EPA
U.S. Environmental Protection Agency

EPS

Earnings per share

Exchange Act

Securities Exchange Act of 1934

FDIC

Federal Deposit Insurance Corporation

FERC

The Federal Energy Regulatory Commission

FMBForsite

First Mortgage BondForsite Development, Inc. and its subsidiaries, each a non-affiliated company

FTR

Financial transmission right

GAAP

U.S. Generally Accepted Accounting Principles

Gas AMR

Consumers’ gas automated meter reading project, which involves the installation of communication modules to allow drive-by meter reading

GCR

Gas cost recovery

Genesee

Genesee Power Station Limited Partnership, a variable interest entity in which HYDRA-CO Enterprises, Inc., a wholly owned subsidiary of CMS Enterprises, has a 50 percent50-percent interest

kWh

Kilowatt-hour, a unit of energy equal to one thousand watt-hours

Ludington

Ludington pumped-storage plant, jointly owned by Consumers and DTE Electric Company, a non-affiliated company

MATS

Mercury and Air Toxics Standards, which limit mercury, acid gases, and other toxic pollution from coal-fueled and oil-fueled power plants

MD&A

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

MDEQ

Michigan Department of Environmental Quality

METC

Michigan Electric Transmission Company, LLC, a non-affiliated company

MGP

Manufactured gas plant

Part I—Financial Information

Item 1.Financial Statements

INDEX TO FINANCIAL STATEMENTS

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, transmission, 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 operations and investments. 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, transmission, 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

·                 their securities’ credit ratings

The key elements of CMS Energy’s and Consumers’ business strategy are depicted below:

CMS Energy and Consumers are focused on the “triple bottom line”: people, planet, and profit, underpinned by performance. They are committed to sustainable business practices and to pursuing the goals of safe and excellent operations, a strong ethical culture, environmental quality, and social responsibility. Consumers’ 2016 Sustainability Report, which is available to the public, provides an overview of Consumers’ efforts to continue meeting Michigan’s energy needs safely, efficiently, affordably, and reliably. The report also highlights Consumers’ commitment to Michigan businesses, its corporate citizenship, and its role in reducing the state’s air emissions. In a 2016 report published by Sustainalytics, a global leader in sustainability research and analysis, CMS Energy scored the highest among 54 U.S. utilities in environmental, social, and governance performance.

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. In 2015, Consumers reduced recordable safety incidents by 29 percent compared with 2014. The number of recordable safety incidents in 20152016 was the lowest in Consumers’ history. For the nine months ended September 30, 2016, Consumers reduced recordable safety incidents by a further 21 percent compared with the same period in 2015.

Customer Value

Consumers continues to placeplaces a high priority on customer value. Consumers’ capital investment program is aimed at improving safety and increasing electric and gas reliability, which has resulted in measureable improvements in customer satisfaction.

Additionally, Consumers has undertaken several initiatives to keep electricity and natural gas affordable for its customers. These initiatives include the adoption of a lean operations model that is focused on completing work safely and correctly the first time, thus minimizing rework and waste, while delivering services on time. Other cost-saving initiatives undertaken by Consumers include accelerated pension funding, employee and retiree health care cost sharing, replacement of coal-fueled generation with more efficient gas-fueled generation, targeted infrastructure investment, including the installation of smart meters, negotiated labor agreements, information and control system efficiencies, and productivity improvements. In addition, Consumers’ gas commodity costs declined by 6468 percent from 20052006 through 2015,2016, due not only to a decrease in partmarket prices but also to Consumers’ improvements to its gas infrastructure and optimization of its gas purchasing and storage strategy. These savings are all passed on to customers.

In December 2016, Consumers and Entergy reached an agreement to terminate their PPA in May 2018, four years ahead of schedule. Under the PPA, Consumers purchases virtually all of the capacity and energy produced by Palisades, up to the annual average capacity of 798 MW. The prices that Consumers pays under the PPA, and which it recovers from its electric customers, are presently higher than the cost to purchase electricity from the market. Under the agreement, Consumers will make a termination payment of $172 million to Entergy. Consumers expects that, as a result of terminating the PPA, its electric customers will realize substantial savings from lower future energy and capacity costs. Actual savings will depend on market conditions. The agreement is contingent on the MPSC’s approval of Consumers’ recovery in electric rates of the termination payment. The MPSC has indicated that it will make a final determination on this recovery by September 2017, after full evaluation of the prudency of the termination payment and of how the termination will impact Michigan’s electric reliability and resource adequacy.

Utility Investment

Consumers expects to make capital investments of about $17$18 billion from 20162017 through 2025.2026. While Consumersit has substantially more investment opportunities that would add customer value, 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 six to eight percent. This rate-base growth, together with Consumers’ cost-control initiatives, should allow Consumers to maintain sustainable customer base rate increases (excluding PSCR and GCR charges) at or below the rate of inflation.

Presented in the following illustration are planned capital investments of about $8.5$9.0 billion that Consumers expects to make in 2016from 2017 through 2020:2021:

Consumers’ planned base capital investments of $4.4$4.6 billion represent projects to maintain Consumers’its system and comprise $2.6 billion at the electric utility to preserve reliability and capacity and $1.8$2.0 billion at the gas utility to sustain deliverability and enhance pipeline integrity. An additional $2.3$2.5 billion of planned reliability investments at Consumers are aimed at reducing outages and improving customer satisfaction; these investments comprise $1.6$1.8 billion at the gas utility to replace mains and enhance transmission and storage systems and $0.7 billion at the electric utility to strengthen circuits and substations and replace poles. Consumers also expects to spend $0.6$0.5 billion on environmental investments needed to comply with state and federal laws and regulations.

Consumers’ Smart Energy program also represents a major capital investment. TheConsumers began the full-scale deployment of advanced metering infrastructure beganfor electric and combination customers in 2012 and is plannedplans to continue throughcomplete it by the end of 2017. Consumers has spent $0.5$0.6 billion through 20152016 on its Smart Energy program, and expects to spend an additional $0.3$0.1 billion following a phased approach, throughin 2017. In addition, Consumers expects to spend $0.2 billion through 2019 in deploying Gas AMR technology beginning in 2017.for gas-only customers.

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.

·                 2016 Electric Rate Case:In March 2016, Consumers filed an application with the MPSC seeking an annual rate increase of $225 million, based on a 10.7 percent authorized return on equity. The filing also seeks approval of an investment recovery mechanism that would provide for additional annual rate increases of $38 million beginning in 2017, $92 million beginning in 2018, and $92 million beginning in 2019 for incremental investments that Consumers plans to make in those years, subject to reconciliation. In September 2016, Consumers self-implemented an annual rate increase of $170 million, subject to refund with interest. The MPSC issued an order in February 2017, authorizing an annual rate increase of $113 million, based on a 10.1 percent authorized return on equity.

·2017 Electric Rate Case: In March 2017, Consumers filed an application with the MPSC seeking an annual rate increase of $173 million, based on a 10.5 percent authorized return on equity.

·                 Gas Rate Case: In August 2016, Consumers filed an application with the MPSC seeking an annual rate increase of $90 million, based on a 10.6 percent authorized return on equity. The largest component of the request is anIn March 2017, Consumers reduced its requested annual revenue requirement of $84 million relatedrate increase to new investments that will allow Consumers to strengthen infrastructure and improve system capacity and deliverability.

$80 million. The filing also seeks approval of two rate adjustment mechanisms: one that would reconcile annually Consumers’ actual nonfuel revenues with the revenues approved by the MPSC, and another that would provide for additional annual rate increases of $35 million beginning in 2018 and another $35 million beginning in 2019 for incremental investments that Consumers plans to make in those years, subject to reconciliation. These future investments are intendedThe MPSC issued an order in January 2017, limiting Consumers’ self-implementation to help ensure adequate system capacity and deliverability.an annual rate increase of $20 million. Accordingly, in January 2017, Consumers self-implemented an annual rate increase of $20 million, subject to refund with interest.

In 2015, Michigan’s governor outlined several key goals for the state’s energy policy, with a focus on increasing the use of clean energy sources, reducing Michigan’s reliance on coal, deploying smart meters, investing in the power grid and pipeline system, eliminating energy waste, and ensuring affordable, reliable, and adaptable energy while protecting the environment. The Michigan Senate and House of Representatives are considering two separate but similar pieces of legislation to address energy policy. Consumers is unable to predict the form and timing of any final legislation. While most of the proposed changes represent potential benefits to Consumers’ customers, Consumers’ business plan assumes no changes to the existing law.

In SeptemberDecember 2016, Michigan’s governor signed the 2016 Energy Law, which became effective in April 2017. Among other things, the 2016 Energy Law:

·raises the renewable energy standard from the present ten-percent requirement to 12.5 percent by 2019 and MISO announced15 percent by 2021

·establishes a goal of 35 percent combined renewable energy and energy waste reduction by 2025

·authorizes incentives for demand response programs and expands existing incentives for energy efficiency programs

·authorizes incentives for new PPAs with non-affiliates

·establishes an integrated planning process for new generation resources

·shortens from twelve months to ten months the time by which the MPSC must issue a final order in general rate cases, but prohibits electric and gas utilities from filing general rate cases for increases in rates more often than once every twelve months

·eliminates utilities’ self-implementation of rates under general rate cases

·requires the MPSC to implement equitable cost-of-service rates for customers participating in a net metering program

The 2016 Energy Law also establishes a path to ensure that MISO will submit a proposal to FERCforward capacity is secured for all electric customers in November 2016 that would impose capacity requirements onMichigan, including customers served by alternative electric suppliers operating in Michigan. Presently, under the 2008 Energy Law,ROA. Under existing Michigan law, electric customers in Consumers’ service territory are allowed to buy electric generation service from alternative electric suppliers in an aggregate amount up to ten percent of Consumers’ weather-adjusted retail sales for the preceding calendar year. UnderThe 2016 Energy Law retains the joint proposal,ten percent cap on ROA, with certain exceptions. The new law also authorizes the MPSC to ensure that alternative electric suppliers would be required to procurehave procured enough capacity to cover their anticipated capacity

requirements for the subsequent three-yearfour-year forward period. IfIn March 2017, the MPSC indicated that it plans to achieve this objective through the use of a state reliability mechanism. Under such a mechanism, if an alternative electric supplier did not procure enoughdemonstrate that it had procured its capacity itsrequirements for the four-year forward period, ROA customers would then pay a charge to the utility for capacity charge setthat is not provided by the MPSC. The capacity charge would be determined in a separate proceeding in 2017, should FERC approve MISO’s proposal. Consumers cannot predict the outcome of this proposal.alternative electric supplier.

Environmental and health and safety regulations are other areas of importance for CMS Energy and Consumers, and they are monitoring numerous legislative and regulatory initiatives, including those to regulate greenhouse gases, and related litigation. CMS Energy and Consumers believe that these laws and regulations related to their operations will continue to become more stringent and require them to make additional substantial capital expenditures for emissions control equipment, CCR disposal and storage, cooling water intake equipment, effluent treatment, PCB remediation, and gas pipeline safety. Present and reasonably anticipated state and federal environmental statutes and regulations including but not limited to the Clean Air Act, including the Clean Power Plan, as well as the Clean Water Act, the Federal Resource Conservation and Recovery Act of 1976, CERCLA, and the Pipeline Safety, Regulatory Certainty, and Job Creation Act of 2011, will continue to have a material effect on CMS Energy and Consumers.

Financial Performance

For the ninethree months ended September 30, 2016,March 31, 2017, CMS Energy’s net income available to common stockholders was $474$199 million and diluted EPS were $1.70.$0.71. This compares with net income available to common stockholders of $417$164 million and diluted EPS of $1.51$0.59 for the ninethree months ended September 30, 2015.March 31, 2016. Among the primary factors contributing to CMS Energy’s increased earnings in 20162017 were benefits from electric and gas rate increases, and higher electric sales due mainly to warmer-than-normal summer weather.deliveries, a property tax settlement, and cost reductions. These changes were offset partially by higher depreciation and property

taxes on increased plant in service and by lower gas deliveries, reflecting the second-warmest winter in Consumers’ history.service.

Consumers’ utility operations are seasonal. The consumption of electric energy typically increases in the summer months, due primarily to the use of air conditioners and other cooling equipment, while peak demand for natural gas occurs in the winter due to colder temperatures and the resulting use of natural gas as heating fuel. In addition, Consumers’ electric rates, which follow a seasonal rate design, are higher in the summer months than in the remaining months of the year. 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.

Consumers expects that a continued rise in industrial production in its service territory will drive its total electric deliveries to increase annually by about one-half percent on average through 2020.2021. Excluding the impacts of energy efficiencywaste reduction programs, Consumers expects its total electric deliveries to increase by about one percent annually through 2020.2021. Consumers is projecting that its gas deliveries will remain stable through 2020.2021. 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. In order to minimize increases in customer base rates, Consumers has set goalswill continue to achieve further annual productivity improvements. Additionally, Consumerspursue cost savings through its lean operations model, and will strivecontinue to give priority to capital investments that increase customer value or lower costs.

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

RESULTS OF OPERATIONS

CMS Energy Consolidated Results of Operations

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

Consumers Electric Utility Results of Operations

Following is a discussion of significant changes to net income available to common stockholders.

Electric Deliveries and Rate Increases: For the three months ended September 30, 2016,March 31, 2017, electric delivery revenues increased $45 million compared with 2015.2016. This change reflected a $52$32 million rate increase, $9 million in higher deliveries, and a $4 million increase in sales due primarily to favorable weather. Additionally, revenues increased $14 million due to a rate increase self-implemented in September 2016. These increases were offset partially by a $15 million decrease resulting from lower summer rates as authorized in the December 2015 rate order and a $6 million decrease in other revenues associated with securitization bonds that Consumers issued in 2001 and retired in October 2015.revenues. Deliveries to end-use customers were 10.79.2 billion kWh in 20162017 and 10.19.1 billion kWh in 2015.2016.

For the nine months ended September 30, 2016, electric delivery revenues increased $88 million compared with 2015. This change reflected $59 million from a December 2015 rate increase and a September 2016 self-implemented rate increase, $46 million from an increase in sales due primarily to favorable weather, and a $9 million increase associated with energy efficiency programs. These increases were offset partially by a $26 million decrease in revenue associated with securitization bonds that Consumers issued in 2001 and retired in October 2015. Deliveries to end-use customers were 28.9 billion kWh in 2016 and 28.4 billion kWh in 2015.

Maintenance and Other Operating Expenses: For the three months ended September 30, 2016,March 31, 2017, maintenance and other operating expenses decreased $15$3 million compared with 2015.2016. This change was due to a $10reflected the absence, in 2017, of $7 million decrease in expenses at the seven coal-fueledcoal-fuel electric generating units that Consumers retired in April 2016 and a $6 million decrease in2016. Additionally, postretirement benefit costs attributable primarily to the change todecreased by $3 million, reflecting a full-yield-curve approach to calculate the service cost and interest expense components of net periodic benefit costs for the DB Pension and OPEB Plans. Also contributing to the change were a $4$5 million reduction in service restoration expenses andassociated with the early adoption of a $1 million decrease in other operating and maintenance costs. These reductions werenew accounting standard, offset partially by a $6$2 million charge associated with a voluntary separation program.

of cost increases. For additional details on the nine months ended September 30, 2016, maintenance and other operating expenses decreased $36 million compared with 2015. This change was due to a $21 million decrease in expenses at the seven coal-fueled electric generating units that Consumers retired in April 2016, a $19 million decrease in

postretirement benefit costs attributable primarily to the change to a full-yield-curve approach to calculate the service cost and interest expense componentsimplementation of net periodic benefit costs for the DB Pension and OPEB Plans, and a $10 million decrease in uncollectible accounts expense. Also contributing to the change was a $4 million decrease associated with a State of Michigan use tax settlement reached in June 2016.this standard, see Note 1, New Accounting Standards. These decreases were offset partially by a $9$7 million increase associated with energy efficiency programs, a $6 million chargein maintenance and other operating expenses, resulting primarily from higher service restoration costs associated with a voluntary separation program, and a $3 million increase in forestry expenses.March 2017 wind storm.

Depreciation and Amortization: For the three months ended September 30, 2016,March 31, 2017, depreciation and amortization expense increased $6$13 million compared with 2015. This change reflected a $27 million increase in depreciation expense related2016, due primarily to increased plant in service and an increase in depreciation rates that became effective in December 2015, offset partially by a $21 million decrease in amortization of securitized assets, reflecting the conclusion in October 2015 of Consumers’ 2001 securitization program.service.

For the nine months ended September 30, 2016, depreciation and amortization expense increased $16 million compared with 2015. This change reflected a $72 million increase in depreciation expense related to increased plant in service and an increase in depreciation rates that became effective in December 2015, offset partially by a $56 million decrease in amortization associated primarily with securitized assets, reflecting the conclusion in October 2015 of Consumers’ 2001 securitization program.

General Taxes: For the ninethree months ended September 30, 2016,March 31, 2017, general taxes increaseddecreased $9 million compared with 2015. This change was2016, due primarilylargely to an $8 million increase inthe settlement of a property taxes, reflecting higher capital spending, and a $1 million increase to payroll taxestax appeal related to a voluntary separation program.Consumers’ Zeeland plant.

Other Income, Net of Expenses: For the ninethree months ended September 30, 2016,March 31, 2017, other income, net of expenses, decreased $8increased $6 million compared with 2015.2016. This decrease reflected the absence, in 2016, ofchange was due to a $6$9 million gain related toon a donation of CMS Energy stock by Consumers. The gainConsumers, which was eliminated on CMS Energy’s consolidated statements of income. The decrease also reflectedincome, and a $2$1 million charitable contribution madeincrease in 2016.

Interest Charges: For the nine months ended September 30, 2016, interest charges increased $5 million compared with 2015.other income, net of expenses. These changesincreases were due primarily to higher average debt levels.

Income Taxes: For the three months ended September 30, 2016, income taxes increased $18 million compared with 2015. This change was attributable primarily to higher electric utility earnings.

For the nine months ended September 30, 2016, income taxes increased $30 million compared with 2015. This increase reflected $34 million related to higher electric utility earnings, offset partially by a $4 million decrease due to a changereduction in the treatment of excess tax benefits on restricted stock awards as a result ofnonoperating retirement benefit credits associated with the early adoption of a new accounting standard. For additional details on the implementation of this standard, see Note 1, New Accounting Standards.

Income Taxes: For the three months ended March 31, 2017, income taxes increased $16 million compared with 2016. This change reflected a $19 million increase attributable to higher electric utility earnings, offset partially by a $3 million reduction of other income taxes.

Consumers Gas Utility Results of Operations

Following is a discussion of significant changes to net income available to common stockholders.

Gas Deliveries and Rate Increases: For the three months ended September 30, 2016,March 31, 2017, gas delivery revenues increased $8$10 million compared with 2015.2016. This change reflected a $4 million increase from a January 20162017 self-implemented rate increase of $6 million and a $4 million increase in other revenues. Deliveries to end-use customers were 26119 bcf in 20162017 and 27121 bcf in 2015.2016.

For the nine months ended September 30, 2016, gas delivery revenues decreased $27 million compared with 2015. This change reflected a $50 million decrease in sales due primarily to milder winter weather. This decrease was offset partially by $23 million related to a January 2016 rate increase. Deliveries to end-use customers were 196 bcf in 2016 and 223 bcf in 2015.

Maintenance and Other Operating Expenses: For the three months ended September 30, 2016,March 31, 2017, maintenance and other operating expenses decreased $9$10 million compared with 2015.2016. This change was due to a $4decrease reflects $6 million decrease in postretirement benefit costs attributable primarily to the change to a full-yield-curve approach to calculate the service costof lower gas distribution and interestcustomer operations expense components of net periodic benefit costs for the DB Pension and OPEB Plans and a $2 million decreasereduction in uncollectible accounts expense. Also contributing to the change was a $7 million reduction in other gas distribution operating and maintenance expenses, offset partially by a $4 million charge associated with a voluntary separation program.

For the nine months ended September 30, 2016, maintenance and other operating expenses decreased $22 million compared with 2015. This change was due to a $12$2 million decrease in postretirement benefit costs, attributable primarily to the change toreflecting a full-yield-curve approach to calculate the service cost and interest expense components of net periodic benefit costs for the DB Pension and OPEB Plans and a $6 million decrease in uncollectible accounts expense. Additionally, there was an $8$4 million reduction in other gas distribution operating and maintenance expenses. These decreases wereassociated with the early adoption of a new accounting standard, offset partially by a $4$2 million charge associated with a voluntary separation program.of cost increases. For additional details on the implementation of this standard, see Note 1, New Accounting Standards.

Depreciation and Amortization: For the ninethree months ended September 30, 2016,March 31, 2017, depreciation and amortization expense increased $15$11 million compared with 2015,2016, due primarily to increased plant in service.

General Taxes: For the ninethree months ended September 30, 2016,March 31, 2017, general taxes increased $4$3 million compared with 2015,2016, due primarily to increased property taxes, reflecting higher capital spending.

Other Income, Taxes: Net of Expenses:For the ninethree months ended September 30, 2016,March 31, 2017, other income, taxes decreased $12net of expenses, increased $2 million compared with 2015.2016. This change reflected a $10 million reduction related to lower gas utility earnings and a $2 million decreasewas due to a change$5 million gain on a donation of CMS Energy stock by Consumers, which was eliminated on CMS Energy’s consolidated statements of income. This increase was offset partially by a $3 million reduction in the treatment of excess tax benefits on restricted stock awards as a result ofnonoperating retirement benefit credits associated with the early adoption of a new accounting standard. For additional details on the implementation of this standard, see Note 1, New Accounting Standards.

Income Taxes: For the three months ended March 31, 2017, income taxes increased $2 million compared with 2016, attributable to higher gas utility earnings.

Enterprises Results of Operations

For the three months ended September 30, 2016,March 31, 2017, net income of the enterprises segment increased $5$6 million compared with 2015,2016, due primarily to higher prices for capacity and demand revenue from DIG and $1 million resulting from delays in planned maintenance at equity method investees.

For the nine months ended September 30, 2016, net income of the enterprises segment increased $7 million compared with 2015, due primarily to higher prices for capacity and demand revenue from DIG and $2 million resulting from lower maintenance expenses at equity method investees.DIG.

Corporate Interest and Other Results of Operations

For the three months ended September 30, 2016,March 31, 2017, corporate interest and other net expenses increased $2 million compared with 2015, due primarily to higher fixed charges reflecting higher debt levels, offset partially by lower average interest rates.

For the nine months ended September 30, 2016, corporate interest and other net expenses decreased $10 million compared with 2015,2016, due primarily to a settlement reached with the Michigan Department of Treasury that resulted in after-tax reductions of $2 million in general taxes and $3 million in income tax expense. Also contributing to the change were the absence, in 2016,elimination of a $5$9 million intercompany charge related to aafter-tax gain resulting from the donation of CMS Energy stock by Consumers and $2 million of higher net earnings at EnerBank. These decreases were offset partially by higher fixed charges.Consumers.

For additional details on the settlement with the Michigan Department of Treasury, see Note 3, Contingencies and Commitments—Other Contingencies.

CASH POSITION, INVESTING, AND FINANCING

At September 30, 2016,March 31, 2017, CMS Energy had $367$463 million of consolidated cash and cash equivalents, which included $28$30 million of restricted cash and cash equivalents. At September 30, 2016,March 31, 2017, Consumers had $49$212 million of consolidated cash and cash equivalents, which included $28$30 million of restricted cash and cash equivalents.

Operating Activities

Presented in the following table are specific components of net cash provided by operating activities for the ninethree months ended September 30, 2016March 31, 2017 and 2015:2016:

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

2                   Core working capital comprises accounts receivable, notes receivable, accrued revenue, inventories, accounts payable, and accrued rate refunds.

For the ninethree months ended September 30, 2016,March 31, 2017, net cash provided by operating activities at CMS Energy decreased $179increased $14 million compared with 20152016 and net cash provided by operating activities at Consumers decreased $139$17 million compared with 2015. These decreases were due primarily to lower collections from customers, including collections2016. At both CMS Energy and Consumers, higher net income, net of GCR underrecoveries and gas sold at lower prices in 2016, and higher energy optimization spending. These changes werenon-cash transactions, was offset partially by reduced customer collections, attributable to lower gas

prices and sales volumes. The change at Consumers also reflected a decreasereimbursement received from CMS Energy in 2016 for a prior-year postretirement benefits contributions, gas purchases at lower prices in 2016, and higher net income. At Consumers, the greater impact from changes in other assets and liabilities and the increase in non-cash transactions reflected an increase in the deferred income tax liability and expense associated with bonus depreciation on higher capital expenditures.contribution.

Investing Activities

Presented in the following table are specific components of net cash used in investing activities for the ninethree months ended September 30, 2016March 31, 2017 and 2015:2016:

For the ninethree months ended September 30, 2016,March 31, 2017, net cash used in investing activities at CMS Energy increased $65decreased $98 million compared with 20152016 and net cash used in investing activities at Consumers increased $123decreased $43 million compared with 2015.2016. These changes were due primarily to higherlower capital expenditures and costs to retire property at Consumers, offset partially by the absence, in 2016, of DB SERP fund contributions.Consumers. The change at CMS Energy was also due to the absence,slower growth in 2016, of proceeds fromEnerBank consumer lending and the sale of EnerBank notes receivable and was offset partially by slower growth in EnerBank consumer lending.receivable.

Financing Activities

Presented in the following table are specific components of net cash provided by (used in)used in financing activities for the ninethree months ended September 30, 2016March 31, 2017 and 2015:2016:

For the ninethree months ended September 30, 2016,March 31, 2017, net cash provided byused in financing activities at CMS Energy increased $374decreased $176 million compared with 20152016 and net cash used in financing activities at Consumers decreased $261$49 million compared with 2015. At2016. Higher debt issuances and, at Consumers, an increased stockholder contribution from CMS Energy the change was due to an increase in debt and common stock issuances. These changes were offset partially by higher debt retirements and higher repayments under Consumers’ commercial paper program and an increase in debt retirements.program.

At Consumers, the change was due primarily to an increase in debt issuances and contributions from CMS Energy, offset partially by higher debt repayments under the commercial paper program and an increase in debt retirements.

CAPITAL RESOURCES AND LIQUIDITY

CMS Energy uses dividends and tax-sharing payments 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 FERC requirements and provisions under the Federal Power Act and the Natural Gas Act. For additional details on Consumers’ dividend restrictions, see Note 4, Financings and Capitalization—Dividend Restrictions. For the ninethree months ended September 30, 2016,March 31, 2017, Consumers paid $361$148 million in dividends on its common stock to CMS Energy.

As a result of federal tax legislation passed in December 2015 that extends bonus depreciation, CMS Energy expects to be able to extend the use of federal net operating loss carryforwards and, accordingly, defer its federal income tax payments through 2020. As a consequence, however, CMS Energy expects to receive lower tax-sharing payments from Consumers during that period. This may require CMS Energy to maintain higher levels of debt in order to invest in its businesses, pay

dividends, and fund its general obligations. Despite this, CMS Energy does not anticipate a need for a block equity offering.

In April 2015,March 2017, CMS Energy entered into an updated continuous equity offering program. Under this program, CMS Energy may sell, from time to time in “at the market” offerings, common stock having an aggregate sales price of up to $100 million. CMS Energy issued common stockThere have been no sales of securities under the program and received net proceeds of $60 million in March 2016 and $30 million in 2015.this program.

Consumers uses cash flows generated from operations and external financing transactions, as well as stockholder contributions from CMS Energy, to fund capital expenditures, retire debt, pay dividends, contribute to its employee benefit plans, and fund its other obligations. As a result of accelerated pension funding in recent years and several initiatives to reduce costs, Consumers anticipates continued strong cash flows from operating activities for the remainder of 2016.2017.

Access to the financial and capital markets depends on CMS Energy’s and Consumers’ credit ratings and on market conditions. As evidenced by past financing transactions, CMS Energy and Consumers have had ready access to these markets. Barring major market dislocations or disruptions, CMS Energy and Consumers expect to continue to have ready access to the financial and capital markets. If access to these markets were to diminish or otherwise become restricted, CMS Energy and Consumers would implement contingency plans to address debt maturities, which could include reduced capital spending.

At September 30, 2016,March 31, 2017, CMS Energy had $549 million of its secured revolving credit facility available and Consumers had $893 million available. 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’ commercial paper program, which allows Consumers to issue, in one or more placements, up to $500 million in the aggregate in commercial paper notes with maturities of up to 365 days and that bear interest at fixed or floating rates. These issuances are supported by one of Consumers’ revolving credit facilities. While the amount of outstanding commercial paper does not reduce the revolving credit facility’s available capacity, Consumers does not intend to issue commercial paper in an amount exceeding the available facility capacity. At September 30, 2016, $75 million ofMarch 31, 2017, no commercial paper notes were outstanding under this program. For additional details on CMS Energy’s and Consumers’ secured revolving credit facilities and commercial paper program, see Note 4, Financings and Capitalization.

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 September 30, 2016,March 31, 2017, no default had occurred with respect to any financial covenants contained in CMS Energy’s and Consumers’ credit agreements, debt indentures, or other facilities. CMS Energy and Consumers were each in compliance with these covenants as of September 30, 2016,March 31, 2017, as presented in the following table:

1                   Applies to CMS Energy’s $550 million revolving and $180 million term loan credit agreements.

2                   Applies to Consumers’ $650 million $250 million, and $30$250 million revolving credit agreements and its $68 million, $35 million, and $68$30 million reimbursement agreements.

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’s and Consumers’ present level of cash and expected cash flows from operating activities, together with access to sources of liquidity, are anticipated to be sufficient to fund the companies’ contractual obligations for 20162017 and beyond.

Off-Balance-Sheet Arrangements

CMS Energy, Consumers, and certain of their subsidiaries enter into various arrangements in the normal course of business to facilitate commercial transactions with third parties. These arrangements include indemnities, surety bonds, letters of credit, and financial and performance guarantees. Indemnities are usually agreements to reimburse a counterparty that may incur losses due to outside claims or breach of contract terms. The maximum payment that could be required under a number of these indemnity obligations is not estimable; the maximum obligation under indemnities for which such amounts were estimable was $153 million at September 30, 2016.March 31, 2017. While CMS Energy and Consumers believe it is unlikely that they will incur any material losses related to indemnities they have not recorded as liabilities, they cannot predict the impact of these contingent obligations on their liquidity and financial condition. For additional details on these and other guarantee arrangements, see Note 3, Contingencies and Commitments—Guarantees.

OUTLOOK

Several business trends and uncertainties may affect CMS Energy’s and Consumers’ financial condition and results of operations. These trends and uncertainties could have a material impact on CMS Energy’s and Consumers’ consolidated income, cash flows, or financial position. For additional details regarding these and other uncertainties, see Forward-Looking Statements and Information; Note 2, Regulatory Matters; Note 3, Contingencies and Commitments; and Part II—Item 1A. Risk Factors.

Consumers Electric Utility and Gas Utility Outlook and Uncertainties

Energy Waste Reduction Plan: The 2016 Energy Law, which became effective in April 2017, expands the existing energy optimization program to include demand response programs, calling the combined initiatives energy waste reduction. The 2016 Energy Law:

·extends the requirement to achieve annual reductions of 1.0 percent in customers’ electricity use through 2021 and 0.75 percent in customers’ natural gas use indefinitely

·removes limits on investments under the program and provides for a higher return on those investments; together, these provisions effectively double the financial incentives Consumers may earn for exceeding the statutory targets

·establishes a goal of 35 percent combined renewable energy and energy waste reduction by 2025

Under its existing 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. In March 2017, Consumers filed applications with the MPSC for approval of an energy waste reduction plan that would amend and expand Consumers’ existing energy optimization plan and allow for recovery of increased investments to meet the requirements of the 2016 Energy Law.

Smart Energy and Gas AMR: Consumers began the full-scale deployment of smart meters in 2012 and expects to complete it inby the end of 2017. Smart meters allow customers to monitor and manage their energy usage, which Consumers expects will help reduce demand during critical peak times, resulting in lower peak electric capacity requirements. In addition, Consumers is able to disconnect and reconnect service, read, and bill from smart meters remotely. Consumers will continue to add further functionality to its smart meters. Consumers is also installing communication modules on gas meters in areas where it provides both electricity and natural gas to customers. The communication modules allow Consumers to read and bill from gas meters remotely.

Consumers expects that under its Smart Energy program it will have installed a total of 1.8 million smart meters and 600,000 communication modules throughout its service territory by the end of 2017. As of September 30, 2016,March 31, 2017, Consumers had upgraded 1.21.5 million electric customers to smart meters and had installed 250,000470,000 communication modules on gas meters.

In areas where it provides only natural gas to customers, Consumers will deploybegan the deployment of Gas AMR technology beginning in 2017.2017 and expects to complete it in 2019. Under this program, Consumers plans to install communication modules are expected to be installed on 1.2 million gas meters, allowing Consumersit to conduct drive-by meter reading.

Consumers Electric Utility Outlook and Uncertainties

Clean Energy Plan:Resource Planning: Consumers continues to experience increasing demand for electricity due to Michigan’s recoveringgrowing 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 orderApril 2016, Consumers retired seven of its coal-fueled electric generating units, representing 950 MW of capacity. In December 2016, Consumers and Entergy reached an agreement to address futureterminate their PPA under which Consumers purchases virtually all of the capacity requirements and growingenergy produced by Palisades, up to the annual average capacity of 798 MW. Under the agreement, which is contingent on the MPSC’s approval of Consumers’ recovery in electric demandrates of the termination payment, the PPA would terminate in Michigan,May 2018, four years ahead of schedule.

Even with the retirements of seven of its coal-fueled units and the expected termination of the Palisades PPA, Consumers has a comprehensive clean energy plan designedexpects to meet the short-term and long-term electricity needscapacity requirements of its full-service customers through:

·                 energy efficiency

·demand managementwaste reduction

·                 expanded use of renewable energy

·the use of the Jackson plant, a 540-MW natural gas-fueled electric generating plant purchased in 2015

·                 construction or purchase of electric generating units

·                 continued operation or upgrade of existing units, including upgrades at Ludington

·renegotiations of existing PPAs

·                 purchases of short-term market capacity

InSpecifically, to address the potential termination of the Palisades PPA, Consumers issued a request for proposals in April 2016, Consumers retired seven of its coal-fueled electric generating units, representing 950 MW of generating capacity. Even with these retirements, Consumers expects2017 to meet the capacity requirements of its full-service customers for 2016 through 2020 through the use ofacquire a 540-MW natural gas-fueled electric generating plant purchasedof up to 800 MW. Consumers is interested in December 2015, upgrades at Ludington, expanded use of renewable energy, energy efficiency programs, and demand management programs. In October 2016,acquiring a simple-cycle or combined-cycle generating plant operating in Michigan’s Lower Peninsula. Also, Consumers completed an auction to purchase generation capacity for 2017. The MSPC must approve any2018. Any contracts that Consumers entersentered into as a result of the auction. As demand forecasts become more certain, Consumers may take additional actionsrequest for proposals and the auction are subject to cover any remaining capacity requirements for its full-service customers, including participation inMPSC approval and are contingent on the annual MISO planning resource auction.MPSC’s approval of the termination of the Palisades PPA.

Renewable Energy Plan: Consumers’The 2016 Energy Law raises the renewable energy plan details howstandard from the present ten-percent requirement to 15 percent in 2021, with an interim target of 12.5 percent in 2019. Consumers expects to meet REC and capacity standards prescribed by the 2008 Energy Law. This law requires Consumersis required to submit RECs, which represent proof that the associated electricity was generated from a renewable energy resource, in an amount equal to at least ten percentthe required percentage of Consumers’ electric sales volume each year. 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.

In conjunction with its renewable energy plan, Consumers signed a 15-year agreement in September 2015 to purchase renewable capacity, energy, and RECs from a 100-MW wind park to be constructed in Huron County, Michigan. The wind park is expected to be operational inby the end of 2017. In September 2016,addition, Consumers applied forhas obtained a special land use permit for the construction of two additional phases at its Cross Winds® Energy Park PhasesPark: Phase II, with a nameplate capacity of 44 MW, and III. ThisPhase III, with a nameplate capacity of 76 MW. In March 2017, the MPSC approved Consumers’ application to construct Phase II, which is expected to be operational by the end of 2017. Both phases of the project will qualify for certain federal production tax credits, thatwhich are expected to reduce thegenerate cost of the construction. These cost savings that will be passed on to customers. Consumers also completed construction of two community solar projects in 2016. Together, these solar projects provide a combined four MW of nameplate capacity.

Electric Customer Deliveries and Revenue: Consumers’ electric customer deliveries are largely dependent on Michigan’s economy. Consumers expects weather-adjusted electric deliveries to increase in 20162017 by one-half to one percent compared with 2015.2016.