CONSUMERS ENERGY CO - Quarter Report: 2012 May (Form 10-Q)

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

OR

(A Michigan Corporation)

One Energy Plaza, Jackson, Michigan 49201

(517) 788-0550

(A Michigan Corporation)

One Energy Plaza, Jackson, Michigan 49201

(517) 788-0550

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 x    No ¨    Consumers Energy Company:  Yes x    No ¨

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 x    No ¨    Consumers Energy Company:  Yes x    No ¨

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 x    Accelerated filer ¨    Non-Accelerated filer ¨    Smaller reporting company ¨

(Do not check if a smaller reporting company)

Consumers Energy Company:

Large accelerated filer ¨    Accelerated filer ¨    Non-Accelerated filer x    Smaller reporting company ¨

(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 ¨    No x    Consumers Energy Company:  Yes ¨    No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock at July 13, 2012:

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

June 30, 2012

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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 2011 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:

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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 3: Contingencies and Commitments and Note 4: Regulatory Matters; 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:

CMS Energy’s business strategy has emphasized 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 2007 to 2011, Consumers achieved a 73 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. 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 $6.6 billion from 2012 through 2016. 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 distribution investments of $1.7 billion comprise $1.0 billion of electric utility projects to improve reliability and increase capacity and $0.7 billion of gas utility projects to increase capacity and deliverability and enhance pipeline integrity. Consumers also expects to spend $1.5 billion on environmental investments needed to comply with state and federal laws and regulations. An additional $1.2 billion of planned reliability investments at Consumers are aimed at reducing outages and improving customer satisfaction; these investments comprise $0.8 billion at the electric utility to strengthen circuits and substations, replace poles, and upgrade the Ludington pumped-storage plant, and $0.4 billion at the gas utility to replace mains and enhance transmission and storage systems.

Renewable energy projects are another major component of Consumers’ planned capital investments. Consumers expects to spend $0.5 billion on renewable energy investments, under an MPSC-approved renewable energy plan, from 2012 through 2016. The 2008 Energy Law requires that at least ten percent of Consumers’ electric sales volume come from renewable energy sources by 2015, and it includes requirements for specific capacity additions. Consumers has historically included renewable resources as part of its portfolio, with about five percent of its present power supply coming from such renewable sources as hydroelectric, landfill gas, biomass, and wind.

Consumers’ Smart Grid program, with an estimated total project capital cost of $750 million, also represents a major capital investment. The full-scale deployment of advanced metering infrastructure is planned to begin in the second half of 2012 and to continue through 2019. Consumers has spent $140 million through 2011 on its Smart Grid program, and expects to spend an additional $260 million, following a phased approach, from 2012 through 2016.

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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.

In April 2012, the Michigan Court of Appeals ruled in an appeal filed by ABATE that disputed the MPSC’s decision to authorize an electric revenue decoupling mechanism for Detroit Edison. The Court concluded that the MPSC lacks statutory authority to approve or direct the use of a revenue decoupling mechanism for electric providers. Consumers cannot predict whether this decision will be appealed to the Michigan Supreme Court or the timing or outcome of any such appeal. As a result, Consumers determined that it no longer met the accounting criteria for recognition of a regulatory asset under an alternative revenue program, and wrote off its $59 million electric revenue decoupling mechanism regulatory asset at March 31, 2012. Although the case before the Court of Appeals related specifically to Detroit Edison, Consumers will continue to pursue all of its legal and regulatory avenues to recover its decoupling revenues.

As a result of the Court of Appeals decision in the Detroit Edison case, the MPSC requested all interested parties to submit comments regarding the future use of electric revenue decoupling mechanisms in Michigan. In May 2012, Consumers filed its comments with the MPSC. Consumers is unable to predict the outcome of this matter.

In September 2011, Consumers filed its first reconciliation of the gas revenue decoupling mechanism, requesting recovery of $16 million from customers for the period June 2010 through May 2011. This mechanism, which was extended through April 2012 and was not affected by the Court of Appeals decision on electric decoupling, allowed Consumers to adjust future gas rates to compensate for changes in sales volumes resulting from the difference between the level of average sales per customer adopted in the order and actual average weather-adjusted sales per customer, subject to certain conditions. Certain parties have filed in opposition to the reconciliation. At June 30, 2012, Consumers had a $33 million non-current regulatory asset recorded for gas revenue decoupling.

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The 2008 Energy Law limits alternative electric supply to ten percent of Consumers’ weather-adjusted retail sales of the preceding calendar year. At June 30, 2012, Consumers’ electric deliveries under the ROA program were at the ten percent limit.

In March 2012, a bill was introduced to the Michigan Senate and House of Representatives that, upon enactment, would revise the 2008 Energy Law and allow customers then 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 23 percent. The revision also proposes an increase in the cap of six percentage points per year from 2013 through 2015.

In June 2012, a bill was introduced to the Michigan Senate and House of Representatives that would likely phase out electric choice and return the state’s electric industry to full regulation. This legislation was meant to counterpoint the bill introduced in March 2012. Consumers is unable to predict the outcome of these two legislative proposals.

In January 2012, a ballot initiative was filed proposing to amend the Michigan Constitution to require Michigan utilities to obtain at least 25 percent of their electric energy from clean renewable energy sources such as wind, solar, biomass, and hydropower by 2025. The proposed amendment would also limit how much utilities could charge customers for the cost of complying with this requirement. If this ballot initiative is certified by the State Board of Canvassers, Michigan voters will vote on the proposal in the November 2012 general election.

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 July 2011, the EPA finalized CSAPR, which replaces CAIR. In December 2011, due to litigation surrounding CSAPR, the U.S. Court of Appeals for the D.C. Circuit issued a stay of CSAPR, stating that CAIR would remain in place while the court considers the issues.

Additionally, in February 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. CMS Energy and Consumers are continuing to assess the impact and cost of complying with CSAPR and MATS.

FINANCIAL PERFORMANCE IN 2012 AND BEYOND

For the six months ended June 30, 2012, CMS Energy’s net income available to common stockholders was $167 million, and diluted EPS were $0.62. This compares with net income available to common stockholders of $235 million and diluted EPS of $0.90 for the six months ended June 30, 2011. The main factors contributing to the decline in earnings in 2012 were the write-off of Consumers’ electric revenue decoupling mechanism regulatory asset, as discussed above, and the absence of a tax benefit recognized in 2011 related to the enactment of the MCIT.

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 by about one percent annually through 2016, driven largely by the continued rise in industrial production. Consumers is projecting that its gas sales will remain stable through 2016. This outlook reflects growth in gas demand offset by energy efficiency and conservation.

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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.

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 2012 versus 2011:

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CONSUMERS ELECTRIC UTILITY RESULTS OF OPERATIONS

Electric deliveries and rate increases: For the three months ended June 30, 2012, electric delivery revenues increased $45 million compared with 2011. This variance was due to additional revenues of $25 million resulting from a December 2011 self-implemented rate increase and $26 million resulting from higher deliveries, reflecting warmer weather and increased usage in 2012. Additionally, other miscellaneous revenue increased $3 million. These increases were offset partially by the absence, in 2012, of $9 million of electric decoupling revenues recognized in 2011. Deliveries to end-use customers were 9.5 billion kWh in 2012, an increase of 0.6 billion kWh, or 6.7 percent, compared with 2011.

For the six months ended June 30, 2012, electric delivery revenues decreased $12 million compared with 2011. This decrease reflected a $59 million charge to write off Consumers’ electric decoupling mechanism regulatory asset, and the absence, in 2012, of $30 million of electric decoupling revenues recognized in 2011. These decreases were offset largely by additional revenues of $51 million resulting from a December 2011 self-implemented rate increase, $11 million resulting from higher deliveries in 2012, and a $15 million increase in surcharges and other miscellaneous revenues. Deliveries to end-use customers were 18.7 billion kWh in 2012, an increase of 0.4 billion kWh, or 2.2 percent, compared with 2011.

Maintenance and other operating expenses: For the three months ended June 30, 2012, maintenance and other operating expenses decreased $7 million compared with 2011. This decrease reflected the $14 million recovery of costs associated with Consumers’ proposed coal-fueled plant and a $7 million reduction in service restoration costs. These decreases were offset partially by $8 million of voluntary separation program expenses, $5 million of higher energy optimization program costs, and a $1 million increase in other operating expenses.

For the six months ended June 30, 2012, maintenance and other operating expenses decreased $4 million compared with 2011. This decrease reflected the $14 million recovery of costs associated with Consumers’ proposed coal-fueled plant and a $9 million reduction in service restoration costs. These decreases were offset partially by $8 million of voluntary separation program expenses, $9 million of higher energy optimization program costs, and a $2 million increase in other operating expenses.

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Depreciation and amortization: For the three months ended June 30, 2012, depreciation and amortization expense increased $7 million compared with 2011, and for the six months ended June 30, 2012, depreciation and amortization expense increased $13 million compared with 2011. These increases were due primarily to higher depreciation expense from increased plant in service.

Income taxes: For the three months ended June 30, 2012, income taxes increased $25 million compared with 2011, reflecting higher electric utility earnings in 2012.

CONSUMERS GAS UTILITY RESULTS OF OPERATIONS

Gas deliveries and rate increases: For the three months ended June 30, 2012, gas delivery revenues increased $3 million compared with 2011. This increase reflected $5 million in additional revenues from March 2012 and May 2011 rate increases and a $5 million increase in surcharges and other miscellaneous revenues. These increases were offset partially by a $7 million reduction resulting from lower customer deliveries, due primarily to warmer weather in 2012. Gas deliveries, including transportation to end-use customers, were 40 bcf in 2012, a decrease of 6 bcf, or 13 percent, compared with 2011.

For the six months ended June 30, 2012, gas delivery revenues decreased $32 million compared with 2011. This decrease reflected a $67 million reduction resulting from lower customer deliveries, due primarily to warmer weather in 2012. The decrease was offset partially by $19 million of additional revenues from March 2012 and May 2011 rate increases, an $8 million increase related to the energy optimization program, and an $8 million increase in other miscellaneous revenues. Gas deliveries, including transportation to end-use customers, were 146 bcf in 2012, a decrease of 33 bcf, or 18 percent, compared with 2011.

Maintenance and other operating expenses: For the six months ended June 30, 2012, maintenance and other operating expenses increased $8 million compared with 2011 due to $8 million of higher energy optimization program costs and $4 million of voluntary separation program expenses, offset partially by $4 million of lower gas distribution operating expenses.

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Depreciation and amortization: For the six months ended June 30, 2012, depreciation and amortization expense increased $5 million compared with 2011, due primarily to higher depreciation expense from increased plant in service.

Income taxes: For the six months ended June 30, 2012, income taxes decreased $15 million compared with 2011, reflecting lower gas utility earnings in 2012.

ENTERPRISES RESULTS OF OPERATIONS

For the three months ended June 30, 2012, the enterprises segment recorded a net loss of $1 million, compared with net income of $29 million for the three months ended June 30, 2011, and for the six months ended June 30, 2012, net income of the enterprises segment decreased $28 million compared with 2011. These changes were due primarily to the absence, in 2012, of a $28 million income tax benefit resulting from the enactment of the MCIT in May 2011.

CORPORATE INTEREST AND OTHER RESULTS OF OPERATIONS

For the six months ended June 30, 2012, corporate interest and other net expenses decreased $2 million compared with 2011, due primarily to higher net earnings at EnerBank.

DISCONTINUED OPERATIONS

For each of the three-month periods ended June 30, 2012 and 2011, the net loss recorded from discontinued operations was less than $1 million.

For the six months ended June 30, 2012, income from discontinued operations was $7 million, reflecting the elimination of a liability related to a prior asset sale, compared with income from discontinued operations of $2 million in 2011 as a result of a favorable legal settlement related to a previously sold business.

CASH POSITION, INVESTING, AND FINANCING

At June 30, 2012, CMS Energy had $215 million of consolidated cash and cash equivalents, which included $28 million of restricted cash and cash equivalents. Consumers had $181 million of consolidated cash and cash equivalents, which included $27 million of restricted cash and cash equivalents.

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OPERATING ACTIVITIES

Presented in the following table are specific components of net cash provided by operating activities for the six months ended June 30, 2012 and 2011:

¹ Non-cash transactions comprise depreciation and amortization, changes in deferred income taxes, postretirement benefits

expense, and other non-cash items.

² Core working capital comprises accounts receivable and accrued revenues, inventories, and accounts payable.

For the six months ended June 30, 2012, net cash provided by operating activities at CMS Energy decreased $273 million compared with 2011, and net cash provided by operating activities at Consumers decreased $232 million compared with 2011. The decreases were due primarily to lower gas sales and a smaller reduction in core working capital, reflecting lower usage of gas inventory.

INVESTING ACTIVITIES

Presented in the following table are specific components of net cash used in investing activities for the six months ended June 30, 2012 and 2011:

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For the six months ended June 30, 2012, net cash used in investing activities at CMS Energy increased $139 million compared with 2011, and net cash used in investing activities at Consumers increased $156 million compared with 2011. The increases were due primarily to increases in capital expenditures.

FINANCING ACTIVITIES

Presented in the following table are specific components of net cash used in financing activities for the six months ended June 30, 2012 and 2011:

For the six months ended June 30, 2012, net cash used in financing activities at CMS Energy increased $307 million compared with 2011, and net cash used in financing activities at Consumers increased $238 million compared with 2011. These increases were due primarily to an increase in net debt retirements.

RETIREMENT BENEFITS

Presented in the following table are the most recent estimates of CMS Energy’s and Consumers’ pension cost, OPEB cost, and cash contributions through 2014:

Contribution estimates comprise amounts required for pension and discretionary contributions for OPEB. Consumers’ pension and OPEB costs are recoverable through its general ratemaking process. Actual future costs and contributions will depend on future investment performance, changes in discount rates, and various other factors related to the Pension Plan and OPEB participants.

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For additional details on retirement benefits, see Note 10: Retirement Benefits.

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 5: Financings and Capitalization – Dividend Restrictions. For the six months ended June 30, 2012, Consumers paid $158 million in dividends on common stock to CMS Energy.

In June 2011, CMS Energy entered into a continuous equity offering program under which CMS Energy may sell, from time to time in “at the market” offerings, common stock having an aggregate sales price of up to $50 million. In June 2012, under this program, CMS Energy issued 650,235 shares of common stock at an average price of $23.07 per share, resulting in net proceeds of $15 million. In June 2011, under this program, CMS Energy issued 762,925 shares of common stock at an average price of $19.66 per share, resulting in net proceeds of $15 million.

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 become diminished or otherwise restricted, however, CMS Energy and Consumers would implement contingency plans to address debt maturities, which could include reduced capital spending. CMS Energy and Consumers had the following secured revolving credit facilities available at June 30, 2012:

¹ Obligations under this facility are secured by Consumers common stock.

² Obligations under this facility are secured by FMBs of Consumers.

CMS Energy and Consumers use these credit facilities for general working capital purposes and to issue letters of credit. An additional source of liquidity is Consumers’ revolving accounts receivable sales program, which allows it to transfer up to $250 million of accounts receivable as a secured borrowing. At June 30, 2012, $250 million of accounts receivable were eligible for transfer under this program.

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Certain of CMS Energy’s and Consumers’ credit agreements and debt indentures contain covenants that require CMS Energy and Consumers to maintain certain financial ratios, as defined therein. At June 30, 2012, no events of default had occurred with respect to any financial covenants contained in CMS Energy’s and Consumers’ credit agreements or debt indentures. CMS Energy and Consumers were each in compliance with these limits as of June 30, 2012, 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 2012 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 $512 million at June 30, 2012. 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 3: 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 3: 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’ balanced energy initiative is a comprehensive energy resource plan designed to meet the short-term and long-term electricity needs of its customers through:

In December 2011, Consumers formally canceled its plans to build an 830-MW coal-fueled plant at its Karn/Weadock generating complex. This decision reflects present and anticipated market conditions, new environmental standards, and Consumers’ expectations of the generation sources that will provide the best energy value to customers. Consumers also plans to mothball seven of its smaller coal-fueled units in 2015. Consumers will continue to evaluate its options for the plants, which include:

Renewable Energy Plan: Consumers’ renewable energy plan details how Consumers will meet REC and capacity standards prescribed by the 2008 Energy Law. This law requires Consumers to obtain RECs in an amount equal to at least ten percent of its electric sales volume (estimated to be 3.5 million RECs annually) by 2015. RECs represent proof that the associated electricity was generated from a renewable energy resource. 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 capacity from renewable energy resources by 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 by 2015. Through June 2012, Consumers has contracted for the purchase of 297 MW of nameplate capacity from renewable energy suppliers, which represents 59 percent of the 2015 renewable capacity requirement.

In November 2011, Consumers began construction of Lake Winds^® Energy Park, a 100-MW wind park in Mason County, Michigan. Consumers expects the wind park to be operational in late 2012. Consumers will continue development of Cross Winds^® Energy Park, its 150-MW wind park in Tuscola County, Michigan, scheduled for operation by late 2015, as well as seek other opportunities for wind generation development in support of the renewable capacity standards. Consumers expects to meet its 2015 renewable capacity requirement with a combination of owned and contracted renewable capacity.

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In January 2012, a ballot initiative was filed proposing to amend the Michigan Constitution to require Michigan utilities to obtain at least 25 percent of their electric energy from clean renewable energy sources such as wind, solar, biomass, and hydropower by 2025. The proposed amendment would also limit how much utilities could charge customers for the cost of complying with this requirement. If this ballot initiative is certified by the State Board of Canvassers, Michigan voters will vote on the proposal in the November 2012 general election.

Electric Customer Deliveries and Revenue: Consumers’ electric customer deliveries are largely dependent on Michigan’s economy, which has suffered from economic and financial instability in the automotive and real estate sectors. Consumers believes economic conditions in Michigan are improving, and expects weather-adjusted electric deliveries to increase in 2012 by two percent compared with 2011.

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

Electric ROA: The Customer Choice Act allows all of Consumers’ electric customers to buy electric generation service from Consumers or from an alternative electric supplier. The 2008 Energy Law revised the Customer Choice Act by limiting alternative electric supply to ten percent of Consumers’ weather-adjusted retail sales of the preceding calendar year. At June 30, 2012, electric deliveries under the ROA program were at the ten percent limit and alternative electric suppliers were providing 787 MW of generation service to ROA customers. Based on 2011 weather-adjusted retail sales, Consumers expects 2012 electric deliveries under the ROA program to be at a similar level to 2011.

In March 2012, a bill was introduced to the Michigan Senate and House of Representatives that, upon enactment, would revise the 2008 Energy Law and allow customers then 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 23 percent. The revision also proposes an increase in the cap of six percentage points per year from 2013 through 2015.

In June 2012, a bill was introduced to the Michigan Senate and House of Representatives that would likely phase out electric choice and return the state’s electric industry to full regulation. This legislation was meant to counterpoint the bill introduced in March 2012. Consumers is unable to predict the outcome of these two legislative proposals.

Electric Transmission: In July 2011, FERC issued an order in a rulemaking proceeding concerning regional electric transmission planning and cost allocations. In August 2011, Consumers and several other electric utilities filed a joint petition seeking clarification/rehearing of FERC’s July order and opposing the allocation methodology. In May 2012, FERC issued an order denying the utilities’ clarification/rehearing requests on this order. Following this denial, Consumers and several other electric utilities filed a petition for review of FERC’s order with the U. S. Court of Appeals.

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 December 2011, Consumers, along with the Michigan Attorney General, ABATE, Detroit Edison, the Michigan Municipal Electric Association, and the Michigan Public Power Agency, 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. Regardless of the outcome of this appeal, Consumers expects to continue to recover transmission expenses, including those associated with the MISO tariff revision, through the PSCR process.

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Electric Rate Matters: Rate matters are critical to Consumers’ electric utility business. For details on Consumers’ electric rate matters, see Note 4: Regulatory Matters.

Electric Environmental Estimates: Consumers’ operations are subject to various state and federal environmental laws and regulations. Consumers estimates that it will incur expenditures of $1.5 billion from 2012 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 July 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. This rule had mandated emission reductions beginning in 2012, which CMS Energy and Consumers were prepared to meet through fuel blend changes. In December 2011, due to litigation surrounding CSAPR, the U.S. Court of Appeals for the D.C. Circuit issued a stay of CSAPR, stating that CAIR would remain in place while the court considers the issues. The court heard oral arguments in April 2012, but there is no timeline for a decision or order from the court.

In February 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. Generally, existing units must meet the standards within three to four years of issuance of the final rule.

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

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. Consumers believes these claims are baseless, but is unable to predict the outcome of this petition.

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 also follows litigation involving greenhouse gases. Consumers believes Congress may eventually pass greenhouse gas legislation, but is unable to predict the form and timing of any final legislation.

In 2010, the EPA released its Prevention of Significant Deterioration and Title V Greenhouse Gas Tailoring Rule, which sets greenhouse gas emissions limits that define when permits are required for new and existing industrial facilities under NSR PSD and Title V Renewable Operating Permit programs. Numerous parties have challenged this rule in the U.S. Court of Appeals for the D.C. Circuit. In June 2012, the U.S. Court of Appeals for the D.C. Circuit upheld the Tailoring Rule and dismissed challenges to it and to three other greenhouse gas rules. Consumers does not expect to incur significant expenditures to comply with this rule.

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In March 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 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. Consumers submitted comments on the proposed rule in June 2012. The EPA is also expected to propose emissions guidelines within the next year 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.

CCBs: In June 2010, the EPA proposed rules regulating CCBs, such as coal ash, under the Resource Conservation and Recovery Act. Michigan already regulates CCBs as low-hazard industrial waste. The EPA proposed a range of alternatives for regulating CCBs, including regulation as either a nonhazardous 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 March 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 late 2012. Consumers also expects the EPA to propose new regulations in November 2012 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 April 2010, the EPA issued an Advance Notice of Proposed Rulemaking, indicating that it is considering a variety of regulatory actions with respect to PCBs. One proposal aims to phase out equipment containing PCBs by 2025. Another proposal eliminates an exemption for small equipment containing PCBs. To comply with this proposed rule, Consumers could incur substantial costs associated with existing electrical equipment potentially containing PCBs. A proposal is expected in late 2012.

Other electric environmental matters could have a major impact on Consumers’ outlook. For additional details on other electric environmental matters, see Note 3: Contingencies and Commitments – Consumers Electric Utility Contingencies – Electric Environmental Matters.

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CONSUMERS GAS UTILITY BUSINESS OUTLOOK AND UNCERTAINTIES

Gas Deliveries: Consumers expects weather-adjusted gas deliveries in 2012 to decline by one percent compared with 2011. 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 from this trend due to:

Gas Rate Matters: Rate matters are critical to Consumers’ gas utility business. For details on Consumers’ gas rate matters, see Note 4: Regulatory Matters.

Gas Pipeline Safety: In January 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:

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.

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 3: Contingencies and Commitments – Consumers Gas Utility Contingencies – Gas Environmental Matters.

CONSUMERS OTHER OUTLOOK AND UNCERTAINTIES

Smart Grid: Consumers’ grid modernization effort continues, with the selection of a vendor that will provide smart electric meters and a cellular communications network to allow Consumers to transmit and receive electric usage information from customers’ homes and businesses. Smart meters are designed 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 operational benefits to Consumers. Consumers intends to use a phased implementation approach, beginning deployment in the second half of 2012 and continuing through 2019. Consumers also plans to install communication modules on gas meters in areas where Consumers provides both electricity and natural gas to customers.

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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:

For additional details regarding the enterprises segment’s uncertainties, see Note 3: 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 June 30, 2012, and five percent of CMS Energy’s net income available to common stockholders for the six months ended June 30, 2012. The carrying value of EnerBank’s loan portfolio was $486 million at June 30, 2012. Its loan portfolio was funded primarily by deposit liabilities of $458 million. Twelve-month rolling average default rates on loans held by EnerBank have declined from 1.1 percent at June 30, 2011 to 0.8 percent at June 30, 2012. 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. Presently, EnerBank meets or exceeds all of its capital requirements.

Voluntary Separation Program: In April 2012, CMS Energy announced a voluntary separation program for its salaried employees. The separation date for the majority of employees who participated in the program was July 1, 2012. Management approved 232 employees for early separation and CMS Energy recorded a charge of $12 million related to this program during the three months ended June 30, 2012.

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 3: Contingencies and Commitments and Note 4: Regulatory Matters.

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NEW ACCOUNTING STANDARDS

For details regarding the implementation of new accounting standards during the six months ended June 30, 2012, see Note 1: New Accounting Standards.

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CMS Energy Corporation

Consolidated Statements of Income

(Unaudited)