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Derivative Instruments | 9 Months Ended
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Sep. 30, 2011
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. Neither CMS Energy nor Consumers enters into any derivatives for trading purposes. The contracts used to manage market risks may qualify as derivative instruments. If a contract is a derivative and does not qualify for the normal purchases and sales exception, the contract is recorded on the balance sheet at its fair value. Each reporting period, the resulting asset or liability is adjusted to reflect any change in the fair value of the contract. Since none of CMS Energy's or Consumers' derivatives has been designated as an accounting hedge, all changes in fair value are reported in earnings. For a discussion of how CMS Energy and Consumers determine the fair value of their derivatives, see Note 2, Fair Value Measurements. 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 they purchase. 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. To manage commodity price risks associated with these forward purchase and sale contracts, CMS ERM uses various financial instruments, such as futures, options, and swaps. At September 30, 2011, CMS ERM held the following derivative contracts:
| • |  | a forward contract for the physical sale of 574 GWh of electricity through 2015 on behalf of one of CMS Energy's non-utility generating plants;
| • |  | forward contracts to purchase 4.4 bcf and sell 7.5 bcf of natural gas through 2012 in CMS ERM's role as a marketer of natural gas for third-party producers; and
| • |  | an option to sell 151 GWh of electricity through 2011.
Presented in the following table are the fair values of CMS Energy's and Consumers' derivative instruments:
In Millions
|  | Derivative Assets |  |  | Derivative Liabilities
|  | Balance |  |  | Fair Value at |  |  | Balance |  |  | Fair Value at
|  | Sheet |  |  | September 30, |  |  | December 31, |  |  | Sheet |  |  | September 30, |  |  | December 31, |
|  | Location |  |  | 2011 |  |  | 2010 |  |  | Location |  |  | 2011 |  |  | 2010 |
CMS Energy, including Consumers |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivatives not designated as hedging instruments |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commodity contracts1 |  | Other assets |  | $ | 2 |  |  | $ | 1 |  |  | Other liabilities2 |  | $ | 3 |  |  | $ | 4 |
Consumers |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivatives not designated as hedging instruments |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commodity contracts |  | Other assets |  | $ | 2 |  |  | $ | 1 |  |  | Other liabilities |  | $ | — |  |  | $ | — |
1 Assets and liabilities are presented gross and exclude the impact of offsetting derivative assets and liabilities under master netting agreements, which was less than $1 million at September 30, 2011 and December 31, 2010. 2 Liabilities exclude the impact of offsetting cash margin deposits paid by CMS ERM to other parties, which was less than $1 million at September 30, 2011 and December 31, 2010. CMS Energy presents these liabilities net of these impacts on its consolidated balance sheets. Presented in the following table is the effect on CMS Energy's consolidated statements of income of its derivatives not designated as hedging instruments:
In Millions
|  | Amount of Gain (Loss) on Derivatives Recognized in Income
|  | Three Months Ended September 30 |  |  | Nine Months Ended September 30
Location of Gain (Loss) on Derivatives Recognized in Income |  | 2011 |  |  | 2010 |  |  | 2011 |  |  | 2010 |
CMS Energy |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commodity contracts |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Operating revenue |  | $ | (1 | ) |  | $ | 2 |  |  | $ | (1 | ) |  | $ | 5 |
Fuel for electric generation |  |  | — |  |  |  | 1 |  |  |  | — |  |  |  | 3 |
Purchased and interchange power |  |  | — |  |  |  | 1 |  |  |  | — |  |  |  | 2 |
Total CMS Energy |  | $ | (1 | ) |  | $ | 4 |  |  | $ | (1 | ) |  | $ | 10 |
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 $3 million for the three months ended September 30, 2010. Consumers' gains on FTRs deferred as regulatory liabilities were $2 million for the nine months ended September 30, 2011 and $4 million for the nine months ended September 30, 2010. CMS Energy's derivative liabilities subject to credit-risk-related contingent features were less than $1 million at September 30, 2011 and were $1 million at December 31, 2010. Credit Risk: CMS Energy's swaps, options, and forward contracts contain credit risk, which is the risk that a counterparty will fail to meet its contractual obligations. CMS ERM enters into contracts primarily with companies in the electric and gas industry. This industry concentration may have a positive or negative impact on CMS Energy's exposure to credit risk based on how similar changes in economic conditions, the weather, or other conditions affect these counterparties. CMS ERM reduces its credit risk exposure by using industry-standard agreements that allow for netting positive and negative exposures associated with the same counterparty. Typically, these agreements also allow each party to demand adequate assurance of future performance from the other party, when there is reason to do so. At September 30, 2011, if counterparties within this industry concentration all failed to meet their contractual obligations, the loss to CMS Energy on contracts accounted for as derivatives would be less than $1 million. CMS Energy does not expect a material adverse effect on its consolidated balance sheets and consolidated statements of income as a result of counterparty nonperformance, given CMS Energy's credit policies, current exposures, and credit reserves.
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. Neither CMS Energy nor Consumers enters into any derivatives for trading purposes. The contracts used to manage market risks may qualify as derivative instruments. If a contract is a derivative and does not qualify for the normal purchases and sales exception, the contract is recorded on the balance sheet at its fair value. Each reporting period, the resulting asset or liability is adjusted to reflect any change in the fair value of the contract. Since none of CMS Energy's or Consumers' derivatives has been designated as an accounting hedge, all changes in fair value are reported in earnings. For a discussion of how CMS Energy and Consumers determine the fair value of their derivatives, see Note 2, Fair Value Measurements. 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 they purchase. 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. To manage commodity price risks associated with these forward purchase and sale contracts, CMS ERM uses various financial instruments, such as futures, options, and swaps. At September 30, 2011, CMS ERM held the following derivative contracts:
| • |  | a forward contract for the physical sale of 574 GWh of electricity through 2015 on behalf of one of CMS Energy's non-utility generating plants;
| • |  | forward contracts to purchase 4.4 bcf and sell 7.5 bcf of natural gas through 2012 in CMS ERM's role as a marketer of natural gas for third-party producers; and
| • |  | an option to sell 151 GWh of electricity through 2011.
Presented in the following table are the fair values of CMS Energy's and Consumers' derivative instruments:
In Millions
|  | Derivative Assets |  |  | Derivative Liabilities
|  | Balance |  |  | Fair Value at |  |  | Balance |  |  | Fair Value at
|  | Sheet |  |  | September 30, |  |  | December 31, |  |  | Sheet |  |  | September 30, |  |  | December 31, |
|  | Location |  |  | 2011 |  |  | 2010 |  |  | Location |  |  | 2011 |  |  | 2010 |
CMS Energy, including Consumers |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivatives not designated as hedging instruments |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commodity contracts1 |  | Other assets |  | $ | 2 |  |  | $ | 1 |  |  | Other liabilities2 |  | $ | 3 |  |  | $ | 4 |
Consumers |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivatives not designated as hedging instruments |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commodity contracts |  | Other assets |  | $ | 2 |  |  | $ | 1 |  |  | Other liabilities |  | $ | — |  |  | $ | — |
1 Assets and liabilities are presented gross and exclude the impact of offsetting derivative assets and liabilities under master netting agreements, which was less than $1 million at September 30, 2011 and December 31, 2010. 2 Liabilities exclude the impact of offsetting cash margin deposits paid by CMS ERM to other parties, which was less than $1 million at September 30, 2011 and December 31, 2010. CMS Energy presents these liabilities net of these impacts on its consolidated balance sheets. Presented in the following table is the effect on CMS Energy's consolidated statements of income of its derivatives not designated as hedging instruments:
In Millions
|  | Amount of Gain (Loss) on Derivatives Recognized in Income
|  | Three Months Ended September 30 |  |  | Nine Months Ended September 30
Location of Gain (Loss) on Derivatives Recognized in Income |  | 2011 |  |  | 2010 |  |  | 2011 |  |  | 2010 |
CMS Energy |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commodity contracts |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Operating revenue |  | $ | (1 | ) |  | $ | 2 |  |  | $ | (1 | ) |  | $ | 5 |
Fuel for electric generation |  |  | — |  |  |  | 1 |  |  |  | — |  |  |  | 3 |
Purchased and interchange power |  |  | — |  |  |  | 1 |  |  |  | — |  |  |  | 2 |
Total CMS Energy |  | $ | (1 | ) |  | $ | 4 |  |  | $ | (1 | ) |  | $ | 10 |
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 $3 million for the three months ended September 30, 2010. Consumers' gains on FTRs deferred as regulatory liabilities were $2 million for the nine months ended September 30, 2011 and $4 million for the nine months ended September 30, 2010. CMS Energy's derivative liabilities subject to credit-risk-related contingent features were less than $1 million at September 30, 2011 and were $1 million at December 31, 2010. Credit Risk: CMS Energy's swaps, options, and forward contracts contain credit risk, which is the risk that a counterparty will fail to meet its contractual obligations. CMS ERM enters into contracts primarily with companies in the electric and gas industry. This industry concentration may have a positive or negative impact on CMS Energy's exposure to credit risk based on how similar changes in economic conditions, the weather, or other conditions affect these counterparties. CMS ERM reduces its credit risk exposure by using industry-standard agreements that allow for netting positive and negative exposures associated with the same counterparty. Typically, these agreements also allow each party to demand adequate assurance of future performance from the other party, when there is reason to do so. At September 30, 2011, if counterparties within this industry concentration all failed to meet their contractual obligations, the loss to CMS Energy on contracts accounted for as derivatives would be less than $1 million. CMS Energy does not expect a material adverse effect on its consolidated balance sheets and consolidated statements of income as a result of counterparty nonperformance, given CMS Energy's credit policies, current exposures, and credit reserves.

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- Definition The entire disclosure for the entity's entire derivative instruments and hedging activities. Describes an entity's risk management strategies, derivatives in hedging activities and non-hedging derivative instruments, the assets, obligations, liabilities, revenues and expenses arising therefrom, and the amounts of and methodologies and assumptions used in determining the amounts of such items. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 133 -Paragraph 44 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1B -URI http://asc.fasb.org/extlink&oid=6935481&loc=SL5580258-113959 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(n)) -URI http://asc.fasb.org/extlink&oid=6881521&loc=d3e23780-122690 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4A -URI http://asc.fasb.org/extlink&oid=6935481&loc=SL5618551-113959 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4B -URI http://asc.fasb.org/extlink&oid=6935481&loc=SL5624163-113959 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4J -URI http://asc.fasb.org/extlink&oid=6935481&loc=SL5708773-113959 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=6935481&loc=d3e41638-113959 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4C -URI http://asc.fasb.org/extlink&oid=6935481&loc=SL5624171-113959 Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=6935481&loc=d3e41620-113959 Reference 10: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 5 -URI http://asc.fasb.org/extlink&oid=6935481&loc=d3e41641-113959 Reference 11: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6887037&loc=d3e80748-113994 Reference 12: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 45 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6441202&loc=d3e80720-113993 Reference 13: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=6887037&loc=d3e80784-113994 Reference 14: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6935481&loc=SL5579240-113959 Reference 15: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=6935481&loc=d3e41635-113959 Reference 16: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4E -URI http://asc.fasb.org/extlink&oid=6935481&loc=SL5624181-113959 Reference 17: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4H -URI http://asc.fasb.org/extlink&oid=6935481&loc=SL5624258-113959 Reference 18: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1A -URI http://asc.fasb.org/extlink&oid=6935481&loc=SL5579245-113959 Reference 19: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 25 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6886632&loc=d3e76258-113986 Reference 20: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 133 -Paragraph 45 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. 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