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Leases

6 Months Ended

Jun. 30, 2019

Lessee

CMS Energy and Consumers lease various assets from third parties, including railcars, real estate, service vehicles, and gas pipeline capacity. In addition, CMS Energy and Consumers account for a number of their PPAs as finance and operating leases.

CMS Energy and Consumers do not record right-of-use assets or lease liabilities on their balance sheets for rentals with lease terms of 12 months or less, most of which are for the lease of real estate and fleet vehicles. Lease expense for these rentals is recognized on a straight-line basis over the lease term. Consumers includes future payments for all renewal options that it is reasonably certain to exercise in its measurement of lease right-of-use assets and lease liabilities. CMS Energy and Consumers include executory costs in the measurement of their right-of-use assets and lease liabilities, except for maintenance costs related to their railcar leases.

Operating leases for coal-carrying railcars have original lease terms ranging from five to 15 years, expiring over the next four years with options to renew. These leases contain fair market value extension and buyout provisions.

Operating leases for real estate have original lease terms ranging from three to 60 years, expiring over the next 42 years. These leases contain fair market value extension and buyout provisions.

Finance leases for Consumers’ service vehicles have original lease terms ranging from five to ten years, expiring over the next seven years. Some have end-of-lease rental adjustment clauses based on proceeds received from the sale or disposition of the vehicles, and others have fair market value purchase options.

Consumers has finance leases for gas transportation pipelines to the D.E. Karn generating complex and Zeeland. The finance lease for the gas transportation pipeline into the D.E. Karn generating complex has a term of 15 years with a provision to extend the contract from month to month. The remaining term of the contract was three years at June 30, 2019. The finance lease for the gas transportation pipeline to Zeeland was extended in 2017 for five years pursuant to a renewal provision in the contract, with additional renewal provisions of five to ten years.

The remaining terms of Consumers’ long-term PPAs accounted for as finance and operating leases range between one and 14 years. Most of these PPAs contain provisions at the end of the initial contract terms to renew the agreements annually under mutually agreed‑upon terms at the time of renewal. Energy and capacity payments that vary depending on quantities delivered are recognized as variable lease costs when incurred. Consumers accounts for a PPA with one of CMS Energy’s equity method subsidiaries as a lease.

Presented in the following table is information about CMS Energy’s and Consumers’ lease right-of-use assets and lease liabilities:



In Millions, Except as Noted
June 30, 2019	CMS Energy, including Consumers				Consumers
Operating leases
Right-of-use assets¹		$	51			$	44
Lease liabilities
Current lease liabilities²		10				8
Non-current lease liabilities³		41				35
Finance leases
Right-of-use assets		$	76			$	76
Lease liabilities⁴
Current lease liabilities		7				7
Non-current lease liabilities		63				63
Weighted-average remaining lease term (in years)
Operating leases		16				13
Finance leases		12				12
Weighted-average discount rate
Operating leases		3.7		%		3.7		%
Finance leases⁵		2.0		%		2.0		%


¹	CMS Energy’s and Consumers’ operating right-of-use lease assets are reported as other non‑current assets on their consolidated balance sheets.


²	The current portion of CMS Energy’s and Consumers’ operating lease liabilities are reported as other current liabilities on their consolidated balance sheets.


³	The non‑current portion of CMS Energy’s and Consumers’ operating lease liabilities are reported as other non‑current liabilities on their consolidated balance sheets.


⁴	This includes $25 million for leases with related parties, of which less than $1 million is current.


⁵	This rate excludes the impact of Consumers’ pipeline agreements and long-term PPAs accounted for as finance leases. The required capacity payments under these agreements, when compared to the underlying fair value of the leased assets, result in effective interest rates that exceed market rates for leases with similar terms.

CMS Energy and Consumers report operating, variable, and short-term lease costs as operating expenses on their consolidated statements of income, except for certain amounts that may be capitalized to other assets. Presented in the following table is a summary of CMS Energy’s and Consumers’ total lease costs:



In Millions
	CMS Energy, including Consumers						Consumers
June 30, 2019	Three Months Ended			Six Months Ended			Three Months Ended			Six Months Ended
Operating lease costs		$	3		$	6		$	3		$	5
Finance lease costs
Amortization of right-of-use assets		2			4			2			4
Interest on lease liabilities		5			9			5			9
Variable lease costs		24			55			24			55
Total lease costs		$	34		$	74		$	34		$	73

Presented in the following table is cash flow information related to amounts paid on CMS Energy’s and Consumers’ lease liabilities:



In Millions
Six Months Ended June 30, 2019	CMS Energy, including Consumers			Consumers
Cash paid for amounts included in the measurement of lease liabilities
Cash used in operating activities for operating leases		$	5		$	5
Cash used in operating activities for finance leases		9			9
Cash used in financing activities for finance leases		3			3

Presented in the following table are the minimum rental commitments under CMS Energy’s and Consumers’ non‑cancelable leases:



In Millions
				Finance Leases
June 30, 2019	Operating Leases			Pipelines and PPAs			Other			Total
CMS Energy, including Consumers
Remainder of 2019		$	5		$	9		$	5		$	14
2020		11			17			6			23
2021		11			17			5			22
2022		5			14			5			19
2023		3			13			5			18
2024		2			13			3			16
2025 and thereafter		35			79			11			90
Total minimum lease payments		$	72		$	162		$	40		$	202
Less discount		21			128			4			132
Present value of minimum lease payments		$	51		$	34		$	36		$	70
Consumers
Remainder of 2019		$	5		$	9		$	5		$	14
2020		9			17			6			23
2021		9			17			5			22
2022		4			14			5			19
2023		3			13			5			18
2024		2			13			3			16
2025 and thereafter		28			79			11			90
Total minimum lease payments		$	60		$	162		$	40		$	202
Less discount		17			128			4			132
Present value of minimum lease payments		$	43		$	34		$	36		$	70

Presented in the following table are the minimum rental commitments under CMS Energy’s and Consumers’ non‑cancelable leases at December 31, 2018, prior to the adoption of ASU 2016‑02:



In Millions
December 31, 2018	Capital Leases			Operating Leases
CMS Energy, including Consumers
2019		$	14		$	16
2020		11			15
2021		11			15
2022		8			8
2023		6			5
2024 and thereafter		21			38
Total minimum lease payments		$	71		$	97
Less discount		22
Present value of minimum lease payments		$	49
Less current portion		9
Non-current portion		$	40
Consumers
2019		$	14		$	14
2020		11			14
2021		11			13
2022		8			7
2023		6			5
2024		21			32
Total minimum lease payments		$	71		$	85
Less discount		22
Present value of minimum lease payments		$	49
Less current portion		9
Non-current portion		$	40

Lessor

CMS Energy and Consumers are the lessor under power sales and natural gas delivery agreements that are accounted for as leases.

CMS Energy has power sales agreements that are accounted for as operating leases. These agreements have remaining terms ranging from three to 24 years. In addition to fixed payments, these agreements have variable payments based on energy delivered. For the three months ended June 30, 2019, CMS Energy’s lease revenue from its power sales agreements was $42 million, which included variable lease payments of $29 million. For the six months ended June 30, 2019, CMS Energy’s lease revenue from its power sales agreements was $90 million, which included variable lease payments of $63 million.

Consumers has an agreement to build, own, operate, and maintain a compressed natural gas fueling station for a term of 20 years, which began in December 2018. This agreement is accounted for as a direct finance lease, under which the lessee has the option to purchase the natural gas fueling station at the end of the lease term. Fixed monthly payments escalate annually with inflation.

In December 2018, Consumers and a subsidiary of CMS Energy executed a 20‑year natural gas transportation agreement, related to a pipeline owned by Consumers, which will automatically extend annually unless terminated by either party. This agreement is accounted for by Consumers as a direct finance lease. The effects of the lease are eliminated on CMS Energy’s consolidated financial statements.

Presented in the following table are the minimum rental payments to be received under CMS Energy’s non‑cancelable operating leases:



In Millions
June 30, 2019
Remainder of 2019	$	28
2020	54
2021	54
2022	48
2023	44
2024	44
2025 and thereafter	62
Total minimum lease payments	$	334

Presented in the following table are the minimum rental payments to be received under CMS Energy’s and Consumers’ non‑cancelable direct financing leases:



In Millions
June 30, 2019	CMS Energy, including Consumers			Consumers
Remainder of 2019		$	—		$	1
2020		—			1
2021		—			1
2022		—			1
2023		—			1
2024		—			1
2025 and thereafter		10			19
Total minimum lease payments		$	10		$	25
Less unearned income		5			15
Present value of lease payments recognized as lease receivables		$	5		$	10

Consumers Energy Company

Leases [Line Items]

Leases