Fair Value Measurements

9 Months Ended

Sep. 30, 2014

Fair Value Measurements

5: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, 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 recorded at fair value on a recurring basis:

In Millions
	CMS Energy, including Consumers						Consumers
	September 30			December 31			September 30			December 31
	2014			2013			2014			2013
Assets1
Cash equivalents		$	394		$	87		$	146		$	-
Restricted cash equivalents			37			16			37			15
CMS Energy common stock			-			-			32			29
Nonqualified deferred    compensation plan assets			8			6			5			4
DB SERP
Cash equivalents			2			-			1			-
Mutual funds			131			136			93			95
Derivative instruments
Commodity contracts			4			5			3			4
Total		$	576		$	250		$	317		$	147
Liabilities1
Nonqualified deferred    compensation plan liabilities		$	8		$	6		$	5		$	4
Derivative instruments
Commodity contracts			2			1			2			-
Total		$	10		$	7		$	7		$	4

¹ All assets and liabilities were classified as Level 1 with the exception of commodity contracts, which were classified as Level 2 or Level 3, and which were insignificant at September 30, 2014.

Cash Equivalents:  Cash equivalents and restricted cash equivalents consist of money market funds with daily liquidity.  Short-term debt instruments classified as cash equivalents or restricted cash equivalents on the consolidated balance sheets are not included since they are recorded at amortized cost.

Nonqualified Deferred Compensation Plan Assets and Liabilities:  The nonqualified deferred compensation plan assets consist of mutual funds, which are valued using the daily quoted NAVs that are publicly available and are the basis for transactions to buy or sell shares in each fund.  CMS Energy and Consumers value their nonqualified 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 the assets in other non‑current assets and the liabilities in other non‑current liabilities on their consolidated balance sheets.

DB SERP Assets:  CMS Energy and Consumers value their DB SERP assets using a market approach that incorporates quoted market prices.  The DB SERP cash equivalents consist of a money market fund with daily liquidity.  The DB SERP invests in mutual funds that hold primarily fixed-income instruments of varying maturities.  In order to meet their investment objectives, the funds hold investment-grade debt securities, and may invest a portion of their assets in high-yield securities, foreign debt, and derivative instruments.  CMS Energy and Consumers value these funds using the daily quoted NAVs that are publicly available and are the basis for transactions to buy or sell shares in each fund.  CMS Energy and Consumers report their DB SERP assets in other non‑current assets on their consolidated balance sheets.  For additional details about DB SERP securities, see Note 6, Financial Instruments.

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.  CMS Energy values its exchange-traded derivative contracts based on Level 1 quoted prices and values other derivatives using Level 2 inputs, including commodity forward prices and credit risk factors.  CMS Energy and Consumers have classified certain derivatives as Level 3 since the fair value measurements incorporate assumptions that cannot be observed or confirmed through market transactions.

The majority of derivatives classified as Level 3 are FTRs held by Consumers.  Consumers 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 FTRs are deferred as regulatory assets or liabilities until the instruments are settled.  Due to the lack of quoted pricing information, Consumers determines the fair value of its FTRs based on Consumers’ average historical settlements.

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

Presented in the following table 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	2014			2013			2014			2013
CMS Energy, including Consumers
Balance at beginning of period		$	1		$	8		$	4		$	2
Total gains (losses) offset through regulatory accounting			2			(2)			(16)			5
Purchases			-			1			(1)			-
Settlements			(2)			(1)			14			(1)
Balance at end of period		$	1		$	6		$	1		$	6
Unrealized gains included in earnings relating to assets and    liabilities still held at end of period1		$	-		$	1		$	-		$	-
Consumers
Balance at beginning of period		$	1		$	10		$	4		$	2
Total gains (losses) offset through regulatory accounting			2			(2)			(16)			5
Purchases			-			(1)			(1)			-
Settlements			(2)			(1)			14			(1)
Balance at end of period		$	1		$	6		$	1		$	6

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

Consumers Energy Company [Member]

Fair Value Measurements

5: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, 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 recorded at fair value on a recurring basis:

In Millions
	CMS Energy, including Consumers						Consumers
	September 30			December 31			September 30			December 31
	2014			2013			2014			2013
Assets1
Cash equivalents		$	394		$	87		$	146		$	-
Restricted cash equivalents			37			16			37			15
CMS Energy common stock			-			-			32			29
Nonqualified deferred    compensation plan assets			8			6			5			4
DB SERP
Cash equivalents			2			-			1			-
Mutual funds			131			136			93			95
Derivative instruments
Commodity contracts			4			5			3			4
Total		$	576		$	250		$	317		$	147
Liabilities1
Nonqualified deferred    compensation plan liabilities		$	8		$	6		$	5		$	4
Derivative instruments
Commodity contracts			2			1			2			-
Total		$	10		$	7		$	7		$	4

¹ All assets and liabilities were classified as Level 1 with the exception of commodity contracts, which were classified as Level 2 or Level 3, and which were insignificant at September 30, 2014.

Cash Equivalents:  Cash equivalents and restricted cash equivalents consist of money market funds with daily liquidity.  Short-term debt instruments classified as cash equivalents or restricted cash equivalents on the consolidated balance sheets are not included since they are recorded at amortized cost.

Nonqualified Deferred Compensation Plan Assets and Liabilities:  The nonqualified deferred compensation plan assets consist of mutual funds, which are valued using the daily quoted NAVs that are publicly available and are the basis for transactions to buy or sell shares in each fund.  CMS Energy and Consumers value their nonqualified 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 the assets in other non‑current assets and the liabilities in other non‑current liabilities on their consolidated balance sheets.

DB SERP Assets:  CMS Energy and Consumers value their DB SERP assets using a market approach that incorporates quoted market prices.  The DB SERP cash equivalents consist of a money market fund with daily liquidity.  The DB SERP invests in mutual funds that hold primarily fixed-income instruments of varying maturities.  In order to meet their investment objectives, the funds hold investment-grade debt securities, and may invest a portion of their assets in high-yield securities, foreign debt, and derivative instruments.  CMS Energy and Consumers value these funds using the daily quoted NAVs that are publicly available and are the basis for transactions to buy or sell shares in each fund.  CMS Energy and Consumers report their DB SERP assets in other non‑current assets on their consolidated balance sheets.  For additional details about DB SERP securities, see Note 6, Financial Instruments.

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.  CMS Energy values its exchange-traded derivative contracts based on Level 1 quoted prices and values other derivatives using Level 2 inputs, including commodity forward prices and credit risk factors.  CMS Energy and Consumers have classified certain derivatives as Level 3 since the fair value measurements incorporate assumptions that cannot be observed or confirmed through market transactions.

The majority of derivatives classified as Level 3 are FTRs held by Consumers.  Consumers 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 FTRs are deferred as regulatory assets or liabilities until the instruments are settled.  Due to the lack of quoted pricing information, Consumers determines the fair value of its FTRs based on Consumers’ average historical settlements.

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

Presented in the following table 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	2014			2013			2014			2013
CMS Energy, including Consumers
Balance at beginning of period		$	1		$	8		$	4		$	2
Total gains (losses) offset through regulatory accounting			2			(2)			(16)			5
Purchases			-			1			(1)			-
Settlements			(2)			(1)			14			(1)
Balance at end of period		$	1		$	6		$	1		$	6
Unrealized gains included in earnings relating to assets and    liabilities still held at end of period1		$	-		$	1		$	-		$	-
Consumers
Balance at beginning of period		$	1		$	10		$	4		$	2
Total gains (losses) offset through regulatory accounting			2			(2)			(16)			5
Purchases			-			(1)			(1)			-
Settlements			(2)			(1)			14			(1)
Balance at end of period		$	1		$	6		$	1		$	6

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