Financial Instruments

9 Months Ended

Sep. 30, 2012

Financial Instruments

7:FINANCIAL INSTRUMENTS

Presented in the following table are the carrying amounts and fair values, by level within the fair value hierarchy, of CMS Energy’s and Consumers’ financial instruments that are not recorded at fair value.  The table does not include information on cash, cash equivalents, short-term accounts and notes receivable, short-term investments, and current liabilities since the carrying amount of these items approximate their fair values because of their short-term nature.  For information about assets and liabilities recorded at fair value and for additional details regarding the fair value hierarchy, see Note 2: Fair Value Measurements.

In Millions
	September 30, 2012															December 31, 2011
	Carrying			Fair Value												Carrying
	Amount			Total			Level 1			Level 2			Level 3			Amount			Fair Value
CMS Energy, including Consumers
Securities held to
maturity		$	8		$	9		$	-		$	9		$	-		$	7		$	7
Notes receivable1			513			541			-			-			541			480			504
Long-term debt2			7,199			8,251			-			8,251			-			7,073			8,025
Consumers
Long-term debt3		$	4,348		$	4,987		$	-		$	4,987		$	-		$	4,326		$	4,882

¹ Includes current portion of notes receivable of $27 million at September 30, 2012 and $19 million at December 31, 2011.

² Includes current portion of long-term debt of $488 million at September 30, 2012 and $1,033 million at December 31, 2011.

³ Includes current portion of long-term debt of $40 million at September 30, 2012 and $339 million at December 31, 2011.

Notes receivable consist of EnerBank’s fixed-rate installment loans.  EnerBank estimates the fair value of these loans using a discounted cash flows technique that incorporates market interest rates as well as assumptions about the remaining life of the loans and credit risk. 

CMS Energy and Consumers estimate the fair value of their long-term debt using quoted prices from market trades of the debt, if available.  In the absence of quoted prices, CMS Energy and Consumers calculate market yields and prices for the debt using a matrix method that incorporates market data for similarly rated debt.  Depending on the information available, other valuation techniques may be used that rely on internal assumptions and models.  CMS Energy includes the value of the conversion features in estimating the fair value of its convertible debt, and incorporates, as appropriate, information on the market prices of CMS Energy common stock. 

The effects of third-party credit enhancements are excluded from the fair value measurements of long-term debt.  At September 30, 2012 and December 31, 2011, CMS Energy’s long-term debt included $103 million principal amount that was supported by third-party credit enhancements.  This entire principal amount was at Consumers. 

Presented in the following table are CMS Energy’s and Consumers’ investment securities classified as available for sale or held to maturity:

In Millions
	September 30, 2012												December 31, 2011
				Unrealized			Unrealized			Fair						Unrealized			Unrealized			Fair
	Cost			Gains			Losses			Value			Cost			Gains			Losses			Value
CMS Energy, including Consumers
Available for sale
SERP
Mutual funds		$	124		$	4		$	-		$	128		$	113		$	-		$	-		$	113
Held to maturity
Debt securities			8			1			-			9			7			-			-			7
Consumers
Available for sale
SERP
Mutual funds		$	84		$	2		$	-		$	86		$	74		$	-		$	-		$	74
CMS Energy
common stock			6			25			-			31			7			28			-			35

The mutual funds classified as available for sale hold primarily fixed-income instruments of varying maturities.  During the nine months ended September 30, 2012, CMS Energy contributed $13 million to the SERP, which included a contribution of $9 million by Consumers.  The contributions were used to acquire additional shares in the mutual funds.  Debt securities classified as held to maturity consist primarily of mortgage-backed securities held by EnerBank. 

Sales activity for CMS Energy’s and Consumers’ investment securities was insignificant for each of the three-month and nine-month periods ended September 30, 2012 and 2011.  In January 2012, based on a donation commitment made in 2011, Consumers transferred shares of CMS Energy common stock to a related charitable foundation and recognized a gain of $5 million in income to reflect the excess of fair value over cost of the stock donated.  In January 2011, based on a donation commitment made in 2010, Consumers transferred shares of CMS Energy common stock to a related charitable foundation and recognized a gain of $4 million in income to reflect the excess of fair value over cost of the stock donated.

Consumers Energy Company [Member]

Financial Instruments

7:FINANCIAL INSTRUMENTS

Presented in the following table are the carrying amounts and fair values, by level within the fair value hierarchy, of CMS Energy’s and Consumers’ financial instruments that are not recorded at fair value.  The table does not include information on cash, cash equivalents, short-term accounts and notes receivable, short-term investments, and current liabilities since the carrying amount of these items approximate their fair values because of their short-term nature.  For information about assets and liabilities recorded at fair value and for additional details regarding the fair value hierarchy, see Note 2: Fair Value Measurements.

In Millions
	September 30, 2012															December 31, 2011
	Carrying			Fair Value												Carrying
	Amount			Total			Level 1			Level 2			Level 3			Amount			Fair Value
CMS Energy, including Consumers
Securities held to
maturity		$	8		$	9		$	-		$	9		$	-		$	7		$	7
Notes receivable1			513			541			-			-			541			480			504
Long-term debt2			7,199			8,251			-			8,251			-			7,073			8,025
Consumers
Long-term debt3		$	4,348		$	4,987		$	-		$	4,987		$	-		$	4,326		$	4,882

¹ Includes current portion of notes receivable of $27 million at September 30, 2012 and $19 million at December 31, 2011.

² Includes current portion of long-term debt of $488 million at September 30, 2012 and $1,033 million at December 31, 2011.

³ Includes current portion of long-term debt of $40 million at September 30, 2012 and $339 million at December 31, 2011.

Notes receivable consist of EnerBank’s fixed-rate installment loans.  EnerBank estimates the fair value of these loans using a discounted cash flows technique that incorporates market interest rates as well as assumptions about the remaining life of the loans and credit risk. 

CMS Energy and Consumers estimate the fair value of their long-term debt using quoted prices from market trades of the debt, if available.  In the absence of quoted prices, CMS Energy and Consumers calculate market yields and prices for the debt using a matrix method that incorporates market data for similarly rated debt.  Depending on the information available, other valuation techniques may be used that rely on internal assumptions and models.  CMS Energy includes the value of the conversion features in estimating the fair value of its convertible debt, and incorporates, as appropriate, information on the market prices of CMS Energy common stock. 

The effects of third-party credit enhancements are excluded from the fair value measurements of long-term debt.  At September 30, 2012 and December 31, 2011, CMS Energy’s long-term debt included $103 million principal amount that was supported by third-party credit enhancements.  This entire principal amount was at Consumers. 

Presented in the following table are CMS Energy’s and Consumers’ investment securities classified as available for sale or held to maturity:

In Millions
	September 30, 2012												December 31, 2011
				Unrealized			Unrealized			Fair						Unrealized			Unrealized			Fair
	Cost			Gains			Losses			Value			Cost			Gains			Losses			Value
CMS Energy, including Consumers
Available for sale
SERP
Mutual funds		$	124		$	4		$	-		$	128		$	113		$	-		$	-		$	113
Held to maturity
Debt securities			8			1			-			9			7			-			-			7
Consumers
Available for sale
SERP
Mutual funds		$	84		$	2		$	-		$	86		$	74		$	-		$	-		$	74
CMS Energy
common stock			6			25			-			31			7			28			-			35

The mutual funds classified as available for sale hold primarily fixed-income instruments of varying maturities.  During the nine months ended September 30, 2012, CMS Energy contributed $13 million to the SERP, which included a contribution of $9 million by Consumers.  The contributions were used to acquire additional shares in the mutual funds.  Debt securities classified as held to maturity consist primarily of mortgage-backed securities held by EnerBank. 

Sales activity for CMS Energy’s and Consumers’ investment securities was insignificant for each of the three-month and nine-month periods ended September 30, 2012 and 2011.  In January 2012, based on a donation commitment made in 2011, Consumers transferred shares of CMS Energy common stock to a related charitable foundation and recognized a gain of $5 million in income to reflect the excess of fair value over cost of the stock donated.  In January 2011, based on a donation commitment made in 2010, Consumers transferred shares of CMS Energy common stock to a related charitable foundation and recognized a gain of $4 million in income to reflect the excess of fair value over cost of the stock donated.