three months ended March 31, 2013, net cash provided by operating activities at CMS Energy increased $90 million compared with 2012, and net cash provided by operating activities at Consumers increased $32 million compared with 2012.  The increases were due primarily to higher net income and the receipt of a $69 million renewable energy grant for Lake Winds® Energy Park, offset partially by higher pension contributions and an increase in accounts receivable resulting from higher gas sales.

INVESTING ACTIVITIES

Presented in the following table are specific components of net cash used in investing activities for the three months ended March 31, 2013 and 2012:

For the three months ended March 31, 2013, net cash used in investing activities at CMS Energy decreased $20 million compared with 2012, and net cash used in investing activities at Consumers decreased $17 million compared with 2012.  The decreases were due primarily to a reduction in capital expenditures under Consumers’ capital investment program.

FINANCING ACTIVITIES

Presented in the following table are specific components of net cash provided by (used in) financing activities for the three months ended March 31, 2013 and 2012:

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For the three months ended March 31, 2013, net cash provided by financing activities at CMS Energy increased $186 million compared with 2012 and net cash used in financing activities at Consumers decreased $213 million compared with 2012.  These changes were due primarily to a decrease in net debt retirements, offset partially by repayments by Consumers under its revolving accounts receivable sales program.

CAPITAL RESOURCES AND LIQUIDITY

CMS Energy uses dividends from its subsidiaries and external financing and capital transactions to invest in its utility and non-utility businesses, retire debt, pay dividends, and fund its other obligations.  The ability of CMS Energy’s subsidiaries, including Consumers, to pay dividends to CMS Energy depends upon each subsidiary’s revenues, earnings, cash needs, and other factors.  In addition, Consumers’ ability to pay dividends is restricted by certain terms included in its debt covenants and articles of incorporation, and potentially by provisions under the Federal Power Act and the Natural Gas Act and FERC requirements.  For additional details on Consumers’ dividend restrictions, see Note 3, Financings and Capitalization – Dividend Restrictions.  For the three months ended March 31, 2013, Consumers paid $93 million in common stock dividends to CMS Energy.

CMS Energy has entered into two continuous equity offering programs permitting it to sell, from time to time in “at the market” offerings, common stock having an aggregate sales price of up to $50 million per program.  Under the first program, entered into in 2011, CMS Energy issued common stock and received net proceeds of $20 million in March 2013 and $15 million in each of 2012 and 2011.  In April 2013, CMS Energy entered into the second continuous equity offering program.

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

CMS Energy’s and Consumers’ access to the financial and capital markets depends on their credit ratings and on market conditions.  As evidenced by past financing transactions, CMS Energy and Consumers have had ready access to these markets and, barring major market dislocations or disruptions, they expect to continue to have such access.  If access to these markets were to diminish or otherwise become restricted, however, CMS Energy and Consumers would implement contingency plans to address debt maturities, which could include reduced capital spending.  CMS Energy and Consumers had the following secured revolving credit facilities available at March 31, 2013:

CMS Energy and Consumers use these credit facilities for general working capital purposes and to issue letters of credit.  An additional source of liquidity is Consumers’ revolving accounts receivable sales

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program, which allows it to transfer up to $250 million of accounts receivable as a secured borrowing.  At March 31, 2013, $250 million of accounts receivable were eligible for transfer under this program.

Certain of CMS Energy’s and Consumers’ credit agreements, debt indentures, and other facilities contain covenants that require CMS Energy and Consumers to maintain certain financial ratios, as defined therein.  At March 31, 2013, no events of default had occurred with respect to any financial covenants contained in CMS Energy’s and Consumers’ credit agreements, debt indentures, or other facilities.  CMS Energy and Consumers were each in compliance with these covenants as of March 31, 2013, as presented in the following table:

Components of CMS Energy’s and Consumers’ cash management plan include controlling operating expenses and capital expenditures and evaluating market conditions for financing and refinancing opportunities.  CMS Energy and Consumers believe that their present level of cash and their expected cash flows from operating activities, together with their access to sources of liquidity, will be sufficient to fund their contractual obligations for 2013 and beyond.

OFF-BALANCE-SHEET ARRANGEMENTS

CMS Energy, Consumers, and certain of their subsidiaries also enter into various arrangements in the normal course of business to facilitate commercial transactions with third parties.  These arrangements include indemnities, surety bonds, letters of credit, and financial and performance guarantees.  Indemnities are usually agreements to reimburse a counterparty that may incur losses due to outside claims or breach of contract terms.  The maximum payment that could be required under a number of these indemnity obligations is not estimable; the maximum obligation under indemnities for which such amounts were estimable was $482 million at March 31, 2013.  While CMS Energy and Consumers believe it is unlikely that they will incur any material losses related to indemnities they have not recorded as liabilities, they cannot predict the impact of these contingent obligations on their liquidity and financial condition.  For additional details on these and other guarantee arrangements, see Note 2, Contingencies and Commitments – Guarantees.

OUTLOOK

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

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CONSUMERS ELECTRIC UTILITY BUSINESS OUTLOOK AND UNCERTAINTIES

Balanced Energy Initiative:  Consumers continues to experience increasing demand for electricity due to Michigan’s recovering economy and increased use of air conditioning, consumer electronics, and other electric devices, offset partially by the predicted effects of energy efficiency and conservation.  In July 2012, customers set a new all-time peak demand record of 9,006 MW.

Consumers plans to mothball seven of its smaller coal-fueled units.  In March 2013, Consumers submitted applications to MISO to delay the mothballing of the units by one year, to 2016.  Consumers will continue to evaluate its options for the plants, which include:

·                 installing more environmental equipment on the units to reduce emissions further in order to meet new environmental standards and continue to operate the units;

·                 seeking a further extension of compliance deadlines for new environmental standards;

·                 converting the units to natural gas instead of coal;

·                 decommissioning the units; or

·                 a combination of these options, depending on customer needs and market conditions.

With the potential closure of these plants and the potential tightening of the MISO capacity market, Consumers could experience a shortfall in generation capacity of up to 1,500 MW in 2016.  In order to address future capacity requirements and growing electric demand in Michigan, Consumers updated its balanced energy initiative, a comprehensive energy resource plan designed to meet the short-term and long-term electricity needs of its customers through:

·                 energy efficiency;

·                 demand management;

·                 expanded use of renewable energy;

·                 development of new power plants;

·                 power or generating asset purchases to complement existing generating sources; and

·                 continued operation or upgrade of existing units.

In December 2012, Consumers announced plans to build a 700-MW gas-fueled plant at its Thetford complex in Genesee County, Michigan and filed an air permit application with the MDEQ for the proposed plant.  Construction of the plant is contingent upon obtaining a certificate of necessity from the MPSC and environmental permits.  Consumers expects the plant to be operational in 2017.

Renewable Energy Plan:  Consumers’ renewable energy plan details how Consumers will meet REC and capacity standards prescribed by the 2008 Energy Law.  This law requires Consumers to obtain RECs in an amount equal to at least ten percent of its electric sales volume (estimated to be 3.5 million RECs annually) in 2015 and each year thereafter.  RECs represent proof that the associated electricity was generated from a renewable energy resource.  Under its renewable energy plan, Consumers expects to meet its renewable energy requirement each year with a combination of newly generated RECs and previously generated RECs carried over from prior years.

The 2008 Energy Law also requires Consumers to obtain 500 MW of new capacity from renewable energy resources by the end of 2015, either through generation resources owned by Consumers or through agreements to purchase capacity from other parties.  To meet its renewable capacity requirements, Consumers expects to add more than 500 MW of owned or contracted renewable capacity.  Through March 2013, Consumers has contracted for the purchase of 299 MW of nameplate capacity from renewable energy suppliers and owns 100 MW of nameplate capacity at its recently constructed Lake Winds® Energy Park.  The combination of the contracted and owned capacity represents 80 percent of the 2015 renewable capacity requirement.  Consumers expects to meet the balance of the requirement through

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the completion of its Cross Winds® Energy Park in Tuscola County, Michigan, which is scheduled to begin operations in late 2015.

The extension of tax credits for wind projects for which construction begins prior to December 31, 2013 could reduce significantly the cost of meeting the renewable requirements of the 2008 Energy Law.  Consumers cannot predict the overall impact on Cross Winds® Energy Park of the extension of tax credits for wind projects.

Energy Optimization Plan:  The 2008 Energy Law requires Consumers to achieve energy savings equivalent to annual sales reduction targets through at least 2015.  The targets are incremental with the goal of achieving a six percent reduction in customers’ electricity use and a four percent reduction in customers’ natural gas use by December 31, 2015.  Under its energy optimization plan, Consumers provides its customers with incentives to reduce usage by offering energy audits, rebates and discounts on purchases of highly efficient appliances, and other incentives and programs.  Consumers estimates that, through its gas and electric energy optimization programs, its customers realized $184 million in energy savings during 2012.

Electric Customer Deliveries and Revenue:  Consumers’ electric customer deliveries are largely dependent on Michigan’s economy, which has suffered from economic and financial instability in the automotive and real estate sectors in recent years.

Consumers expects weather-adjusted electric deliveries to decrease in 2013 by three percent compared with 2012.  Consumers’ outlook for 2013 includes reduced deliveries to its largest customer, which produces energy-related and computer components.  Consumers has a long-term contract with this customer to provide electricity at a discounted rate for economic development purposes.  Excluding this customer, Consumers expects weather-adjusted electric deliveries in 2013 to remain stable compared with 2012.  This outlook reflects Consumers’ belief that economic conditions in Michigan are improving.

Over the next five years, Consumers expects average electric delivery growth of about 0.5 to 1.0 percent annually.  This increase reflects growth in electric demand, offset partially by the predicted effects of energy efficiency programs and appliance efficiency standards.  Actual delivery levels will depend on:

·                 energy conservation measures and results of energy efficiency programs;

·                 fluctuations in weather; and

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

Electric ROA:  The Customer Choice Act allows Consumers’ electric customers to buy electric generation service from Consumers or from an alternative electric supplier.  The 2008 Energy Law revised the Customer Choice Act by limiting alternative electric supply to ten percent of Consumers’ weather-adjusted retail sales of the preceding calendar year.  At March 31, 2013, electric deliveries under the ROA program were at the ten percent limit and alternative electric suppliers were providing 788 MW of generation service to ROA customers.  Of Consumers’ 1.8 million electric customers, 309 customers purchased electric generation service under the ROA program.  Based on 2012 weather-adjusted retail sales, Consumers expects 2013 electric deliveries under the ROA program to be at a similar level to 2012.

In February 2013, a bill was introduced to the Michigan Senate that, if enacted, would revise the 2008 Energy Law and allow customers on the ROA program waiting list to switch their service to an alternative electric supplier.  Presently, the proportion of Consumers’ electric deliveries under the ROA program and on the ROA waiting list is 25 percent.  The revision also proposes an increase in the cap of six percentage points per year from 2014 through 2016.  Consumers is unable to predict the outcome of this legislative proposal.  The Michigan legislature also has conducted hearings on the subject of energy

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competition.  If a proposal to deregulate electric generation in Michigan were enacted, it could have a material adverse effect on Consumers’ financial results and operations.

Electric Transmission:  In 2011, FERC issued an order in a rulemaking proceeding concerning regional electric transmission planning and cost allocations.  Consumers and several other electric utilities filed a joint petition seeking clarification/rehearing of FERC’s order and opposing the allocation methodology.  In 2012, following FERC’s denial of their requests for clarification/rehearing, Consumers and several other electric utilities filed a petition for review of FERC’s order with the U.S. Court of Appeals.  In March 2013, the U.S. Court of Appeals for the Sixth Circuit issued a scheduling order in this matter.

In a related matter, in 2010, MISO filed and FERC approved a tariff revision proposing a cost allocation methodology for a new category of transmission projects.  Under this tariff revision, the cost of these new transmission projects will be spread proportionally across the Midwest Energy Market.  Consumers believes that Michigan customers will bear additional costs under MISO’s tariff without receiving comparable benefits from these projects.  In 2011, Consumers, along with the Michigan Attorney General, ABATE, DTE Electric, and other parties, filed a petition for review of FERC’s order with the U.S. Court of Appeals for the Seventh Circuit following FERC’s denial of their request for rehearing opposing the allocation methodology in the MISO tariff revision.  In April 2013, the U.S. Court of Appeals conducted oral arguments on this matter.  Regardless of the outcome of these appeals, Consumers expects to continue to recover transmission expenses, including those associated with the MISO tariff revision, through the PSCR process.

In 2012, ReliabilityFirst Corporation informed Consumers that Consumers may not be properly registered to meet certain NERC electric reliability standards.  Consumers is assessing its registration status, taking into consideration FERC’s December 2012 order on the definition of a bulk electric system.  In light of this order, Consumers is reviewing the status of its electric distribution assets under FERC’s modified test and also reviewing prior correspondence from ReliabilityFirst Corporation as to the potential classification of its assets as within a bulk electric system for reliability purposes.  Consumers presently does not expect the resolution of any issues in this area to result in material unrecoverable costs.

Governor’s Energy Initiative:  The Michigan governor has instituted a process pursuant to which a series of reports are to be completed in December 2013 addressing energy efficiency, renewable energy, the electricity market and customer choice, and other subjects.  The process is designed to help the governor and other lawmakers determine the state’s next steps regarding energy policies.  A series of public hearings have been scheduled in 2013 to gather input.  Consumers expects to participate actively in this process but cannot predict its outcome.

Electric Rate Matters:  Rate matters are critical to Consumers’ electric utility business.  For additional details on electric rate matters, see Note 1, Regulatory Matters.

Pending Electric Rate Case:  In September 2012, Consumers filed an application with the MPSC seeking an annual rate increase of $148 million, based on a 10.5 percent authorized return on equity.  In January 2013, Consumers supplemented its electric rate case application to reflect changes to its environmental compliance and generation outage plans, which reduced its requested annual rate increase to $145 million.

In this filing, Consumers requested authority to recover new investment in system reliability, environmental compliance, and technology enhancements.  Costs associated with these investments represent 85 percent of the total annual rate increase requested.  The filing also seeks approval of several rate adjustment mechanisms, including a mechanism that would reconcile annually Consumers’ actual nonfuel revenues with the revenues approved by the MPSC, and a mechanism that would allow recovery in 2014 of an additional $82 million associated with incremental 2014 capital investments, subject to reconciliation.

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In March 2013, Consumers self-implemented an annual rate increase of $110 million out of its requested $145 million, subject to refund with interest.  Consumers’ self-implementation required no order by the MSPC, and no intervenors in Consumers’ electric rate case opposed Consumers’ self-implementation amount.

Electric Environmental Estimates:  Consumers’ operations are subject to various state and federal environmental laws and regulations.  Consumers estimates that it will incur expenditures of $1.1 billion from 2013 through 2018 to continue to comply with the Clean Air Act, Clean Water Act, and numerous state and federal environmental regulations.  Consumers expects to recover these costs in customer rates, but cannot guarantee this result.  Consumers’ primary environmental compliance focus includes, but is not limited to, the following matters:

Air Quality:  In 2011, the EPA released CSAPR, a final replacement rule for CAIR, which requires Michigan and 27 other states to improve air quality by reducing power plant emissions that, according to EPA computer models, contribute to ground-level ozone and fine particle pollution in other downwind states.  In 2012, the U.S. Court of Appeals for the D.C. Circuit voided CSAPR and held that CAIR would remain in place until the EPA promulgated a new rule.  A request by the EPA for a rehearing of this ruling was denied, and the EPA and other parties have sought an appeal to the U.S. Supreme Court.

In 2012, the EPA published its final MACT emission standards for electric generating units, based on Section 112 of the Clean Air Act, calling the final rule MATS.  Under MATS, all of Consumers’ existing coal-fueled electric generating units are required to add additional controls for hazardous air pollutants.  Existing units, unless granted extensions, must meet the standards by mid-April 2015.  Consumers has received from the MDEQ a one-year extension for MATS and the Michigan Mercury Rule for ten of its coal-fueled units, allowing them to run as presently configured until April 2016.

Presently, Consumers’ strategy to comply with air quality regulations, including CAIR and MATS, involves the installation of emission control equipment at some facilities and the suspension of operations at others; however, Consumers continues to evaluate these rules in conjunction with other EPA rulemakings, litigation, and congressional action.  This evaluation could result in:

·                 changes in environmental compliance costs related to Consumers’ coal-fueled power plants;

·                 a change in the fuel mix at coal-fueled and oil-fueled power plants;

·                 changes in how certain plants are used; and

·                 the retirement, mothballing, or repowering with an alternative fuel of some of Consumers’ generating units.

The MDEQ renewed and issued the B.C. Cobb Renewable Operating Permit in August 2011 after an extensive review and a public comment period.  In October 2011, the Sierra Club and the Natural Resources Defense Council filed a petition with the EPA to object to the MDEQ’s issuance of the state Renewable Operating Permit, alleging that the facility is not in compliance with certain provisions of the Clean Air Act, including NSR and Title V.  Consumers responded to these allegations in December 2011.  The EPA could either deny the petition outright or grant the petition and remand the matter to the MDEQ for further action.  The Sierra Club or the Natural Resources Defense Council could also file suit in federal district court seeking EPA action on the petition.  Consumers believes these claims are baseless, but is unable to predict the outcome of this petition.

Fine Particulate Matter:  In December 2012, the EPA finalized a rule that strengthens the air quality standard for fine particulate matter.  Consumers expects short-term impacts to be limited, but this new standard could give rise to air quality concerns in states downwind of Michigan and put pressure on Michigan and other Midwestern states to reduce emissions further.  Given its present strategy for CAIR and MATS compliance, however, Consumers will already be achieving significant reductions in emissions that contribute to the formation of fine particulate matter.

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Greenhouse Gases:  In the recent past, there have been numerous legislative and regulatory initiatives at the state, regional, and national levels that involve the regulation of greenhouse gases.  Consumers continues to monitor and comment on these initiatives and to follow litigation involving greenhouse gases.  Consumers believes Congress may eventually pass greenhouse gas legislation, but is unable to predict the form and timing of any final legislation.

In 2012, the EPA released its proposed “Standards of Performance for Greenhouse Gas Emissions for New Stationary Sources:  Electric Utility Generating Units” pursuant to Section 111 of the Clean Air Act.  This proposed rule, which is scheduled to be finalized in 2013, applies only to new fossil-fuel-fired steam electric generating units.  The standard would require that carbon dioxide emissions not exceed those of a modern, efficient natural gas combined-cycle plant, regardless of fuel type.  The EPA is also expected to propose emissions guidelines within the next one to three years for states to regulate greenhouse gas emissions from existing generating units under Section 111(d) of the Clean Air Act.  Under the expected schedule, states will be required to submit plans to the EPA within nine months of issuance of the final rule and guidelines.  Consumers will continue to monitor activity regarding any proposed regulations involving new source performance standards.

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

CCRs:  In 2010, the EPA proposed rules regulating CCRs, such as coal ash, under the Resource Conservation and Recovery Act.  Recent communications from the EPA stress the need to coordinate CCR rulemaking guidelines for steam electric generating plants under the Clean Water Act.  A final CCR rule could be issued in 2014.  Michigan already regulates CCRs as low-hazard industrial waste.  The EPA proposed a range of alternatives for regulating CCRs, including regulation as either a non-hazardous waste or a hazardous waste.  If coal ash were regulated as a hazardous waste, Consumers would likely cease the beneficial reuse of this product, which would result in a significant increase in the amount of coal ash requiring costly disposal.  Additionally, if the cost of upgrading existing coal ash disposal areas to meet hazardous waste landfill standards were to become economically prohibitive, existing coal ash disposal areas could close, requiring Consumers to find costly alternative arrangements for disposal.  Consumers is unable to predict the impacts from this wide range of possible outcomes, but significant expenditures are likely.

Water:  In 2011, the EPA issued a proposed rule to regulate existing electric generating plant cooling water intake systems under Section 316(b) of the Clean Water Act aimed at reducing alleged harmful impacts on fish and shellfish.  Consumers continues to evaluate this proposed rule and its potential impacts on Consumers’ plants.  A final rule is expected in June 2013.  Consumers also expects the EPA to propose new regulations in 2013 for wastewater discharges from electric generating plants that will require physical and/or chemical treatment facilities for all wastewater.  A final rule is expected in 2014.

PCBs:  In 2010, the EPA issued an Advance Notice of Proposed Rulemaking, indicating that it is considering a variety of regulatory actions with respect to PCBs.  One approach would aim to phase out equipment containing PCBs by 2025.  Another approach would eliminate an exemption for small equipment containing PCBs.  To comply with any such regulatory actions, Consumers could incur substantial costs associated with existing electrical equipment potentially containing PCBs.  A proposed rule is expected in 2013.

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

CONSUMERS GAS UTILITY BUSINESS OUTLOOK AND UNCERTAINTIES

Gas Deliveries:  Consumers expects weather-adjusted gas deliveries in 2013 to grow by about three percent compared with 2012.  Over the next five years, Consumers expects average gas deliveries to remain stable.  This outlook reflects modest growth in gas demand offset by the predicted effects of energy efficiency and conservation.  Actual delivery levels from year to year may vary due to:

·                 fluctuations in weather;

·                 use by power producers;

·                 availability and development of renewable energy sources;

·                 changes in gas prices;

·                 Michigan economic conditions, including population trends and housing activity;

·                 the price of competing energy sources or fuels; and

·                 energy efficiency and conservation impacts.

Gas Transmission:  In January 2013, Consumers announced plans to build a 24-mile, 36-inch natural gas pipeline in St. Joseph and Branch Counties, Michigan.  Consumers expects to spend about $120 million for this project.  Construction of the pipeline is contingent upon obtaining approval from the MPSC and environmental permits.  Consumers expects the pipeline to be operational by the end of 2014.

Gas Transportation:  In July 2012, Trunkline filed a proposal with FERC to cease transporting natural gas through one of its two main transmission pipelines serving Michigan.  More than 60 percent of the natural gas supplied to Consumers’ gas customers is delivered by Trunkline’s two main transmission pipelines.  In August 2012, Consumers filed a motion with FERC to protest against the proposed abandonment on the grounds that it would negatively impact customers and that it could hamper the development of gas-fueled electric generation in Michigan.  The Governor, the MPSC, and various other parties have also filed protests with FERC.  If Trunkline’s proposal is granted, the abandonment could result in higher gas prices and reduced availability for Michigan gas customers.

Gas Rate Matters:  Rate matters are critical to Consumers’ gas utility business.  For additional details on Consumers’ gas rate matters, see Note 1, Regulatory Matters.

Pending Gas Rate Case:  In February 2013, Consumers filed an application with the MPSC seeking an annual rate increase of $49 million, based on a 10.5 percent authorized return on equity.  The filing requested authority to recover new investments in customer reliability, deliverability, safety, and system enhancements.  Costs associated with these investments represent 120 percent of the total annual rate increase requested; this amount is offset partially by reductions in the revenue requirement associated with working capital.

The filing also seeks approval of several rate adjustment mechanisms, including a mechanism that would reconcile annually Consumers’ actual nonfuel revenues with the revenues approved by the MPSC, and a mechanism that would allow recovery of an additional $70 million associated with additional capital investments in the period July 2014 through December 2015, subject to reconciliation.

Gas Pipeline Safety:  In 2012, President Obama signed the Pipeline Safety, Regulatory Certainty, and Job Creation Act of 2011.  The law reauthorizes existing federal pipeline safety programs of the Pipeline and Hazardous Materials Safety Administration through 2015 and it contains provisions mandating:

·                 an increase in the maximum fine for safety violations to $2 million;

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·                 an increase in the number of pipeline inspectors;

·                 a study regarding application of integrity management requirements outside of “high consequence areas;”

·                 a survey regarding existing plans for safe management and replacement of cast iron pipelines;

·                 prescribed notification and on-site incident response times;

·                 installation of automatic or remotely controlled shut-off valves on new or replaced pipelines where feasible;

·                 historical design and construction documentation to verify maximum allowable operating pressures; and

·                 establishment of new regulations for testing (pressure tests or equivalent methods) of previously untested pipelines in high-consequence areas.

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

MPSC Investigations:  The MPSC is presently conducting investigations into two natural gas explosions that occurred in Consumers’ gas service territory, in Wayne, Michigan and Royal Oak, Michigan.  Consumers does not expect the outcome of these investigations to have a material adverse impact on its liquidity, financial condition, or results of operations, but cannot predict the financial impact or outcome.

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

CONSUMERS OTHER OUTLOOK AND UNCERTAINTIES

Smart Energy:  Consumers’ grid modernization effort continues.  In August 2012, Consumers began installing smart meters in Muskegon County, Michigan.  One of the functions of smart meters is to allow customers to monitor and manage their energy usage, which should help reduce demand during critical peak times, resulting in lower peak capacity requirements.  The installation of smart meters should also provide for both operational and customer benefits.  At March 31, 2013, Consumers had upgraded 60,000 electric residential and small business customers in Muskegon County, Michigan to smart meters.  Consumers expects to have installed about 400,000 smart meters throughout western Michigan by the end of 2014.  By mid-2013, Consumers should be able to begin reading meters remotely; further functionality will be added in 2013 and 2014.  Consumers also plans to install communication modules on gas meters in areas where Consumers provides both electricity and natural gas to customers.

ENTERPRISES OUTLOOK AND UNCERTAINTIES

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

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

·                 indemnity and environmental remediation obligations at Bay Harbor;

·                 obligations related to a tax claim from the government of Equatorial Guinea;

·                 the outcome of certain legal proceedings;

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

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

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

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

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

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

OTHER OUTLOOK AND UNCERTAINTIES

EnerBank:  EnerBank, a wholly owned subsidiary of CMS Capital, is a Utah state-chartered, FDIC-insured industrial bank providing unsecured home improvement loans.  EnerBank represented two percent of CMS Energy’s net assets at March 31, 2013, and three percent of CMS Energy’s net income available to common stockholders for the three months ended March 31, 2013.  The carrying value of EnerBank’s loan portfolio was $541 million at March 31, 2013.  Its loan portfolio was funded primarily by deposit liabilities of $511 million.  The twelve-month rolling average default rate on loans held by EnerBank has remained stable at 0.8 percent at March 31, 2013.  CMS Energy is required both by law and by contract to provide financial support, including infusing additional capital, to ensure that EnerBank satisfies mandated capital requirements and has sufficient liquidity to operate.  With its self-funding plan, EnerBank has exceeded these requirements historically and exceeded them as of March 31, 2013.

Litigation:  CMS Energy, Consumers, and certain of their subsidiaries are named as parties in various litigation matters, as well as in administrative proceedings before various courts and governmental agencies, arising in the ordinary course of business.  For additional details regarding these and other legal matters, see Note 1, Regulatory Matters and Note 2, Contingencies and Commitments.

NEW ACCOUNTING STANDARDS

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

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CMS Energy Corporation

Consolidated Statements of Income

(Unaudited)

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