Fair Value Measurements

12 Months Ended

Dec. 31, 2011

Fair Value Measurements

4:    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 tables are CMS Energy's and Consumers' assets and liabilities, by level within the fair value hierarchy, reported at fair value on a recurring basis:

December 31, 2011	Total		Level 1		Level 2		Level 3
	In Millions
CMS ENERGY, INCLUDING CONSUMERS
Assets
Cash equivalents	$	109	$	109	$	—	$	—
Restricted cash equivalents		15		15		—		—
Nonqualified deferred compensation plan assets		4		4		—		—
SERP
Cash equivalents		1		1		—		—
Mutual funds		113		113		—		—
Derivative instruments
Commodity contracts		3		1		—		2
Total	$	245	$	243	$	—	$	2
Liabilities
Nonqualified deferred compensation plan liabilities	$	4	$	4	$	—	$	—
Derivative instruments
Commodity contracts		7		—		3		4
Total	$	11	$	4	$	3	$	4
CONSUMERS
Assets
Cash equivalents	$	56	$	56	$	—	$	—
Restricted cash equivalents		14		14		—		—
CMS Energy common stock		35		35		—		—
Nonqualified deferred compensation plan assets		3		3		—		—
SERP
Cash equivalents		1		1		—		—
Mutual funds		74		74		—		—
Derivative instruments
Commodity contracts		2		—		—		2
Total	$	185	$	183	$	—	$	2
Liabilities
Nonqualified deferred compensation plan liabilities	$	3	$	3	$	—	$	—
Total	$	3	$	3	$	—	$	—

December 31, 2010	Total		Level 1		Level 2		Level 3
			In Millions
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 contracts		1		—		—		1
Total	$	287	$	258	$	28	$	1
Liabilities
Nonqualified deferred compensation plan liabilities	$	6	$	6	$	—	$	—
Derivative instruments
Commodity contracts		4		—		—		4
Total	$	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
Total	$	121	$	103	$	17	$	1
Liabilities
Nonqualified deferred compensation plan liabilities	$	4	$	4	$	—	$	—
Total	$	4	$	4	$	—	$	—

Cash Equivalents: Cash equivalents and restricted cash equivalents consist of money market funds with daily liquidity.

Nonqualified Deferred Compensation Plan Assets: The nonqualified deferred compensation plan assets consist of various mutual funds that are valued using a market approach. CMS Energy and Consumers value these assets using the daily quoted net asset values 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. The 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 net asset values that are the basis for transactions to buy or sell shares in each fund.

At December 31, 2010, the SERP held state and municipal bonds, which were valued using a matrix pricing model incorporating Level 2 market-based information. The fair value of the bonds was 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 9, 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. CMS Energy has exchange-traded derivative contracts that are valued based on Level 1 quoted prices, 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. At December 31, 2011, the most significant derivatives classified as Level 3 were a power option sold by CMS ERM and FTRs held by Consumers. At December 31, 2010, the most significant derivative classified as Level 3 was an electricity sales agreement held by CMS ERM. In valuing their derivative instruments not classified as Level 1, CMS Energy and Consumers may incorporate adjustments for credit risk, or the risk of nonperformance, as deemed appropriate. For additional details about derivative contracts, see Note 10, Derivative Instruments.

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:

Years Ended December 31	2011			2010			2009
				In Millions
CMS ENERGY, INCLUDING CONSUMERS
Balance at beginning of period	$	(3	)	$	(8	)	$	(16	)
Total gains included in earnings1		2			5			7
Total gains offset through regulatory accounting		2			3			9
Purchases		1			1			1
Sales		(4	)		(1	)		—
Settlements		—			(3	)		(9	)
Balance at end of period	$	(2	)	$	(3	)	$	(8	)
Unrealized gains included in earnings relating to assets and liabilities still held at end of period1	$	2		$	4		$	6
CONSUMERS
Balance at beginning of period	$	1		$	—		$	—
Total gains offset through regulatory accounting		2			3			9
Purchases		1			1			1
Settlements		(2	)		(3	)		(10	)
Balance at end of period	$	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 year ended December 31, 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 year ended December 31, 2010:

In Millions
		Level 1		Level 2		Level 3		Losses
CMS ENERGY, INCLUDING CONSUMERS
Assets held for sale	$	-	$	5	$	-	$	(6	)

In 2010, CMS Energy wrote down assets held for sale from their carrying amount of $11 million to their fair value of $5 million, resulting in a loss of $6 million, which was recorded in earnings as part of discontinued operations. The fair value was determined based on the price that CMS Energy received for the sale of these assets, which closed in January 2011. CMS Energy had no other nonrecurring fair value measurements and Consumers had no nonrecurring fair value measurements during the years ended December 31, 2010 and 2009.

Consumers Energy Company [Member]

Fair Value Measurements

4:    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:

December 31, 2011	Total		Level 1		Level 2		Level 3
	In Millions
CMS ENERGY, INCLUDING CONSUMERS
Assets
Cash equivalents	$	109	$	109	$	—	$	—
Restricted cash equivalents		15		15		—		—
Nonqualified deferred compensation plan assets		4		4		—		—
SERP
Cash equivalents		1		1		—		—
Mutual funds		113		113		—		—
Derivative instruments
Commodity contracts		3		1		—		2
Total	$	245	$	243	$	—	$	2
Liabilities
Nonqualified deferred compensation plan liabilities	$	4	$	4	$	—	$	—
Derivative instruments
Commodity contracts		7		—		3		4
Total	$	11	$	4	$	3	$	4
CONSUMERS
Assets
Cash equivalents	$	56	$	56	$	—	$	—
Restricted cash equivalents		14		14		—		—
CMS Energy common stock		35		35		—		—
Nonqualified deferred compensation plan assets		3		3		—		—
SERP
Cash equivalents		1		1		—		—
Mutual funds		74		74		—		—
Derivative instruments
Commodity contracts		2		—		—		2
Total	$	185	$	183	$	—	$	2
Liabilities
Nonqualified deferred compensation plan liabilities	$	3	$	3	$	—	$	—
Total	$	3	$	3	$	—	$	—

December 31, 2010	Total		Level 1		Level 2		Level 3
			In Millions
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 contracts		1		—		—		1
Total	$	287	$	258	$	28	$	1
Liabilities
Nonqualified deferred compensation plan liabilities	$	6	$	6	$	—	$	—
Derivative instruments
Commodity contracts		4		—		—		4
Total	$	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
Total	$	121	$	103	$	17	$	1
Liabilities
Nonqualified deferred compensation plan liabilities	$	4	$	4	$	—	$	—
Total	$	4	$	4	$	—	$	—

Cash Equivalents: Cash equivalents and restricted cash equivalents consist of money market funds with daily liquidity.

Nonqualified Deferred Compensation Plan Assets: The nonqualified deferred compensation plan assets consist of various mutual funds that are valued using a market approach. CMS Energy and Consumers value these assets using the daily quoted net asset values 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. The 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 assts in high-yield securities, foreign debt, and derivative instruments. CMS Energy and Consumers value these funds using the daily quoted net asset values that are the basis for transactions to buy or sell shares in each fund.

At December 31, 2010, the SERP held state and municipal bonds, which were valued using a matrix pricing model incorporating Level 2 market-based information. The fair value of the bonds was 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 9, 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. CMS Energy has exchange-traded derivative contracts that are valued based on Level 1 quoted prices, 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. At December 31, 2011, the most significant derivatives classified as Level 3 were a power option sold by CMS ERM and FTRs held by Consumers. At December 31, 2010, the most significant derivative classified as Level 3 was an electricity sales agreement held by CMS ERM. In valuing their derivative instruments not classified as Level 1, CMS Energy and Consumers may incorporate adjustments for credit risk, or the risk of nonperformance, as deemed appropriate. For additional details about derivative contracts, see Note 10, Derivative Instruments.

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:

Years Ended December 31	2011			2010			2009
				In Millions
CMS ENERGY, INCLUDING CONSUMERS
Balance at beginning of period	$	(3	)	$	(8	)	$	(16	)
Total gains included in earnings1		2			5			7
Total gains offset through regulatory accounting		2			3			9
Purchases		1			1			1
Sales		(4	)		(1	)		—
Settlements		—			(3	)		(9	)
Balance at end of period	$	(2	)	$	(3	)	$	(8	)
Unrealized gains included in earnings relating to assets and liabilities still held at end of period1	$	2		$	4		$	6
CONSUMERS
Balance at beginning of period	$	1		$	—		$	—
Total gains offset through regulatory accounting		2			3			9
Purchases		1			1			1
Settlements		(2	)		(3	)		(10	)
Balance at end of period	$	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 year ended December 31, 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 year ended December 31, 2010:

In Millions
		Level 1		Level 2		Level 3		Losses
CMS ENERGY, INCLUDING CONSUMERS
Assets held for sale	$	-	$	5	$	-	$	(6	)

In 2010, CMS Energy wrote down assets held for sale from their carrying amount of $11 million to their fair value of $5 million, resulting in a loss of $6 million, which was recorded in earnings as part of discontinued operations. The fair value was determined based on the price that CMS Energy received for the sale of these assets, which closed in January 2011. CMS Energy had no other nonrecurring fair value measurements and Consumers had no nonrecurring fair value measurements during the years ended December 31, 2010 and 2009.