Leases

12 Months Ended

Dec. 31, 2013

Leases

9:LEASES

CMS Energy and Consumers lease various assets, including railcars, service vehicles, gas pipeline capacity, and buildings.  In addition, CMS Energy and Consumers account for a number of their PPAs as capital and operating leases.

Operating leases for coal-carrying railcars have lease terms, which range from three to 15 years, expiring without extension provisions over the next ten years and with extension provisions over the next 13 years.  These leases contain fair market value extension and buyout provisions, with some providing for predetermined extension period rentals.  Capital leases for Consumers’ vehicle fleet operations have a maximum term of 120 months with some having end-of-lease rental adjustment clauses based on the proceeds received from the sale or disposition of the vehicles, and others having fixed percentage purchase options.

Consumers has capital leases for gas transportation pipelines to the D.E. Karn generating complex and Zeeland.  The capital 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 eight years at December 31, 2013.  The capital lease for the gas transportation pipeline to Zeeland was extended in 2012 for five years pursuant to the renewal provision at the end of the contract.  At December 31, 2013, the remaining term of the contract was four years with a renewal provision of an additional five years at the end of the contract.  The remaining terms of Consumers’ long-term PPAs accounted for as leases range between two and 19 years.  Most of these PPAs contain provisions at the end of the initial contract terms to renew the agreements annually.

Presented in the following table are Consumers’ minimum lease expense and contingent rental expense.  For each of the years ended December 31, 2013, 2012, and 2011, all of CMS Energy’s minimum lease expense and contingent rental expense were attributable to Consumers.

In Millions
Years Ended December 31	2013			2012			2011
Consumers
Minimum operating lease expense
PPAs		$	6		$	6		$	10
Other agreements			21			23			22
Contingent rental expense1			77			33			11

1Contingent rental expense is related to capital and operating lease PPAs and is based on delivery of energy and capacity in excess of minimum lease payments.

Consumers is authorized by the MPSC to record operating lease payments as operating expense and recover the total cost from customers.

Presented in the following table are the minimum annual rental commitments under Consumers’ non‑cancelable leases at December 31, 2013.  All of CMS Energy’s non‑cancelable leases at December 31, 2013 were attributable to Consumers.

In Millions
	Capital Leases			Financing1			Operating Leases
Consumers
2014		$	14		$	19		$	26
2015			14			18			25
2016			11			17			20
2017			10			17			20
2018			10			16			17
2019 and thereafter			31			46			56
Total minimum lease payments		$	90		$	133		$	164
Less imputed interest			39			25
Present value of net minimum lease payments		$	51		$	108
Less current portion			8			13
Non-current portion		$	43		$	95

¹ In 2007, Consumers sold Palisades to Entergy and entered into a 15-year PPA to buy all of the capacity and energy then capable of being produced by Palisades.  Consumers has continuing involvement with Palisades through security provided to Entergy for Consumers’ PPA obligation and other arrangements.  Because of these ongoing arrangements, Consumers accounted for the transaction as a financing of Palisades and not a sale.  Accordingly, no gain on the sale of Palisades was recognized on the consolidated statements of income.  Consumers accounted for the remaining non-real-estate assets and liabilities associated with the transaction as a sale.

Palisades remains on Consumers’ consolidated balance sheets and Consumers continues to depreciate it.  Consumers recorded the related proceeds as a finance obligation with payments recorded to interest expense and the finance obligation based on the amortization of the obligation over the life of the Palisades PPA.  The value of the finance obligation was determined based on an allocation of the transaction proceeds to the fair values of the net assets sold and fair value of the plant asset under the financing.  Total amortization and interest charges under the financing were $20 million for each of the years ended December 31, 2013 and December 31, 2012 and $21 million for the year ended December 31, 2011.

Consumers Energy Company [Member]

Leases

9:LEASES

CMS Energy and Consumers lease various assets, including railcars, service vehicles, gas pipeline capacity, and buildings.  In addition, CMS Energy and Consumers account for a number of their PPAs as capital and operating leases.

Operating leases for coal-carrying railcars have lease terms, which range from three to 15 years, expiring without extension provisions over the next ten years and with extension provisions over the next 13 years.  These leases contain fair market value extension and buyout provisions, with some providing for predetermined extension period rentals.  Capital leases for Consumers’ vehicle fleet operations have a maximum term of 120 months with some having end-of-lease rental adjustment clauses based on the proceeds received from the sale or disposition of the vehicles, and others having fixed percentage purchase options.

Consumers has capital leases for gas transportation pipelines to the D.E. Karn generating complex and Zeeland.  The capital 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 eight years at December 31, 2013.  The capital lease for the gas transportation pipeline to Zeeland was extended in 2012 for five years pursuant to the renewal provision at the end of the contract.  At December 31, 2013, the remaining term of the contract was four years with a renewal provision of an additional five years at the end of the contract.  The remaining terms of Consumers’ long-term PPAs accounted for as leases range between two and 19 years.  Most of these PPAs contain provisions at the end of the initial contract terms to renew the agreements annually.

Presented in the following table are Consumers’ minimum lease expense and contingent rental expense.  For each of the years ended December 31, 2013, 2012, and 2011, all of CMS Energy’s minimum lease expense and contingent rental expense were attributable to Consumers.

In Millions
Years Ended December 31	2013			2012			2011
Consumers
Minimum operating lease expense
PPAs		$	6		$	6		$	10
Other agreements			21			23			22
Contingent rental expense1			77			33			11

1Contingent rental expense is related to capital and operating lease PPAs and is based on delivery of energy and capacity in excess of minimum lease payments.

Consumers is authorized by the MPSC to record operating lease payments as operating expense and recover the total cost from customers.

Presented in the following table are the minimum annual rental commitments under Consumers’ non‑cancelable leases at December 31, 2013.  All of CMS Energy’s non‑cancelable leases at December 31, 2013 were attributable to Consumers.

In Millions
	Capital Leases			Financing1			Operating Leases
Consumers
2014		$	14		$	19		$	26
2015			14			18			25
2016			11			17			20
2017			10			17			20
2018			10			16			17
2019 and thereafter			31			46			56
Total minimum lease payments		$	90		$	133		$	164
Less imputed interest			39			25
Present value of net minimum lease payments		$	51		$	108
Less current portion			8			13
Non-current portion		$	43		$	95

¹ In 2007, Consumers sold Palisades to Entergy and entered into a 15-year PPA to buy all of the capacity and energy then capable of being produced by Palisades.  Consumers has continuing involvement with Palisades through security provided to Entergy for Consumers’ PPA obligation and other arrangements.  Because of these ongoing arrangements, Consumers accounted for the transaction as a financing of Palisades and not a sale.  Accordingly, no gain on the sale of Palisades was recognized on the consolidated statements of income.  Consumers accounted for the remaining non-real-estate assets and liabilities associated with the transaction as a sale.

Palisades remains on Consumers’ consolidated balance sheets and Consumers continues to depreciate it.  Consumers recorded the related proceeds as a finance obligation with payments recorded to interest expense and the finance obligation based on the amortization of the obligation over the life of the Palisades PPA.  The value of the finance obligation was determined based on an allocation of the transaction proceeds to the fair values of the net assets sold and fair value of the plant asset under the financing.  Total amortization and interest charges under the financing were $20 million for each of the years ended December 31, 2013 and December 31, 2012 and $21 million for the year ended December 31, 2011.