Leases and Palisades Financing

12 Months Ended

Dec. 31, 2020

Leases [Line Items]

Leases and Palisades Financing

Leases and Palisades Financing

Lessee

CMS Energy and Consumers lease various assets from third parties, including coal-carrying railcars, real estate, service vehicles, and gas pipeline capacity. In addition, CMS Energy and Consumers account for several of their PPAs as leases.

CMS Energy and Consumers do not record right-of-use assets or lease liabilities on their consolidated balance sheets for rentals with lease terms of 12 months or less, most of which are for the lease of real estate and service vehicles. Lease expense for these rentals is recognized on a straight-line basis over the lease term.

CMS Energy and Consumers include future payments for all renewal options, fair market value extensions, and buyout provisions reasonably certain of exercise in their measurement of lease right-of-use assets and lease liabilities. In addition, certain leases for service vehicles contain end-of-lease adjustment clauses based on proceeds received from the sale or disposition of the vehicles. CMS Energy and Consumers also include executory costs in the measurement of their right-of-use assets and lease liabilities, except for maintenance costs related to their coal-carrying railcar leases.

Most of Consumers’ 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 finance 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
	CMS Energy, including Consumers								Consumers
December 31	2020				2019				2020				2019
Operating leases
Right-of-use assets1		$	34			$	47			$	28			$	40
Lease liabilities
Current lease liabilities2		9				9				7				8
Non-current lease liabilities3		25				37				21				32
Finance leases
Right-of-use assets		$	65			$	71			$	65			$	71
Lease liabilities4
Current lease liabilities		7				6				7				6
Non-current lease liabilities		53				60				53				60
Weighted-average remaining lease term (in years)
Operating leases		19				17				18				14
Finance leases		12				12				12				12
Weighted-average discount rate
Operating leases		3.9		%		3.8		%		3.8		%		3.7		%
Finance leases5		1.8		%		1.9		%		1.8		%		1.9		%

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

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

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

4Includes related-party lease liabilities of $25 million, of which less than $1 million was current, at December 31, 2020 and December 31, 2019.

5This 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
Years Ended December 31	2020			2019
CMS Energy, including Consumers
Operating lease costs		$	10		$	11
Finance lease costs
Amortization of right-of-use assets		6			6
Interest on lease liabilities		17			18
Variable lease costs		94			95
Short-term lease costs		17			16
Total lease costs		$	144		$	146
Consumers
Operating lease costs		$	9		$	9
Finance lease costs
Amortization of right-of-use assets		6			6
Interest on lease liabilities		17			18
Variable lease costs		94			95
Short-term lease costs		16			16
Total lease costs		$	142		$	144

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

In Millions
Years Ended December 31	2020			2019
CMS Energy, including Consumers
Cash paid for amounts included in the measurement of lease liabilities
Cash used in operating activities for operating leases		$	11		$	11
Cash used in operating activities for finance leases		17			18
Cash used in financing activities for finance leases		6			7
Consumers
Cash paid for amounts included in the measurement of lease liabilities
Cash used in operating activities for operating leases		$	9		$	9
Cash used in operating activities for finance leases		17			18
Cash used in financing activities for finance leases		6			7

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

In Millions
				Finance Leases
December 31, 2020	Operating Leases			Pipelines and PPAs			Other			Total
CMS Energy, including Consumers
2021		$	10		$	17		$	5		$	22
2022		4			14			5			19
2023		2			13			5			18
2024		1			13			3			16
2025		1			13			1			14
2026 and thereafter		34			66			11			77
Total minimum lease payments		$	52		$	136		$	30		$	166
Less discount		18			103			3			106
Present value of minimum lease payments		$	34		$	33		$	27		$	60
Consumers
2021		$	8		$	17		$	5		$	22
2022		4			14			5			19
2023		2			13			5			18
2024		1			13			3			16
2025		1			13			1			14
2026 and thereafter		27			66			11			77
Total minimum lease payments		$	43		$	136		$	30		$	166
Less discount		15			103			3			106
Present value of minimum lease payments		$	28		$	33		$	27		$	60

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. In addition to fixed payments, these agreements have variable payments based on energy delivered. For the year ended December 31, 2020, lease revenue from these power sales agreements was $148 million, which included variable lease payments of $93 million. For the year ended December 31, 2019, lease revenue from these power sales agreements was $174 million, which included variable lease payments of $119 million.

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

In Millions
December 31, 2020
2021	$	54
2022	48
2023	43
2024	43
2025	44
2026 and thereafter	18
Total minimum lease payments	$	250

Consumers has an agreement to build, own, operate, and maintain a compressed natural gas fueling station through December 2038. 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. This agreement is accounted for as a direct finance lease and will automatically extend annually unless terminated by either party. The effects of the lease are eliminated on CMS Energy’s consolidated financial statements.

Minimum rental payments to be received under Consumers’ direct financing leases are $1 million for each of the next five years and $18 million for the years thereafter. The lease receivable was $10 million as of December 31, 2020, which does not include unearned income of $13 million.

Minimum rental payments to be received under CMS Energy’s direct finance lease are less than $1 million for each of the next five years and $10 million for the years thereafter. The lease receivable was $5 million as of December 31, 2020, which does not include unearned income of $5 million.

Palisades Financing

In 2007, Consumers sold Palisades to Entergy and entered into a 15-year PPA to purchase virtually all of the capacity and energy produced by Palisades, up to the annual average capacity of 798 MW. Consumers accounted for this transaction as a financing because of its continuing involvement with Palisades through security provided to Entergy for the PPA obligation and other arrangements. Palisades has therefore remained on Consumers’ consolidated balance sheets and Consumers has continued to depreciate it. At the time of the sale, Consumers recorded the sales proceeds as a financing obligation, and has subsequently recorded a portion of the payments under the PPA as interest expense and as a reduction of the financing obligation.

Total amortization and interest charges under the financing were $14 million for the year ended December 31, 2020, $15 million for the year ended December 31, 2019, and $16 million for the year ended December 31, 2018. At December 31, 2020, the Palisades asset and financing obligation both had a balance of $16 million.

Presented in the following table are the minimum Palisades PPA payments included in the financing obligation:

In Millions
December 31, 2020
2021	$	14
2022	3
Total minimum payments	$	17
Less discount	1
Financing obligation	$	16
Less current portion	13
Non-current portion	$	3

Consumers Energy Company

Leases [Line Items]

Leases and Palisades Financing

Leases and Palisades Financing

Lessee

CMS Energy and Consumers lease various assets from third parties, including coal-carrying railcars, real estate, service vehicles, and gas pipeline capacity. In addition, CMS Energy and Consumers account for several of their PPAs as leases.

CMS Energy and Consumers do not record right-of-use assets or lease liabilities on their consolidated balance sheets for rentals with lease terms of 12 months or less, most of which are for the lease of real estate and service vehicles. Lease expense for these rentals is recognized on a straight-line basis over the lease term.

CMS Energy and Consumers include future payments for all renewal options, fair market value extensions, and buyout provisions reasonably certain of exercise in their measurement of lease right-of-use assets and lease liabilities. In addition, certain leases for service vehicles contain end-of-lease adjustment clauses based on proceeds received from the sale or disposition of the vehicles. CMS Energy and Consumers also include executory costs in the measurement of their right-of-use assets and lease liabilities, except for maintenance costs related to their coal-carrying railcar leases.

Most of Consumers’ 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 finance 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
	CMS Energy, including Consumers								Consumers
December 31	2020				2019				2020				2019
Operating leases
Right-of-use assets1		$	34			$	47			$	28			$	40
Lease liabilities
Current lease liabilities2		9				9				7				8
Non-current lease liabilities3		25				37				21				32
Finance leases
Right-of-use assets		$	65			$	71			$	65			$	71
Lease liabilities4
Current lease liabilities		7				6				7				6
Non-current lease liabilities		53				60				53				60
Weighted-average remaining lease term (in years)
Operating leases		19				17				18				14
Finance leases		12				12				12				12
Weighted-average discount rate
Operating leases		3.9		%		3.8		%		3.8		%		3.7		%
Finance leases5		1.8		%		1.9		%		1.8		%		1.9		%

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

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

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

4Includes related-party lease liabilities of $25 million, of which less than $1 million was current, at December 31, 2020 and December 31, 2019.

5This 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
Years Ended December 31	2020			2019
CMS Energy, including Consumers
Operating lease costs		$	10		$	11
Finance lease costs
Amortization of right-of-use assets		6			6
Interest on lease liabilities		17			18
Variable lease costs		94			95
Short-term lease costs		17			16
Total lease costs		$	144		$	146
Consumers
Operating lease costs		$	9		$	9
Finance lease costs
Amortization of right-of-use assets		6			6
Interest on lease liabilities		17			18
Variable lease costs		94			95
Short-term lease costs		16			16
Total lease costs		$	142		$	144

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

In Millions
Years Ended December 31	2020			2019
CMS Energy, including Consumers
Cash paid for amounts included in the measurement of lease liabilities
Cash used in operating activities for operating leases		$	11		$	11
Cash used in operating activities for finance leases		17			18
Cash used in financing activities for finance leases		6			7
Consumers
Cash paid for amounts included in the measurement of lease liabilities
Cash used in operating activities for operating leases		$	9		$	9
Cash used in operating activities for finance leases		17			18
Cash used in financing activities for finance leases		6			7

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

In Millions
				Finance Leases
December 31, 2020	Operating Leases			Pipelines and PPAs			Other			Total
CMS Energy, including Consumers
2021		$	10		$	17		$	5		$	22
2022		4			14			5			19
2023		2			13			5			18
2024		1			13			3			16
2025		1			13			1			14
2026 and thereafter		34			66			11			77
Total minimum lease payments		$	52		$	136		$	30		$	166
Less discount		18			103			3			106
Present value of minimum lease payments		$	34		$	33		$	27		$	60
Consumers
2021		$	8		$	17		$	5		$	22
2022		4			14			5			19
2023		2			13			5			18
2024		1			13			3			16
2025		1			13			1			14
2026 and thereafter		27			66			11			77
Total minimum lease payments		$	43		$	136		$	30		$	166
Less discount		15			103			3			106
Present value of minimum lease payments		$	28		$	33		$	27		$	60

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. In addition to fixed payments, these agreements have variable payments based on energy delivered. For the year ended December 31, 2020, lease revenue from these power sales agreements was $148 million, which included variable lease payments of $93 million. For the year ended December 31, 2019, lease revenue from these power sales agreements was $174 million, which included variable lease payments of $119 million.

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

In Millions
December 31, 2020
2021	$	54
2022	48
2023	43
2024	43
2025	44
2026 and thereafter	18
Total minimum lease payments	$	250

Consumers has an agreement to build, own, operate, and maintain a compressed natural gas fueling station through December 2038. 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. This agreement is accounted for as a direct finance lease and will automatically extend annually unless terminated by either party. The effects of the lease are eliminated on CMS Energy’s consolidated financial statements.

Minimum rental payments to be received under Consumers’ direct financing leases are $1 million for each of the next five years and $18 million for the years thereafter. The lease receivable was $10 million as of December 31, 2020, which does not include unearned income of $13 million.

Minimum rental payments to be received under CMS Energy’s direct finance lease are less than $1 million for each of the next five years and $10 million for the years thereafter. The lease receivable was $5 million as of December 31, 2020, which does not include unearned income of $5 million.

Palisades Financing

In 2007, Consumers sold Palisades to Entergy and entered into a 15-year PPA to purchase virtually all of the capacity and energy produced by Palisades, up to the annual average capacity of 798 MW. Consumers accounted for this transaction as a financing because of its continuing involvement with Palisades through security provided to Entergy for the PPA obligation and other arrangements. Palisades has therefore remained on Consumers’ consolidated balance sheets and Consumers has continued to depreciate it. At the time of the sale, Consumers recorded the sales proceeds as a financing obligation, and has subsequently recorded a portion of the payments under the PPA as interest expense and as a reduction of the financing obligation.

Total amortization and interest charges under the financing were $14 million for the year ended December 31, 2020, $15 million for the year ended December 31, 2019, and $16 million for the year ended December 31, 2018. At December 31, 2020, the Palisades asset and financing obligation both had a balance of $16 million.

Presented in the following table are the minimum Palisades PPA payments included in the financing obligation:

In Millions
December 31, 2020
2021	$	14
2022	3
Total minimum payments	$	17
Less discount	1
Financing obligation	$	16
Less current portion	13
Non-current portion	$	3