Fair Value Measurements

9 Months Ended

Sep. 30, 2011

Fair Value Measurements

2: FAIR VALUE MEASUREMENTS

Accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. When measuring fair value, CMS Energy and Consumers are required to incorporate all assumptions that market participants would use in pricing an asset or liability, including assumptions about risk. A fair value hierarchy prioritizes inputs used to measure fair value according to their observability in the market. The three levels of the fair value hierarchy are as follows:

• Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities.

• Level 2 inputs are observable, market-based inputs, other than Level 1 prices. Level 2 inputs may include quoted prices for similar assets or liabilities in active markets, quoted prices in inactive markets, interest rates and yield curves observable at commonly quoted intervals, credit risks, default rates, and inputs derived from or corroborated by observable market data.

• Level 3 inputs are unobservable inputs that reflect CMS Energy's or Consumers' own assumptions about how market participants would value their assets and liabilities.

To the extent possible, CMS Energy and Consumers use quoted market prices or other observable market pricing data in valuing assets and liabilities measured at fair value. If this information is unavailable, they use market-corroborated data or reasonable estimates about market participant assumptions. CMS Energy and Consumers classify fair value measurements within the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement in its entirety.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Presented in the following table are CMS Energy's and Consumers' assets and liabilities, by level within the fair value hierarchy, reported at fair value on a recurring basis at September 30, 2011:

In Millions
	Total		Level 1		Level 2		Level 3
CMS Energy, including Consumers
Assets
Cash equivalents	$	512	$	512	$	—	$	—
Restricted cash equivalents		14		14		—		—
Nonqualified deferred compensation plan assets		4		4		—		—
SERP
Cash equivalents		1		1		—		—
Mutual fund		87		87		—		—
State and municipal bonds		26		—		26		—
Derivative instruments
Commodity contracts1		2		—		—		2
Total2	$	646	$	618	$	26	$	2
Liabilities
Nonqualified deferred compensation plan liabilities	$	4	$	4	$	—	$	—
Derivative instruments
Commodity contracts3		3		—		—		3
Total4	$	7	$	4	$	—	$	3
Consumers
Assets
Cash equivalents	$	282	$	282	$	—	$	—
Restricted cash equivalents		13		13		—		—
CMS Energy common stock		31		31		—		—
Nonqualified deferred compensation plan assets		3		3		—		—
SERP
Cash equivalents		1		1		—		—
Mutual fund		57		57		—		—
State and municipal bonds		17		—		17		—
Derivative instruments
Commodity contracts		2		—		—		2
Total5	$	406	$	387	$	17	$	2
Liabilities
Nonqualified deferred compensation plan liabilities	$	3	$	3	$	—	$	—
Total	$	3	$	3	$	—	$	—

1	This amount is gross and excludes the impact of offsetting derivative assets and liabilities under master netting arrangements, which was less than $1million at September 30, 2011.
2	At September 30, 2011, CMS Energy's assets classified as Level 3 represented less than one percent of CMS Energy's total assets measured at fair value.
3	This amount is gross and excludes the impact of offsetting derivative assets and liabilities under master netting arrangements and offsetting cash margin deposits paid by CMS ERM to other parties, which was less than $1million at September 30, 2011.
4	At September 30, 2011, CMS Energy's liabilities classified as Level 3 represented 43 percent of CMS Energy's total liabilities measured at fair value. The Level 3 liabilities consisted primarily of an electricity sales agreement held by CMS ERM.
5	At September 30, 2011, Consumers' assets classified as Level 3 represented less than one percent of Consumers' total assets measured at fair value.

Presented in the following table are CMS Energy's and Consumers' assets and liabilities, by level within the fair value hierarchy, reported at fair value on a recurring basis at December 31, 2010:

In Millions
	Total		Level 1		Level 2		Level 3
CMS Energy, including Consumers
Assets
Cash equivalents	$	183	$	183	$	—	$	—
Restricted cash equivalents		6		6		—		—
Nonqualified deferred compensation plan assets		6		6		—		—
SERP
Cash equivalents		1		1		—		—
Mutual fund		62		62		—		—
State and municipal bonds		28		—		28		—
Derivative instruments
Commodity contracts1		1		—		—		1
Total2	$	287	$	258	$	28	$	1
Liabilities
Nonqualified deferred compensation plan liabilities	$	6	$	6	$	—	$	—
Derivative instruments
Commodity contracts3		4		—		—		4
Total4	$	10	$	6	$	—	$	4
Consumers
Assets
Cash equivalents	$	19	$	19	$	—	$	—
Restricted cash equivalents		6		6		—		—
CMS Energy common stock		34		34		—		—
Nonqualified deferred compensation plan assets		4		4		—		—
SERP
Cash equivalents		1		1		—		—
Mutual fund		39		39		—		—
State and municipal bonds		17		—		17		—
Derivative instruments
Commodity contracts		1		—		—		1
Total5	$	121	$	103	$	17	$	1
Liabilities
Nonqualified deferred compensation plan liabilities	$	4	$	4	$	—	$	—
Total	$	4	$	4	$	—	$	—

1	This amount is gross and excludes the impact of offsetting derivative assets and liabilities under master netting arrangements, which was less than $1million at December 31, 2010.
2	At December 31, 2010, CMS Energy's assets classified as Level 3 represented less than one percent of CMS Energy's total assets measured at fair value.
3	This amount is gross and excludes the impact of offsetting derivative assets and liabilities under master netting arrangements and offsetting cash margin deposits paid by CMS ERM to other parties, which was less than $1million at December 31, 2010.
4	At December 31, 2010, CMS Energy's liabilities classified as Level 3 represented 40 percent of CMS Energy's total liabilities measured at fair value. The Level 3 liabilities consisted primarily of an electricity sales agreement held by CMS ERM.
5	At December 31, 2010, Consumers' assets classified as Level 3 represented one percent of Consumers' total assets measured at fair value.

Cash Equivalents: Cash equivalents and restricted cash equivalents consist of money market funds with daily liquidity. The funds invest in U.S. Treasury notes, other government-backed securities, repurchase agreements collateralized by U.S. Treasury notes, and highly rated, short-term corporate debt securities.

Nonqualified Deferred Compensation Plan Assets: CMS Energy's and Consumers' nonqualified deferred compensation plan assets are invested in various mutual funds. CMS Energy and Consumers value these assets using a market approach, using the daily quoted net asset values provided by the fund managers that are the basis for transactions to buy or sell shares in each fund. CMS Energy and Consumers report these assets in other non-current assets on their consolidated balance sheets.

SERP Assets: CMS Energy and Consumers value their SERP assets using a market approach, incorporating prices and other relevant information from market transactions. The SERP cash equivalents consist of a money market fund with daily liquidity, which invests in state and municipal securities.

The SERP invests in a short-term, fixed-income mutual fund that holds a variety of debt securities with average maturities of one to three years. The fund invests primarily in investment-grade debt securities but, in order to achieve its investment objective, it may invest a portion of its assets in high-yield securities, foreign debt, and derivative instruments. The fair value of the fund is determined using the daily published net asset value, which is the basis for transactions to buy or sell shares in the fund.

The SERP state and municipal bonds are investment grade securities that are valued using a matrix pricing model that incorporates Level 2 market-based information. The fair value of the bonds is derived from various observable inputs, including benchmark yields, reported trades, broker/dealer quotes, bond ratings, and general information on market movements normally considered by market participants when pricing such debt securities. CMS Energy and Consumers report their SERP assets in other non-current assets on their consolidated balance sheets. For additional details about SERP securities, see Note 7, Financial Instruments.

Nonqualified Deferred Compensation Plan Liabilities: CMS Energy and Consumers value their non-qualified deferred compensation plan liabilities based on the fair values of the plan assets, as they reflect what is owed to the plan participants in accordance with their investment elections. CMS Energy and Consumers report these liabilities in other non-current liabilities on their consolidated balance sheets.

Derivative Instruments: CMS Energy and Consumers value their derivative instruments using either a market approach that incorporates information from market transactions, or an income approach that discounts future expected cash flows to a present value amount. They use various inputs to value the derivatives depending on the type of contract and the availability of market data. CMS Energy has exchange-traded derivative contracts that are valued based on Level 1 quoted prices in actively traded markets, as well as derivatives valued using Level 2 inputs, including commodity market prices, interest rates, credit ratings, default rates, and market-based seasonality factors. CMS Energy and Consumers have classified certain derivatives as Level 3 since the fair value measurements incorporate pricing assumptions that cannot be observed or confirmed through market transactions.

The most significant derivatives classified as Level 3 are an electricity sales agreement held by CMS ERM and FTRs held by Consumers. At December 31, 2010 and in prior periods, quoted electricity prices were not available for the entire term of the electricity sales agreement held by CMS ERM, and a proprietary forward pricing model was used to determine fair value. At September 30, 2011, quoted prices at the nearest active market were available for the entire term of the agreement. The agreement, however, remains classified as Level 3 since the pricing differential between the nearest active market in Ohio and the delivery point in Michigan cannot be confirmed with observable market transactions. There is no quoted pricing information for FTRs held by Consumers. Consumers determines the fair value of FTRs based on Consumers' average historical settlements.

For fair values other than Level 1 prices, CMS Energy and Consumers may incorporate adjustments for the risk of nonperformance as deemed appropriate. For derivative assets, a credit adjustment is applied against the asset based on the published default rate for the credit rating assigned to the counterparty based on an internal credit-scoring model. This model considers various inputs, including the counterparty's financial statements, credit reports, trade press, and other information available to market participants. If the internal rating is comparable to credit ratings published by independent rating agencies, the resulting credit adjustment is classified as Level 2. If the internal rating is outside of the range of ratings given by independent agencies and the credit adjustment is significant to the overall valuation, the derivative fair value is classified as Level 3. CMS Energy and Consumers adjust their derivative liabilities downward to reflect the risk of their own nonperformance, based on their published credit ratings. CMS Energy and Consumers monitor market conditions and may incorporate other data, such as credit default swap rates, in determining adjustments for credit risk as warranted. For additional details about derivative contracts, see Note 8, Derivative Instruments.

Assets and Liabilities Measured at Fair Value on a Recurring Basis using Significant Level 3 Inputs

Presented in the following tables are reconciliations of changes in the fair values of Level 3 assets and liabilities at CMS Energy and Consumers:

In Millions
	Three Months Ended						Nine Months Ended
September 30	2011			2010			2011			2010
CMS Energy, including Consumers
Balance at beginning of period	$	—		$	(5	)	$	(3	)	$	(8	)
Total gains (losses) included in earnings1		(1	)		2			(1	)		4
Total gains (losses) offset through regulatory accounting		(1	)		3			2			4
Settlements		1			(3	)		1			(3	)
Balance at end of period	$	(1	)	$	(3	)	$	(1	)	$	(3	)
Unrealized gains (losses) included in earnings relating to assets and liabilities still held at end of period1	$	(1	)	$	2		$	—		$	4
Consumers
Balance at beginning of period	$	3		$	—		$	1		$	—
Total gains (losses) offset through regulatory accounting		(1	)		3			2			4
Settlements		—			(2	)		(1	)		(3	)
Balance at end of period	$	2		$	1		$	2		$	1

¹ CMS Energy records realized and unrealized gains and losses for Level 3 recurring fair values in earnings as a component of operating revenue or maintenance and other operating expenses on its consolidated statements of income.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

CMS Energy and Consumers had no nonrecurring fair value measurements during the nine months ended September 30, 2011.

Presented in the following table are CMS Energy's assets, by level within the fair value hierarchy, reported at fair value on a nonrecurring basis during the nine months ended September 30, 2010:

In Millions
	Level 1		Level 2		Level 3		Losses
CMS Energy, including Consumers
Assets held for sale	$	—	$	—	$	7	$	(4	)

In June 2010, CMS Energy wrote down assets held for sale from their carrying amount of $11 million to their fair value of $7 million, resulting in a loss of $4 million, which was recorded in earnings as part of discontinued operations. The fair value was determined based on a discounted cash flow technique. CMS Energy had no other nonrecurring fair value measurements and Consumers had no nonrecurring fair value measurements during the nine months ended September 30, 2010.

Consumers Energy Company [Member]

Fair Value Measurements

2: FAIR VALUE MEASUREMENTS

Accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. When measuring fair value, CMS Energy and Consumers are required to incorporate all assumptions that market participants would use in pricing an asset or liability, including assumptions about risk. A fair value hierarchy prioritizes inputs used to measure fair value according to their observability in the market. The three levels of the fair value hierarchy are as follows:

• Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities.

• Level 2 inputs are observable, market-based inputs, other than Level 1 prices. Level 2 inputs may include quoted prices for similar assets or liabilities in active markets, quoted prices in inactive markets, interest rates and yield curves observable at commonly quoted intervals, credit risks, default rates, and inputs derived from or corroborated by observable market data.

• Level 3 inputs are unobservable inputs that reflect CMS Energy's or Consumers' own assumptions about how market participants would value their assets and liabilities.

To the extent possible, CMS Energy and Consumers use quoted market prices or other observable market pricing data in valuing assets and liabilities measured at fair value. If this information is unavailable, they use market-corroborated data or reasonable estimates about market participant assumptions. CMS Energy and Consumers classify fair value measurements within the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement in its entirety.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Presented in the following table are CMS Energy's and Consumers' assets and liabilities, by level within the fair value hierarchy, reported at fair value on a recurring basis at September 30, 2011:

In Millions
	Total		Level 1		Level 2		Level 3
CMS Energy, including Consumers
Assets
Cash equivalents	$	512	$	512	$	—	$	—
Restricted cash equivalents		14		14		—		—
Nonqualified deferred compensation plan assets		4		4		—		—
SERP
Cash equivalents		1		1		—		—
Mutual fund		87		87		—		—
State and municipal bonds		26		—		26		—
Derivative instruments
Commodity contracts1		2		—		—		2
Total2	$	646	$	618	$	26	$	2
Liabilities
Nonqualified deferred compensation plan liabilities	$	4	$	4	$	—	$	—
Derivative instruments
Commodity contracts3		3		—		—		3
Total4	$	7	$	4	$	—	$	3
Consumers
Assets
Cash equivalents	$	282	$	282	$	—	$	—
Restricted cash equivalents		13		13		—		—
CMS Energy common stock		31		31		—		—
Nonqualified deferred compensation plan assets		3		3		—		—
SERP
Cash equivalents		1		1		—		—
Mutual fund		57		57		—		—
State and municipal bonds		17		—		17		—
Derivative instruments
Commodity contracts		2		—		—		2
Total5	$	406	$	387	$	17	$	2
Liabilities
Nonqualified deferred compensation plan liabilities	$	3	$	3	$	—	$	—
Total	$	3	$	3	$	—	$	—

1	This amount is gross and excludes the impact of offsetting derivative assets and liabilities under master netting arrangements, which was less than $1million at September 30, 2011.
2	At September 30, 2011, CMS Energy's assets classified as Level 3 represented less than one percent of CMS Energy's total assets measured at fair value.
3	This amount is gross and excludes the impact of offsetting derivative assets and liabilities under master netting arrangements and offsetting cash margin deposits paid by CMS ERM to other parties, which was less than $1million at September 30, 2011.
4	At September 30, 2011, CMS Energy's liabilities classified as Level 3 represented 43 percent of CMS Energy's total liabilities measured at fair value. The Level 3 liabilities consisted primarily of an electricity sales agreement held by CMS ERM.
5	At September 30, 2011, Consumers' assets classified as Level 3 represented less than one percent of Consumers' total assets measured at fair value.

Presented in the following table are CMS Energy's and Consumers' assets and liabilities, by level within the fair value hierarchy, reported at fair value on a recurring basis at December 31, 2010:

In Millions
	Total		Level 1		Level 2		Level 3
CMS Energy, including Consumers
Assets
Cash equivalents	$	183	$	183	$	—	$	—
Restricted cash equivalents		6		6		—		—
Nonqualified deferred compensation plan assets		6		6		—		—
SERP
Cash equivalents		1		1		—		—
Mutual fund		62		62		—		—
State and municipal bonds		28		—		28		—
Derivative instruments
Commodity contracts1		1		—		—		1
Total2	$	287	$	258	$	28	$	1
Liabilities
Nonqualified deferred compensation plan liabilities	$	6	$	6	$	—	$	—
Derivative instruments
Commodity contracts3		4		—		—		4
Total4	$	10	$	6	$	—	$	4
Consumers
Assets
Cash equivalents	$	19	$	19	$	—	$	—
Restricted cash equivalents		6		6		—		—
CMS Energy common stock		34		34		—		—
Nonqualified deferred compensation plan assets		4		4		—		—
SERP
Cash equivalents		1		1		—		—
Mutual fund		39		39		—		—
State and municipal bonds		17		—		17		—
Derivative instruments
Commodity contracts		1		—		—		1
Total5	$	121	$	103	$	17	$	1
Liabilities
Nonqualified deferred compensation plan liabilities	$	4	$	4	$	—	$	—
Total	$	4	$	4	$	—	$	—

1	This amount is gross and excludes the impact of offsetting derivative assets and liabilities under master netting arrangements, which was less than $1million at December 31, 2010.
2	At December 31, 2010, CMS Energy's assets classified as Level 3 represented less than one percent of CMS Energy's total assets measured at fair value.
3	This amount is gross and excludes the impact of offsetting derivative assets and liabilities under master netting arrangements and offsetting cash margin deposits paid by CMS ERM to other parties, which was less than $1 million at December 31, 2010.
4	At December 31, 2010, CMS Energy's liabilities classified as Level 3 represented 40 percent of CMS Energy's total liabilities measured at fair value. The Level 3 liabilities consisted primarily of an electricity sales agreement held by CMS ERM.
5	At December 31, 2010, Consumers' assets classified as Level 3 represented one percent of Consumers' total assets measured at fair value.

Cash Equivalents: Cash equivalents and restricted cash equivalents consist of money market funds with daily liquidity. The funds invest in U.S. Treasury notes, other government-backed securities, repurchase agreements collateralized by U.S. Treasury notes, and highly rated, short-term corporate debt securities.

Nonqualified Deferred Compensation Plan Assets: CMS Energy's and Consumers' nonqualified deferred compensation plan assets are invested in various mutual funds. CMS Energy and Consumers value these assets using a market approach, using the daily quoted net asset values provided by the fund managers that are the basis for transactions to buy or sell shares in each fund. CMS Energy and Consumers report these assets in other non-current assets on their consolidated balance sheets.

SERP Assets: CMS Energy and Consumers value their SERP assets using a market approach, incorporating prices and other relevant information from market transactions. The SERP cash equivalents consist of a money market fund with daily liquidity, which invests in state and municipal securities.

The SERP invests in a short-term, fixed-income mutual fund that holds a variety of debt securities with average maturities of one to three years. The fund invests primarily in investment-grade debt securities but, in order to achieve its investment objective, it may invest a portion of its assets in high-yield securities, foreign debt, and derivative instruments. The fair value of the fund is determined using the daily published net asset value, which is the basis for transactions to buy or sell shares in the fund.

The SERP state and municipal bonds are investment grade securities that are valued using a matrix pricing model that incorporates Level 2 market-based information. The fair value of the bonds is derived from various observable inputs, including benchmark yields, reported trades, broker/dealer quotes, bond ratings, and general information on market movements normally considered by market participants when pricing such debt securities. CMS Energy and Consumers report their SERP assets in other non-current assets on their consolidated balance sheets. For additional details about SERP securities, see Note 7, Financial Instruments.

Nonqualified Deferred Compensation Plan Liabilities: CMS Energy and Consumers value their non-qualified deferred compensation plan liabilities based on the fair values of the plan assets, as they reflect what is owed to the plan participants in accordance with their investment elections. CMS Energy and Consumers report these liabilities in other non-current liabilities on their consolidated balance sheets.

Derivative Instruments: CMS Energy and Consumers value their derivative instruments using either a market approach that incorporates information from market transactions, or an income approach that discounts future expected cash flows to a present value amount. They use various inputs to value the derivatives depending on the type of contract and the availability of market data. CMS Energy has exchange-traded derivative contracts that are valued based on Level 1 quoted prices in actively traded

markets, as well as derivatives valued using Level 2 inputs, including commodity market prices, interest rates, credit ratings, default rates, and market-based seasonality factors. CMS Energy and Consumers have classified certain derivatives as Level 3 since the fair value measurements incorporate pricing assumptions that cannot be observed or confirmed through market transactions.

The most significant derivatives classified as Level 3 are an electricity sales agreement held by CMS ERM and FTRs held by Consumers. At December 31, 2010 and in prior periods, quoted electricity prices were not available for the entire term of the electricity sales agreement held by CMS ERM, and a proprietary forward pricing model was used to determine fair value. At September 30, 2011, quoted prices at the nearest active market were available for the entire term of the agreement. The agreement, however, remains classified as Level 3 since the pricing differential between the nearest active market in Ohio and the delivery point in Michigan cannot be confirmed with observable market transactions. There is no quoted pricing information for FTRs held by Consumers. Consumers determines the fair value of FTRs based on Consumers' average historical settlements.

For fair values other than Level 1 prices, CMS Energy and Consumers may incorporate adjustments for the risk of nonperformance as deemed appropriate. For derivative assets, a credit adjustment is applied against the asset based on the published default rate for the credit rating assigned to the counterparty based on an internal credit-scoring model. This model considers various inputs, including the counterparty's financial statements, credit reports, trade press, and other information available to market participants. If the internal rating is comparable to credit ratings published by independent rating agencies, the resulting credit adjustment is classified as Level 2. If the internal rating is outside of the range of ratings given by independent agencies and the credit adjustment is significant to the overall valuation, the derivative fair value is classified as Level 3. CMS Energy and Consumers adjust their derivative liabilities downward to reflect the risk of their own nonperformance, based on their published credit ratings. CMS Energy and Consumers monitor market conditions and may incorporate other data, such as credit default swap rates, in determining adjustments for credit risk as warranted. For additional details about derivative contracts, see Note 8, Derivative Instruments.

Assets and Liabilities Measured at Fair Value on a Recurring Basis using Significant Level 3 Inputs

Presented in the following tables are reconciliations of changes in the fair values of Level 3 assets and liabilities at CMS Energy and Consumers:

In Millions
	Three Months Ended						Nine Months Ended
September 30	2011			2010			2011			2010
CMS Energy, including Consumers
Balance at beginning of period	$	—		$	(5	)	$	(3	)	$	(8	)
Total gains (losses) included in earnings1		(1	)		2			(1	)		4
Total gains (losses) offset through regulatory accounting		(1	)		3			2			4
Settlements		1			(3	)		1			(3	)
Balance at end of period	$	(1	)	$	(3	)	$	(1	)	$	(3	)
Unrealized gains (losses) included in earnings relating to assets and liabilities still held at end of period1	$	(1	)	$	2		$	—		$	4
Consumers
Balance at beginning of period	$	3		$	—		$	1		$	—
Total gains (losses) offset through regulatory accounting		(1	)		3			2			4
Settlements		—			(2	)		(1	)		(3	)
Balance at end of period	$	2		$	1		$	2		$	1

¹ CMS Energy records realized and unrealized gains and losses for Level 3 recurring fair values in earnings as a component of operating revenue or maintenance and other operating expenses on its consolidated statements of income.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

CMS Energy and Consumers had no nonrecurring fair value measurements during the nine months ended September 30, 2011.

Presented in the following table are CMS Energy's assets, by level within the fair value hierarchy, reported at fair value on a nonrecurring basis during the nine months ended September 30, 2010:

In Millions
	Level 1		Level 2		Level 3		Losses
CMS Energy, including Consumers
Assets held for sale	$	—	$	—	$	7	$	(4	)

In June 2010, CMS Energy wrote down assets held for sale from their carrying amount of $11 million to their fair value of $7 million, resulting in a loss of $4 million, which was recorded in earnings as part of discontinued operations. The fair value was determined based on a discounted cash flow technique. CMS Energy had no other nonrecurring fair value measurements and Consumers had no nonrecurring fair value measurements during the nine months ended September 30, 2010.