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Fair Value Measurements
 6 Months Ended
Jun. 30, 2012
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, forward prices, 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:

 

                                 
In Millions  
June 30, 2012    Total      Level 1      Level 2      Level 3  

CMS Energy, including Consumers

                                    

Assets

                                    

Cash equivalents

      $    141         $    141         $        -         $        -   

Restricted cash equivalents

      14         14         -         -   

Nonqualified deferred compensation plan assets

      5         5         -         -   

SERP

                                    

Mutual funds

      127         127         -         -   

Derivative instruments

                                    

Commodity contracts

      7         1         1         5   

Total

      $    294         $    288         $        1         $        5   
   

Liabilities

                                    

Nonqualified deferred compensation plan liabilities

      $        5         $        5         $        -         $        -   

Derivative instruments

                                    

Commodity contracts

      6         -         4         2   

Total

      $      11         $        5         $       4         $        2   
   

Consumers

                                    

Assets

                                    

Cash equivalents

      $    122         $    122         $        -         $        -   

Restricted cash equivalents

      14         14         -         -   

CMS Energy common stock

      30         30         -         -   

Nonqualified deferred compensation plan assets

      3         3         -         -   

SERP

                                    

Mutual funds

      86         86         -         -   

Derivative instruments

                                    

Commodity contracts

      5         -         -         5   

Total

      $    260         $    255         $        -         $        5   
   

Liabilities

                                    

Nonqualified deferred compensation plan liabilities

      $        3         $        3         $        -         $        -   

Total

      $        3         $        3         $        -         $        -   
   

 

 

                                 
In Millions  
December 31, 2011    Total      Level 1      Level 2      Level 3  

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       $ -       $ -   
   

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 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. The SERP cash equivalents at December 31, 2011 consisted of a money market fund with daily liquidity. 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 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 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 forward 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 assumptions that cannot be observed or confirmed through market transactions.

The most significant derivatives classified as Level 3 are a power option sold by CMS ERM and FTRs held by Consumers. The power option sold by CMS ERM is valued using unobservable assumptions about price volatility and the pricing differential between the delivery point and the nearest active market. Due to the lack of quoted pricing information, Consumers determines the fair value of its FTRs based on Consumers' average historical settlements. Under regulatory accounting, all changes in fair value associated with FTRs are deferred as regulatory assets or liabilities until the instruments are settled. 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. CMS Energy and Consumers apply credit risk adjustments, where appropriate, to the net receivable from or payable to each counterparty. 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     Six Months Ended  
June 30    2012     2011     2012     2011  

CMS Energy, including Consumers

                                 

Balance at beginning of period

      $       (1 )      $       (2 )      $       (2 )      $       (3 ) 

Total gains included in earnings 1

     -        -        2        -   

Total gains offset through regulatory accounting

      9        2        7        2   

Purchases

      -        -        -        1   

Settlements

      (5 )      -        (4 )      -   

Balance at end of period

      $        3        $         -        $        3        $         -   
   

Unrealized gains included in earnings relating to assets and liabilities still held at end of period1

     $         -        $         -        $        2        $        1   
   

Consumers

                                 

Balance at beginning of period

      $        1        $         -        $        2        $        1   

Total gains offset through regulatory accounting

      9        2        7        2   

Purchases

      -        1        -        1   

Settlements

      (5 )      -        (4 )      (1 ) 

Balance at end of period

      $        5        $        3        $        5        $        3   
   

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

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, forward prices, 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:

 

                                 
In Millions  
June 30, 2012    Total      Level 1      Level 2      Level 3  

CMS Energy, including Consumers

                                    

Assets

                                    

Cash equivalents

      $    141         $    141         $        -         $        -   

Restricted cash equivalents

      14         14         -         -   

Nonqualified deferred compensation plan assets

      5         5         -         -   

SERP

                                    

Mutual funds

      127         127         -         -   

Derivative instruments

                                    

Commodity contracts

      7         1         1         5   

Total

      $    294         $    288         $        1         $        5   
   

Liabilities

                                    

Nonqualified deferred compensation plan liabilities

      $5         $        5         $        -         $        -   

Derivative instruments

                                    

Commodity contracts

      6         -         4         2   

Total

      $      11         $        5         $       4         $        2   
   

Consumers

                                    

Assets

                                    

Cash equivalents

      $    122         $    122         $        -         $        -   

Restricted cash equivalents

      14         14         -         -   

CMS Energy common stock

      30         30         -         -   

Nonqualified deferred compensation plan assets

      3         3         -         -   

SERP

                                    

Mutual funds

      86         86         -         -   

Derivative instruments

                                    

Commodity contracts

      5         -         -         5   

Total

      $    260         $    255         $        -         $        5   
   

Liabilities

                                    

Nonqualified deferred compensation plan liabilities

      $        3         $        3         $        -         $        -   

Total

      $        3         $        3         $        -         $        -   
   

 

 

                                 
In Millions  
December 31, 2011    Total      Level 1      Level 2      Level 3  

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       $ -       $ -   
   

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 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. The SERP cash equivalents at December 31, 2011 consisted of a money market fund with daily liquidity. 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 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 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 forward 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 assumptions that cannot be observed or confirmed through market transactions.

The most significant derivatives classified as Level 3 are a power option sold by CMS ERM and FTRs held by Consumers. The power option sold by CMS ERM is valued using unobservable assumptions about price volatility and the pricing differential between the delivery point and the nearest active market. Due to the lack of quoted pricing information, Consumers determines the fair value of its FTRs based on Consumers' average historical settlements. Under regulatory accounting, all changes in fair value associated with FTRs are deferred as regulatory assets or liabilities until the instruments are settled. 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. CMS Energy and Consumers apply credit risk adjustments, where appropriate, to the net receivable from or payable to each counterparty. 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     Six Months Ended  
June 30    2012     2011     2012     2011  

CMS Energy, including Consumers

                                 

Balance at beginning of period

      $       (1 )      $       (2 )      $       (2 )      $       (3 ) 

Total gains included in earnings 1

     -        -        2        -   

Total gains offset through regulatory accounting

      9        2        7        2   

Purchases

      -        -        -        1   

Settlements

      (5 )      -        (4 )      -   

Balance at end of period

      $        3        $         -        $        3        $         -   
   

Unrealized gains included in earnings relating to assets and liabilities still held at end of period 1

      $         -        $         -        $        2        $        1   
   

Consumers

                                 

Balance at beginning of period

      $        1        $         -        $        2        $        1   

Total gains offset through regulatory accounting

      9        2        7        2   

Purchases

      -        1        -        1   

Settlements

      (5 )      -        (4 )      (1 ) 

Balance at end of period

      $        5        $        3        $        5        $        3   
   

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.