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TABLE OF CONTENTS
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PART IV

Table of Contents

  

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

    FORM 10-K    
ý   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2012
   

 

 

OR

 

 

o

 

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

 

 

 

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

1-5611

 

CONSUMERS ENERGY COMPANY

 

38-0442310
    (A Michigan Corporation)
One Energy Plaza, Jackson, Michigan 49201
(517) 788-0550
   

Securities registered pursuant to Section 12(b) of the Act:


Registrant
  Title of Class   Name of Each Exchange
on Which Registered
 
CMS Energy Corporation   Common Stock, $0.01 par value   New York Stock Exchange
Consumers Energy Company   Preferred Stocks, $100 par value: $4.16
Series, $4.50 Series
  New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
CMS Energy Corporation: Yes ý    No o    Consumers Energy Company: Yes ý    No o

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
CMS Energy Corporation: Yes o    No ý    Consumers Energy Company: Yes o    No ý

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 ý    Noo    Consumers Energy Company: Yes ý    Noo

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 ý    No o    Consumers Energy Company: Yes ý    No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
CMS Energy Corporation:
Large accelerated filer ý    Accelerated filer o    Non-Accelerated filer o    Smaller reporting company o
                                                                          (Do not check if a smaller reporting company)

Consumers Energy Company:
Large accelerated filer o    Accelerated filer o    Non-Accelerated filer ý    Smaller reporting company o
                                                                          (Do not check if a smaller reporting company)

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
CMS Energy Corporation: Yes o    No ý    Consumers Energy Company: Yes o    No ý

The aggregate market value of CMS Energy voting and non-voting common equity held by non-affiliates was $6.165 billion for the 262,346,966 CMS Energy Common Stock shares outstanding on June 29, 2012 based on the closing sale price of $23.50 for CMS Energy Common Stock, as reported by the New York Stock Exchange on such date.

There were 265,935,441 shares of CMS Energy Common Stock outstanding on February 8, 2013, including 1,091,320 shares owned by Consumers Energy Company. On February 21, 2013, CMS Energy held all voting and non-voting common equity of Consumers. Documents incorporated by reference in Part III: CMS Energy's proxy statement and Consumers' information statement relating to the 2013 annual meeting of stockholders to be held May 17, 2013.

   


Table of Contents


CMS Energy Corporation
Consumers Energy Company

Annual Reports on Form 10-K to the Securities and Exchange Commission for the Year Ended December 31, 2012


TABLE OF CONTENTS

      Page 

Glossary

 
3

Filing Format

  10

Forward-Looking Statements and Information

  10

PART I:

   

Item 1. Business

 
13

Item 1A. Risk Factors

  31

Item 1B. Unresolved Staff Comments

  45

Item 2. Properties

  45

Item 3. Legal Proceedings

  46

Item 4. Mine Safety Disclosures

  46

PART II:

   

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 
47

Item 6. Selected Financial Data

  48

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

  48

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

  48

Item 8. Financial Statements and Supplementary Data

  49

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

  177

Item 9A. Controls and Procedures

  177

Item 9B. Other Information

  179

PART III:

   

Item 10. Directors, Executive Officers and Corporate Governance

 
179

Item 11. Executive Compensation

  180

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

  180

Item 13. Certain Relationships and Related Transactions, and Director Independence

  180

Item 14. Principal Accountant Fees and Services

  180

PART IV:

   

Item 15. Exhibits and Financial Statement Schedules

 
181

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GLOSSARY

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

2008 Energy Law   Comprehensive energy reform package enacted in Michigan in 2008
        
ABATE   Association of Businesses Advocating Tariff Equity
        
ABO   Accumulated benefit obligation; the liabilities of a pension plan based on service and pay to date, which differs from the PBO in that it does not reflect expected future salary increases
        
AFUDC   Allowance for borrowed and equity funds used during construction
        
AOCI   Accumulated other comprehensive income (loss)
        
ARO   Asset retirement obligation
        
ASU   Financial Accounting Standards Board Accounting Standards Update
        
Bay Harbor   A residential/commercial real estate area located near Petoskey, Michigan, in which CMS Energy sold its interest in 2002
        
bcf   Billion cubic feet
        
Big Rock   Big Rock Point nuclear power plant, formerly owned by Consumers
        
Btu   British thermal unit
        
CAIR   The Clean Air Interstate Rule
        
Cantera Gas Company   Cantera Gas Company LLC, a non-affiliated company, formerly known as CMS Field Services
        
Cantera Natural Gas, Inc.    Cantera Natural Gas, Inc., a non-affiliated company that purchased CMS Field Services
        
CAO   Chief Accounting Officer
        
CCR   Coal combustion residual
        
CEO   Chief Executive Officer
        
CFO   Chief Financial Officer
        
C&HR Committees   The Compensation and Human Resources Committees of the Boards of Directors of CMS Energy and Consumers
        
city-gate contract   An arrangement made for the point at which a local distribution company physically receives gas from a supplier or pipeline
        

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Clean Air Act   Federal Clean Air Act of 1963, as amended
        
Clean Water Act   Federal Water Pollution Control Act of 1972, as amended
        
CMS Capital   CMS Capital, L.L.C., a wholly owned subsidiary of CMS Energy
        
CMS Energy   CMS Energy Corporation, the parent of Consumers and CMS Enterprises
        
CMS Enterprises   CMS Enterprises Company, a wholly owned subsidiary of CMS Energy
        
CMS ERM   CMS Energy Resource Management Company, formerly CMS MST, a wholly owned subsidiary of CMS Enterprises
        
CMS Field Services   CMS Field Services, Inc., a former wholly owned subsidiary of CMS Gas Transmission
        
CMS Gas Transmission   CMS Gas Transmission Company, a wholly owned subsidiary of CMS Enterprises
        
CMS Generation San Nicolas Company   CMS Generation San Nicolas Company, a company in which CMS Enterprises formerly owned a 0.1 percent interest
        
CMS Land   CMS Land Company, a wholly owned subsidiary of CMS Capital
        
CMS MST   CMS Marketing, Services and Trading Company, a wholly owned subsidiary of CMS Enterprises, whose name was changed to CMS ERM in 2004
        
CMS Viron   CMS Viron Corporation, a wholly owned subsidiary of CMS ERM
        
Consumers   Consumers Energy Company, a wholly owned subsidiary of CMS Energy
        
Consumers Funding   Consumers Funding LLC, a wholly owned consolidated bankruptcy-remote subsidiary of Consumers and special-purpose entity organized for the sole purpose of purchasing and owning Securitization property, assuming Securitization bonds, and pledging its interest in Securitization property to a trustee to collateralize the Securitization bonds
        
CSAPR   The Cross-State Air Pollution Rule
        
Customer Choice Act   Customer Choice and Electricity Reliability Act, a Michigan statute
        
DB SERP   Defined Benefit Supplemental Executive Retirement Plan
        
DCCP   Defined Company Contribution Plan
        
DC SERP   Defined Contribution Supplemental Executive Retirement Plan
        

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DIG   Dearborn Industrial Generation, L.L.C., a wholly owned subsidiary of Dearborn Industrial Energy, L.L.C., a wholly owned subsidiary of CMS Energy
        
Dodd-Frank Act   Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
        
DOE   U.S. Department of Energy
        
DOJ   U.S. Department of Justice
        
DTE Electric   DTE Electric Company, a non-affiliated company
        
EBITDA   Earnings before interest, taxes, depreciation, and amortization
        
EnerBank   EnerBank USA, a wholly owned subsidiary of CMS Capital
        
Entergy   Entergy Corporation, a non-affiliated company
        
EPA   U.S. Environmental Protection Agency
        
EPS   Earnings per share
        
Exchange Act   Securities Exchange Act of 1934, as amended
        
Exeter   Exeter Energy Limited Partnership, sold by CMS Energy to ReEnergy Sterling LLC, a non-affiliated company, in 2011
        
FDIC   Federal Deposit Insurance Corporation
        
FERC   The Federal Energy Regulatory Commission
        
fine particulate matter   Particulate matter that is 2.5 microns or less in diameter
        
First Mortgage Bond Indenture   The indenture dated as of September 1, 1945 between Consumers and The Bank of New York Mellon, as Trustee, as amended and supplemented
        
FLI Liquidating Trust   Trust formed in Missouri bankruptcy court to accomplish the liquidation of Farmland Industries, Inc., a non-affiliated entity
        
FMB   First mortgage bond
        
FOV   Finding of Violation
        
GAAP   U.S. Generally Accepted Accounting Principles
        
GCC   Gas Customer Choice, which allows gas customers to purchase gas from alternative suppliers
        
GCR   Gas cost recovery
        

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Genesee   Genesee Power Station Limited Partnership, a VIE in which HYDRA-CO Enterprises, Inc., a wholly owned subsidiary of CMS Enterprises, has a 50 percent interest
        
Grayling   Grayling Generating Station Limited Partnership, a VIE in which HYDRA-CO Enterprises, Inc., a wholly owned subsidiary of CMS Enterprises, has a 50 percent interest
        
GWh   Gigawatt-hour, a unit of energy equal to one billion watt-hours
        
Health Care Acts   Comprehensive health care reform enacted in March 2010, comprising the Patient Protection and Affordable Care Act and the related Health Care and Education Reconciliation Act
        
IRS   Internal Revenue Service
        
ISFSI   Independent spent fuel storage installation
        
kilovolts   Thousand volts, a unit used to measure the difference in electrical pressure along a current
        
kVA   Thousand volt-amperes, a unit used to reflect the electrical power capacity rating of equipment or a system
        
kWh   Kilowatt-hour, a unit of energy equal to one thousand watt-hours
        
LIBOR   The London Interbank Offered Rate
        
Ludington   Ludington pumped-storage plant, jointly owned by Consumers and DTE Electric
        
MACT   Maximum Achievable Control Technology, which is the emission control that is achieved in practice by the best-controlled similar source
        
MATS   Mercury and Air Toxic Standards, which limit mercury, acid gases, and other toxic pollution from coal-fueled and oil-fueled power plants
        
MBT   Michigan Business Tax
        
mcf   Thousand cubic feet
        
MCIT   Michigan Corporate Income Tax
        
MCV Facility   A 1,500 MW gas-fueled, combined-cycle cogeneration facility operated by the MCV Partnership
        
MCV Partnership   Midland Cogeneration Venture Limited Partnership
        
MCV PPA   PPA between Consumers and the MCV Partnership
        
MD&A   Management's Discussion and Analysis of Financial Condition and Results of Operations
        

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MDEQ   Michigan Department of Environmental Quality
        
MDL   A pending multi-district litigation case in Nevada
        
MGP   Manufactured gas plant
        
Michigan Mercury Rule   Michigan Air Pollution Control Rules, Part 15, Emission Limitations and Prohibitions — Mercury, addressing mercury emissions from coal-fueled electric generating units
        
Midwest Energy Market   An energy market developed by MISO to provide day-ahead and real-time market information and centralized dispatch for market participants
        
MISO   The Midwest Independent Transmission System Operator, Inc.
        
mothball   To place a generating unit into a state of extended reserve shutdown in which the unit is inactive and unavailable for service for a specified period, during which the unit can be brought back into service after receiving appropriate notification and completing any necessary maintenance or other work; generation owners in MISO must request approval to mothball a unit, and MISO then evaluates the request for reliability impacts
        
MPSC   Michigan Public Service Commission
        
MRV   Market-related value of plan assets
        
MW   Megawatt, a unit of power equal to one million watts
        
MWh   Megawatt-hour, a unit of energy equal to one million watt-hours
        
NAV   Net asset value
        
NERC   The North American Electric Reliability Corporation, a non-affiliated company
        
NOV   Notice of Violation
        
NPDES   National Pollutant Discharge Elimination System, a permit system for regulating point sources of pollution under the Clean Water Act
        
NREPA   Part 201 of Michigan Natural Resources and Environmental Protection Act, a statute that covers environmental activities including remediation
        
NSR   New Source Review, a construction-permitting program under the Clean Air Act
        
NYMEX   The New York Mercantile Exchange
        
OPEB   Postretirement benefit plans other than pensions
        

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Palisades   Palisades nuclear power plant, sold by Consumers to Entergy in 2007
        
Panhandle   Panhandle Eastern Pipe Line Company, including its wholly owned subsidiaries Trunkline, Pan Gas Storage Company, Panhandle Storage Company, and Panhandle Holding Company, a former wholly owned subsidiary of CMS Gas Transmission
        
PBO   Projected benefit obligation
        
PCB   Polychlorinated biphenyl
        
Pension Plan   Trusteed, non-contributory, defined benefit pension plan of CMS Energy, Consumers, and Panhandle
        
PISP   Performance Incentive Stock Plan
        
PPA   Power purchase agreement
        
PSCR   Power supply cost recovery
        
PSD   Prevention of Significant Deterioration
        
PURPA   Public Utility Regulatory Policies Act of 1978
        
REC   Renewable energy credit established under the 2008 Energy Law
        
ReliabilityFirst Corporation   ReliabilityFirst Corporation, a non-affiliated company responsible for the preservation and enhancement of bulk power system reliability and security
        
Renewable Operating Permit   Michigan's Title V permitting program under the Clean Air Act
        
Right to Work   Legislation enacted in December 2012 as Michigan Public Acts 348 and 349, which prohibits collective bargaining agreements between companies and unions that require employees to join unions and pay union dues in order to maintain their employment
        
RMRR   Routine maintenance, repair, and replacement
        
ROA   Retail Open Access, which allows electric generation customers to choose alternative electric suppliers pursuant to the Customer Choice Act
        
S&P   Standard & Poor's Financial Services LLC
        
SEC   U.S. Securities and Exchange Commission
        
Securitization   A financing method authorized by statute and approved by the MPSC which allows a utility to sell its right to receive a portion of the rate payments received from its customers for the repayment of securitization bonds issued by a special-purpose entity affiliated with such utility
        

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Sherman Act   Sherman Antitrust Act of 1890
        
Smart Energy   Consumers' Smart Energy grid modernization project, which includes the installation of smart meters that transmit and receive data, a two-way communications network, and modifications to Consumers' existing information technology system to manage the data and enable changes to key business processes
        
stranded costs   Costs such as owned and purchased generation and regulatory assets that are incurred by utilities to serve their customers in a regulated monopoly environment, and which may not be recoverable in a competitive environment because of customers leaving their systems and ceasing to pay for their costs
        
Superfund   Comprehensive Environmental Response, Compensation, and Liability Act of 1980
        
Supplemental Environmental Projects   Environmentally beneficial projects that a party agrees to undertake as part of the settlement of an enforcement action, but which the party is not otherwise legally required to perform
        
T.E.S. Filer City   T.E.S. Filer City Station Limited Partnership, a VIE in which HYDRA-CO Enterprises, Inc., a wholly owned subsidiary of CMS Enterprises, has a 50 percent interest
        
Title V   A federal program under the Clean Air Act designed to standardize air quality permits and the permitting process for major sources of emissions across the U.S.
        
Trunkline   Trunkline Gas Company, LLC, a non-affiliated company
        
Trust Preferred Securities   Securities representing an undivided beneficial interest in the assets of statutory business trusts, the interests of which have a preference with respect to certain trust distributions over the interests of either CMS Energy or Consumers, as applicable, as owner of the common beneficial interests of the trusts
        
TSR   Total shareholder return
        
USW   United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union, AFL-CIO-CLC
        
UWUA   Utility Workers Union of America, AFL-CIO
        
VEBA trust   Voluntary employees' beneficiary association trusts accounts established specifically to set aside employer-contributed assets to pay for future expenses of the OPEB plan
        
VIE   Variable interest entity
        
Zeeland   A 935 MW gas-fueled power plant located in Zeeland, Michigan and owned by Consumers

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FILING FORMAT

This combined Form 10-K is separately filed by CMS Energy and Consumers. Information in this combined Form 10-K 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.


FORWARD-LOOKING STATEMENTS AND INFORMATION

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    earnings volatility resulting from the application of fair value accounting to certain energy commodity contracts, such as electricity sales agreements and interest rate and foreign currency contracts;

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

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

For additional details regarding these and other uncertainties, see Item 1A. Risk Factors; Item 8. Financial Statements and Supplementary Data, MD&A – Outlook; and Item 8. Financial Statements and Supplementary Data, Notes to the Consolidated Financial Statements – Note 3, Regulatory Matters and Note 4, Contingencies and Commitments.

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PART I

ITEM 1. BUSINESS

GENERAL

CMS ENERGY

CMS Energy was formed as a corporation in Michigan in 1987 and 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 serves individuals and businesses operating in the alternative energy, automotive, chemical, metal, and food products industries, as well as a diversified group of other industries. CMS Enterprises, through its subsidiaries and equity investments, is engaged primarily in independent power production and owns power generation facilities fueled mostly by natural gas and biomass.

CMS Energy manages its businesses by the nature of services each provides and operates, principally in three business segments: electric utility, gas utility, and enterprises, its non-utility operations and investments. Consumers' consolidated operations account for substantially all of CMS Energy's total assets, income, and operating revenue. CMS Energy's consolidated operating revenue was $6.3 billion in 2012, $6.5 billion in 2011, and $6.4 billion in 2010.

For further information about operating revenue, net operating income, and identifiable assets and liabilities attributable to all of CMS Energy's business segments and operations, see Item 8. Financial Statements and Supplementary Data, CMS Energy's Selected Financial Information, Consolidated Financial Statements, and Notes to the Consolidated Financial Statements.

CONSUMERS

Consumers has served Michigan customers since 1886. Consumers was incorporated in Maine in 1910 and became a Michigan corporation in 1968. Consumers owns and operates electric distribution and generation facilities and gas transmission, storage, and distribution facilities. It provides electricity and/or natural gas to 6.6 million of Michigan's 10 million residents. Consumers' rates and certain other aspects of its business are subject to the jurisdiction of the MPSC and FERC, as described in "CMS Energy and Consumers Regulation" in this Item 1.

Consumers' consolidated operating revenue was $6.0 billion in 2012, $6.3 billion in 2011, and $6.2 billion in 2010. For further information about operating revenue, net operating income, and identifiable assets and liabilities attributable to Consumers' electric and gas utility operations, see Item 8. Financial Statements and Supplementary Data, Consumers' Selected Financial Information, Consolidated Financial Statements, and Notes to the Consolidated Financial Statements.

Consumers owns its principal properties in fee, except that most electric lines and gas mains are located below public roads or on land owned by others and are accessed by Consumers through easements and other rights. Almost all of Consumers' properties are subject to the lien of its First Mortgage Bond Indenture. For additional information on Consumers' properties, see Consumers Electric Utility – Electric Utility Properties and Consumers Gas Utility – Gas Utility Properties in the "Business Segments" section of this Item 1.

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In 2012, Consumers served 1.8 million electric customers and 1.7 million gas customers in Michigan's Lower Peninsula. Presented in the following map is Consumers' service territory:

MAP

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BUSINESS SEGMENTS

CONSUMERS ELECTRIC UTILITY

Electric Utility Operations:    Consumers' electric utility operations, which include the generation, purchase, distribution, and sale of electricity, generated operating revenue of $4.0 billion in 2012, $3.9 billion in 2011, and $3.8 billion in 2010. Consumers' electric utility customer base consists of a mix of residential, commercial, and diversified industrial customers in Michigan's Lower Peninsula.

Presented in the following illustration is Consumers' 2012 electric utility operating revenue of $4.0 billion by customer class:

CHART

Consumers' electric utility operations are not dependent on a single customer, or even a few customers, and the loss of any one or even a few of Consumers' largest customers is not reasonably likely to have a material adverse effect on Consumers' financial condition.

In each of 2012 and 2011, Consumers' electric deliveries were 38 billion kWh, which included ROA deliveries of four billion kWh, resulting in net bundled sales of 34 billion kWh.

Consumers' electric utility operations are seasonal. The consumption of electric energy typically increases in the summer months, due primarily to the use of air conditioners and other cooling equipment.

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Presented in the following illustration are Consumers' monthly weather-adjusted electric deliveries (deliveries adjusted to reflect normal weather conditions) to its customers, including ROA deliveries, during 2012 and 2011:

CHART

Consumers' 2012 summer peak demand was 9,006 MW, which included ROA demand of 619 MW. For the 2011-2012 winter period, Consumers' peak demand was 5,864 MW, which included ROA demand of 500 MW. As required by MISO reserve margin requirements, Consumers owns or controls, through long-term contracts, capacity required to supply most of its projected firm peak load and necessary reserve margin for summer 2013. Consumers expects to acquire the balance of its 2013 requirements through MISO's forward capacity auction scheduled to be conducted in April 2013.

Electric Utility Properties:    Consumers' distribution system includes:

    421 miles of high-voltage distribution radial lines operating at 120 kilovolts or above;
    4,259 miles of high-voltage distribution overhead lines operating at 23 kilovolts, 46 kilovolts, and 69 kilovolts;
    17 miles of high-voltage distribution underground lines operating at 23 kilovolts and 46 kilovolts;
    55,965 miles of electric distribution overhead lines;
    10,162 miles of underground distribution lines; and
    substations with an aggregate transformer capacity of 24 million kVA.

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Consumers is interconnected to the interstate high-voltage electric transmission system owned by Michigan Electric Transmission Company, LLC, a non-affiliated company, and operated by MISO, to neighboring utilities, and to other transmission systems.

At December 31, 2012, Consumers' electric generating system consisted of the following:

   



Name and Location (Michigan)
 

Number of Units and Year
Entered Service
    2012
Generation
Capacity1
(MW)
   
2012 Net
Generation
(GWh)
 
   
Coal generation                  

J.H. Campbell 1 & 2 – West Olive

  2 Units, 1962-1967     615     2,747  

J.H. Campbell 3 – West Olive2

  1 Unit, 1980     770     4,606  

B.C. Cobb 4 & 5 – Muskegon3

  2 Units, 1956-1957     312     1,564  

D.E. Karn 1 & 2 – Essexville

  2 Units, 1959-1961     515     2,200  

J.C. Weadock 7 & 8 – Essexville3

  2 Units, 1955-1958     310     1,566  

J.R. Whiting 1-3 – Erie3

  3 Units, 1952-1953     324     1,344  
   
Total coal generation         2,846     14,027  
   
Oil/Gas steam generation                  

B.C. Cobb 1-3 – Muskegon

  3 Units, 1999-20004          

D.E. Karn 3 & 4 – Essexville

  2 Units, 1975-1977     1,276     82  

Zeeland (combined cycle) – Zeeland

  1 Unit, 2002     519     2,537  
   
Total oil/gas steam generation         1,795     2,619  
   
Hydroelectric                  

Conventional hydro generation

  13 Plants, 1906-1949     76     399  

Ludington – Ludington

  6 Units, 1973     954 5   (295 )6
   
Total hydroelectric         1,030     104  
   
Gas/Oil combustion turbine                  

Various plants

  7 Plants, 1966-1971     40     5  

Zeeland (simple cycle) – Zeeland

  2 Units, 2001     308     385  
   
Total gas/oil combustion turbine         348     390  
   
Wind generation                  

Lake Winds® Energy Park7

  56 Turbines, 2012     100     34  
   
Total wind generation         100     34  
   
Total owned generation         6,119     17,174  
Purchased and interchange power8         2,488 9   18,690 10
   
Total supply         8,607     35,864  
Generation and transmission use/loss               (1,761 )
   
Total net bundled sales               34,103  
   
    1
    Represents each plant's electric generation capacity during the summer months, except for Lake Winds® Energy Park, which began operations in November 2012.

    2
    Represents Consumers' share of the capacity of the J.H. Campbell 3 unit, net of the 6.69 percent ownership interest of the Michigan Public Power Agency and Wolverine Power Supply Cooperative, Inc.

    3
    In December 2011, Consumers announced its plans to mothball seven smaller coal-fueled generating units in 2015. For further information, see Item 8. Financial Statements and Supplementary Data,

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      MD&A – Outlook, "Consumers Electric Utility Business Outlook and Uncertainties – Balanced Energy Initiative."

    4
    B.C. Cobb 1-3 are retired coal-fueled units that were converted to gas-fueled units. B.C. Cobb 1-3 were placed back into service in the years indicated, and subsequently mothballed beginning in April 2009. Consumers has received an extension of the mothball period to April 2013 and plans to request a further extension of the mothball period through September 2015.

    5
    Represents Consumers' 51 percent share of the capacity of Ludington. DTE Electric owns the remaining 49 percent.

    6
    Represents Consumers' share of net pumped-storage generation. The pumped-storage facility consumes electricity to pump water during off-peak hours for storage in order to generate electricity later during peak-demand hours.

    7
    Wind generation is an intermittent resource and as a result, the capacity credit associated with wind resources located in the MISO service area is less than the generation nameplate capacity. The capacity credit for Lake Winds® Energy Park is 13 MW for 2013.

    8
    Includes purchases from the Midwest Energy Market, long-term purchase contracts, and seasonal purchases.

    9
    Includes 1,240 MW of purchased contract capacity from the MCV Facility and 778 MW of purchased contract capacity from Palisades.

    10
    Includes 4,555 GWh of purchased energy from the MCV Facility and 6,875 GWh of purchased energy from Palisades.

As shown in the following illustration, Consumers' 2012 generation capacity of 8,607 MW, including purchased capacity of 2,488 MW, relied on a variety of fuel sources:

CHART

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Consumers generated power from the following sources:

GWh 

 

Net Generation

    2012     2011     2010     2009     2008  
   

Owned generation

                               

Coal

    14,027     15,468     17,879     17,255     17,701  

Gas

    3,003     1,912     1,043     565     804  

Renewable energy

    433     425     365     466     454  

Oil

    6     7     21     14     41  

Net pumped storage1

    (295 )   (365 )   (366 )   (303 )   (382 )
   

Total owned generation

    17,174     17,447     18,942     17,997     18,618  
   

Purchased and interchange power

                               

Purchased renewable energy2

    1,435     1,587     1,582     1,472     1,503  

Purchased generation – other2

    13,104     11,087     10,421     10,066     12,140  

Net interchange power3

    4,151     6,825     6,045     6,925     6,653  
   

Total purchased and interchange power

    18,690     19,499     18,048     18,463     20,296  
   

Total supply

    35,864     36,946     36,990     36,460     38,914  
   
    1
    Represents Consumers' share of net pumped-storage generation. The pumped-storage facility consumes electricity to pump water during off-peak hours for storage in order to generate electricity later during peak-demand hours.

    2
    Includes purchases from long-term purchase contracts.

    3
    Includes purchases from the Midwest Energy Market and seasonal purchases.

The cost of all fuels consumed, shown in the following table, fluctuates with the mix of fuel used.

Cost Per Million Btu 

Fuel Consumed

  2012   2011   2010   2009   2008
 

Coal

  $    2.98   $    2.94   $    2.51   $    2.37   $    2.01

Gas

  3.16   4.95   5.57   6.57   10.94

Oil

  19.08   18.55   10.98   9.59   11.54
 

All fuels1

  $    3.05   $    3.18   $    2.71   $    2.56   $    2.47
 
    1
    Weighted-average fuel costs

In 2012, Consumers' four coal-fueled generating sites burned 8 million tons of coal and produced a combined total of 14,027 GWh of electricity, which represented 39 percent of the energy provided by Consumers to meet customer demand.

In order to obtain its coal requirements, Consumers enters into physical coal supply contracts. At December 31, 2012, Consumers had contracts to purchase coal through 2015; payment obligations under these contracts totaled $214 million. All of Consumers' coal supply contracts have fixed prices. At December 31, 2012, Consumers had 78 percent of its 2013 expected coal requirements under contract, as well as a 45-day supply of coal on hand.

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In conjunction with its coal supply contracts, Consumers leases a fleet of rail cars and has long-term transportation contracts with various companies to provide rail and vessel services for delivery of purchased coal to Consumers' generating facilities. Consumers' coal transportation contracts expire from 2013 through 2014; payment obligations under these contracts totaled $238 million.

During 2012, Consumers purchased 52 percent of the electricity it provided to customers through long-term PPAs, seasonal purchases, and the Midwest Energy Market. Consumers offers its generation into the Midwest Energy Market on a day-ahead and real-time basis and bids for power in the market to serve the demand of its customers. Consumers is a net purchaser of power and supplements its generation capability with purchases from the Midwest Energy Market to meet its customers' needs during peak demand periods.

At December 31, 2012, Consumers had unrecognized future commitments (amounts for which liabilities, in accordance with GAAP, have not been recorded on its balance sheet) to purchase capacity and energy under long-term PPAs with various generating plants. These contracts require monthly capacity payments based on the plants' availability or deliverability. The payments for 2013 through 2040 total $12.5 billion and range from $911 million to $964 million annually for each of the next five years. These amounts may vary depending on plant availability and fuel costs. For further information about Consumers' future capacity and energy purchase obligations, see Item 8. Financial Statements and Supplementary Data, MD&A — Capital Resources and Liquidity and Note 4, Contingencies and Commitments — Contractual Commitments.

Electric Utility Competition:    Consumers' electric utility business is subject to actual and potential competition from many sources, in both the wholesale and retail markets, as well as in electric generation, electric delivery, and retail services.

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 weather-adjusted retail sales for the preceding calendar year. At December 31, 2012, electric deliveries under the ROA program were at the ten percent limit. Alternative electric suppliers were providing 777 MW of generation service to ROA customers.

Consumers also has competition or potential competition from:

industrial customers relocating all or a portion of their production capacity outside Consumers' service territory for economic reasons;
municipalities owning or operating competing electric delivery systems; and
customer self-generation.

Consumers addresses this competition by monitoring activity in adjacent areas and monitoring compliance with the MPSC's and FERC's rules, providing non-energy services, providing value to customers through Consumers' rates and service, and offering tariff-based incentives that support economic development.

CONSUMERS GAS UTILITY

Gas Utility Operations:    Consumers' gas utility operations, which include the purchase, transmission, storage, distribution, and sale of natural gas, generated operating revenue of

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$2.0 billion in 2012, $2.3 billion in 2011, and $2.4 billion in 2010. Consumers' gas utility customer base consists of a mix of residential, commercial, and diversified industrial customers in Michigan's Lower Peninsula.

Presented in the following illustration is Consumers' 2012 gas utility operating revenue of $2.0 billion by customer class:

CHART

Consumers' gas utility operations are not dependent on a single customer, or even a few customers, and the loss of any one or even a few of Consumers' largest customers is not reasonably likely to have a material adverse effect on Consumers' financial condition.

In 2012, deliveries of natural gas, including off-system transportation deliveries, through Consumers' pipeline and distribution network, totaled 329 bcf, which included GCC deliveries of 49 bcf. In 2011, deliveries of natural gas, including off-system transportation deliveries, through Consumers' pipeline and distribution network, totaled 337 bcf, which included GCC deliveries of 48 bcf. Consumers' gas utility operations are seasonal. Consumers injects natural gas into storage during the summer months for use during the winter months when the demand for natural gas is higher. Peak demand occurs in the winter due to colder temperatures and the resulting use of natural gas as a heating fuel. During 2012, 42 percent of the natural gas supplied to all customers during the winter months was supplied from storage.

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Presented in the following illustration are Consumers' monthly weather-adjusted gas deliveries to its customers, including GCC deliveries, during 2012 and 2011:

CHART

Gas Utility Properties:    Consumers' gas distribution and transmission system located in Michigan's Lower Peninsula consists of:

26,720 miles of distribution mains;
1,657 miles of transmission lines;
seven compressor stations with a total of 151,172 installed and available horsepower; and
15 gas storage fields with an aggregate storage capacity of 309 bcf and a working storage capacity of 143 bcf.

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Gas Utility Supply:    In 2012, Consumers purchased 62 percent of the gas it delivered from U.S. producers and 9 percent from Canadian producers. The remaining 29 percent was purchased from authorized GCC suppliers and delivered by Consumers to customers in the GCC program. Presented in the following illustration are the supply arrangements for the gas Consumers delivered to GCC and GCR customers during 2012:

CHART

Firm transportation or firm city-gate contracts are those that define a fixed amount, price, and delivery time frame. Consumers' firm gas transportation contracts are with ANR Pipeline Company, Great Lakes Gas Transmission, L.P., Panhandle, and Trunkline. Under these contracts, Consumers purchases and transports gas to Michigan for ultimate delivery to its customers. Consumers' firm gas transportation contracts expire through 2017 and provide for the delivery of 75 percent of Consumers' total gas supply requirements. Consumers purchases the balance of its required gas supply under firm city-gate contracts and through authorized suppliers under the GCC program.

Gas Utility Competition:    Competition exists in various aspects of Consumers' gas utility business. Competition comes from other gas suppliers taking advantage of direct access to Consumers' customers (GCC) and from alternative fuels and energy sources, such as propane, oil, and electricity.

ENTERPRISES SEGMENT – NON-UTILITY OPERATIONS AND INVESTMENTS

CMS Energy's enterprises segment, through various subsidiaries and certain equity investments, is engaged primarily in domestic independent power production and the marketing of independent power production. The enterprises segment's operating revenue included in income from continuing operations in CMS Energy's consolidated financial statements was $183 million in 2012, $204 million in 2011, and $238 million in 2010. The enterprises segment's operating revenue included in income (loss) from discontinued operations in CMS Energy's consolidated financial statements was less than $1 million in 2011 and was $10 million in 2010.

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Independent Power Production:    At December 31, 2012, CMS Energy had ownership interests in independent power plants totaling 1,135 gross MW or 1,034 net MW. (Net MW reflects that portion of the gross capacity relating to CMS Energy's ownership interests.) Presented in the following table are CMS Energy's interests in independent power plants at December 31, 2012:

   

Location

  Primary
Fuel Type
    Ownership Interest
(%)
    Gross Capacity
(MW)
    Gross Capacity
Under Long-Term
Contract
(%)
 
   

Dearborn, Michigan

  Natural gas     100     710     39  

Gaylord, Michigan

  Natural gas     100     156     47  

Comstock, Michigan

  Natural gas     100     68     47  

Filer City, Michigan

  Coal     50     73     100  

Flint, Michigan

  Biomass     50     40     100  

Grayling, Michigan

  Biomass     50     38     100  

New Bern, North Carolina

  Biomass     50     50     100  
   

Total

              1,135        
   

The operating revenue from independent power production included in income from continuing operations in CMS Energy's consolidated financial statements was $16 million in 2012, $17 million in 2011, and $18 million in 2010. The operating revenue from independent power production included in income (loss) from discontinued operations in CMS Energy's consolidated financial statements was less than $1 million in 2011 and was $10 million in 2010. CMS Energy's independent power production business faces competition from generators, marketers and brokers, and utilities marketing power in the wholesale market.

Energy Resource Management:    CMS ERM purchases and sells energy commodities in support of CMS Energy's generating facilities and continues to focus on optimizing CMS Energy's independent power production portfolio. In 2012, CMS ERM marketed 13 bcf of natural gas and 4,591 GWh of electricity. Electricity marketed by CMS ERM was generated by independent power production of the enterprises segment and unrelated third parties. CMS ERM's operating revenue included in income from continuing operations in CMS Energy's consolidated financial statements was $167 million in 2012, $187 million in 2011, and $220 million in 2010.

OTHER BUSINESSES

EnerBank:    EnerBank, a wholly owned subsidiary of CMS Energy, is a Utah state-chartered, FDIC-insured industrial bank providing unsecured consumer installment loans for financing home improvements. EnerBank's operating revenue included in income from continuing operations in CMS Energy's consolidated financial statements was $57 million in 2012, $46 million in 2011, and $38 million in 2010.

CMS ENERGY AND CONSUMERS REGULATION

CMS Energy, Consumers, and their subsidiaries are subject to regulation by various federal, state, local, and foreign governmental agencies, including those described in the following sections.

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FERC

FERC has exercised limited jurisdiction over several independent power plants and exempt wholesale generators in which CMS Enterprises has ownership interests, as well as over CMS ERM, CMS Gas Transmission, and DIG. Among other things, FERC has jurisdiction over acquisitions, operations, and disposals of certain assets and facilities, services provided and rates charged, conduct among affiliates, and limited jurisdiction over holding company matters with respect to CMS Energy. FERC, in connection with NERC and with regional reliability organizations, also regulates generation owners and operators, load serving entities, purchase and sale entities, and others with regard to reliability of the bulk power system. FERC regulates limited aspects of Consumers' gas business, principally compliance with FERC capacity release rules, shipping rules, the prohibition against certain buy/sell transactions, and the price-reporting rule.

FERC also regulates certain aspects of Consumers' electric operations, including compliance with FERC accounting rules, wholesale rates, operation of licensed hydroelectric generating plants, transfers of certain facilities, corporate mergers, and issuances of securities.

MPSC

Consumers is subject to the jurisdiction of the MPSC, which regulates public utilities in Michigan with respect to retail utility rates, accounting, utility services, certain facilities, corporate mergers, and other matters.

The Michigan Attorney General, ABATE, the MPSC Staff, and certain other parties typically participate in MPSC proceedings concerning Consumers. The Michigan Attorney General, ABATE, and others often appeal significant MPSC orders.

Rate Proceedings:    For information regarding open rate proceedings, see Item 8. Financial Statements and Supplementary Data, Notes to the Consolidated Financial Statements, Note 3, Regulatory Matters.

OTHER REGULATION

The U.S. Secretary of Energy regulates imports and exports of natural gas and has delegated various aspects of this jurisdiction to FERC and the DOE's Office of Fossil Fuels.

The U.S. Department of Transportation Office of Pipeline Safety regulates the safety and security of gas pipelines through the Natural Gas Pipeline Safety Act of 1968 and subsequent laws.

EnerBank is regulated by the State of Utah and the FDIC.

ENERGY LEGISLATION

CMS Energy, Consumers, and their subsidiaries are subject to various legislative-driven matters, including Michigan's 2008 Energy Law. This law requires that at least ten percent of Consumers' electric sales volume come from renewable energy sources by 2015, and includes requirements for specific capacity additions. The 2008 Energy Law also requires Consumers to prepare an energy optimization plan and achieve annual sales reduction targets through at least 2015. The targets are incremental with the goal of achieving a six percent reduction in customers'

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electricity use and a four percent reduction in customers' natural gas use by December 31, 2015. The 2008 Energy Law also reformed the Customer Choice Act to limit alternative energy suppliers to supplying no more than ten percent of Consumers' weather-adjusted sales. For additional information regarding Consumers' renewable energy and energy optimization plans and the Customer Choice Act, see Item 8. Financial Statements and Supplementary Data, MD&A, Outlook, "Consumers Electric Utility Business Outlook and Uncertainties."

CMS ENERGY AND CONSUMERS ENVIRONMENTAL COMPLIANCE

CMS Energy, Consumers, and their subsidiaries are subject to various federal, state, and local regulations for environmental quality, including air and water quality, solid waste management, and other matters. For additional information concerning environmental matters, see Item 1A. Risk Factors and Item 8. Financial Statements and Supplementary Data, Notes to the Consolidated Financial Statements, Note 4, Contingencies and Commitments.

CMS Energy has recorded a significant liability for its affiliates' obligations associated with Bay Harbor and Consumers has recorded a significant liability for its obligations at a number of MGP sites. For additional information, see Item 1A. Risk Factors and Item 8. Financial Statements and Supplementary Data, Notes to the Consolidated Financial Statements, Note 4, Contingencies and Commitments.

Air:    Consumers continues to install state-of-the-art emissions control equipment at its electric generating plants and to convert electric generating units to burn cleaner fuels. Consumers estimates that it will incur expenditures of $835 million from 2013 through 2018 to comply with present and future federal and state regulations that will require extensive reductions in nitrogen oxides, sulfur dioxides, particulate matter, and mercury emissions. Consumers' estimate may increase if additional or more stringent laws or regulations are adopted or implemented regarding greenhouse gases, including carbon dioxide.

Solid Waste Disposal:    Costs related to the construction, operation, and closure of solid waste disposal facilities for coal ash are significant. Historically, Consumers has worked with others to reuse 30 to 50 percent of ash produced by its coal-fueled plants, and sells ash for use as a Portland cement replacement in concrete products, as feedstock for the manufacture of Portland cement, and for other environmentally sustainable uses. Consumers' solid waste disposal areas are regulated under Michigan's solid waste rules. Consumers has converted all of its fly ash handling systems to dry systems. All of Consumers' ash facilities have programs designed to protect the environment and are subject to quarterly MDEQ inspections. The EPA has proposed new federal regulations for ash disposal areas. Consumers preliminarily estimates that it will incur expenditures of $125 million from 2013 through 2018 to comply with future regulations relating to ash disposal, assuming ash is regulated as a non-hazardous solid waste.

Water:    Consumers uses significant amounts of water to operate and cool its electric generating plants. Water discharge quality is regulated and administered by the MDEQ under the federal NPDES program. To comply with such regulation, Consumers' facilities have discharge monitoring programs. The EPA is developing new regulations related to cooling water intake systems, but these new regulations are not expected to take effect until after 2018. Accordingly, Consumers does not presently expect to incur any significant expenditures to comply with future regulations relating to cooling water intake systems through 2018. Significant expenditures could be required beyond 2018, but until a rule is final, any potential expenditures are difficult to predict. Consumers also expects the EPA to propose new federal regulations for wastewater discharges from electric generating plants in 2013, with a final rule in 2014. Consumers'

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preliminary estimate of expenditures to comply with these expected regulations is $180 million from 2013 through 2018.

For further information concerning estimated capital expenditures related to air, solid waste disposal, and water see Item 8. Financial Statements and Supplementary Data, MD&A, Outlook, "Consumers Electric Utility Business Outlook and Uncertainties – Electric Environmental Estimates."

INSURANCE

CMS Energy and its subsidiaries, including Consumers, maintain insurance coverage generally similar to comparable companies in the same lines of business. The insurance policies are subject to terms, conditions, limitations, and exclusions that might not fully compensate CMS Energy or Consumers for all losses. A portion of each loss is generally assumed by CMS Energy or Consumers in the form of deductibles and self-insured retentions that, in some cases, are substantial. As CMS Energy or Consumers renews its policies, it is possible that some of the present insurance coverage may not be renewed or obtainable on commercially reasonable terms due to restrictive insurance markets.

CMS Energy's and Consumers' present insurance program does not cover the risks of certain environmental cleanup costs and environmental damages, such as claims for air pollution, damage to sites owned by CMS Energy or Consumers, and some long-term storage or disposal of wastes.

EMPLOYEES

Presented in the following table are the number of employees of CMS Energy and Consumers:

   

December 31

    2012     2011     2010  
   

CMS Energy, including Consumers

                   

Number of full-time-equivalent employees

    7,514     7,727     7,822  

Consumers

                   

Number of full-time-equivalent employees

    7,205     7,435     7,522  
   

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CMS ENERGY EXECUTIVE OFFICERS (AS OF FEBRUARY 1, 2013)

 

Name

  Age   Position   Period
 

John G. Russell

  55   President and CEO of CMS Energy   5/2010-Present

      President and CEO of Consumers   5/2010-Present

      Director of CMS Energy   5/2010-Present

      Director of Consumers   5/2010-Present

      Director of CMS Enterprises   5/2010-Present

      Chairman of the Board, President, and CEO of CMS Enterprises   5/2010-Present

      President and Chief Operating Officer of Consumers   10/2004-5/2010

           

Thomas J. Webb

  60   Executive Vice President and CFO of CMS Energy   8/2002-Present

      Executive Vice President and CFO of Consumers   8/2002-Present

      Executive Vice President and CFO of CMS Enterprises   8/2002-Present

      Director of CMS Enterprises   8/2002-Present

           

James E. Brunner

  60   Senior Vice President and General Counsel of CMS Energy   2/2006-Present

      Senior Vice President and General Counsel of Consumers   2/2006-Present

      Senior Vice President and General Counsel of CMS Enterprises   11/2007-Present

      Director of CMS Enterprises   9/2006-Present

           

John M. Butler

  48   Senior Vice President of CMS Energy   7/2006-Present

      Senior Vice President of Consumers   7/2006-Present

      Senior Vice President of CMS Enterprises   9/2006-Present

           

David G. Mengebier

  55   Senior Vice President and Chief Compliance Officer of CMS Energy   11/2006-Present

      Senior Vice President and Chief Compliance Officer of Consumers   11/2006-Present

      Senior Vice President of CMS Enterprises   3/2003-Present

           

Glenn P. Barba

  47   Vice President, Controller, and CAO of CMS Energy   2/2003-Present

      Vice President, Controller, and CAO of Consumers   1/2003-Present

      Vice President, Controller, and CAO of CMS Enterprises   11/2007-Present
 

There are no family relationships among executive officers and directors of CMS Energy.

The term of office of each of the executive officers extends to the first meeting of the Board of Directors of CMS Energy after the next annual election of Directors of CMS Energy (scheduled to be held on May 17, 2013).

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CONSUMERS EXECUTIVE OFFICERS (AS OF FEBRUARY 1, 2013)

 

Name

  Age   Position   Period
 

John G. Russell

  55   President and CEO of CMS Energy   5/2010-Present

      President and CEO of Consumers   5/2010-Present

      Director of CMS Energy   5/2010-Present

      Director of Consumers   5/2010-Present

      Director of CMS Enterprises   5/2010-Present

      Chairman of the Board, President, and CEO of CMS Enterprises   5/2010-Present

      President and Chief Operating Officer of Consumers   10/2004-5/2010

           

Thomas J. Webb

  60   Executive Vice President and CFO of CMS Energy   8/2002-Present

      Executive Vice President and CFO of Consumers   8/2002-Present

      Executive Vice President and CFO of CMS Enterprises   8/2002-Present

      Director of CMS Enterprises   8/2002-Present

           

James E. Brunner

  60   Senior Vice President and General Counsel of CMS Energy   2/2006-Present

      Senior Vice President and General Counsel of Consumers   2/2006-Present

      Senior Vice President and General Counsel of CMS Enterprises   11/2007-Present

      Director of CMS Enterprises   9/2006-Present

           

John M. Butler

  48   Senior Vice President of CMS Energy   7/2006-Present

      Senior Vice President of Consumers   7/2006-Present

      Senior Vice President of CMS Enterprises   9/2006-Present

           

David G. Mengebier

  55   Senior Vice President and Chief Compliance Officer of CMS Energy   11/2006-Present

      Senior Vice President and Chief Compliance Officer of Consumers   11/2006-Present

      Senior Vice President of CMS Enterprises   3/2003-Present

           

Jackson L. Hanson

  56   Senior Vice President of Consumers   5/2010-Present

      Vice President of Consumers   11/2006-5/2010

           

Daniel J. Malone

  52   Senior Vice President of Consumers   5/2010-Present

      Vice President of Consumers   6/2008-5/2010

      Site Business Manager of Consumers   12/2006-6/2008

           

Glenn P. Barba

  47   Vice President, Controller, and CAO of CMS Energy   2/2003-Present

      Vice President, Controller, and CAO of Consumers   1/2003-Present

      Vice President, Controller, and CAO of CMS Enterprises   11/2007-Present
 

There are no family relationships among executive officers and directors of Consumers.

The term of office of each of the executive officers extends to the first meeting of the Board of Directors of Consumers after the next annual election of Directors of Consumers (scheduled to be held on May 17, 2013).

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AVAILABLE INFORMATION

CMS Energy's internet address is www.cmsenergy.com. Information contained on CMS Energy's website is not incorporated herein. All of CMS Energy's annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed pursuant to Section 13(a) or 15(d) of the Exchange Act are accessible free of charge on CMS Energy's website. These reports are available soon after they are filed electronically with the SEC. Also on CMS Energy's website are its:

    Corporate Governance Principles;
    Codes of Conduct:
    CMS Energy Corporation/Consumers Energy Company Board of Directors Code of Conduct – January 2013,
    Code of Conduct and Guide to Ethical Business Behavior 2010,
    Guide to Ethical Business Behavior Addendum – March 1, 2011, and
    Guide to Ethical Business Behavior Addendum – January 24, 2013;
    Board Committee Charters (including the Audit Committee, the Compensation and Human Resources Committee, the Finance Committee, and the Governance and Public Responsibility Committee); and
    Articles of Incorporation (and amendments) and Bylaws.

CMS Energy will provide this information in print to any stockholder who requests it.

Any materials CMS Energy files with the SEC may also be read and copied at the SEC's Public Reference Room at 100 F Street, N.E., Washington D.C., 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address is www.sec.gov.

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ITEM 1A. RISK FACTORS

Actual results in future periods for CMS Energy and Consumers could differ materially from historical results and the forward-looking statements contained in this report. Factors that might cause or contribute to these differences include, but are not limited to, those discussed in the following sections. CMS Energy's and Consumers' businesses are influenced by many factors that are difficult to predict, that involve uncertainties that may materially affect results, and that are often beyond their control. Additional risks and uncertainties not presently known or that the companies' management believes to be immaterial may also adversely affect the companies. The risk factors described in the following sections, as well as the other information included in this report and in other documents filed with the SEC, should be considered carefully before making an investment in securities of CMS Energy or Consumers. Risk factors of Consumers are also risk factors of CMS Energy. All of these risk factors are potentially significant.

CMS Energy depends on dividends from its subsidiaries to meet its debt service obligations.

Due to its holding company structure, CMS Energy depends on dividends from its subsidiaries to meet its debt service and other payment obligations. Consumers' ability to pay dividends or acquire its own stock from CMS Energy is limited by restrictions contained in Consumers' preferred stock provisions and potentially by other legal restrictions, such as certain terms in its articles of incorporation, and by FERC requirements. At December 31, 2012, under its articles of incorporation, Consumers had $536 million of unrestricted retained earnings available to pay common stock dividends. If sufficient dividends are not paid to CMS Energy by its subsidiaries, CMS Energy may not be able to generate the funds necessary to fulfill its payment obligations, which could have a material adverse effect on CMS Energy's liquidity and financial condition.

CMS Energy has indebtedness that could limit its financial flexibility and its ability to meet its debt service obligations.

At December 31, 2012, CMS Energy, including Consumers, had $7.2 billion aggregate principal amount of indebtedness. CMS Energy had $2.4 billion aggregate principal amount of indebtedness at December 31, 2012. At December 31, 2012, there were no borrowings and $2 million of letters of credit outstanding under CMS Energy's revolving credit agreement. CMS Energy and its subsidiaries may incur additional indebtedness in the future.

The level of CMS Energy's present and future indebtedness could have several important effects on its future operations, including, among others:

    a significant portion of CMS Energy's cash flow from operations could be dedicated to the payment of principal and interest on its indebtedness and would not be available for other purposes;
    covenants contained in CMS Energy's existing debt arrangements, which require it to meet certain financial tests, could affect its flexibility in planning for, and reacting to, changes in its business;
    CMS Energy's ability to obtain additional financing for working capital, capital expenditures, acquisitions, and general corporate and other purposes could become limited;
    CMS Energy could be placed at a competitive disadvantage to its competitors that are less leveraged;

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    CMS Energy's vulnerability to adverse economic and industry conditions could increase; and
    CMS Energy's future credit ratings could fluctuate.

CMS Energy's ability to meet its debt service obligations and to reduce its total indebtedness will depend on its future performance, which will be subject to general economic conditions, industry cycles, changes in laws or regulatory decisions, and financial, business, and other factors affecting its operations, many of which are beyond its control. CMS Energy cannot make assurances that its business will continue to generate sufficient cash flow from operations to service its indebtedness. If CMS Energy is unable to generate sufficient cash flows from operations, it may be required to sell assets or obtain additional financing. CMS Energy cannot ensure that additional financing will be available on commercially acceptable terms or at all.

CMS Energy and Consumers have financing needs and could be unable to obtain bank financing or access the capital markets. Potential disruption in the capital and credit markets could have a material adverse effect on CMS Energy's and Consumers' businesses, including the availability and cost of short-term funds for liquidity requirements and their ability to meet long-term commitments. These consequences could have a material adverse effect on CMS Energy's and Consumers' liquidity, financial condition, and results of operations.

CMS Energy and Consumers may be subject to liquidity demands under commercial commitments, guarantees, indemnities, letters of credit, and other contingent liabilities. Consumers' capital requirements are expected to be substantial over the next several years as it implements renewable power generation and environmental projects, and those requirements may increase if additional laws or regulations are adopted or implemented.

CMS Energy and Consumers rely on the capital markets, particularly for publicly offered debt, as well as on bank syndications, to meet their financial commitments and short-term liquidity needs if internal funds are not available from Consumers' operations and, in the case of CMS Energy, dividends from Consumers and its other subsidiaries. CMS Energy and Consumers also use letters of credit issued under certain of their revolving credit facilities to support certain operations and investments.

Longer term disruptions in the capital and credit markets as a result of uncertainty, changing or increased regulation, reduced alternatives, or failures of significant financial institutions could adversely affect CMS Energy's and Consumers' access to liquidity needed for their respective businesses, as could Consumers' inability to obtain prior FERC authorization for any securities issuances, including publicly offered debt, as is required under the Federal Power Act. Any disruption or inability to obtain FERC authorization could require CMS Energy and Consumers to take measures to conserve cash until the markets stabilize or until alternative credit arrangements or other funding for their business needs can be arranged. These measures could include deferring capital expenditures, changing CMS Energy's and Consumers' commodity purchasing strategy to avoid collateral-posting requirements, and reducing or eliminating future share repurchases, dividend payments, or other discretionary uses of cash.

CMS Energy continues to explore financing opportunities to supplement its financial plan. These potential opportunities include refinancing and/or issuing new debt, preferred stock and/or common equity, and bank financing. Similarly, Consumers plans to seek funds through the capital markets, commercial lenders, and leasing arrangements. Entering into new financings is subject in part to capital market receptivity to utility industry securities in general and to CMS Energy's and Consumers' securities in particular. CMS Energy and Consumers cannot

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guarantee the capital markets' acceptance of their securities or predict the impact of factors beyond their control, such as actions of rating agencies. If CMS Energy or Consumers is unable to obtain bank financing or access the capital markets to incur or refinance indebtedness, or is unable to obtain commercially reasonable terms for any financing, there could be a material adverse effect on its liquidity, financial condition, and results of operations.

Certain of CMS Energy's securities and those of its affiliates, including Consumers, are rated by various credit rating agencies. Any reduction or withdrawal of one or more of its credit ratings could have a material adverse impact on CMS Energy's or Consumers' ability to access capital on acceptable terms and maintain commodity lines of credit, could make its cost of borrowing higher, and could cause CMS Energy or Consumers to reduce its capital expenditures. If it is unable to maintain commodity lines of credit, CMS Energy or Consumers may have to post collateral or make prepayments to certain of its suppliers under existing contracts. Further, since Consumers provides dividends to CMS Energy, any adverse developments affecting Consumers that result in a lowering of its credit ratings could have an adverse effect on CMS Energy's credit ratings. CMS Energy and Consumers cannot guarantee that any of their present ratings will remain in effect for any given period of time or that a rating will not be lowered or withdrawn entirely by a rating agency.

There are risks associated with Consumers' significant capital investment program planned for the next five years.

Consumers' planned investments include the Smart Energy program, new power generation, gas compression, environmental controls, and other electric and gas infrastructure to upgrade delivery systems. The success of these investments depends on or could be affected by a variety of factors including, but not limited to, effective cost and schedule management during implementation, changes in commodity and other prices, operational performance, changes in environmental, legislative and regulatory requirements, and regulatory cost recovery. Consumers cannot predict the impact that any of these factors could have on the success of its capital investment program. It is possible that adverse events associated with these factors could have a material adverse effect on Consumers' liquidity, financial condition, and results of operations.

Electric industry legislation in Michigan, coupled with increased competition in gas and electric markets, could have a material adverse effect on CMS Energy's and Consumers' businesses.

The 2008 Energy Law, among other things, limits alternative electric supply to ten percent of weather-adjusted retail sales for the preceding calendar year. Lower natural gas prices due to a large supply of natural gas on the market, coupled with low capacity prices in the electric supply market, are placing increasing competitive pressure on Consumers' electric supply. Presently, Consumers' electric rates are above the Midwest average, while the ROA level on Consumers' system is at the ten-percent cap and the proportion of Consumers' electric deliveries under the ROA program and on the ROA waiting list is 25 percent. In February 2013, a proposal was made to raise the ROA limit above ten percent. If the bill is enacted, it could have a material adverse effect on Consumers' business. In addition, the Michigan legislature is conducting hearings on the subject of energy competition. If other bills to raise the ROA limit above ten percent are proposed in the future and enacted, they could have a material adverse effect on Consumers' business.

Recently, the Michigan governor announced a process pursuant to which a series of reports are to be completed in December 2013 addressing energy efficiency, renewable energy, the electricity market and customer choice, and other subjects. The process is designed to help the

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governor and other lawmakers determine the state's next steps regarding energy policies. A series of public hearings have been scheduled in 2013 to gather input. Consumers expects to participate actively in this process but cannot predict its outcome.

Other new legislation or interpretations could change how the businesses of CMS Energy and Consumers operate, impact Consumers' ability to recover costs through rate increases, or require CMS Energy and Consumers to incur additional expenses.

CMS Energy and Consumers are subject to rate regulation, which could have an adverse effect on financial results.

CMS Energy and Consumers are subject to rate regulation. Electric and gas rates for their utilities are set by the MPSC and cannot be increased without regulatory authorization. While Consumers is permitted by the 2008 Energy Law to self-implement rate changes six months after a rate filing with the MPSC, subject to certain limitations, if a final rate order from the MPSC provides for lower rates than Consumers self-implemented, Consumers must refund the difference, with interest. Also, the MPSC may delay or deny implementation of a rate increase upon showing of good cause. In February 2011, the MPSC found good cause to delay Consumers' self-implementation of its requested gas rate increase. Consumers did not experience delays in self-implementation of rate increases in 2012.

In addition, Consumers' plans for making significant capital investments, including modifications to meet new environmental requirements and investment in new generation, could be affected adversely or could have a material adverse effect on Consumers if rate regulators fail to provide timely rate relief or to approve a Certificate of Necessity for new generation. Regulators seeking to avoid or minimize rate increases could resist raising customer rates sufficiently to permit Consumers to recover the full cost of modifications to meet environmental requirements and other prudent investments. In addition, because certain costs are mandated by state requirements for cost recovery, such as resource additions to meet Michigan's renewable resource standard, regulators could be more inclined to oppose rate increases for other required items and investments. Rate regulators could also face pressure to avoid or limit rate increases for a number of reasons, including failure of Michigan's economy to improve sufficiently or diminishment of Consumers' customer base. In addition to potentially affecting Consumers' investment program, any limitation of cost recovery through rates could have a material adverse effect on Consumers' liquidity, financial condition, and results of operations.

Orders of the MPSC could limit recovery of costs of providing service including, but not limited to, 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-based investments, sunk investment in mothballed or retired coal-fueled generating plants, costs associated with the proposed retirement and decommissioning of facilities, depreciation expense, MISO energy and transmission costs, costs associated with energy efficiency investments and state or federally mandated renewable resource standards, Smart Energy program costs, or expenditures subjected to tracking mechanisms. These orders could also result in adverse regulatory treatment of other matters including, but not limited to, prevention or curtailment of shutoffs for non-paying customers, Consumers' gas revenue decoupling mechanism, prevention or curtailment of rights to self-implement rate requests, or refunds of previously self-implemented rates.

FERC authorizes certain subsidiaries of CMS Energy to sell electricity at market-based rates. Failure of CMS Energy and Consumers to obtain adequate rates or regulatory approvals in a

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timely manner could have a material adverse effect on CMS Energy's and Consumers' liquidity, financial condition, and results of operations.

The various risks associated with the MPSC and FERC regulation of CMS Energy's and Consumers' businesses, which include the risk of adverse decisions in any number of rate or regulatory proceedings before either agency, as well as judicial proceedings challenging any such agency decisions, could have a substantial negative effect on the companies' investment plans and results of operations.

Electric industry regulation could have a material adverse effect on CMS Energy's and Consumers' businesses.

Federal and state regulation of electric utilities has changed dramatically in the last two decades and could continue to change over the next several years. These changes could have a material adverse effect on CMS Energy's and Consumers' liquidity, financial condition, and results of operations.

CMS Energy and Consumers are subject to, or affected by, extensive federal and state utility regulation. In CMS Energy's and Consumers' business planning and management of operations, they must address the effects of existing and proposed regulation on their businesses and changes in the regulatory framework, including initiatives by federal and state legislatures, regional transmission organizations, utility regulators, and taxing authorities. Adoption of new regulations by federal or state agencies, or changes to present regulations and interpretations of these regulations, could have a material adverse effect on CMS Energy's and Consumers' liquidity, financial condition, and results of operations.

There are multiple proceedings pending before FERC involving transmission matters. CMS Energy and Consumers cannot predict the impact of these electric industry restructuring proceedings on their liquidity, financial condition, and results of operations.

Periodic reviews of the values of CMS Energy's and Consumers' assets could result in impairment charges.

CMS Energy and Consumers are required by GAAP to review periodically the carrying value of their assets, including those that may be sold. Market conditions, the operational characteristics of their assets, and other factors could result in recording impairment charges for their assets, which could have an adverse effect on their stockholders equity and their access to additional financing. In addition, CMS Energy and Consumers may be required to record impairment charges at the time they sell assets, depending on the sale prices they are able to secure and other factors.

CMS Energy and Consumers could incur significant costs to comply with environmental requirements.

CMS Energy, Consumers, and their subsidiaries are subject to costly and increasingly stringent environmental regulations. They believe that environmental laws and regulations related to their operations will continue to become more stringent and require them to make additional significant capital expenditures for emissions control equipment.

In 2011, the EPA finalized and promulgated CSAPR as a replacement for CAIR. In August 2012, the U.S. Court of Appeals for the D.C. Circuit voided CSAPR and held that CAIR would

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remain in place until the EPA promulgated a new rule. A request by the EPA for a rehearing of this ruling was denied.

In December 2011, the EPA issued the maximum achievable control technology standard for electric generating units, also known as MATS. This rule is expected to have a significant impact on Consumers' coal-fueled generating fleet.

In addition, the EPA is continually in the process of tightening standards for air quality. The EPA recently proposed new rules relating to fine particulate matter and ozone. These changes could also have a significant impact on Consumers' coal-fueled generating fleet.

In May 2010, the EPA issued a final rule that addresses greenhouse gas emissions from stationary sources under the Clean Air Act permitting programs. The "tailoring rule" sets thresholds for greenhouse gas emissions that define when permits under the NSR and Title V programs are required for new and existing industrial facilities. This regulation took effect in January 2011. In March 2012, the EPA released its proposed "Standards of Performance for Greenhouse Gas Emissions for New Stationary Sources: Electric Utility Generating Units." The proposed rule applies only to new fossil-fuel-fired steam electric generating units and would require that carbon dioxide emissions not exceed those of a modern, efficient natural gas combined-cycle-plant, regardless of fuel type. The EPA is also expected to propose emissions guidelines within the next one to three years for states to regulate greenhouse gas emissions from existing generating stations. In addition, legislation to regulate, control, or limit greenhouse gases could be enacted in the future by the U.S. Congress.

In 2012, 98 percent of the energy generated by Consumers came from fossil-fueled power plants, with 80 percent coming from coal-fueled power plants. CMS Enterprises also has interests in fossil-fueled power plants and other types of power plants that produce greenhouse gases. The aforementioned federal laws and rules, as well as additional laws and rules, if enacted, and international accords and treaties, could require CMS Energy and Consumers to install additional equipment for emission controls, purchase carbon emissions allowances, curtail operations, invest in non-fossil-fuel generating capacity, or take other significant steps to manage or lower the emission of greenhouse gases.

The following risks related to climate change and emissions could also have a material adverse impact on CMS Energy's and Consumers' liquidity, financial condition, and results of operations:

    litigation originated by third parties against CMS Energy, Consumers, or their subsidiaries due to CMS Energy's or Consumers' greenhouse gas or other emissions;
    impairment of CMS Energy's or Consumers' reputation due to their greenhouse gas or other emissions and public perception of their response to potential environmental regulations, rules, and legislation; and
    extreme weather conditions, such as severe storms, that may affect customer demand, company operations, or assets.

The EPA is considering regulating CCRs, such as coal ash, as hazardous wastes under the Resource Conservation and Recovery Act. Michigan already regulates CCRs as low-hazard industrial waste. If coal ash is regulated as a hazardous waste, Consumers would likely cease the beneficial re-use of this product, resulting in significantly more coal ash requiring costly disposal. Additionally, it is possible that existing landfills could be closed if the upgrades to hazardous waste landfill standards are economically prohibitive. Costs associated with this potential regulation could be substantial.

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The EPA is revising regulations that govern cooling water intake structures aimed at protecting aquatic life and that govern water discharges. Costs associated with these revisions could be material to CMS Energy, Consumers, and CMS Enterprises and result in operational changes or possibly significant impacts on the economics of generating units. In addition, the EPA is expected to propose new regulations in 2013 for wastewater discharges from electric generating plants. These new regulations may require physical and/or chemical treatment facilities for all waste water.

CMS Energy and Consumers expect to collect fully from their customers, through the ratemaking process, expenditures incurred to comply with environmental regulations, but cannot guarantee this outcome. If Consumers were unable to recover these expenditures from customers in rates, it could negatively affect CMS Energy's and/or Consumers' liquidity, results of operations, and financial condition and CMS Energy and/or Consumers could be required to seek significant additional financing to fund these expenditures.

For additional information regarding compliance with environmental regulations, see Item 1. Business, CMS Energy and Consumers Environmental Compliance and Item 8. Financial Statements and Supplementary Data, MD&A, Outlook, "Consumers Electric Utility Business Outlook and Uncertainties."

CMS Energy's and Consumers' businesses could be affected adversely by any delay in meeting environmental requirements.

A delay or failure by CMS Energy or Consumers to obtain or maintain any necessary environmental permits, approvals under the MISO tariff, or approvals to satisfy any applicable environmental regulatory requirements or install emission control equipment could:

    prevent the construction of new facilities;
    prevent the continued operation and sale of energy from existing facilities;
    prevent the suspension of operations at existing facilities;
    prevent the modification of existing facilities; or
    result in significant additional costs that could have a material adverse effect on their liquidity, financial condition, and results of operations.

CMS Energy and Consumers expect to incur additional significant costs related to remediation of legacy environmental sites.

Consumers is presently monitoring or remediating 23 former MGP sites. Consumers is working collaboratively with the MDEQ to agree upon executable remediation plans. About one-third of the 23 sites have been remediated to the extent possible and are now being monitored. The remaining sites are being actively remediated through excavation, treatment at the site, containment, and/or natural reduction; two of these sites require complex remediation plans due to the involvement of surface water.

The MDEQ established a "No Further Action" status for these sites and others like them in late 2010 and is presently overhauling the implementation of the 2010 statutory revisions with a focus on streamlining the process, reasonable and consistent implementation, and risk-based techniques.

CMS Energy and Consumers expect to incur additional significant costs related to the remediation of these former MGP sites. Based upon prior MPSC orders, Consumers expects to

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be able to recover the costs of these cleanup activities through its gas rates, but cannot guarantee that outcome.

In addition, CMS Energy retained environmental remediation obligations for the collection and treatment of leachate at Bay Harbor after selling its interests in the development in 2002. Leachate is produced when water enters into cement kiln dust piles left over from former cement plant operations at the site. CMS Energy has signed agreements with the EPA and the MDEQ relating to Bay Harbor. If CMS Energy were unable to meet its commitments under these agreements, or if unanticipated events occurred, CMS Energy could incur additional material costs relating to its Bay Harbor remediation obligations.

Consumers also expects to incur remediation and other response activity costs at a number of other sites under NREPA and Superfund. Consumers believes these costs should be recoverable in rates, but cannot guarantee that outcome.

CMS Energy and Consumers could be affected adversely by legacy litigation and retained liabilities.

In 2002, CMS Energy notified appropriate regulatory and governmental agencies that some employees at CMS MST and CMS Field Services appeared to have provided inaccurate information regarding natural gas trades to various energy industry publications which compile and report index prices. CMS Energy has cooperated with the DOJ's investigation regarding this matter. CMS Energy is unable to predict the outcome of the DOJ investigation or the amount of any fines or penalties that may be imposed and what effect, if any, the investigation will have on CMS Energy.

CMS Energy, CMS MST, CMS Field Services, Cantera Natural Gas, Inc., and Cantera Gas Company were named as defendants in various lawsuits arising as a result of alleged false natural gas price reporting. Allegations included manipulation of NYMEX natural gas futures and options prices, price-fixing conspiracies, and artificial inflation of natural gas retail prices in Colorado, Kansas, Missouri, and Wisconsin. CMS Energy cannot predict the outcome of the lawsuits or the amount of damages for which CMS Energy may be liable. It is possible that the outcome in one or more of the lawsuits could have a material adverse effect on CMS Energy's liquidity, financial condition, and results of operations.

The agreements that CMS Energy and Consumers enter into for the sale of assets customarily include provisions whereby they are required to:

    retain specified preexisting liabilities, such as for taxes, pensions, or environmental conditions;
    indemnify the buyers against specified risks, including the inaccuracy of representations and warranties that CMS Energy and Consumers make; and
    make payments to the buyers depending on the outcome of post-closing adjustments, litigation, audits, or other reviews, including claims resulting from attempts by foreign or domestic governments to assess taxes on past operations or transactions.

Many of these contingent liabilities can remain open for extended periods of time after the sales are closed. Depending on the extent to which the buyers may ultimately seek to enforce their rights under these contractual provisions, and the resolution of any disputes concerning them, there could be a material adverse effect on CMS Energy's or Consumers' liquidity, financial condition, and results of operations.

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In January 2002, CMS Energy sold its oil, gas, and methanol investments in Equatorial Guinea. The government of Equatorial Guinea claims that CMS Energy owes $142 million in taxes, plus interest, in connection with the sale. CMS Energy has concluded that the government's tax claim is without merit. The government of Equatorial Guinea indicated through a request for arbitration in October 2011 that it still intends to pursue its claim. CMS Energy is vigorously contesting the claim, and cannot predict the financial impact or outcome of this matter. It is possible that the outcome of this matter could have a material adverse effect on CMS Energy's liquidity, financial condition, and results of operations.

CMS Energy's and Consumers' energy sales and operations are affected by seasonal factors and varying weather conditions from year to year.

CMS Energy's and Consumers' businesses are seasonal. Demand for electricity is greater in the summer cooling season and the winter heating season. Demand for natural gas peaks in the winter heating season. Accordingly, their overall results in the future may fluctuate substantially on a seasonal basis. Mild temperatures during the summer cooling season and winter heating season could have a material adverse effect on CMS Energy's and Consumers' liquidity, financial condition, and results of operations.

Consumers is exposed to risks related to general economic conditions in its service territories.

Consumers' electric and gas utility businesses are affected by the economic conditions impacting the customers they serve. Although Consumers believes that economic conditions in Michigan are improving, the economy in Consumers' service territories continues to be affected adversely by the recession and its impact on the state's automotive and real estate sectors and by relatively high unemployment. In addition, Consumers' largest single customer has experienced sharply reduced electric demand. The Michigan economy also has been affected negatively by the uncertainty in the financial and credit markets. If economic conditions in Michigan decline further, Consumers may experience reduced demand for electricity or natural gas that could result in decreased earnings and cash flow. In addition, economic conditions in Consumers' service territory affect its collections of accounts receivable and levels of lost or stolen gas, which in turn impact its liquidity, financial condition, and results of operations.

CMS Energy and Consumers are subject to information security risks, risks of unauthorized access to their systems, and technology failures.

In the regular course of business, CMS Energy and Consumers handle a range of sensitive security and customer information. CMS Energy and Consumers are subject to laws and rules issued by various agencies concerning safeguarding and maintaining the confidentiality of this information. A security breach of CMS Energy's and Consumers' information systems could involve theft or the inappropriate release of certain types of information, such as confidential customer information or, separately, system operating information. These events could disrupt operations, subject CMS Energy and Consumers to possible financial liability, damage their reputation and diminish the confidence of customers, and have a material adverse effect on CMS Energy's and Consumers' liquidity, financial conditions, and results of operations.

CMS Energy and Consumers operate in a highly regulated industry that requires the continued operation of sophisticated information technology systems and network infrastructure. Despite implementation of security measures, CMS Energy's and Consumers' technology systems are vulnerable to disability, failures, cyber crime, and unauthorized access. Those failures or breaches could impact the reliability of electric and gas generation and delivery and also subject

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CMS Energy and Consumers to financial harm. Cyber crime, which includes the use of malware, computer viruses, and other means for disruption or unauthorized access against companies, including CMS Energy and Consumers, has increased in frequency, scope, and potential impact in recent years. While CMS Energy and Consumers have not been subject to cyber crime incidents that have had a material impact on their operations to date, their security measures in place may be insufficient to prevent a major cyber attack in the future. If CMS Energy's and Consumers' technology systems were to fail or be breached, CMS Energy and Consumers might not be able to fulfill critical business functions, and sensitive confidential and proprietary data could be compromised, which could have a material adverse effect on CMS Energy's and Consumers' liquidity, financial condition, and results of operations.

A variety of technological tools and systems, including both company-owned information technology and technological services provided by outside parties, support critical functions. The failure of these technologies, or the inability of CMS Energy and Consumers to have these technologies supported, updated, expanded, or integrated into other technologies, could hinder their business operations and materially adversely affect their liquidity, financial condition, and results of operations.

CMS Energy's and Consumers' businesses have safety risks.

Consumers' electric and gas delivery systems, power plants, gas infrastructure, and energy products could be involved in accidents that result in injury or property loss to customers, employees, or the public. Although CMS Energy and Consumers have insurance coverage for many potential incidents (subject to deductibles and self-insurance amounts that could be material), depending upon the nature or severity of any incident or accident, CMS Energy or Consumers could suffer financial loss, damage to its reputation, and negative repercussions from regulatory agencies or other public authorities.

CMS Energy's and Consumers' revenues and results of operations are subject to risks that are beyond their control, including but not limited to natural disasters, terrorist attacks or related acts of war, hostile cyber intrusions, or other catastrophic events.

The impact of natural disasters, wars, terrorist acts, cyber intrusions, and other catastrophic events on the facilities and operations of CMS Energy and Consumers could have a material adverse effect on their liquidity, financial condition, and results of operations. A terrorist attack on physical infrastructure or a major natural disaster could result in severe damage to CMS Energy's and Consumers' assets beyond what could be recovered through insurance policies. Hostile cyber intrusions, including those targeting information systems as well as electronic control systems used at the generating plants and for the electric and gas distribution systems, could severely disrupt business operations and result in loss of service to customers, as well as significant expense to repair security breaches or system damage. Terrorist attacks or acts of war could result in the disruption of power and fuel markets that could increase costs or disrupt service. Widespread outages in Consumers' systems as a result of storms, floods, or other natural disasters could result in a prolonged loss of service to customers and significant expense to repair system damages. There is a risk that the regulators could assess Consumers' preparedness or response as inadequate and take adverse actions as a result.

Instability in the financial markets as a result of terrorism, war, natural disasters, credit crises, recessions, or other factors, could have a material adverse effect on CMS Energy's and Consumers' liquidity, financial condition, and results of operations.

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CMS Energy and Consumers are exposed to significant reputational risks.

Consumers is actively engaged in multiple regulatory oversight processes and has a large electric and gas customer base. As a result, Consumers has a highly visible public profile in Michigan. Consumers and CMS Energy could suffer negative impacts to their reputations as a result of operational incidents, violations of corporate compliance policies, regulatory violations, or other events. This could have a material adverse effect on CMS Energy's and Consumers' liquidity, financial condition, and results of operations. It could also result in negative customer perception and increased regulatory oversight.

The markets for alternative energy and distributed generation could impact financial results.

Advances in technology could reduce the cost of alternative methods of producing electricity, such as fuel cells, microturbines, windmills, and photovoltaic (solar) cells, to a level that is competitive with that of fossil-fuel technology utilized by CMS Energy and Consumers to produce a majority of their electricity. It is also possible that electric customers could reduce their electric consumption significantly through demand-side energy conservation programs. Changes in technology could also alter the channels through which electric customers buy electricity. Any of these changes could have a material adverse effect on CMS Energy's and Consumers' liquidity, financial condition, or results of operations.

Energy risk management strategies may not be effective in managing fuel and electricity pricing risks, which could result in unanticipated liabilities to CMS Energy and Consumers or increased volatility in their earnings.

Consumers is exposed to changes in market prices for natural gas, coal, electricity, emission allowances, and RECs. Prices for natural gas, coal, electricity, emission allowances, and RECs may fluctuate substantially over relatively short periods of time and expose Consumers to commodity price risk. A substantial portion of Consumers' operating expenses for its plants consists of the costs of obtaining these commodities. Consumers manages these risks using established policies and procedures, and it may use various contracts to manage these risks, including swaps, options, futures, and forward contracts. No assurance can be made that these strategies will be successful in managing Consumers' pricing risk or that they will not result in net liabilities to Consumers as a result of future volatility in these markets.

Natural gas prices in particular have been historically volatile. Consumers routinely enters into contracts to mitigate exposure to the risks of demand, market effects of weather, and changes in commodity prices associated with its gas distribution business. These contracts are executed in conjunction with the GCR mechanism, which is designed to allow Consumers to recover prudently incurred costs associated with those positions. If the MPSC determined that any of these contracts or related contracting policies were imprudent, recovery of these costs could be disallowed. Consumers does not always hedge the entire exposure of its operations from commodity price volatility. Furthermore, the ability to hedge exposure to commodity price volatility depends on liquid commodity markets. As a result, to the extent the commodity markets are illiquid, Consumers may not be able to execute its risk management strategies, which could result in greater unhedged positions than preferred at a given time. To the extent that unhedged positions exist, fluctuating commodity prices could have a negative effect on CMS Energy's and Consumers' liquidity, financial condition, and results of operations.

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CMS Energy and Consumers are exposed to credit risk of those with whom they do business.

CMS Energy and Consumers are exposed to credit risk of counterparties with whom they do business. Adverse economic conditions or financial difficulties experienced by these counterparties could impair the ability of these counterparties to pay for CMS Energy's and Consumers' services or fulfill their contractual obligations, including performance and payment of damages. CMS Energy and Consumers depend on these counterparties to remit payments and perform services timely. Any delay or default in payment or performance of contractual obligations could have a material adverse effect on CMS Energy's and Consumers' liquidity, financial condition, and results of operations.

In recent years, the capital and credit markets have experienced unprecedented high levels of volatility and disruption. Market volatility and disruption could have a negative impact on CMS Energy's and Consumers' lenders, suppliers, customers, and other counterparties, causing them to fail to meet their obligations. Adverse economic conditions could also have a negative impact on the loan portfolio of CMS Energy's banking subsidiary, EnerBank.

Consumers may not be able to obtain an adequate supply of coal or natural gas, which could limit its ability to operate its electric generation facilities or serve its natural gas customers.

Consumers is dependent on coal for a significant portion of its electric generating capacity. While Consumers has coal supply and transportation contracts in place, there can be no assurance that the counterparties to these agreements will fulfill their obligations to supply coal to Consumers. The suppliers under the agreements may experience financial or operational problems that inhibit their ability to fulfill their obligations to Consumers. In addition, suppliers under these agreements may not be required to supply coal to Consumers under certain circumstances, such as in the event of a natural disaster. If Consumers were unable to obtain its coal requirements under existing or future coal supply and transportation contracts, it might be required to purchase coal at higher prices or forced to purchase electricity from higher cost generating resources in the Midwest Energy Market, which would increase Consumers' working capital requirements.

Consumers has firm interstate transportation and supply agreements in place to facilitate deliveries of natural gas to its customers. Apart from the contractual and monetary remedies available to Consumers in the event of a counterparty's failure to perform, there can be no assurances that the counterparties to these firm interstate transportation and supply agreements will fulfill their obligations to provide natural gas to Consumers. In addition, suppliers under these agreements may not be required to deliver natural gas to Consumers in certain circumstances, such as in the event of a natural disaster. If Consumers were unable to obtain its natural gas supply requirements under existing or future natural gas supply and transportation contracts, it could be required to purchase natural gas at higher prices from other sources or implement its natural gas curtailment program filed with the MPSC, which would increase Consumers' working capital requirements and decrease its natural gas revenues.

Market performance and other changes could decrease the value of employee benefit plan assets, which then could require significant funding.

The performance of the capital markets affects the values of assets that are held in trust to satisfy future obligations under CMS Energy's and Consumers' pension and postretirement benefit plans. CMS Energy and Consumers have significant obligations under these plans and hold significant assets in these trusts. These assets are subject to market fluctuations and will

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yield uncertain returns, which may fall below CMS Energy's and Consumers' forecasted return rates. A decline in the market value of the assets or a change in the level of interest rates used to measure the required minimum funding levels may significantly increase the funding requirements of these obligations. Also, changes in demographics, including an increased number of retirements or changes in life expectancy assumptions, may significantly increase the funding requirements of the obligations related to the pension and postretirement benefit plans. Additionally, while CMS Energy and Consumers presently do not expect that the Health Care Acts will significantly increase obligations of their postretirement benefit plans, they cannot guarantee this outcome. If CMS Energy and Consumers are unable to manage their pension and postretirement plan assets successfully, it could have a material adverse effect on their liquidity, financial condition, and results of operations.

A work interruption or other union actions could adversely affect Consumers.

Over 40 percent of Consumers' employees are represented by unions. If these employees were to engage in a strike, work stoppage, or other slowdown, or if the terms and conditions in labor agreements were renegotiated, Consumers could experience a significant disruption in its operations and higher ongoing labor costs. Additionally, while Consumers presently has good relationships with the unions representing its employees, Consumers cannot predict the impact of recent Right to Work legislation on union negotiations and relationships when existing union contracts expire.

Failure to attract and retain an appropriately qualified workforce could harm CMS Energy's and Consumers' results of operations.

The workforce of CMS Energy and Consumers is aging and a number of employees will become eligible to retire within the next few years. If CMS Energy and Consumers were unable to match skill sets to future needs, they could encounter operating challenges and increased costs. These challenges could include a lack of resources, loss of knowledge, and delays in skill development. Additionally, higher costs could result from the use of contractors to replace employees, loss of productivity, and safety incidents. Failing to train replacement employees adequately and to transfer internal knowledge and expertise could affect CMS Energy's and Consumers' ability to manage and operate their businesses. If CMS Energy and Consumers were unable to attract and retain an appropriately qualified workforce, their results of operations could be affected negatively.

Unplanned power plant outages could be costly for Consumers.

Unforeseen maintenance of our power plants may be required for many reasons, including catastrophic events such as fires, explosions, floods, or other acts of God, equipment failure, operator error, or to comply with environmental or safety regulations. When unplanned maintenance work is required on power plants or other equipment, Consumers will not only incur unexpected maintenance expenses, but it may also have to make spot market purchases of replacement electricity that exceed Consumers' costs of generation. Additionally, unplanned maintenance work may reduce the capacity credit Consumers receives from MISO and may cause Consumers to incur additional capacity costs in future years. If Consumers were unable to recover any of these increased costs in rates, it could have a material adverse effect on Consumers' liquidity, financial condition, and results of operations.

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Changes in taxation as well as the inherent difficulty in quantifying potential tax effects of business decisions could negatively impact CMS Energy's and Consumers' results of operations.

CMS Energy and Consumers are required to make judgments regarding the potential tax effects of various financial transactions and results of operations in order to estimate their obligations to taxing authorities. The tax obligations include income, real estate, sales and use taxes, employment-related taxes, and ongoing issues related to these tax matters. The judgments include determining reserves for potential adverse outcomes regarding tax positions that have been taken and may be subject to challenge by the IRS and/or other taxing authorities. Unfavorable settlements of any of the issues related to these reserves at CMS Energy or Consumers could have a material adverse effect on their liquidity, financial condition, and results of operations.

CMS Energy and Consumers are subject to changing tax laws. Increases in local, state, or federal tax rates or other changes in tax laws could have adverse impacts on their liquidity, financial condition, and results of operations.

CMS Energy and its subsidiaries, including Consumers and EnerBank, must comply with the Dodd-Frank Act and its related regulations, which are subject to change and may involve material costs or affect operations.

In 2010, the Dodd-Frank Act was passed into law. The Dodd-Frank Act is a sweeping piece of legislation, and the financial services industry is still assessing the impacts. Congress detailed some significant changes, but the Dodd-Frank Act leaves many details to be determined by regulation and further study. Regulations that are intended to implement the Dodd-Frank Act are being adopted by the appropriate agencies. The Dodd-Frank Act also created the Bureau of Consumer Financial Protection, which is part of the Federal Reserve and has been granted significant rule-making authority in the area of consumer financial products and services. The direction that the Bureau of Consumer Financial Protection will take, the regulations it will adopt, and its interpretation of existing laws and regulations are not yet fully known.

The Dodd-Frank Act added a new Section 13 to the Bank Holding Company Act. Known as the Volcker Rule, it generally restricts certain banking entities (such as EnerBank) and their subsidiaries or affiliates from engaging in proprietary trading activities and from owning equity in or sponsoring any private equity or hedge fund. The statutory effective date of the Volcker Rule was July 2012, but it is subject to certain transition periods and exceptions for "permitted activities." In April 2012, the Federal Reserve Board issued a statement clarifying that banks and other financial institutions have until July 2014 to conform fully their activities and investments to the requirements, but final implementing regulations have not yet been issued. Under the statute and based on draft regulations issued in October 2011, the activities of CMS Energy and its subsidiaries (including EnerBank) are not expected to be materially affected; however, they would be restricted from engaging in proprietary trading, investing in third-party hedge or private equity funds, and sponsoring these funds in the future unless CMS Energy qualified for an exemption from the rule. CMS Energy cannot predict the full impact of the Volcker Rule on CMS Energy's or EnerBank's operations or financial condition until final regulations are issued.

Furthermore, effective July 2011, all companies that directly or indirectly control an FDIC-insured bank are required to serve as a source of financial strength for that institution. As a result, CMS Energy could be called upon by the FDIC to infuse additional capital into EnerBank to the extent that EnerBank fails to satisfy its capital requirements. In addition, CMS

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Energy is contractually required (i) to make cash capital contributions to EnerBank in the event that EnerBank does not maintain required minimum capital ratios and (ii) to provide EnerBank financial support, in an amount and duration as may be necessary for EnerBank to meet the cash needs of its depositors and other operations. EnerBank has exceeded these requirements historically and exceeds them as of February 2013.

In addition, the Dodd-Frank Act potentially provides for regulation by the Commodity Futures Trading Commission of certain energy-related contracts. CMS Energy expects that it and its subsidiaries will qualify for an end-user exception, but these regulations could affect the ability of CMS Energy and its subsidiaries to participate in these markets and could add additional regulatory oversight over their contracting activities. Although CMS Energy and Consumers do not expect that this will have material impacts on their energy contracting activities, they cannot predict the outcome.

CMS Energy could be required to pay cash to certain security holders in connection with the optional conversion of their convertible securities.

CMS Energy has outstanding one series of cash-convertible securities, of which an aggregate principal amount of $172 million was outstanding at December 31, 2012. If the trading price of CMS Energy's common stock exceeds a specified amount at the end of a particular fiscal quarter, then holders of these convertible securities will have the option to convert their securities in the following fiscal quarter, with the principal amount payable in cash by CMS Energy. Accordingly, if the trading price minimum is satisfied and security holders exercise their conversion rights, CMS Energy may be required to outlay a significant amount of cash to those security holders and recognize losses, which could have a material adverse effect on CMS Energy's liquidity and results of operations.

CMS Energy's and Consumers' financial statements, including their reported earnings, could be significantly impacted by convergence with International Financial Reporting Standards.

The Financial Accounting Standards Board is expected to make broad changes to GAAP as part of an overall initiative to converge U.S. standards with International Financial Reporting Standards. These changes could have significant impacts on the financial statements of CMS Energy and Consumers. Also, the SEC is considering incorporating International Financial Reporting Standards into the financial reporting system for U.S. registrants. A transition to International Financial Reporting Standards could significantly impact CMS Energy's and Consumers' financial results, since these standards differ from GAAP in many ways. One of the major differences is the lack of special accounting treatment for regulated activities under International Financial Reporting Standards, which could result in greater earnings volatility for CMS Energy and Consumers.


ITEM 1B. UNRESOLVED STAFF COMMENTS

None.


ITEM 2. PROPERTIES

Descriptions of CMS Energy's and Consumers' properties are found in the following sections of Item 1. Business, all of which are incorporated by reference in this Item 2:

    Business Segments, "Consumers Electric Utility – Electric Utility Properties;"

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    Business Segments, "Consumers Gas Utility – Gas Utility Properties;" and
    Business Segments, "Enterprises Segment – Non-Utility Operations and Investments – Independent Power Production."


ITEM 3. LEGAL PROCEEDINGS

For information regarding CMS Energy's, Consumers', and their subsidiaries' significant pending administrative and judicial proceedings involving regulatory, operating, transactional, environmental, and other matters, see Item 8. Financial Statements and Supplementary Data, Notes to the Consolidated Financial Statements, Note 3, Regulatory Matters and Note 4, Contingencies and Commitments.

CMS Energy, Consumers, and certain of their subsidiaries and affiliates are also parties to routine lawsuits and administrative proceedings incidental to their businesses involving, for example, claims for personal injury and property damage, contractual matters, various taxes, and rates and licensing.


ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES

CMS ENERGY

CMS Energy's common stock is traded on the New York Stock Exchange. Market prices for CMS Energy's common stock and related security holder matters are contained in Item 8. Financial Statements and Supplementary Data, MD&A and Notes to the Consolidated Financial Statements, Note 21, Quarterly Financial and Common Stock Information (Unaudited), which are incorporated by reference herein. At February 8, 2013, the number of registered holders of CMS Energy's common stock totaled 38,206, based on the number of record holders. Presented in the following table are CMS Energy's dividends on its common stock:

Per Share 

 

Period

  February   May   August   November  
   

2012

  $    0.24   $    0.24   $    0.24   $    0.24  

2011

  0.21   0.21   0.21   0.21  
   

Information regarding securities authorized for issuance under equity compensation plans is included in CMS Energy's definitive proxy statement, which is incorporated by reference herein. For additional information regarding dividends and dividend restrictions, see Item 8. Financial Statements and Supplementary Data, Notes to the Consolidated Financial Statements, Note 5, Financings and Capitalization.

CONSUMERS

Consumers' common stock is privately held by its parent, CMS Energy, and does not trade in the public market. Presented in the following table are Consumers' cash dividends on its common stock:

In Millions 

 

Period

  February   May   August   November  
   

2012

  $    115   $    43   $    144   $    91  

2011

  104   92   96   82  
   

For additional information regarding dividends and dividend restrictions, see Item 8. Financial Statements and Supplementary Data, Notes to the Consolidated Financial Statements, Note 5, Financings and Capitalization.

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ISSUER REPURCHASES OF EQUITY SECURITIES

Presented in the following table are CMS Energy's repurchases of equity securities for the three months ended December 31, 2012:

   

Period

  Total Number
of Shares
Purchased1
  Average Price
Paid per Share
  Total Number
of Shares
Purchased as
Part of
Publicly
Announced
Plans or
Programs
  Maximum
Number of
Shares That
May Yet Be
Purchased
Under Publicly
Announced
Plans or
Programs
 
   

October 1, 2012 to October 31, 2012

  444   $    23.43      

November 1, 2012 to November 30, 2012

         

December 1, 2012 to December 31, 2012

         
   

Total

  444   $    23.43      
   
    1
    Common shares were purchased to satisfy the minimum statutory income tax withholding obligation for common shares that have vested under the PISP. Shares repurchased have a value based on the market price on the vesting date.

UNREGISTERED SALES OF EQUITY SECURITIES

None.


ITEM 6. SELECTED FINANCIAL DATA

Selected financial information for CMS Energy and Consumers is contained in Item 8. Financial Statements and Supplementary Data, Selected Financial Information, which is incorporated by reference herein.


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management's discussion and analysis of financial condition and results of operations for CMS Energy and Consumers is contained in Item 8. Financial Statements and Supplementary Data, MD&A, which is incorporated by reference herein.


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK

Quantitative and qualitative disclosures about market risk for CMS Energy and Consumers are contained in Item 8. Financial Statements and Supplementary Data, MD&A, Critical Accounting Policies and Estimates, "Financial and Derivative Instruments and Market Risk Information," which is incorporated by reference herein.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Financial Statements:

  Page 

Selected Financial Information

   

CMS Energy

  50

Consumers

  51

Management's Discussion and Analysis of Financial Condition and Results of Operations

  52

Consolidated Financial Statements

   

CMS Energy

  86

Consumers

  95

Notes to the Consolidated Financial Statements

  103

Reports of Independent Registered Public Accounting Firm

   

CMS Energy

  175

Consumers

  176

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Selected Financial Information

  CMS Energy Corporation  

                                           
   

                2012     2011     2010     2009     2008  
   

                                           

Operating revenue (in millions)

  ($)     6,253     6,503     6,432     6,205     6,807  

                                           

Income (loss) from equity method investees (in millions)

  ($)     17     9     11     (2 )   5  

                                           

Income from continuing operations (in millions)1

  ($)     377     415     366     220     301  

                                           

Income (loss) from discontinued operations (in millions)

  ($)     7     2     (23 )   20     1  

                                           

Net income available to common stockholders (in millions)

  ($)     382     415     324     218     284  

                                           

Average common shares outstanding (in thousands)

        260,678     250,824     231,473     227,169     225,671  

                                           

Earnings from continuing operations per average common share

                                   

CMS Energy

  – Basic       ($)     1.43     1.65     1.50     0.87     1.25  

  – Diluted       ($)     1.39     1.57     1.36     0.83     1.20  

                                           

Earnings per average common share

                                   

CMS Energy

  – Basic       ($)     1.46     1.66     1.40     0.96     1.25  

  – Diluted       ($)     1.42     1.58     1.28     0.91     1.20  

                                           

Cash provided by operations (in millions)

  ($)     1,241     1,169     959     848     557  

                                           

Capital expenditures, excluding assets placed under capital lease (in millions)

  ($)     1,227     882     821     818     792  

                                           

Total assets (in millions)

  ($)     17,131     16,452     15,616     15,256     14,901  

                                           

Long-term debt, excluding current portion (in millions)

  ($)     6,710     6,040     6,448     5,895     6,015  

                                           

Non-current portion of capital and finance lease obligations (in millions)

  ($)     153     167     188     197     206  

                                           

Total preferred stock (in millions)

  ($)                 239     243  

                                           

Cash dividends declared per common share

  ($)     0.96     0.84     0.66     0.50     0.36  

                                           

Market price of common stock at year-end

  ($)     24.38     22.08     18.60     15.66     10.11  

                                           

Book value per common share at year-end

  ($)     12.09     11.92     11.19     11.42     10.93  

                                           

Number of employees at year-end (full-time equivalents)

        7,514     7,727     7,822     8,039     7,970  

                                           

Electric Utility Statistics

                                   

Sales (billions of kWh)

        38     38     38     36     37  

Customers (in thousands)

        1,786     1,791     1,792     1,796     1,814  

Average sales rate per kWh

  (¢)     10.94     10.80     10.54     9.81     9.48  

                                           

Gas Utility Statistics

                                   

Sales and transportation deliveries (bcf)

        329     337     317     319     338  

Customers (in thousands)2

        1,715     1,713     1,711     1,708     1,713  

Average sales rate per mcf

  ($)     9.55     9.98     10.60     10.73     11.25  
   
    1
    Income from continuing operations includes income attributable to noncontrolling interests of $2 million in each of 2012 and 2011, $3 million in 2010, $11 million in 2009, and $7 million in 2008.

    2
    Excludes off-system transportation customers.

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Selected Financial Information

  Consumers Energy Company  

                                   
   

        2012     2011     2010     2009     2008  
   

                                   

Operating revenue (in millions)

  ($)     6,013     6,253     6,156     5,963     6,421  

                                   

Net income (in millions)

  ($)     439     467     434     293     364  

                                   

Net income available to common stockholder (in millions)

  ($)     437     465     432     291     362  

                                   

Cash provided by operations (in millions)

  ($)     1,353     1,323     910     922     873  

                                   

Capital expenditures, excluding assets placed under capital lease (in millions)

  ($)     1,222     876     815     811     789  

                                   

Total assets (in millions)

  ($)     16,275     15,662     14,839     14,622     14,246  

                                   

Long-term debt, excluding current portion (in millions)

  ($)     4,297     3,987     4,488     4,063     3,908  

                                   

Non-current portion of capital and finance lease obligations (in millions)

  ($)     153     167     188     197     206  

                                   

Total preferred stock (in millions)

  ($)     44     44     44     44     44  

                                   

Number of preferred stockholders at year-end

        1,378     1,428     1,496     1,531     1,584  

                                   

Number of employees at year-end (full-time equivalents)

        7,205     7,435     7,522     7,755     7,697  

                                   

Electric Utility Statistics

                                   

Sales (billions of kWh)

        38     38     38     36     37  

Customers (in thousands)

        1,786     1,791     1,792     1,796     1,814  

Average sales rate per kWh

  (¢)     10.94     10.80     10.54     9.81     9.48  

                                   

Gas Utility Statistics

                                   

Sales and transportation deliveries (bcf)

        329     337     317     319     338  

Customers (in thousands)1

        1,715     1,713     1,711     1,708     1,713  

Average sales rate per mcf

  ($)     9.55     9.98     10.60     10.73     11.25  
   
    1
    Excludes off-system transportation customers.

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CMS Energy Corporation
Consumers Energy Company
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

EXECUTIVE OVERVIEW

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

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

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

    regulation and regulatory matters;
    economic conditions;
    weather;
    energy commodity prices;
    interest rates; and
    CMS Energy's and Consumers' securities' credit ratings.

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

CHART

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SAFE, EXCELLENT OPERATIONS

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

CUSTOMER VALUE

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

UTILITY INVESTMENT

Consumers expects to make capital investments of about $7 billion from 2013 through 2017, as presented in the following illustration:

CHART

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.

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

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

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

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

REGULATION

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

    Electric Rate Case:  In June 2012, the MPSC authorized an annual rate increase of $118 million, based on a 10.3 percent authorized return on equity. Consumers filed an application in September 2012 to reconcile the total revenues collected under rates self-implemented in December 2011 to those that would have been collected under final rates. This reconciliation requests that the MPSC find that no refund is required.

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

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

    Gas Rate Case:  In June 2012, the MPSC authorized an annual rate increase of $16 million, based on a 10.3 percent authorized return on equity. In January 2013, the MPSC approved Consumers' reconciliation of the total revenues under rates self-implemented in March 2012 to those that would have been collected under the final rates. As a result of the reconciliation, which found that a refund was required, Consumers had a $2 million regulatory liability recorded at December 31, 2012. Consumers will refund this amount to customers in March 2013.

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

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

    Revenue Decoupling Mechanisms:  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 DTE Electric. The Court concluded that the MPSC lacks statutory authority to approve or direct the use of a revenue decoupling mechanism for electric providers. 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, at March 31, 2012, wrote off its $59 million electric revenue decoupling mechanism regulatory asset.

      In November 2012, the Michigan Court of Appeals ruled in an appeal of the MPSC's 2010 order in Consumers' electric rate case; this appeal had been filed by the Attorney General and ABATE. In light of the Court's previous ruling that the MPSC does not have authority to authorize electric decoupling, the Court reversed the portion of the 2010 order related to Consumers' electric revenue decoupling mechanism, substantiating Consumers' decision to write off its associated regulatory asset in March 2012. In addition, the Court remanded this portion of the electric rate case to the MPSC for further proceedings.

      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 was extended through April 2012 and was not

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      affected by the Court of Appeals decision on electric decoupling. The gas revenue decoupling mechanism allowed Consumers to adjust future gas rates to the degree that actual average weather-adjusted sales per customer differed from the rate order. In December 2012, the MPSC approved Consumers' reconciliation of the gas revenue decoupling mechanism for the full amount of its request for the period June 2010 through May 2011. The MPSC authorized recovery over three months beginning in February 2013.

      Consumers filed its final reconciliation of the gas revenue decoupling mechanism in August 2012, requesting recovery of $17 million from customers for the period June 2011 through April 2012. At December 31, 2012, Consumers had a $33 million regulatory asset recorded for gas revenue decoupling for the period June 2010 through April 2012.

    DOE Settlement:  In 2011, Consumers entered into an agreement with the DOE to settle its claims related to the DOE's failure to accept spent nuclear fuel and filed an application with the MPSC regarding the allocation of the settlement amount. In December 2012, the MPSC authorized Consumers to refund to customers $23 million previously collected through rates for spent nuclear fuel costs over a six-month period beginning in January 2013. The MPSC also authorized Consumers to utilize $85 million of the settlement amount as recovery of Consumers' regulatory asset for the Big Rock ISFSI.

The 2008 Energy Law limits alternative electric supply to ten percent of Consumers' weather-adjusted retail sales of the preceding calendar year. At December 31, 2012, Consumers' electric deliveries under the ROA program were at the ten percent limit. In February 2013, a bill was introduced to the Michigan Senate that, if enacted, would revise the 2008 Energy Law and allow customers on the ROA program waiting list to switch their service to an alternative electric supplier. Presently, the proportion of Consumers' electric deliveries under the ROA program and on the ROA waiting list is 25 percent. The revision also proposes an increase in the cap of six percentage points per year from 2014 through 2016. Consumers is unable to predict the outcome of this legislative proposal.

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

In 2011, the EPA finalized CSAPR, which was intended to replace CAIR; however, 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. In August 2012, the Court voided CSAPR and held that CAIR would remain in place until the EPA promulgated a new rule. A request by the EPA for a rehearing of this ruling was denied.

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 associated with these rules and developments.

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FINANCIAL PERFORMANCE IN 2012 AND BEYOND

In 2012, CMS Energy's net income available to common stockholders was $382 million, and diluted EPS were $1.42. This compares with net income available to common stockholders of $415 million and diluted EPS of $1.58 in 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, offset partially by improved operating results at Consumers.

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 0.5 to 1.0 percent annually through 2017, driven largely by the continued rise in industrial production. Excluding the impacts of energy efficiency programs, Consumers expects its electric sales to increase by about 1.0 to 1.5 percent annually through 2017. Consumers is projecting that its gas sales will remain stable through 2017. This outlook reflects growth in gas demand offset by energy efficiency and conservation.

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

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

In Millions, Except Per Share Amounts  

 

Years Ended December 31

  2012   2011   2010  
   

Net Income Available to Common Stockholders

  $     382   $     415   $     324  

Basic Earnings Per Share

  $    1.46   $    1.66   $    1.40  

Diluted Earnings Per Share

  $    1.42   $    1.58   $    1.28  
   

 

In Millions  

 

Years Ended December 31

  2012   2011   Change   2011   2010   Change  
   

Electric utility

  $    325   $    333   $      (8)   $    333   $    303   $    30  

Gas utility

  110   130   (20)   130   127   3  

Enterprises

  16   32   (16)   32   36   (4)  

Corporate interest and other

  (76)   (82)   6   (82)   (119)   37  

Discontinued operations

  7   2   5   2   (23)   25  
   

Net Income Available to Common Stockholders

  $    382   $    415   $    (33)   $    415   $    324   $    91  
   

Presented in the following table are specific after-tax changes to net income available to common stockholders for 2012 versus 2011:

In Millions  

 

Reasons for the change

  2012 better/(worse) than 2011  
   

Electric and gas rate orders

  $      90      

Electric sales

  19      

Recovery of development costs related to canceled coal-fueled plant

  9      

Gas sales

  (33 )    

Higher depreciation and property tax

  (31 )    

Higher operating and maintenance expenses and expenses related to a 2012 Michigan ballot proposal

  (12 )    

Other regulatory impacts (absence of electric decoupling, offset partially by a gain on DOE settlement)

  (13 )    

Other

  (13 ) $      16  
           

Subsidiary earnings of enterprises segment

      9  

Lower corporate fixed charges, higher EnerBank earnings, and other

      10  

Charge to write off electric decoupling regulatory asset

      (36 )

Absence of tax benefit related to MCIT enactment in 2011

      (32 )
   

Total change

      $    (33 )
   

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Presented in the following table are specific after-tax changes to net income available to common stockholders for 2011 versus 2010:

In Millions  

 

Reasons for the change

  2011 better/(worse) than 2010  
   

Electric and gas rate orders

  $      72      

Gas sales

  18      

Electric sales

  4      

Distribution and service restoration cost

  (37 )    

Other, including depreciation and property tax

  (31 ) $      26  
           

Lower subsidiary earnings of enterprises segment

      (22 )

Cost of debt retirements and preferred stock redemption

  13      

Interest expense

  10      

Other, mainly tax impacts

  10   33  
           

MCIT enactment

  32      

Absence of 2010 increase in Bay Harbor environmental liability

  25      

Absence of 2010 insurance settlement recovery

  (31 )    

Other, including absence of 2010 tax adjustments related to previously sold businesses

  28   54  
   

Total change

      $      91  
   

CONSUMERS ELECTRIC UTILITY RESULTS OF OPERATIONS

In Millions  

 

Years Ended December 31

  2012   2011   Change   2011   2010   Change  
   

Net Income Available to Common Stockholders

  $    325   $    333   $      (8)   $    333   $    303   $      30  
   

Reasons for the change

                         

Electric deliveries and rate increases

          $      81           $      25  

Power supply costs and related revenue          

          2           9  

Other income, net of expenses                        

          (16)           (16)  

Maintenance and other operating expenses          

          5           (31)  

Depreciation and amortization              

          (47)           38  

General taxes

          (10)           1  

Interest charges              

          12           8  

Income taxes

          (35)           (4)  
   

Total change

          $        (8)           $      30  
   

Electric deliveries and rate increases:    For 2012, electric delivery revenues increased $81 million compared with 2011. This increase was due to additional revenues of $106 million resulting from the June 2012 rate order and from Consumers' self-implemented rate increase in December 2011, $19 million from higher deliveries in 2012, and a $46 million increase in other revenues, primarily from energy optimization and renewable energy programs. These increases were offset partially by a $59 million charge to write off Consumers' electric decoupling mechanism regulatory asset, and the absence, in 2012, of $31 million of electric decoupling revenues

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recognized in 2011. Deliveries to end-use customers were 38.1 billion kWh in 2012 and 37.8 billion kWh in 2011.

For 2011, electric delivery revenues increased $25 million compared with 2010. This increase was due to additional revenues of $92 million resulting from a November 2010 rate increase and a $20 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. Deliveries to end-use customers were 37.8 billion kWh in 2011 and 37.7 billion kWh in 2010.

Other income, net of expenses:    For 2012, other income, net of expenses, decreased $16 million compared with 2011, due primarily to expenses related to a 2012 Michigan ballot proposal associated with renewable energy.

For 2011, other income decreased $16 million compared with 2010, due to a reduction in the return on certain regulatory assets as a result of their declining balances.

Maintenance and other operating expenses:    For 2012, maintenance and other operating expenses decreased $5 million compared with 2011. This decrease reflected the authorized recovery of $14 million associated with Consumers' cancelled coal-fueled plant, an $11 million decrease in service restoration costs, a $12 million benefit related to Consumers' settlement with the DOE, and an $8 million decrease in uncollectible accounts expense. These decreases were offset partially by an $18 million increase in energy optimization program costs, a $14 million increase in other operating expenses, including higher costs related to system reliability, and an $8 million increase associated with voluntary separation program expenses.

For 2011, maintenance and other operating expenses increased $31 million compared with 2010. This increase was due to $28 million of higher service restoration costs, caused by a series of unusually severe storms in 2011, a $15 million increase in energy optimization program costs, and an $11 million increase in uncollectible accounts expense. Additionally, forestry, plant maintenance, and other operating expenses increased $31 million in 2011. 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 a $22 million impairment charge recorded in 2010 associated with Consumers' cancelled coal-fueled plant.

Depreciation and amortization:    For 2012, depreciation and amortization expense increased $47 million compared with 2011, due primarily to increased plant in service and an increase in depreciation expense authorized in a June 2012 rate order.

For 2011, depreciation and amortization expense decreased $38 million compared with 2010, due to a $54 million decrease in amortization expense on certain regulatory assets, offset partially by a $16 million increase in depreciation expense from increased plant in service.

General Taxes:    For 2012, general taxes increased $10 million compared with 2011, due primarily to the absence, in 2012, of a favorable outcome to a Michigan single business tax audit recorded in 2011.

Interest Charges:    For 2012, interest charges decreased $12 million compared with 2011, due to lower average debt levels and lower average interest rates in 2012.

For 2011, interest charges decreased $8 million compared with 2010, primarily from the absence, in 2011, of interest expense on a Michigan use tax assessment.

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Income taxes:    For 2012, income taxes increased $35 million compared with 2011. This increase was due to higher electric utility earnings, a change from the MBT to the MCIT in January 2012, and the absence, in 2012, of a $4 million benefit related to the Medicare Part D Subsidy.

For 2011, income taxes increased $4 million compared with 2010, due to higher electric utility earnings.

CONSUMERS GAS UTILITY RESULTS OF OPERATIONS

In Millions  

 

Years Ended December 31

  2012   2011   Change   2011   2010   Change  
   

Net Income Available to Common Stockholders

  $    110   $    130   $    (20)   $    130   $    127   $        3  
   

Reasons for the change

                         

Gas deliveries and rate increases

          $    (29)           $      64  

Other income, net of expenses

          (2)           (9)  

Maintenance and other operating expenses

          8           (34)  

Depreciation and amortization

          (4)           (8)  

General taxes

          (7)           (3)  

Interest charges

          8           3  

Income taxes

          6           (10)  
   

Total change

          $    (20)           $        3  
   

Gas deliveries and rate increases:    For 2012, gas delivery revenues decreased $29 million compared with 2011. This decrease reflected a $43 million reduction resulting from lower customer deliveries, due primarily to milder weather in early 2012, and a $5 million decrease in other revenues. These decreases were offset partially by $19 million of additional revenues from rate increases. Gas deliveries, including transportation to end-use customers, were 259 bcf in 2012, a decrease of 28 bcf, or ten percent, compared with 2011.

For 2011, gas delivery revenues increased $64 million compared with 2010. This increase reflected $11 million in additional revenues from a May 2011 rate increase and $28 million from higher customer usage, of which $16 million was due to colder weather in 2011. In addition, surcharge and other miscellaneous revenues increased $25 million. Gas deliveries, including transportation to end-use customers, were 287 bcf in 2011, an increase of 14 bcf, or five percent, compared with 2010.

Other income, net of expenses:    For 2011, other income decreased $9 million compared with 2010, due primarily to a reduction in interest income related to secured lending agreements.

Maintenance and other operating expenses:    For 2012, maintenance and other operating expenses decreased $8 million compared with 2011. This decrease was due to an $8 million reduction in uncollectible accounts expense and a $4 million reduction in other operating expenses, offset partially by a $4 million increase associated with voluntary separation program expenses.

For 2011, maintenance and other operating expenses increased $34 million compared with 2010. This increase was due to $24 million of higher energy optimization program costs, a $6 million

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increase in uncollectible accounts expense, and $4 million in higher distribution operating expenses.

Depreciation and amortization:    For 2012, depreciation and amortization expense increased $4 million compared with 2011, and for 2011, depreciation and amortization expense increased $8 million compared with 2010. Both increases were due to higher depreciation expense from increased plant in service.

General Taxes:    For 2012, general taxes increased $7 million compared with 2011, due primarily to the absence, in 2012, of a favorable outcome to a Michigan single business tax audit recorded in 2011.

Interest Charges:    For 2012, interest charges decreased $8 million compared with 2011, due to lower average debt levels and lower average interest rates in 2012.

Income taxes:    For 2012, income taxes decreased $6 million compared with 2011, due primarily to lower gas utility earnings.

For 2011, income taxes increased $10 million compared with 2010, due to higher gas utility earnings and the absence, in 2011, of a $3 million benefit related to the Medicare Part D subsidy.

ENTERPRISES RESULTS OF OPERATIONS

In Millions  

 

Years Ended December 31

  2012   2011   Change   2011   2010   Change  
   

Net Income Available to Common Stockholders

  $    16   $    32   $    (16)   $    32   $    36   $    (4)  
   

For 2012, net income of the enterprises segment decreased $16 million compared with 2011, due to the absence, in 2012, of a $28 million income tax benefit resulting from the enactment of the MCIT in May 2011, offset partially by $6 million of tax benefits due primarily to law changes related to Medicare Part D and by $6 million of additional earnings from an insurance settlement received in 2012 and from improved operating results.

For 2011, net income of the enterprises segment decreased $4 million compared with 2010, due to the absence, in 2011, of a $31 million insurance settlement recovery and the absence of a $9 million benefit related to the MBT, lower electric revenues of $14 million, and lower mark-to-market gains of $3 million. These after-tax decreases were offset largely by a $28 million income tax benefit resulting from the enactment of the MCIT in May 2011 and by the absence, in 2011, of a $25 million increase in the environmental remediation liability associated with Bay Harbor.

For further details about the enactment of the MCIT, see Note 14, Income Taxes. For further details regarding Bay Harbor, see Note 4, Contingencies and Commitments.

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CORPORATE INTEREST AND OTHER RESULTS OF OPERATIONS

In Millions 

 

Years Ended December 31

  2012   2011   Change   2011   2010   Change  
   

Net Income (Reduction) Available to Common Stockholders

  $    (76 ) $    (82)   $    6   $    (82)   $    (119)   $    37  
   

For 2012, corporate interest and other net expenses decreased $6 million compared with 2011, due primarily to higher net earnings at EnerBank.

For 2011, corporate interest and other net expenses decreased $37 million compared with 2010, due to a $10 million after-tax decrease in interest expense, reflecting reduced borrowings at lower interest rates, the absence, in 2011, of an $8 million after-tax charge recorded in 2010 for deferred issuance costs on the conversion of preferred stock, and a $5 million after-tax reduction in premiums paid on the early retirement of debt. 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 2012, income from discontinued operations was $7 million, reflecting the elimination of a liability associated with a prior asset sale. For 2011, income from discontinued operations was $2 million, due to a favorable legal settlement related to previously sold business. For 2010, the loss from discontinued operations of $23 million was related to prior asset sales.

For further details regarding discontinued operations, see Note 20, Asset Sales, Discontinued Operations, and Impairment Charges.

CASH POSITION, INVESTING, AND FINANCING

At December 31, 2012, CMS Energy had $122 million of consolidated cash and cash equivalents, which included $29 million of restricted cash and cash equivalents. At December 31, 2012, Consumers had $33 million of consolidated cash and cash equivalents, which included $28 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 years ended December 31, 2012, 2011, and 2010:

In Millions  

 

Years Ended December 31

  2012   2011   Change   2011   2010   Change  
   

CMS Energy, including Consumers

                         

Net income

  $       384   $       417   $      (33 ) $       417   $       343   $       74  

Non-cash transactions1

  1,085   981   104   981   1,112   (131 )
       

  1,469   1,398   71   1,398   1,455   (57 )

Postretirement benefits contributions

  (72 ) (323 ) 251   (323 ) (463 ) 140  

Changes in core working capital2

  (48 ) 135   (183 ) 135   54   81  

Changes in other assets and liabilities, net

  (108 ) (41 ) (67 ) (41 ) (87 ) 46  
       

Net cash provided by operating activities

  $    1,241   $    1,169   $       72   $    1,169   $       959   $     210  
   

Consumers

                         

Net income

  $       439   $       467   $      (28 ) $       467   $       434   $       33  

Non-cash transactions1

  993   947   46   947   1,103   (156 )
       

  1,432   1,414   18   1,414   1,537   (123 )

Postretirement benefits contributions

  (68 ) (315 ) 247   (315 ) (447 ) 132  

Changes in core working capital2

  (31 ) 138   (169 ) 138   57   81  

Changes in other assets and liabilities, net

  20   86   (66 ) 86   (237 ) 323  
       

Net cash provided by operating activities

  $    1,353   $    1,323   $       30   $    1,323   $       910   $     413  
   
    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 2012, net cash provided by operating activities at CMS Energy increased $72 million compared with 2011, and net cash provided by operating activities at Consumers increased $30 million compared with 2011. The increases were due primarily to the absence of a pension fund contribution and the impact of lower gas prices on inventory purchased in 2012, offset partially by lower cash collections resulting from the increase in accumulated credits applied to customer accounts in 2012.

For 2011, net cash provided by operating activities at CMS Energy increased $210 million compared with 2010, and net cash provided by operating activities at Consumers increased $413 million compared with 2010. The increases were due primarily to lower pension contributions and decreased refunds paid to customers, offset partially by the impact of lower gas prices on inventory sold in 2011. Additionally, at Consumers, net cash provided by operating activities increased due to lower income tax payments to CMS Energy in 2011.

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INVESTING ACTIVITIES

Presented in the following table are specific components of net cash used in investing activities for the years ended December 31, 2012, 2011, and 2010:

In Millions  

 

Years Ended December 31

  2012   2011   Change   2011   2010   Change  
   

CMS Energy, including Consumers

                         

Capital expenditures

  $      (1,227 ) $        (882 ) $        (345 ) $        (882 ) $        (821 ) $    (61 )

Costs to retire property and other

  (123 ) (176 ) 53   (176 ) (182 ) 6  
   

Net cash used in investing activities

  $      (1,350 ) $    (1,058 ) $        (292 ) $      (1,058 ) $    (1,003 ) $    (55 )
   

Consumers

                         

Capital expenditures

  $      (1,222 ) $        (876 ) $        (346 ) $        (876 ) $        (815 ) $    (61 )

Costs to retire property and other

  (57 ) (75 ) 18   (75 ) (44 ) (31 )
   

Net cash used in investing activities

  $      (1,279 ) $        (951 ) $        (328 ) $        (951 ) $        (859 ) $    (92 )
   

For 2012, net cash used in investing activities at CMS Energy increased $292 million compared with 2011, and net cash used in investing activities at Consumers increased $328 million compared with 2011. The increases were due primarily to increases in capital expenditures under Consumers' capital investment program. At CMS Energy, these increases were offset partially by slower growth in EnerBank consumer lending.

For 2011, net cash used in investing activities at CMS Energy increased $55 million compared with 2010, and net cash used in investing activities at Consumers increased $92 million compared with 2010. The changes were due primarily to increases in capital expenditures and costs to retire property.

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FINANCING ACTIVITIES

Presented in the following table are specific components of net cash provided by (used in) financing activities for the years ended December 31, 2012, 2011, and 2010:

In Millions  

 

Years Ended December 31

  2012   2011   Change   2011   2010   Change  
   

CMS Energy, including Consumers

                         

Issuance of FMBs, senior notes, and other debt

  $      2,017   $    725   $      1,292   $    725   $      1,704   $    (979 )

Retirement of debt

  (1,829 ) (708 ) (1,121 ) (708 ) (1,033 ) 325  

Common stock issued

  30   29   1   29   10   19  

Redemption of preferred stock

          (239 ) 239  

Payments of common and preferred stock dividends

  (252 ) (211 ) (41 ) (211 ) (162 ) (49 )

Other financing activities

  75   (34 ) 109   (34 ) (78 ) 44  
   

Net cash provided by (used in) financing activities

  $            41   $    (199 ) $        240   $    (199 ) $    202   $    (401 )
   

Consumers

                         

Issuance of FMBs

  $      1,075   $        –   $    1,075   $        –   $    600   $    (600 )

Retirement of debt

  (1,064 ) (80 ) (984 ) (80 ) (482 ) 402  

Payments of common and preferred stock dividends

  (395 ) (376 ) (19 ) (376 ) (360 ) (16 )

Stockholder contribution from CMS Energy

  150   125   25   125   250   (125 )

Other financing activities

  80   (27 ) 107   (27 ) (27 )  
   

Net cash used in financing activities

  $        (154 ) $    (358 ) $        204   $    (358 ) $    (19 ) $    (339 )
   

For 2012, net cash provided by financing activities at CMS Energy increased $240 million compared with 2011 and net cash used in financing activities at Consumers decreased $204 million compared with 2011. These changes were due primarily to proceeds from Consumers' revolving accounts receivable sales program and an increase in net debt issuances to fund Consumers' capital investment program.

For 2011, net cash used in financing activities at CMS Energy increased $401 million compared with 2010 and net cash used in financing activities at Consumers increased by $339 million compared with 2010. These increases were due primarily to a decrease in net proceeds from borrowings and, at Consumers, a lower stockholder's contribution from CMS Energy 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 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 year ended December 31, 2012, Consumers paid $393 million in common stock dividends to CMS Energy.

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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 and June 2011, CMS Energy issued common stock under this program and received net proceeds of $15 million in each period.

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 December 31, 2012:

In Millions  

  Amount of
Facility
  Amount
Borrowed
  Letters of Credit
Outstanding
  Amount
Available
  Expiration
Date
 

CMS Energy

                   

Revolving credit facility1

  $    550   $    –   $      2   $    548   December 2017
 

Consumers

                   

Revolving credit facility2

  $    500   $    –   $      2   $    498   December 2017

Revolving credit facility2

  150       150   April 2017

Revolving credit facility2

  30     30     September 2014
 
    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 December 31, 2012, $140 million of accounts receivable were eligible for transfer under this program.

Certain of CMS Energy's and Consumers' credit agreements, debt indentures, and other facilities contain covenants that require CMS Energy and Consumers to maintain certain financial ratios, as defined therein. At December 31, 2012, no events of default had occurred with respect to any financial covenants contained in CMS Energy's and Consumers' credit

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agreements, debt indentures, or other facilities. CMS Energy and Consumers were each in compliance with these limits as of December 31, 2012, as presented in the following table:

 

      December 31, 2012  

Credit Agreement, Indenture, or Facility

  Description   Limit   Actual
 

CMS Energy

           

$550 million revolving credit agreement and $180 million term loan credit agreement

  Debt to EBITDA   £  6.0 to 1.0   4.7 to 1.0

Senior notes indenture

  Interest Coverage   >  1.6 to 1.0   4.1 to 1.0

$180 million term loan credit agreement

  Interest Coverage   >  2.0 to 1.0   4.1 to 1.0
 

Consumers

           

$500 million, $150 million, and $30 million revolving credit agreements, $35 million and $68 million reimbursement agreements, and $250 million accounts receivable purchase agreement

  Debt to Capital   £ 0.65 to 1.0   0.49 to 1.0
 

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

Contractual Obligations:    Presented in the following table are CMS Energy's and Consumers' contractual obligations for each of the periods presented. The table excludes all amounts

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classified as current liabilities on CMS Energy's and Consumers' consolidated balance sheets, other than the current portion of long-term debt and capital and finance leases.

In Millions  

 

  Payments Due    

December 31, 2012

  Total   Less Than
One Year
  One to
Three Years
  Three to
Five Years
  More Than
Five Years
 
   

CMS Energy, including Consumers

                     

Long-term debt

  $      7,245   $        347   $    1,321   $    1,193   $      4,384  

Interest payments on long-term debt

  2,764   357   669   561   1,177  

Capital and finance leases

  175   24   45   37   69  

Interest payments on capital and finance leases

  74   10   19   16   29  

Operating leases

  180   26   49   38   67  

Asset retirement obligations

  312   12   25   26   249  

Deferred investment tax credit

  43     6   6   31  

Environmental liabilities

  161     40   29   92  

Purchase obligations1

  12,326   1,878   2,018   1,722   6,708  

Purchase obligations – related parties1

  1,469   89   182   188   1,010  
   

Total contractual obligations

  $    24,749   $    2,743   $    4,374   $    3,816   $      13,816  
   

Consumers

                     

Long-term debt

  $      4,341   $          41   $       567   $       700   $       3,033  

Interest payments on long-term debt

  1,901   223   414   358   906  

Capital and finance leases

  175   24   45   37   69  

Interest payments on capital and finance leases

  74   10   19   16   29  

Operating leases

  180   26   49   38   67  

Asset retirement obligations

  311   12   25   26   248  

Deferred investment tax credit

  43     6   6   31  

Environmental liabilities

  111     31   21   59  

Purchase obligations1

  12,326   1,878   2,018   1,722   6,708  

Purchase obligations – related parties1

  1,469   89   182   188   1,010  
   

Total contractual obligations

  $    20,931   $   2,303   $   3,356   $   3,112   $      12,160  
   
    1
    Long-term contracts for purchase of commodities and related services, and construction and technology services. The commodities and related services include natural gas and associated transportation, electricity, and coal and associated transportation.

CMS Energy and Consumers also have recognized non-current liabilities for which the timing of payments cannot be reasonably estimated. These items, which are excluded from the table above, include regulatory liabilities, deferred income taxes, workers compensation liabilities, accrued liabilities under renewable energy programs, and other liabilities. Retirement benefits are also not included in the table above. For details related to benefit payments, see Note 12, Retirement Benefits.

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

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obligations is not estimable; the maximum obligation under indemnities for which such amounts were estimable was $512 million at December 31, 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 4, Contingencies and Commitments – Guarantees.

Capital Expenditures:    Over the next five years, CMS Energy and Consumers expect to make capital investments about $7 billion, including $750 million for Consumers' proposed new gas-fueled plant. CMS Energy and Consumers may revise their forecasts of capital expenditures periodically due to a number of factors, including environmental regulations, business opportunities, market volatility, economic trends, and the ability to access capital. Presented in the following table are CMS Energy's and Consumers' estimated capital expenditures, including lease commitments, for 2013 through 2017:

In Millions  

 

  2013   2014   2015   2016   2017   Total  
   

CMS Energy, including Consumers

                         

Consumers

  $    1,400   $    1,500   $    1,600   $    1,300   $    1,200   $    7,000  

Enterprises

  6   4   1   1   1   13  
   

Total CMS Energy

  $    1,406   $    1,504   $    1,601   $    1,301   $    1,201   $    7,013  
   

Consumers

                         

Electric utility operations1,2

  $    1,000   $    1,100   $    1,300   $    1,000   $       800   $    5,200  

Gas utility operations2

  400   400   300   300   400   1,800  
   

Total Consumers

  $    1,400   $    1,500   $    1,600   $    1,300   $    1,200   $    7,000  
   
    1
    These amounts include estimates for capital expenditures that may be required by environmental laws, regulations, or potential consent decrees.

    2
    These amounts include estimates for capital expenditures related to information technology projects, facility improvements, and vehicle leasing.

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; Item 1A. Risk Factors; and Note 4, Contingencies and Commitments.

CONSUMERS ELECTRIC UTILITY BUSINESS OUTLOOK AND UNCERTAINTIES

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

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Consumers plans to mothball seven of its smaller coal-fueled units in 2015. Consumers will continue to evaluate its options for the plants, which include:

    installing more environmental equipment on the units to reduce emissions further in order to meet new environmental standards and continue to operate the units;
    seeking an extension of compliance deadlines for new environmental standards;
    converting the units to natural gas instead of coal;
    decommissioning the units; and
    a combination of these options, depending on customer needs and market conditions.

With the potential closure of these plants, Consumers could experience a shortfall in generation capacity of up to 1,500 MW in 2015. In order to address future capacity requirements and growing electric demand in Michigan, Consumers updated its balanced energy initiative, a comprehensive energy resource plan designed to meet the short-term and long-term electricity needs of its customers through:

    energy efficiency;
    demand management;
    expanded use of renewable energy;
    development of new power plants;
    power or generating asset purchases to complement existing generating sources; and
    continued operation or upgrade of existing units.

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

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

The 2008 Energy Law also requires Consumers to obtain 500 MW of capacity from renewable energy resources by the end of 2015, either through generation resources owned by Consumers or through agreements to purchase capacity from other parties. To meet its renewable capacity requirements, Consumers expects to add more than 500 MW of owned or contracted renewable capacity. Through December 2012, Consumers has contracted for the purchase of 299 MW of nameplate capacity from renewable energy suppliers and owns 100 MW of nameplate capacity at its recently constructed Lake Winds® Energy Park. The combination of the contracted and owned capacity represents 80 percent of the 2015 renewable capacity requirement. Consumers expects to meet the balance of the requirement through the completion of its Cross Winds® Energy Park in Tuscola County, Michigan, which is scheduled to begin operations in late 2015.

The extension of the tax credits for wind projects for which construction begins prior to December 31, 2013 could reduce significantly the cost of meeting the renewable requirements of

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the 2008 Energy Law; however, the requirements to qualify for the credit are not yet fully defined. Consumers cannot predict the overall impact of this legislative change.

Energy Optimization Plan:    The 2008 Energy Law requires Consumers to achieve energy savings equivalent to annual sales reduction targets through at least 2015. The targets are incremental with the goal of achieving a six percent reduction in customers' electricity use and a four percent reduction in customers' natural gas use by December 31, 2015. At December 31, 2012, Consumers had met 61 percent of its electric goal and 68 percent of its natural gas goal. Under its energy optimization plan, Consumers provides its customers with incentives to reduce usage by offering energy audits, rebates and discounts on purchases of highly efficient appliances, and other incentives and programs. Consumers estimates that, through its gas and electric energy optimization programs, its customers realized $184 million in energy savings during 2012.

Electric Customer Deliveries and Revenue:    Consumers' electric customer deliveries are largely dependent on Michigan's economy, which has suffered from economic and financial instability in the automotive and real estate sectors. Consumers believes economic conditions in Michigan are improving, and expects weather-adjusted electric deliveries to remain stable in 2013 compared with 2012.

Consumers expects average electric delivery growth of about 0.5 to 1.0 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.

Electric ROA:    The Customer Choice Act allows Consumers' electric customers to buy electric generation service from Consumers or from an alternative electric supplier. The 2008 Energy Law revised the Customer Choice Act by limiting alternative electric supply to ten percent of Consumers' weather-adjusted retail sales of the preceding calendar year. At December 31, 2012, electric deliveries under the ROA program were at the ten percent limit and alternative electric suppliers were providing 777 MW of generation service to ROA customers. Based on 2012 weather-adjusted retail sales, Consumers expects 2013 electric deliveries under the ROA program to be at a similar level to 2012.

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

Electric Transmission:    In 2011, FERC issued an order in a rulemaking proceeding concerning regional electric transmission planning and cost allocations. Consumers and several other electric utilities filed a joint petition seeking clarification/rehearing of FERC's order and opposing the allocation methodology. In 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.

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In a related matter, in 2010, MISO filed and FERC approved a tariff revision proposing a cost allocation methodology for a new category of transmission projects. Under this tariff revision, the cost of these new transmission projects will be spread proportionally across the Midwest Energy Market. Consumers believes that Michigan customers will bear additional costs under MISO's tariff without receiving comparable benefits from these projects. In 2011, Consumers, along with the Michigan Attorney General, ABATE, DTE Electric, and other parties, filed a petition for review of FERC's order with the U.S. Court of Appeals for the Seventh Circuit following FERC's denial of their request for rehearing opposing the allocation methodology in the MISO tariff revision. 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.

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

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

Electric Rate Matters:    Rate matters are critical to Consumers' electric utility business. For additional details on electric rate matters, see Note 3, Regulatory Matters.

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

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

Pending Power Supply Cost Recovery Plan:    Consumers submitted its 2013 PSCR plan to the MPSC in September 2012, and in accordance with its proposed plan, self-implemented the 2013 PSCR charge beginning in January 2013.

Electric Environmental Estimates:    Consumers' operations are subject to various state and federal environmental laws and regulations. Consumers estimates that it will incur expenditures of

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$1.1 billion from 2013 through 2018 to continue to comply with the Clean Air Act, Clean Water Act, and numerous state and federal environmental regulations. Consumers expects to recover these costs in customer rates, but cannot guarantee this result. Consumers' primary environmental compliance focus includes, but is not limited to, the following matters:

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

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. Existing units, unless granted extensions, must meet the standards by mid-April 2015. In October 2012, Consumers requested a one-year extension for the J.H. Campbell facility under both MATS and the Michigan Mercury Rule in order to have adequate time to construct emissions controls. In November 2012, the MDEQ granted that request for MATS only, moving the compliance date to April 2016 for the J.H. Campbell facility. The MDEQ has assured Consumers that an extension will also be granted in writing for the Michigan Mercury Rule, but Consumers has not yet received the extension. In addition, in December 2012 Consumers also submitted one-year MATS and Michigan Mercury Rule extension requests to the MDEQ for the B.C. Cobb, J.C. Weadock, and J.R. Whiting facilities to accommodate the potential for construction to alleviate transmission or reliability concerns. Consumers has not yet received a response from the MDEQ to these requests.

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

    changes in environmental compliance costs related to Consumers' coal-fueled power plants;
    a change in the fuel mix at coal-fueled and oil-fueled power plants;
    changes in how certain plants are used; and
    the retirement, mothballing, or repowering with an alternative fuel of some of Consumers' generating units.

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

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

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

In 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 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. Rehearing requests for these rules were denied. Consumers does not expect to incur significant expenditures to comply with this rule.

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 and the EPA is scheduled to finalize this rule by April 2013. The EPA is also expected to propose emissions guidelines within the next one to three years for states to regulate greenhouse gas emissions from existing generating units under Section 111(d) of the Clean Air Act. Under the expected schedule, states will be required to submit plans to the EPA within nine months of issuance of the final rule and guidelines. Consumers will continue to monitor activity regarding any proposed regulations involving new source performance standards.

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

In 2012, carbon dioxide emissions from fossil-fueled power plants owned by Consumers, excluding the portion of Campbell Unit 3 that is owned by others, were 16 million metric tons. During the same period, coal-fueled plants owned by the enterprises segment emitted 620,000 metric tons of carbon dioxide.

CCRs:    In June 2010, the EPA proposed rules regulating CCRs, such as coal ash, under the Resource Conservation and Recovery Act. Recent communications from the EPA stress the need

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

Water:    In 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 June 2013. Consumers also expects the EPA to propose new regulations in 2013 for wastewater discharges from electric generating plants that will require physical and/or chemical treatment facilities for all wastewater. A final rule is expected in 2014.

PCBs:    In 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 approach would aim to phase out equipment containing PCBs by 2025. Another approach would eliminate an exemption for small equipment containing PCBs. To comply with any such regulatory actions, Consumers could incur substantial costs associated with existing electrical equipment potentially containing PCBs. A proposed rule is expected in 2013.

Other electric environmental matters could have a major impact on Consumers' outlook. For additional details on other electric environmental matters, see Note 4, Contingencies and Commitments – Consumers Electric Utility Contingencies – Electric Environmental Matters.

CONSUMERS GAS UTILITY BUSINESS OUTLOOK AND UNCERTAINTIES

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

Gas Transmission:    In January 2013, Consumers announced plans to build a 24-mile, 36-inch natural gas pipeline in St. Joseph and Branch Counties, Michigan. Consumers expects to spend $150 million for this project. Construction of the pipeline is contingent upon obtaining approval

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from the MPSC and environmental permits. Consumers expects the pipeline to be operational by the end of 2014.

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

Gas Rate Matters:    Rate matters are critical to Consumers' gas utility business. For additional details on Consumers' gas rate matters, see Note 3, Regulatory Matters.

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

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

Gas Depreciation:    In August 2012, the MPSC approved a settlement agreement in Consumers' gas depreciation case. The depreciation rates, which became effective in January 2013, will result in a $5 million decrease in annual gas depreciation expense for Consumers.

Pending Gas Cost Recovery Plan:    Consumers submitted its 2013-2014 GCR plan to the MPSC in December 2012, and in accordance with its proposed plan, expects to self-implement the 2013-2014 GCR charge beginning in April 2013.

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:

    an increase in the maximum fine for safety violations to $2 million;
    an increase in the number of pipeline inspectors;
    a study regarding application of integrity management requirements outside of "high consequence areas;"
    a survey regarding existing plans for safe management and replacement of cast iron pipelines;
    prescribed notification and on-site incident response times;
    installation of automatic or remotely controlled shut-off valves on new or replaced pipelines where feasible;

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    historical design and construction documentation to verify maximum allowable operating pressures; and
    establishment of new regulations for testing (pressure tests or equivalent methods) of previously untested pipelines in high-consequence areas.

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

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 4, Contingencies and Commitments – Consumers Gas Utility Contingencies – Gas Environmental Matters.

The Mandatory Reporting of Greenhouse Gases Rule requires facilities engaging in the distribution of natural gas to collect data on greenhouse gas emissions resulting from the combustion of natural gas. In 2012, Consumers estimated that carbon dioxide emissions from its customers were 17 million metric tons.

CONSUMERS OTHER OUTLOOK AND UNCERTAINTIES

Smart Energy:    Consumers' grid modernization effort continues. In August 2012, Consumers began installing smart meters in Muskegon County, Michigan. One of the functions of smart meters is to allow customers to monitor and manage their energy usage, which should help reduce demand during critical peak times, resulting in lower peak capacity requirements. The installation of smart meters should also provide for both operational and customer benefits. At December 31, 2012, Consumers had upgraded 53,000 residential and small business customers in Muskegon County, Michigan to smart meters. Consumers expects to install about 175,000 smart meters throughout western Michigan in each of the years 2013 and 2014. By mid-2013, Consumers should be able to begin reading meters remotely; further functionality will be added in 2013 and 2014. Consumers also plans to install communication modules on gas meters in areas where Consumers provides both electricity and natural gas to customers.

ENTERPRISES OUTLOOK AND UNCERTAINTIES

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

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

    indemnity and environmental remediation obligations at Bay Harbor;
    obligations related to a tax claim from the government of Equatorial Guinea;
    the outcome of certain legal proceedings;
    impacts of declines in electricity prices on the profitability of the enterprises segment's generating units;
    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;

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    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 4, 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 December 31, 2012, and four percent of CMS Energy's net income available to common stockholders for the year ended December 31, 2012. The carrying value of EnerBank's loan portfolio was $544 million at December 31, 2012. Its loan portfolio was funded primarily by deposit liabilities of $527 million. Twelve-month rolling average default rates on loans held by EnerBank have declined from 0.9 percent at December 31, 2011 to 0.8 percent at December 31, 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. EnerBank has exceeded these requirements historically and exceeds them as of February 2013.

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 year ended December 31, 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 4, Contingencies and Commitments and Note 3, Regulatory Matters.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The following accounting policies and related information are important to an understanding of CMS Energy's and Consumers' results of operations and financial condition. For additional accounting policies, see Note 1, Significant Accounting Policies.

USE OF ESTIMATES AND ASSUMPTIONS

In the preparation of CMS Energy's and Consumers' consolidated financial statements, estimates and assumptions are used that may affect reported amounts and disclosures. CMS Energy and Consumers use accounting estimates for asset valuations, unbilled revenue, depreciation, amortization, financial and derivative instruments, employee benefits, stock-based compensation, the effects of regulation, indemnities, and contingencies. Actual results may differ from estimated results due to changes in the regulatory environment, regulatory decisions, lawsuits, competition, and other factors. CMS Energy and Consumers consider all relevant factors in making these assessments.

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Asset Retirement Obligations:    CMS Energy and Consumers are required to record the fair value of the cost to remove assets at the end of their useful lives if there is a legal obligation to remove them. CMS Energy and Consumers have legal obligations to remove some of their assets at the end of their useful lives. CMS Energy and Consumers calculate the fair value of ARO liabilities using an expected present value technique that reflects assumptions about costs, inflation, and profit margin that third parties would require to assume the obligation. For additional details, see Note 11, Asset Retirement Obligations.

Contingencies:    CMS Energy and Consumers make judgments regarding the future outcome of various matters that give rise to contingent liabilities. For such matters, they record liabilities when they are considered probable and reasonably estimable, based on all available information. In particular, CMS Energy and Consumers are participating in various environmental remediation projects for which they have recorded liabilities. The recorded amounts represent estimates that may take into account such considerations as the number of sites, the anticipated scope, cost, and timing of remediation work, the available technology, applicable regulations, and the requirements of governmental authorities. For remediation projects in which the timing of estimated expenditures is considered reliably determinable, CMS Energy and Consumers record the liability at its net present value, using a discount rate equal to the interest rate on monetary assets that are essentially risk-free and have maturities comparable to that of the environmental liability. The amount recorded for any contingency may differ from actual costs incurred when the contingency is resolved.

Fair Value Measurements:    CMS Energy and Consumers have assets and liabilities that are accounted for or disclosed at fair value. Fair value measurements incorporate assumptions that market participants would use in pricing an asset or liability, including assumptions about risk. Development of these assumptions may require significant judgment. For a detailed discussion of the valuation techniques and inputs used to calculate fair value measurements, see Note 6, Fair Value Measurements. Details about the fair value measurements for the Pension Plan and OPEB plan assets are included in Note 12, Retirement Benefits.

Income Taxes:    The amount of income taxes paid by CMS Energy is subject to ongoing audits by federal, state, and foreign tax authorities, which can result in proposed assessments. An estimate of the potential outcome of any uncertain tax issue is highly judgmental. CMS Energy believes adequate reserves have been provided for these exposures; however, future results may include favorable or unfavorable adjustments to the estimated tax liabilities in the period the assessments are made or resolved or when statutes of limitation on potential assessments expire. Additionally, CMS Energy's judgment as to the ability to recover its deferred tax assets may change. CMS Energy believes the valuation allowances related to its deferred tax assets are adequate, but future results may include favorable or unfavorable adjustments. As a result, CMS Energy's effective tax rate may fluctuate significantly over time.

Long-Lived Assets and Equity Method Investments:    CMS Energy and Consumers assess the recoverability of their long-lived assets and equity method investments by performing impairment tests if certain triggering events occur or if there has been a decline in value that may be other than temporary. CMS Energy and Consumers base their evaluations of impairment on such indicators as:

    the nature of the assets;
    projected future economic benefits;
    regulatory and political environments;

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    historical and future cash flow and profitability measurements; and
    other external market conditions and factors.

The estimates CMS Energy and Consumers use may change over time, which could have a material impact on their consolidated financial statements. For additional details, see Note 20, Asset Sales, Discontinued Operations, and Impairment Charges.

Unbilled Revenues:    CMS Energy's and Consumers' customers are billed monthly in cycles having billing dates that do not generally coincide with the end of a calendar month. This results in customers having received electricity or gas that they have not been billed for as of the month-end. Consumers estimates its unbilled revenues by applying an average billed rate to total unbilled deliveries for each customer class. Unbilled revenues, which are recorded as accounts receivable on CMS Energy's and Consumers' consolidated balance sheets, were $403 million at December 31, 2012 and $387 million at December 31, 2011.

ACCOUNTING FOR THE EFFECTS OF INDUSTRY REGULATION

Because Consumers has regulated operations, it uses regulatory accounting to recognize the effects of the regulators' decisions on its financial statements. Consumers continually assesses whether future recovery of its regulatory assets is probable by considering communications and experience with its regulators and changes in the regulatory environment. If Consumers determined that recovery of a regulatory asset were not probable, Consumers would be required to write off the asset and immediately recognize the expense in earnings.

Alternative-Revenue Programs:    The MPSC's 2009 gas rate case order authorized Consumers to implement a gas revenue decoupling mechanism. This mechanism, which was extended through April 2012 in the 2010 gas rate case order, allowed Consumers to adjust future gas rates to the degree that actual average weather-adjusted sales per customer differed from the rate order. Consumers accounted for this program as an alternative-revenue program that met the criteria for recognizing the effects of decoupling adjustments on revenue as gas is delivered.

In 2009, the MPSC approved an energy optimization incentive mechanism that provides a financial incentive if the energy savings of Consumers' customers exceed annual targets established by the MPSC. Consumers accounts for this program as an alternative-revenue program that meets the criteria for recognizing revenue related to the incentive as soon as energy savings exceed the annual targets established by the MPSC.

Revenue Subject to Refund:    Unless prohibited by the MPSC upon a showing of good cause, Consumers is allowed to self-implement new energy rates six months after a new rate case filing; however, the rates that Consumers self-implements may be subject to refund, with interest. Consumers recognizes revenue associated with self-implemented rates. If Consumers considers it probable that it will be required to refund a portion of its self-implemented rates, it records a provision for revenue subject to refund. A final rate order could differ materially from Consumers' estimates underlying its self-implemented rates, giving rise to accounting adjustments. Under accounting rules for prior period adjustments, CMS Energy and Consumers may need to record such differences, if they are specifically identifiable to prior interim periods, as revisions to those periods.

For additional details, see Note 3, Regulatory Matters.

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FINANCIAL AND DERIVATIVE INSTRUMENTS AND MARKET RISK INFORMATION

Financial Instruments:    Debt and equity securities classified as available for sale are reported at fair value as determined from quoted market prices or other observable, market-based inputs. Unrealized gains and losses resulting from changes in fair value of these securities are reported, net of tax, in equity as part of AOCI, except that unrealized losses determined to be other than temporary are reported in earnings.

Derivative Instruments:    CMS Energy and Consumers account for certain contracts as derivative instruments. The criteria used to determine if an instrument qualifies for derivative accounting are complex and often require significant judgment in application. If a contract is a derivative and does not qualify for the normal purchases and sales exception, it is recorded on the consolidated balance sheets at its fair value. Each quarter, the resulting asset or liability is adjusted to reflect any change in the fair value of the contract. The fair values calculated for CMS Energy's and Consumers' derivatives may change significantly as commodity prices and volatilities change. The cash returns actually realized on derivatives may be different from their estimated fair values. For additional details on CMS Energy's and Consumers' derivatives and how the fair values of derivatives are determined, see Note 6, Fair Value Measurements.

Market Risk Information:    CMS Energy and Consumers are exposed to market risks including, but not limited to, changes in interest rates, commodity prices, and investment security prices. They may enter into various risk management contracts to limit exposure to these risks, including swaps, options, futures, and forward contracts. CMS Energy and Consumers enter into these contracts using established policies and procedures, under the direction of an executive oversight committee consisting of senior management representatives and a risk committee consisting of business unit managers.

The following risk sensitivities illustrate the potential loss in fair value, cash flows, or future earnings from financial instruments, assuming a hypothetical adverse change in market rates or prices of ten percent. Potential losses could exceed the amounts shown in the sensitivity analyses if changes in market rates or prices were to exceed ten percent.

Interest-Rate Risk:    CMS Energy and Consumers are exposed to interest-rate risk resulting from issuing fixed-rate and variable-rate financing instruments. CMS Energy and Consumers use a combination of these instruments, and may also enter into interest-rate swap agreements, in order to manage this risk and to achieve a reasonable cost of capital.

Interest-Rate Risk Sensitivity Analysis (assuming an adverse change in market interest rates of ten percent):

In Millions  

 

December 31

  2012   2011  
   

Fixed-rate financing – potential loss in fair value

         

CMS Energy, including Consumers

  $    127   $    154  

Consumers

  84   82  
   

The fair value losses in the above table could be realized only if CMS Energy and Consumers transferred all of their fixed-rate financing to other creditors. The annual earnings exposure related to variable-rate financing was insignificant for both CMS Energy and Consumers at

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December 31, 2012 and 2011, assuming an adverse change in market interest rates of ten percent.

Investment Securities Price Risk:    Through investments in equity securities, CMS Energy and Consumers are exposed to equity price fluctuations. The following table shows the potential effect of adverse changes in equity prices on CMS Energy's and Consumers' available-for-sale investments.

Investment Securities Price Risk Sensitivity Analysis (assuming an adverse change in market prices of ten percent):

In Millions  

 

December 31

  2012   2011  
   

CMS Energy, including Consumers

         

Potential reduction in fair value of available-for-sale securities

         

DB SERP

         

Mutual funds

  $    13   $    11  

Consumers

         

Potential reduction in fair value of available-for-sale securities

         

DB SERP

         

Mutual funds

  $      9   $      7  

CMS Energy common stock

  3   3  
   

Notes Receivable Risk:    CMS Energy is exposed to interest-rate risk resulting from EnerBank's fixed-rate installment loans. EnerBank provides these loans to homeowners to finance home improvements.

Notes Receivable Sensitivity Analysis (assuming an adverse change in market interest rates of ten percent):

In Millions  

 

December 31

  2012   2011  
   

CMS Energy, including Consumers

         

Potential reduction in fair value

         

Notes receivable

  $    9   $    7  
   

The fair value losses in the above table could be realized only if EnerBank sold its loans to other parties. For additional details on financial instruments, see Note 7, Financial Instruments.

RETIREMENT BENEFITS

Pension:    CMS Energy and Consumers have external trust funds to provide retirement pension benefits to their employees under a non-contributory, defined benefit Pension Plan. On September 1, 2005, the defined benefit Pension Plan was closed to new participants and CMS Energy and Consumers implemented the qualified DCCP, which provides an employer contribution of six percent of base pay to the existing 401(k) plan. An employee contribution is not required to receive the plan's employer cash contribution. All employees hired on or after September 1, 2005 participate in this plan as part of their retirement benefit program. Previous cash balance Pension Plan participants also participate in the DCCP as of September 1, 2005. Additional pay credits under the cash balance Pension Plan were discontinued as of that date.

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401(k):    CMS Energy and Consumers provide an employer match in their 401(k) plan equal to 60 percent on eligible contributions up to the first six percent of an employee's wages.

OPEB:    CMS Energy and Consumers provide postretirement health and life benefits under their OPEB plan to qualifying retired employees.

CMS Energy and Consumers record liabilities for pension and OPEB on their consolidated balance sheets at the present value of the future obligations, net of any plan assets. The calculation of the liabilities and associated expenses requires the expertise of actuaries, and requires many assumptions, including:

    life expectancies;
    discount rates;
    expected long-term rate of return on plan assets;
    rate of compensation increases; and
    expected health care costs.

A change in these assumptions could change significantly CMS Energy's and Consumers' recorded liabilities and associated expenses.

Presented in the following table are estimates of CMS Energy's and Consumers' pension cost, OPEB cost, and cash contributions through 2015:

In Millions  

 

  Pension
Cost
  OPEB
Cost
  Pension
Contribution
  OPEB
Contribution
 
   

CMS Energy, including Consumers

 

2013

  $    120   $    60   $    50   $    74  

2014

  114   76   58   60  

2015

  93   70   158   76  

Consumers

                 

2013

  $    117   $    62   $    49   $    73  

2014

  111   78   57   59  

2015

  91   72   154   75  
   

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

Lowering the expected long-term rate of return on the Pension Plan assets by 0.25 percentage point (from 7.75 percent to 7.50 percent) would increase estimated pension cost for 2013 by $4 million for both CMS Energy and Consumers. Lowering the discount rate by 0.25 percentage point (from 4.10 percent to 3.85 percent) would increase estimated pension cost for 2013 by $5 million for both CMS Energy and Consumers.

For additional details on postretirement benefits, see Note 12, Retirement Benefits.

NEW ACCOUNTING STANDARDS

For details regarding the implementation of new accounting standards during the year ended December 31, 2012, see Note 2, New Accounting Standards.

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CMS Energy Corporation
Consolidated Statements of Income

In Millions 

 

Years Ended December 31

  2012    2011    2010  
   

             

Operating Revenue

  $    6,253    $    6,503    $    6,432  

             

Operating Expenses

             

Fuel for electric generation

  598    636    604  

Purchased and interchange power

  1,364    1,282    1,239  

Purchased power – related parties

  87    82    85  

Cost of gas sold

  1,150    1,512    1,590  

Maintenance and other operating expenses

  1,225    1,237    1,206  

Depreciation and amortization

  598    546    576  

General taxes

  229    205    210  

Insurance settlement

  –    –    (50)  

Gain on asset sales, net

  (1)   –    (6)  
       

Total operating expenses

  5,250    5,500    5,454  
   

             

Operating Income

  1,003    1,003    978  

             

Other Income (Expense)

             

Interest income

      19  

Allowance for equity funds used during construction

      5  

Income from equity method investees

  17      11  

Other income

  11    16    32  

Other expense

  (33)   (22)   (24)  
       

Total other income

    18    43  
   

             

Interest Charges

             

Interest on long-term debt

  372    396    394  

Other interest expense

  21    23    40  

Allowance for borrowed funds used during construction

  (4)   (4)   (3)  
       

Total interest charges

  389    415    431  
   

             

Income Before Income Taxes

  622    606    590  

Income Tax Expense

  245    191    224  
       

             

Income From Continuing Operations

  377    415    366  

Income (Loss) From Discontinued Operations, Net of Tax of $4, $–, and $2

      (23)  
       

             

Net Income

  384    417    343  

Income Attributable to Noncontrolling Interests

      3  
       

             

Net Income Attributable to CMS Energy

  382    415    340  

Charge for Deferred Issuance Costs on Preferred Stock

  –    –    8  

Preferred Stock Dividends

  –    –    8  
       

             

Net Income Available to Common Stockholders

  $     382    $     415    $     324  
   

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In Millions, Except Per Share Amounts 

 

Years Ended December 31

  2012   2011    2010  
   

             

Net Income Attributable to Common Stockholders

             

Amounts attributable to continuing operations

  $     375   $     413    $       347  

Amounts attributable to discontinued operations

  7     (23 )
       

Net income available to common stockholders

  $     382   $     415    $       324  
       

             

Income Attributable to Noncontrolling Interests

             

Amounts attributable to continuing operations

  $         2   $         2    $           3  

Amounts attributable to discontinued operations

    –     
       

Income attributable to noncontrolling interests

  $         2   $         2    $           3  
       

             

Basic Earnings Per Average Common Share

             

Basic earnings from continuing operations

  $    1.43   $    1.65    $      1.50  

Basic earnings (loss) from discontinued operations

  0.03   0.01    (0.10 )
       

Basic earnings attributable to common stock

  $    1.46   $    1.66    $      1.40  
       

             

Diluted Earnings Per Average Common Share

             

Diluted earnings from continuing operations

  $    1.39   $    1.57    $      1.36  

Diluted earnings (loss) from discontinued operations

  0.03   0.01    (0.08 )
       

Diluted earnings attributable to common stock

  $    1.42   $    1.58    $      1.28  
       

             

Dividends Declared Per Common Share

  $    0.96   $    0.84    $      0.66  
   

The accompanying notes are an integral part of these statements.

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CMS Energy Corporation
Consolidated Statements of Comprehensive Income

In Millions 

 

Years Ended December 31

  2012   2011   2010  
   

             

Net Income

  $    384   $    417   $    343  
       

             

Retirement Benefits Liability

             

Net loss arising during the period, net of tax benefit of $(7), $(7), and $(6)

  (10 ) (11 ) (9)  

Amortization of net actuarial loss, net of tax of $1, $1, and $–

  2   2   1  

Prior service credit adjustment, net of tax of $–, $–, and $1

      1  

             

Investments

             

Unrealized gain on investments, net of tax of $1, $–, and $–

  2      
       

Other Comprehensive Loss

  (6 ) (9 ) (7)  
   

             

Comprehensive Income

  378   408   336  

             

Comprehensive Income Attributable to Noncontrolling Interests

  2   2   3  
       

             

Comprehensive Income Attributable to CMS Energy

  $    376   $    406   $    333  
   

The accompanying notes are an integral part of these statements.

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CMS Energy Corporation
Consolidated Statements of Cash Flows

In Millions  

 

Years Ended December 31

  2012   2011   2010  
   

  

             

Cash Flows from Operating Activities

             

Net income

  $        384   $        417   $        343  

Adjustments to reconcile net income to net cash provided by operating activities

             

Depreciation and amortization

  598   546   576  

Deferred income taxes and investment tax credit

  227   167   227  

Postretirement benefits expense

  187   161   213  

Bad debt expense

  57   74   57  

Other non-cash operating activities

  16   33   39  

Postretirement benefits contributions

  (72 ) (323 ) (463)  

Cash provided by (used in) changes in assets and liabilities

             

Accounts receivable, notes receivable, and accrued revenue

  (147 ) 119   (72)  

Inventories

  104   (14 ) 133  

Accounts payable

  (5 ) 30   (7)  

Accrued expenses

  (38 ) (34 ) 22  

Other current and non-current assets and liabilities

  (70 ) (7 ) (109)  
       

Net cash provided by operating activities

  1,241   1,169   959  
   

             

Cash Flows from Investing Activities

             

Capital expenditures (excludes assets placed under capital lease)

  (1,227 ) (882 ) (821)  

Cost to retire property

  (49 ) (54 ) (43)  

Cash effect of deconsolidation of partnership

      (10)  

Increase in EnerBank loans receivable

  (63 ) (100 ) (131)  

Other investing activities

  (11 ) (22 ) 2  
       

Net cash used in investing activities

  (1,350 ) (1,058 ) (1,003)  
   

             

Cash Flows from Financing Activities

             

Proceeds from issuance of long-term debt

  1,650   375   1,400  

Proceeds from EnerBank notes, net

  65   98   149  

Issuance of common stock

  30   29   10  

Retirement of long-term debt

  (1,527 ) (413 ) (878)  

Payment of DOE liability

    (43 )  

Payment of common and preferred stock dividends

  (252 ) (211 ) (162)  

Redemption of preferred stock

      (239)  

Payment of capital lease obligations and other financing costs

  (35 ) (34 ) (38)  

Increase (decrease) in notes payable

  110     (40)  
       

Net cash provided by (used in) financing activities

  41   (199 ) 202  
   

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In Millions  

 

Years Ended December 31

  2012   2011   2010  
   

             

Net Increase (Decrease) in Cash and Cash Equivalents, Including Assets Held for Sale

  (68 ) (88 ) 158  

Increase (Decrease) in Cash and Cash Equivalents included in Assets Held for Sale

    2   (1)  
       

Net Increase (Decrease) in Cash and Cash Equivalents

  (68 ) (86 ) 157