Derivative Instruments

9 Months Ended

Sep. 30, 2012

Derivative Instruments

8:DERIVATIVE INSTRUMENTS

In order to limit exposure to certain market risks, primarily changes in commodity prices, interest rates, and foreign exchange rates, CMS Energy and Consumers may enter into various risk management contracts, such as forward contracts, futures, options, and swaps.  The contracts used to manage market risks may qualify as derivative instruments.  Neither CMS Energy nor Consumers enters into any derivatives for trading purposes.

Commodity Price Risk:  In order to support ongoing operations, CMS Energy and Consumers enter into contracts for the future purchase and sale of various commodities, such as electricity, natural gas, and coal.  These forward contracts are generally long-term in nature and result in physical delivery of the commodity at a contracted price.  Most of these contracts are not subject to derivative accounting because:

· they do not have a notional amount (that is, a number of units specified in a derivative instrument, such as MWh of electricity or bcf of natural gas);

· they qualify for the normal purchases and sales exception; or

· there is not an active market for the commodity.

Consumers’ coal purchase contracts are not derivatives because there is not an active market for the coal it purchases.  If an active market for coal develops in the future, some of these contracts may qualify as derivatives.  Since Consumers is subject to regulatory accounting, the resulting fair value gains and losses would be deferred as regulatory assets or liabilities and would not affect net income. 

Consumers also uses FTRs to manage price risk related to electricity transmission congestion.  An FTR is a financial instrument that entitles its holder to receive compensation or requires its holder to remit payment for congestion-related transmission charges.  FTRs are accounted for as derivatives.  Under regulatory accounting, all changes in fair value associated with these instruments are deferred as regulatory assets or liabilities until the instruments are settled.

CMS ERM has not designated its contracts to purchase and sell electricity and natural gas as normal purchases and sales and, therefore, CMS Energy accounts for those contracts as derivatives.

The fair value of CMS Energy’s commodity contracts not designated as hedging instruments and recorded in other assets was $6 million at September 30, 2012 and $3 million at December 31, 2011.  The fair value of Consumers’ commodity contracts not designated as hedging instruments and recorded in other assets was $4 million at September 30, 2012 and $2 million at December 31, 2011.  The fair value of CMS Energy’s commodity contracts not designated as hedging instruments and recorded in other liabilities was $6 million at September 30, 2012 and $7 million at December 31, 2011.  Consumers did not have any contracts recorded as liabilities at September 30, 2012 and December 31, 2011.

Presented in the following table are the location and amount of the gains (losses) on derivatives recognized in CMS Energy’s consolidated statements of income for its derivatives not designated as hedging instruments:

In Millions
	Three Months Ended						Nine Months Ended
September 30	2012			2011			2012			2011
CMS Energy
Commodity contracts
Operating revenue		$	(2)		$	(1)		$	1		$	(1)
Fuel for electric generation			-			-			(2)			-
Cost of gas sold			1			-			1			-
Purchased and interchange power			-			-			(1)			-
Total CMS Energy		$	(1)		$	(1)		$	(1)		$	(1)

Consumers’ gains on FTRs deferred as regulatory liabilities were $1 million for the three months ended September 30, 2012 and $8 million for the nine months ended September 30, 2012.  Consumers’ losses on FTRs deferred as regulatory assets were $1 million for the three months ended September 30, 2011 and its gains on FTRs deferred as regulatory liabilities were $1 million for the nine months ended September 30, 2011.

CMS Energy’s derivative liabilities subject to credit-risk-related contingent features were $4 million at September 30, 2012 and $4 million at December 31, 2011.

Consumers Energy Company [Member]

Derivative Instruments

8:DERIVATIVE INSTRUMENTS

In order to limit exposure to certain market risks, primarily changes in commodity prices, interest rates, and foreign exchange rates, CMS Energy and Consumers may enter into various risk management contracts, such as forward contracts, futures, options, and swaps.  The contracts used to manage market risks may qualify as derivative instruments.  Neither CMS Energy nor Consumers enters into any derivatives for trading purposes.

Commodity Price Risk:  In order to support ongoing operations, CMS Energy and Consumers enter into contracts for the future purchase and sale of various commodities, such as electricity, natural gas, and coal.  These forward contracts are generally long-term in nature and result in physical delivery of the commodity at a contracted price.  Most of these contracts are not subject to derivative accounting because:

· they do not have a notional amount (that is, a number of units specified in a derivative instrument, such as MWh of electricity or bcf of natural gas);

· they qualify for the normal purchases and sales exception; or

· there is not an active market for the commodity.

Consumers’ coal purchase contracts are not derivatives because there is not an active market for the coal it purchases.  If an active market for coal develops in the future, some of these contracts may qualify as derivatives.  Since Consumers is subject to regulatory accounting, the resulting fair value gains and losses would be deferred as regulatory assets or liabilities and would not affect net income. 

Consumers also uses FTRs to manage price risk related to electricity transmission congestion.  An FTR is a financial instrument that entitles its holder to receive compensation or requires its holder to remit payment for congestion-related transmission charges.  FTRs are accounted for as derivatives.  Under regulatory accounting, all changes in fair value associated with these instruments are deferred as regulatory assets or liabilities until the instruments are settled.

CMS ERM has not designated its contracts to purchase and sell electricity and natural gas as normal purchases and sales and, therefore, CMS Energy accounts for those contracts as derivatives.

The fair value of CMS Energy’s commodity contracts not designated as hedging instruments and recorded in other assets was $6 million at September 30, 2012 and $3 million at December 31, 2011.  The fair value of Consumers’ commodity contracts not designated as hedging instruments and recorded in other assets was $4 million at September 30, 2012 and $2 million at December 31, 2011.  The fair value of CMS Energy’s commodity contracts not designated as hedging instruments and recorded in other liabilities was $6 million at September 30, 2012 and $7 million at December 31, 2011.  Consumers did not have any contracts recorded as liabilities at September 30, 2012 and December 31, 2011.

Presented in the following table are the location and amount of the gains (losses) on derivatives recognized in CMS Energy’s consolidated statements of income for its derivatives not designated as hedging instruments:

In Millions
	Three Months Ended						Nine Months Ended
September 30	2012			2011			2012			2011
CMS Energy
Commodity contracts
Operating revenue		$	(2)		$	(1)		$	1		$	(1)
Fuel for electric generation			-			-			(2)			-
Cost of gas sold			1			-			1			-
Purchased and interchange power			-			-			(1)			-
Total CMS Energy		$	(1)		$	(1)		$	(1)		$	(1)

Consumers’ gains on FTRs deferred as regulatory liabilities were $1 million for the three months ended September 30, 2012 and $8 million for the nine months ended September 30, 2012.  Consumers’ losses on FTRs deferred as regulatory assets were $1 million for the three months ended September 30, 2011 and its gains on FTRs deferred as regulatory liabilities were $1 million for the nine months ended September 30, 2011.

CMS Energy’s derivative liabilities subject to credit-risk-related contingent features were $4 million at September 30, 2012 and $4 million at December 31, 2011.