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

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

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

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

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

CMS Energy Corporation :

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock at October 14, 2011:

 

 

CMS Energy Corporation
Consumers Energy Company

Quarterly Reports on Form 10-Q to the Securities and Exchange Commission for the Period Ended
September 30, 2011

TABLE OF CONTENTS

		Page
Glossary			3
Filing Format			8
Forward-Looking Statements and Information			8
PART I — FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited)
CMS Energy			32
Consumers			40
Notes to the Consolidated Financial Statements			47
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			12
Item 3. Quantitative and Qualitative Disclosures about Market Risk			79
Item 4. Controls and Procedures			79
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			80
Item 1A. Risk Factors			80
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			80
Item 3. Defaults Upon Senior Securities			81
Item 4. Removed and Reserved			81
Item 5. Other Information			81
Item 6. Exhibits			82
Signatures			83
EX-4.1
EX-10.1
EX-12.1
EX-12.2
EX-31.1
EX-31.2
EX-31.3
EX-31.4
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

(This page intentionally left blank)

FILING FORMAT

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

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

FORWARD-LOOKING STATEMENTS AND INFORMATION

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

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

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

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

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

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

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

•

sufficient and timely recovery of:

	•		environmental and safety-related expenditures for coal-fueled plants and other utility properties;
	•		power supply and natural gas supply costs;
	•		operating and maintenance expenses;
	•		additional utility rate-based investments;
	•		costs associated with the proposed retirement and decommissioning of facilities;
	•		MISO energy and transmission costs;
	•		costs associated with energy efficiency investments and state or federally mandated renewable resource standards; and
	•		Smart Grid program costs;

	•		expenditures subject to tracking mechanisms;
	•		prevention or curtailment of shutoffs for non-paying customers;
	•		Consumers’ pilot electric and gas decoupling mechanisms;
	•		prevention or curtailment of rights to self-implement rate requests;
	•		refunds of previously self-implemented rates;
	•		implementation of new energy legislation or revisions of existing regulations; and
	•		allocation of the DOE settlement amount;

•

potentially adverse regulatory treatment resulting from pressure on regulators to oppose annual rate increases or to lessen rate impacts upon customers, particularly in difficult economic times;

	•		loss of customer demand for electric generation supply to alternative energy suppliers;
	•		the ability of Consumers to recover its regulatory assets in full and in a timely manner;
	•		the effectiveness of Consumers’ electric and gas decoupling mechanisms in moderating the impact of sales variability on net revenues;
	•		the impact of enforcement powers and investigation activities at FERC;
	•		federal regulation of electric sales and transmission of electricity, including periodic re-examination by federal regulators of CMS Energy’s and Consumers’ market-based sales authorizations in wholesale power markets without price restrictions;
	•		effects of weather conditions, such as unseasonably warm weather during the winter, on sales;
	•		the market perception of the energy industry or of CMS Energy, Consumers, or any of their affiliates;
	•		the credit ratings of CMS Energy or Consumers;
	•		the impact of credit markets, economic conditions, and any new banking regulations on EnerBank;
	•		potential effects of the Dodd-Frank Act and related regulations on CMS Energy and Consumers, including regulation of financial institutions such as EnerBank, whistleblower rules, and shareholder activity that is or may be permitted under the Act;
	•		disruptions in the normal commercial insurance and surety bond markets that may increase costs or reduce traditional insurance coverage, particularly terrorism and sabotage insurance, performance bonds, and tax-exempt debt insurance, and stability of insurance providers, and the ability of Consumers to recover the costs of any such insurance from customers;
	•		changes in energy markets, including availability of capacity and the timing and extent of changes in commodity prices for oil, coal, natural gas, natural gas liquids, electricity, and certain related products due to lower or higher demand, shortages, transportation problems, or other developments, and their impact on CMS Energy’s and Consumers’ cash flows and working capital;
	•		the effectiveness of CMS Energy’s and Consumers’ risk management policies, procedures, and strategies, including their strategies to hedge risk related to future prices of electricity, natural gas, and other energy-related commodities;
	•		changes in construction material prices and the availability of qualified construction personnel to implement Consumers’ construction program;
	•		factors affecting development of generation projects and distribution infrastructure replacement and expansion projects, including those related to project site identification, construction, permitting, and government approvals;
	•		costs and availability of personnel, equipment, and materials for operating and maintaining existing facilities;

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

For additional details regarding these and other uncertainties, see the “Outlook” section included in MD&A; Note 3, Contingencies and Commitments; Note 4, Regulatory Matters; and Part II, Item 1A. Risk Factors.

CMS Energy Corporation
Consumers Energy Company

Safe, Excellent Operations

The safety and security of employees, customers, and the general public remain a priority of CMS Energy and Consumers. Accordingly, CMS Energy and Consumers have worked to integrate a set of safety principles into their business operations and culture. These principles include complying with applicable safety, health, and security regulations and implementing programs and processes aimed at continually improving safety and security conditions. From 2007 to 2010, Consumers achieved a 63 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’ productivity improvements are expected to help keep annual base rate increases (excluding PSCR and GCR charges) at or below the average rate of inflation. 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, with a key aspect of its strategy being the balanced energy initiative. The balanced energy initiative is a comprehensive energy resource plan to meet Consumers’ projected short-term and long-term electric power requirements with energy efficiency, demand management, expanded use of renewable energy, development of new power plants, pursuit of additional PPAs to complement existing generating sources, potential retirement or mothballing of older generating units, and continued operation of other existing units.

Renewable energy projects are a major component of Consumers’ planned capital investments. Consumers expects to spend $500 million on renewable energy investments 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. In May 2011, the MPSC issued an order approving Consumers’ amended renewable energy plan, with slight modifications. The amended plan reduces the renewable energy surcharge that will be billed to customers in the future by an annual amount of $54 million, reflecting lower-than-anticipated costs to comply with renewable energy requirements. In October 2011, Consumers filed an application for the biennial review and approval of its renewable energy plan. The plan further reduces the renewable energy surcharge that will be billed to customers by an annual amount of $3 million.

In February 2011, Consumers and Detroit Edison together announced an $800 million maintenance and upgrade project at their jointly owned Ludington pumped-storage plant. The project, scheduled to begin in 2013 and extend through 2019, is expected to increase the capacity of Ludington by 16 percent, from its present level of 1,872 MW to about 2,172 MW, and increase the plant’s efficiency by five percent. Consumers expects its share of the project cost to total $400 million.

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 will have spent $160 million through 2011 on its Smart Grid program, and expects to spend an additional $260 million, following a phased approach, from 2012 through 2016.

Two additional major investment areas for Consumers are environmental spending and reliability improvements. Consumers expects its environmental investments to total $1.5 billion and its investments in system reliability to total $1.2 billion from 2012 through 2016.

Regulation

Regulatory matters are a key aspect of CMS Energy’s and Consumers’ businesses, particularly Consumers’ rate cases and regulatory proceedings before the MPSC. In September 2011, Michigan Governor Rick Snyder appointed John D. Quackenbush to replace retiring MPSC member Monica Martinez. John D. Quackenbush will serve as chair of the MPSC and former chair Orjiakor Isiogu will continue to serve as a member.

Recent important regulatory events and developments are summarized below.

	•		Gas Rate Cases: In May 2011, the MPSC approved a settlement agreement in Consumers’ 2010 gas rate case, authorizing a $31 million annual increase in gas rates, based on a 10.5 percent authorized return on equity. In September 2011, Consumers filed a new general gas rate case seeking an annual rate increase of $49 million, based on a 10.7 percent authorized return on equity.
	•		Electric Rate Case: In June 2011, Consumers filed a new general electric rate case seeking an annual rate increase of $195 million, based on a 10.7 percent authorized return on equity.
	•		Revenue Decoupling Mechanisms: In March 2011, Consumers filed its first reconciliation of the electric decoupling mechanism, requesting recovery of $27 million from customers for the period December 2009 through November 2010. This mechanism, presently authorized under the MPSC’s 2010 electric rate order through November 2011, allows Consumers to adjust future electric 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 sales per customer, subject to certain conditions.
			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, presently authorized under the MPSC’s 2010 gas rate case order, allows 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.
	•		DOE Settlement: In July 2011, Consumers entered into an agreement with the DOE to settle its claims related to the DOE’s failure to accept spent nuclear fuel. In September 2011, Consumers filed an application with the MPSC regarding the allocation of the $120 million settlement amount.

Environmental regulation is another area of importance for CMS Energy and Consumers, and they are monitoring numerous legislative and regulatory initiatives to regulate greenhouse gases, as well as related litigation. The EPA has taken steps to regulate greenhouse gases under the Clean Air Act, and is expected to propose guidelines for states to regulate greenhouse gas emissions from new and existing sources.

During 2010, the EPA issued various proposals for regulating PCBs, CCBs, sulfur dioxide, and nitrogen oxides. Additionally, in March 2011, the EPA proposed a hazardous air pollutant rule that would establish MACT emission standards for mercury and other hazardous air pollutants. Under the proposed rule, some coal-fueled electric generating units would require additional controls for hazardous air pollutants. Also in March 2011, the EPA issued a proposed rule to regulate existing electric generating plant cooling water intake systems. In July 2011, the EPA finalized the CSAPR, which requires

Michigan and 26 other states to improve air quality by reducing power plant emissions that allegedly contribute to ground-level ozone and fine particle pollution in other downwind states. This rule, which replaces CAIR, mandates emission reductions beginning in 2012. CMS Energy and Consumers are monitoring developments regarding MACT emission standards for potential effects on their operations and are continuing to assess the impact and cost of complying with the CSAPR.

Financial Performance in 2011 and Beyond

For the three months ended September 30, 2011, CMS Energy’s net income available to common stockholders was $139 million, and diluted earnings per share were $0.53. This compares with net income available to common stockholders of $134 million and diluted earnings per share of $0.53 for the three months ended September 30, 2010. For the nine months ended September 30, 2011, CMS Energy’s net income available to common stockholders was $374 million, and diluted earnings per share were $1.43. This compares with net income available to common stockholders of $299 million and diluted earnings per share of $1.19 for the nine months ended September 30, 2010. Among the factors contributing to CMS Energy’s improved performance for the nine months ended September 30, 2011 were benefits from electric and gas rate orders and increased gas deliveries, offset partially by higher depreciation, property taxes, and distribution and service restoration costs. A tax benefit resulting from the enactment of the MCIT in May 2011 was offset by the absence, in 2011, of an insurance settlement recovery recorded in 2010.

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

CMS Energy believes that economic conditions in Michigan 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 more than 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, due largely to 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.

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

Presented in the following table are specific after-tax changes to net income available to common stockholders for the three and nine months ended September 30, 2011 versus 2010:

In Millions
		2011 better/(worse) than 2010
		Three Months Ended September 30								Nine Months Ended September 30
Electric and gas rate orders		$	7							$	59
Gas sales			—								34
Electric sales			6								2
Distribution and service restoration costs			(11	)							(33	)
Other, including depreciation and property tax			(6	)		$	(4	)			(24	)		$	38
Subsidiary earnings of enterprises segment							(3	)							(11	)
Other, mainly reduced financing costs							14								23
2010 insurance settlement recovery			—								(31	)
MCIT enactment			—								32
Voluntary separation plan cost in 2010			—								7
Other, including tax adjustments related to previously sold businesses			(2	)			(2	)			17				25
Total change						$	5							$	75

Electric deliveries and rate increases: For the three months ended September 30, 2011, electric delivery revenues increased $3 million compared with 2010. This variance was due to additional revenues of $17 million resulting from a November 2010 rate increase and a $14 million increase in sales to Consumers’ industrial customers, offset partially by the impact of customers switching from demand rates to energy-only rates. These increases were also offset largely by a $28 million decrease in surcharge revenues and related reserves. Overall, deliveries to end-use customers were 10.4 billion kWh in 2011 and 10.5 billion kWh in 2010.

For the nine months ended September 30, 2011, electric delivery revenues increased $5 million compared with 2010. This variance was due to additional revenues of $83 million resulting from a November 2010 rate increase and a $9 million increase in other revenues, offset largely by the absence, in 2011, of $87 million of surcharges in 2010 to recover retirement benefit expenses and certain regulatory assets. Overall, deliveries to end-use customers were 28.7 billion kWh in 2011 and 28.6 billion kWh in 2010.

Power supply costs and related revenue: For the nine months ended September 30, 2011, PSCR revenue increased $10 million compared with 2010. This increase was due to the absence, in 2011, of a disallowance in 2010 of certain power supply costs.

Other income, net of expenses: For the three months ended September 30, 2011, other income decreased $5 million compared with 2010, and for the nine months ended September 30, 2011, other income decreased $12 million compared with 2010. These decreases were due primarily to a reduction in the return on certain regulatory assets as a result of their declining balances.

Maintenance and other operating expenses: For the three months ended September 30, 2011, maintenance and other operating expenses increased $14 million compared with 2010. This variance was due to $6 million of higher service restoration costs and $14 million of higher forestry and other operating expenses. These increases were offset partially by the absence, in 2011, of $6 million of retirement benefit expenses that were recovered in revenues in 2010.

For the nine months ended September 30, 2011, maintenance and other operating expenses increased $13 million compared with 2010. This variance was due to $27 million of higher service restoration costs, caused by a series of unusually severe storms in 2011, and $24 million of higher forestry, plant maintenance, and other operating expenses. These increases were offset partially by the absence, in 2011,

of $32 million of retirement benefit expenses that were recovered in revenues in 2010 and $6 million of voluntary separation plan expenses incurred in 2010.

Depreciation and amortization: For the three months ended September 30, 2011, depreciation and amortization expense decreased $14 million compared with 2010, and for the nine months ended September 30, 2011, depreciation and amortization expense decreased $38 million compared with 2010. These decreases were due to lower amortization expense on certain regulatory assets, offset partially by higher depreciation expense from increased plant in service.

General taxes: For the three months ended September 30, 2011, general taxes decreased $6 million compared with 2010, reflecting the impact of a final Michigan single business tax assessment for the years 2004 through 2007 that resulted in a tax deficiency less than the amount previously accrued.

Interest charges: For the nine months ended September 30, 2011, interest charges decreased $8 million compared with 2010, primarily from the absence, in 2011, of interest expense on a Michigan use tax assessment.

Income taxes: For the nine months ended September 30, 2011, income taxes increased $11 million compared with 2010, reflecting higher electric utility earnings in 2011.

Gas deliveries and rate increases: For the three months ended September 30, 2011, gas delivery revenues increased $3 million compared with 2010. This increase was due primarily to the May 2011 rate increase. Gas deliveries, including miscellaneous transportation to end-use customers, were 25.5 bcf in 2011, a decrease of 0.5 bcf, or 1.9 percent, compared with 2010.

For the nine months ended September 30, 2011, gas delivery revenues increased $55 million compared with 2010. This increase reflected higher customer usage, of which $38 million was due to colder weather in 2011. Gas deliveries, including miscellaneous transportation to end-use customers, were 205.0 bcf in 2011, an increase of 23.8 bcf, or 13.1 percent, compared with 2010.

Other income, net of expenses: For the three months ended September 30, 2011, other income decreased $2 million compared with 2010, and for the nine months ended September 30, 2011, other income decreased $6 million compared with 2010. These decreases were due primarily to a reduction in interest income related to secured lending agreements.

Maintenance and other operating expenses: For the three months ended September 30, 2011, maintenance and other operating expenses increased $14 million compared with 2010, reflecting higher distribution operating expenses.

For the nine months ended September 30, 2011, maintenance and other operating expenses increased $9 million compared with 2010. The increase was due to $16 million of higher distribution operating expenses, offset partially by the absence, in 2011, of $3 million of retirement benefit expenses that were recovered in revenues in 2010 and $4 million of voluntary separation plan expenses incurred in 2010.

Depreciation and amortization: For the nine months ended September 30, 2011, depreciation and amortization expense increased $6 million compared with 2010, due to higher depreciation expense from increased plant in service.

General taxes: For the three months ended September 30, 2011, general taxes decreased $3 million compared with 2010, reflecting the impact of a final Michigan single business tax assessment for the years 2004 through 2007 that resulted in a tax deficiency less than the amount previously accrued.

Income taxes: For the three months ended September 30, 2011, income taxes decreased $5 million compared with 2010, reflecting lower gas utility earnings in 2011.

For the nine months ended September 30, 2011, income taxes increased $14 million compared with 2010, reflecting higher gas utility earnings in 2011.

For the three months ended September 30, 2011, net income of the enterprises segment decreased $5 million compared with 2010, due primarily to lower after-tax mark-to-market gains of $3 million.

For the nine months ended September 30, 2011, net income of the enterprises segment decreased $15 million compared with 2010, due to the absence, in 2011, of a $31 million insurance settlement recovery in 2010, lower electric revenues of $8 million, and lower mark-to-market gains of $5 million. These after-tax decreases were offset partially by a $28 million income tax benefit resulting from the enactment of the MCIT in May 2011.

For further details about the enactment of the MCIT, see Note 11, Income Taxes.

For the three months ended September 30, 2011, corporate interest and other net expenses decreased $14 million compared with 2010, due primarily to the absence, in 2011, of an $8 million after-tax charge in 2010 for deferred issuance costs on conversion of preferred stock. Also contributing to the decrease were a $4 million benefit from the impact of a final Michigan single business tax assessment for the years

2004 through 2007 that resulted in a tax deficiency less than the amount previously accrued and lower fixed charges in 2011.

For the nine months ended September 30, 2011, corporate interest and other net expenses decreased $26 million compared with 2010, due to the absence, in 2011, of an $8 million after-tax charge in 2010 for deferred issuance costs on conversion of preferred stock and an $8 million after-tax decrease in fixed charges in 2011. Also contributing to the decrease were lower income tax expense resulting partially from the enactment of the MCIT in May 2011 and a $4 million benefit from the impact of a final Michigan single business tax assessment for the years 2004 through 2007 that resulted in a tax deficiency less than the amount previously accrued.

Discontinued Operations

For the nine months ended September 30, 2011, income of $2 million was recorded from discontinued operations due to a legal settlement, compared with a loss from discontinued operations of $17 million in 2010 related to prior asset sales.

¹    Non-cash transactions comprise depreciation and amortization, changes in deferred income taxes, postretirement benefits expense, and other non-cash items.

²    Other core working capital comprises other changes in accounts receivable and accrued revenues, inventories, and accounts payable.

For the nine months ended September 30, 2011, net cash provided by operating activities at CMS Energy increased $197 million compared with 2010. The increase was due primarily to the changes in Consumers’ cash provided by operating activities described in the following paragraph.

For the nine months ended September 30, 2011, net cash provided by operating activities at Consumers increased $345 million compared with 2010. The increase was due primarily to the absence of Pension Plan contributions in 2011, increased collections of accounts receivable, and the absence, in 2011, of refunds paid to customers in 2010.

For the nine months ended September 30, 2011, net cash used in investing activities increased $26 million at CMS Energy compared with 2010. This variance was due to an increase in capital expenditures and other investing activities, including CMS Energy’s contribution of $27 million to its SERP fund. These changes were offset partially by the absence, in 2011, of the cash effect of deconsolidating certain partnerships in 2010.

For the nine months ended September 30, 2011, net cash used in investing activities increased $43 million at Consumers compared with 2010. The variance was due to an increase in asset retirement costs and other investing activities, including Consumers’ contribution of $20 million to its SERP fund.

Financing Activities

Presented in the following table are specific components of net cash (used in) provided by financing activities for the nine months ended September 30, 2011 and 2010:

For the nine months ended September 30, 2011, net cash used in financing activities at CMS Energy increased $404 million compared to 2010. The change was due to a decrease in net proceeds from borrowings and higher dividend payments in 2011.

For the nine months ended September 30, 2011, net cash used in financing activities at Consumers increased $194 million compared with 2010. The change was due to an increase in net retirements of debt, a lower stockholder’s contribution from CMS Energy, and higher dividend payments in 2011.

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 may be restricted by certain terms included in its articles of incorporation, by provisions under the Federal Power Act and the Natural Gas Act, and by FERC requirements. For additional details on Consumers’ dividend restrictions, see Note 5, Financings, “Dividend Restrictions.” For the nine months ended September 30, 2011, Consumers paid $292 million in common stock dividends to CMS Energy.

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

CMS Energy’s and Consumers’ access to the financial and capital markets depends on their credit ratings and on market conditions. As evidenced by past financing transactions, CMS Energy and Consumers have had ready access to these markets and, barring major market dislocations or disruptions, they expect to continue to have such access. If access to these markets were to become diminished or otherwise restricted, however, CMS Energy and Consumers would implement contingency plans to address debt maturities, which could include reduced capital spending. CMS Energy and Consumers had the following secured revolving credit facilities available at September 30, 2011:

¹    On March 31, 2011, CMS Energy entered into a $550 million secured revolving credit facility with a consortium of banks. This facility has a five-year term and replaces CMS Energy’s revolving credit facility that was set to expire in 2012. Obligations under this facility are secured by Consumers common stock.

²    On March 31, 2011, Consumers entered into a $500 million secured revolving credit facility with a consortium of banks. This facility has a five-year term and replaces Consumers’ revolving credit facility that was set to expire in 2012.

³    Obligations under this facility are secured by FMBs of Consumers.

⁴    Secured revolving letter of credit facility.

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 September 30, 2011, $250 million of accounts receivable were eligible for transfer under this program.

CMS Energy’s $550 million revolving credit agreement specifies a maximum debt-to-EBITDA ratio, as defined therein. Consumers’ $500 million revolving credit agreement specifies a maximum debt-to-capital ratio, as defined therein. CMS Energy and Consumers were each in compliance with these limits as of September 30, 2011, as presented in the following table:

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

Off-Balance-Sheet Arrangements

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

Consumers’ Electric Utility Business Outlook and Uncertainties

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

	•		energy efficiency;
	•		demand management;
	•		expanded use of renewable energy;
	•		development of new power plants;
	•		pursuit of additional PPAs to complement existing generating sources;
	•		continued operation of existing units; and
	•		potential retirement or mothballing of older generating units.

In 2010, Consumers announced plans to defer the development of its proposed 830-MW coal-fueled plant at its Karn/Weadock generating complex. This decision reflects reduced customer usage and demand for electricity due to the recession, forecasted lower natural gas prices due to recent developments in shale gas recovery technology, and projected surplus generating capacity in the MISO market. Consumers has been monitoring customer usage and demand, fuel and power prices, and other market conditions, and has not set a timetable for a future decision about the project. Although the likelihood that the plant will be constructed has diminished significantly, in July 2011 the MDEQ granted Consumers an extension of the project’s air permit, which is being challenged by two environmental groups. Consumers’ alternatives to constructing the proposed coal-fueled plant include constructing new gas-fueled generation, relying on additional market purchases, and continued operation of several existing generating units.

Renewable Energy Plan: Consumers’ renewable energy plan details how Consumers will meet REC and capacity standards prescribed by the 2008 Energy Law. This law requires Consumers to obtain RECs in an amount equal to at least ten percent of its electric sales volume (estimated to be 3.5 million RECs annually) by 2015. RECs represent proof that the associated electricity was generated from a renewable energy resource. Under its renewable energy plan, Consumers expects to secure its renewable energy requirement each year with a combination of newly generated RECs and previously generated RECs carried over from prior years. At September 30, 2011, the combination of these sources represented 84 percent of Consumers’ 2015 REC requirement.

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 September 2011, 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.

Consumers has secured more than 81,000 acres of land easements in Michigan’s Huron, Mason, and Tuscola Counties for the potential development of wind generation, and is now collecting wind speed and other meteorological data at those sites. Consumers has entered into construction and supply contracts as well as a contract to purchase wind turbine generators for the construction of Lake Winds Energy Park, a 100-MW wind park in Mason County, which Consumers expects to be operational in late 2012. In July 2011, the Mason County Planning Commission voted in favor of granting a special land use permit

for the construction of Lake Winds Energy Park. The actions of the Mason County Planning Commission have been upheld by the Mason County Zoning Board of Appeals. The permit has now been appealed to the Mason County Circuit Court. Consumers will also continue development of Cross Winds Energy Park, its 150-MW wind park in Tuscola County, scheduled for operation by late 2015, as well as seek other opportunities for wind generation development in support of the renewable capacity standards.

Electric Customer Deliveries and Revenue: Consumers’ electric customer deliveries are largely dependent on Michigan’s economy, which has suffered from economic and financial instability in the automotive and real estate sectors. Consumers believes economic conditions are improving, and expects weather-adjusted electric deliveries to increase in 2011 by 1.5 percent compared with 2010.

Consumers expects average electric delivery growth of more than 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:

	•		energy conservation measures and results of energy efficiency programs;
	•		fluctuations in weather; and
	•		changes in economic conditions, including utilization, expansion, or contraction of manufacturing facilities, population trends, and housing activity.

The MPSC’s 2009 electric rate case order authorized Consumers to implement an electric revenue decoupling mechanism, subject to certain conditions. This decoupling mechanism, which was extended through November 2011 in the MPSC’s 2010 electric rate case order, allows Consumers to adjust future electric 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 sales per customer. This mechanism mitigates the impacts of weather fluctuations, energy efficiency, and conservation on Consumers’ electric utility revenue.

Electric ROA: The Customer Choice Act allows all of Consumers’ electric customers to buy electric generation service from Consumers or from an alternative electric supplier. The 2008 Energy Law revised the Customer Choice Act by limiting alternative electric supply to ten percent of Consumers’ weather-adjusted retail sales of the preceding calendar year. At September 30, 2011, electric deliveries under the ROA program were at the ten percent limit and alternative electric suppliers were providing 792 MW of generation service to ROA customers. Based on 2010 weather-adjusted retail sales, Consumers expects 2011 electric deliveries under the ROA program to be at a similar level to 2010.

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

Electric Rate Matters: Rate matters are critical to Consumers’ electric utility business. See Note 4, Regulatory Matters, “Consumers’ Electric Utility” for details on the following electric rate matters:

	•		electric rate cases;
	•		PSCR;
	•		electric revenue decoupling mechanism;
	•		uncollectible expense tracking mechanism;
	•		electric operation and maintenance expenditures show-cause order;
	•		Big Rock decommissioning;
	•		renewable energy plan;
	•		energy optimization plan; and
	•		electric depreciation.

Electric Environmental Estimates: Consumers’ operations are subject to various state and federal environmental laws and regulations. Consumers estimates that it will incur expenditures of $1.6 billion from 2011 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 December 2008, a court decision remanded CAIR back to the EPA. Until the EPA finalized a new rule, CAIR remained in effect. In July 2011, the EPA released CSAPR, a final replacement rule for CAIR, which requires Michigan and 26 other states to improve air quality by reducing power plant emissions that allegedly contribute to ground level ozone and fine particle pollution in other downwind states. This rule mandates emission reductions beginning in 2012. In a separate but related regulatory action, the EPA also issued a supplemental notice of proposed rulemaking requiring certain states, including Michigan, to reduce nitrogen oxides emissions during the summer months under the CSAPR ozone-season control program. If this supplemental proposal were finalized, it would bring the total number of states covered under CSAPR to 28.

In March 2011, the EPA proposed MACT emission standards for electric generating units, based on Section 112 of the Clean Air Act. Under the proposed rule, some coal-fueled and oil-fueled electric generating units would require additional controls for hazardous air pollutants. Existing units must meet the standards generally within three to four years of issuance of the final rule. Although numerous parties, including the State of Michigan, have sought to extend the deadline, the EPA is scheduled to issue the final rule in December 2011.

Presently, Consumers’ strategy to comply with CSAPR, and with MACT emission standards for electric generating units in its proposed form, involves the installation of state-of-the-art emission control equipment; however, Consumers continues to evaluate CSAPR and MACT emission standards for electric generating units in conjunction with other EPA rulemakings, litigation and congressional action. These rules could result in:

	•		additional or accelerated environmental compliance costs related to Consumers’ coal-fueled and oil-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 of some or all of Consumers’ older, smaller generating units or the temporary suspension of their operations.

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. 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: There are numerous legislative and regulatory initiatives at the state, regional, and national levels that involve the regulation of greenhouse gases. Consumers monitors and comments on these initiatives and also follows litigation involving greenhouse gases. Consumers believes Congress may eventually pass greenhouse gas legislation, but is unable to predict the form and timing of any final legislation.

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

In December 2010, the EPA entered into a settlement agreement with certain states and environmental groups wherein in September 2011 the EPA was to propose new source performance standards for greenhouse gases at new and modified power plants pursuant to Section 111(b) of the Clean Air Act. The EPA did not meet the September 2011 deadline and has not yet announced a new schedule for issuance of the standards. The EPA is also expected to propose emissions guidelines for the 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 need to submit plans to the EPA within nine months of issuance of the final rule and guidelines. Consumers will continue to monitor activity from this settlement and any proposed new source performance standards regulations.

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.

Coal Combustion By-Products: In June 2010, the EPA proposed rules regulating CCBs, such as coal ash, under the Resource Conservation and Recovery Act. Michigan already regulates CCBs as low-hazard industrial waste. The EPA proposed a range of alternatives for regulating CCBs, including regulation as either a non-hazardous waste or a hazardous waste. If coal ash were regulated as a hazardous waste, Consumers would likely cease the beneficial re-use of this product, 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 is evaluating this proposed rule and its potential impacts on Consumers’ plants. A final rule is expected in July 2012.

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 that could contain PCBs.

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.”

Consumers’ Gas Utility Business Outlook and Uncertainties

Gas Deliveries: Consumers believes economic conditions in Michigan are improving, and expects weather-adjusted gas deliveries to increase in 2011 by three percent compared with 2010. Over the next five years, Consumers expects average gas deliveries to remain stable. Actual delivery levels from year to year may vary from this trend due to:

	•		fluctuations in weather;
	•		use by independent 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 greater or less than predicted.

A decoupling mechanism was authorized by the MPSC in Consumers’ 2009 gas rate case, subject to certain conditions. This mechanism, which was extended in the MPSC’s 2010 gas rate order, allows 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. The mechanism does not provide rate adjustments for changes in sales volumes arising from weather fluctuations. This mechanism mitigates the impacts of energy efficiency programs, conservation, and changes in economic conditions on Consumers’ gas utility revenue.

Gas Rate Matters: Rate matters are critical to Consumers’ gas utility business. See Note 4, Regulatory Matters, “Consumers’ Gas Utility” for details on Consumers’ gas rate case, GCR, and gas revenue decoupling mechanism.

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

	•		the installation of automatic shutoff equipment in high consequence areas;
	•		redefinition of “high consequence areas”;
	•		increased civil penalties;
	•		prescribed notification and on-site incident response times;
	•		plans for safe management and replacement of cast iron pipelines;
	•		consideration of seismic activity;
	•		verification of maximum allowable operating pressure of all pipelines; and
	•		certain disclosures to homeowners and regulatory agencies.

Consumers continues to comply with laws and regulations governing natural gas pipeline safety. If these proposed laws are put into effect, Consumers could incur significant additional costs related to its natural

gas pipeline safety programs. Consumers expects that it would be able to recover the costs in rates, consistent with the recovery of other reasonable costs of complying with laws and regulations.

Gas Environmental Estimates: Consumers expects to incur response activity costs at a number of sites, including 23 former MGP sites. For additional details, see Note 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 recent 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 is also considering installing 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;
	•		the outcome of certain legal proceedings;
	•		impacts of declines in electricity prices on the profitability of the enterprises segment’s generating units;
	•		representations, warranties, and indemnities provided by CMS Energy or its subsidiaries in connection with previous sales of assets;
	•		changes in commodity prices and interest rates on certain derivative contracts that do not qualify for hedge accounting and must be marked to market through earnings;
	•		changes in various environmental laws, regulations, principles, 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 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 one percent of CMS Energy’s net assets at September 30, 2011, and two percent of CMS Energy’s net income available to common stockholders for the nine months ended September 30, 2011. The carrying value of EnerBank’s loan portfolio was $439 million at September 30, 2011. Its loan portfolio was funded primarily by deposit liabilities of $422 million. Twelve-month rolling average default rates on loans held by EnerBank have declined from 1.4 percent at December 31, 2010 to 1.0 percent at September 30, 2011. CMS Energy is required to ensure that EnerBank remains well capitalized.

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.

NEW ACCOUNTING STANDARDS

For details regarding the implementation of new accounting standards and new accounting standards issued that are not yet effective, see Note 1, New Accounting Standards.

The accompanying notes are an integral part of these statements.

(This page intentionally left blank)

CMS Energy Corporation
Consolidated Statements of Cash Flows
(Unaudited)

						In Millions
Nine months ended September 30		2011				2010
Cash Flows from Operating Activities
Net Income		$	376			$	318
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization			404				436
Deferred income taxes and investment tax credit			149				205
Postretirement benefits expense			124				169
Other non-cash operating activities			65				54
Postretirement benefits contributions			(56	)			(171	)
Changes in other assets and liabilities:
Decrease in accounts receivable, notes receivable, and accrued revenue			280				239
Decrease in accrued power supply revenue			15				2
Increase in inventories			(106	)			(88	)
Decrease in deferred property taxes			133				127
Increase (decrease) in accounts payable			10				(9	)
Decrease in accrued expenses			(227	)			(187	)
Increase in other current and non-current assets			(23	)			(12	)
Increase (decrease) in other current and non-current liabilities			51				(85	)
Net cash provided by operating activities			1,195				998
Cash Flows from Investing Activities
Capital expenditures (excludes assets placed under capital lease)			(624	)			(611	)
Cost to retire property			(43	)			(31	)
Cash effect of deconsolidation of partnerships			—				(10	)
Increase in EnerBank loans receivable			(60	)			(75	)
Other investing activities			(25	)			1
Net cash used in investing activities			(752	)			(726	)
Cash Flows from Financing Activities
Proceeds from issuance of long-term debt			375				850
Proceeds from EnerBank notes, net			58				105
Issuance of common stock			26				7
Retirement of long-term debt			(300	)			(436	)
Payment of net DOE liability			(43	)			—
Payment of common stock dividends			(159	)			(103	)
Payment of preferred stock dividends			—				(8	)
Redemption of preferred stock			—				(13	)
Payment of capital and finance lease obligations			(18	)			(18	)
Other financing costs			(8	)			(49	)
Net cash (used in) provided by financing activities			(69	)			335
Net Increase in Cash and Cash Equivalents, Including Assets Held for Sale			374				607
Decrease (Increase) in Cash and Cash Equivalents Included in Assets Held for Sale			2				(1	)
Net Increase in Cash and Cash Equivalents			376				606
Cash and Cash Equivalents, Beginning of Period			247				90
Cash and Cash Equivalents, End of Period		$	623			$	696

The accompanying notes are an integral part of these statements.

CMS Energy Corporation
Consolidated Balance Sheets
(Unaudited)

In Millions
		September 30				December 31
ASSETS		2011				2010
Current Assets
Cash and cash equivalents		$	623			$	247
Restricted cash and cash equivalents			29				23
Accounts receivable and accrued revenue, less allowances of $25 in 2011 and 2010			690				981
Notes receivable			62				70
Accounts receivable — related parties			10				10
Accrued power supply revenue			—				15
Inventories at average cost
Gas in underground storage			1,050				946
Materials and supplies			102				104
Generating plant fuel stock			127				125
Deferred property taxes			116				180
Regulatory assets			2				19
Assets held for sale			—				2
Prepayments and other current assets			49				37
Total current assets			2,860				2,759
Plant, Property, and Equipment (at cost)
Plant, property, and equipment, gross			14,607				14,145
Less accumulated depreciation, depletion, and amortization			4,869				4,646
Plant, property, and equipment, net			9,738				9,499
Construction work in progress			672				570
Total plant, property, and equipment			10,410				10,069
Non-current Assets
Regulatory assets			2,002				2,093
Accounts and notes receivable, less allowances of $5 in 2011 and 2010			430				397
Investments			53				49
Assets held for sale			—				4
Other non-current assets			203				245
Total non-current assets			2,688				2,788
Total Assets		$	15,958			$	15,616

The accompanying notes are an integral part of these statements.