Leases And Palisades Financing

12 Months Ended

Dec. 31, 2016

Leases And Palisades Financing

10:Leases and Palisades Financing

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 original lease terms ranging from one to 15 years, expiring without extension provisions over the next seven years and with extension provisions over the next ten years. These leases contain fair market value extension and buyout provisions. 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 five years at December 31, 2016. The capital lease for the gas transportation pipeline to Zeeland has a term of five years with a renewal provision of an additional five years at the end of the contract. The remaining term of the contract was one year at December 31, 2016. The remaining terms of Consumers’ long-term PPAs accounted for as leases range between one and 16 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, 2016,  2015, and 2014, all of CMS Energy’s minimum lease expense and contingent rental expense were attributable to Consumers.

In Millions
Years Ended December 31	2016			2015			2014
Consumers
Minimum operating lease expense
PPAs		$	6		$	6		$	6
Other agreements			14			19			19
Contingent rental expense1			82			82			85

¹ Contingent 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, 2016. All of CMS Energy’s non‑cancelable leases at December 31, 2016 were attributable to Consumers.

In Millions
	Capital Leases			Palisades  Financing			Operating Leases
Consumers
2017		$	15		$	17		$	20
2018			14			16			16
2019			14			15			10
2020			12			14			10
2021			11			14			10
2022 and thereafter			25			3			15
Total minimum lease payments		$	91		$	79		$	81
Less imputed interest			28			10
Present value of net minimum lease payments		$	63		$	69
Less current portion			9			13
Non-current portion		$	54		$	56

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 $17 million for the year ended December 31, 2016, $18 million for the year ended December 31, 2015, and $19 million for the year ended December 31, 2014. At December 31, 2016, the Palisades asset and financing obligation both had a balance of $69 million.

The prices that Consumers pays under the PPA, and which it recovers from its electric customers through the PSCR, are presently higher than the cost to purchase electricity from the market. In December 2016, Consumers and Entergy reached an agreement to terminate the PPA in May 2018. In exchange for early termination, Consumers agreed to pay Entergy $172 million on the termination date.

The agreement is contingent upon Consumers’ receipt of an MPSC order authorizing it to recover the termination payment from its electric customers. Consumers has indicated to the MPSC that it plans to request authorization to recover the termination payment through securitization. In an order issued in January 2017, the MPSC indicated that it will make a final determination on the securitization filing by September 2017, after full evaluation of the prudency of the termination payment and of how the termination will impact Michigan’s electric reliability and resource adequacy. If the MPSC does not approve Consumers’ request by September 30, 2017, the agreement will be null and void (unless otherwise extended) and the PPA will continue until April 2022 under its original terms. The amounts shown in the table above reflect the original terms of the PPA.

Because Consumers accounted for its sale of Palisades to Entergy as a financing transaction, the early termination of the PPA represents a substantial modification of the terms of an existing debt instrument, and Consumers will therefore account for the termination agreement as an extinguishment of debt. Accordingly, in the period in which the termination agreement becomes effective, Consumers will remove from its consolidated balance sheets the existing financing obligation and will record a new financing obligation and a regulatory asset. Consumers will amortize the new financing obligation and will continue to depreciate the Palisades asset until the date of the PPA termination in May 2018 (assuming such termination occurs), when it will recognize the sale of Palisades.

Consumers Energy Company [Member]

Leases And Palisades Financing

10:Leases and Palisades Financing

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 original lease terms ranging from one to 15 years, expiring without extension provisions over the next seven years and with extension provisions over the next ten years. These leases contain fair market value extension and buyout provisions. 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 five years at December 31, 2016. The capital lease for the gas transportation pipeline to Zeeland has a term of five years with a renewal provision of an additional five years at the end of the contract. The remaining term of the contract was one year at December 31, 2016. The remaining terms of Consumers’ long-term PPAs accounted for as leases range between one and 16 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, 2016,  2015, and 2014, all of CMS Energy’s minimum lease expense and contingent rental expense were attributable to Consumers.

In Millions
Years Ended December 31	2016			2015			2014
Consumers
Minimum operating lease expense
PPAs		$	6		$	6		$	6
Other agreements			14			19			19
Contingent rental expense1			82			82			85

¹ Contingent 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, 2016. All of CMS Energy’s non‑cancelable leases at December 31, 2016 were attributable to Consumers.

In Millions
	Capital Leases			Palisades  Financing			Operating Leases
Consumers
2017		$	15		$	17		$	20
2018			14			16			16
2019			14			15			10
2020			12			14			10
2021			11			14			10
2022 and thereafter			25			3			15
Total minimum lease payments		$	91		$	79		$	81
Less imputed interest			28			10
Present value of net minimum lease payments		$	63		$	69
Less current portion			9			13
Non-current portion		$	54		$	56

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 $17 million for the year ended December 31, 2016, $18 million for the year ended December 31, 2015, and $19 million for the year ended December 31, 2014. At December 31, 2016, the Palisades asset and financing obligation both had a balance of $69 million.

The prices that Consumers pays under the PPA, and which it recovers from its electric customers through the PSCR, are presently higher than the cost to purchase electricity from the market. In December 2016, Consumers and Entergy reached an agreement to terminate the PPA in May 2018. In exchange for early termination, Consumers agreed to pay Entergy $172 million on the termination date.

The agreement is contingent upon Consumers’ receipt of an MPSC order authorizing it to recover the termination payment from its electric customers. Consumers has indicated to the MPSC that it plans to request authorization to recover the termination payment through securitization. In an order issued in January 2017, the MPSC indicated that it will make a final determination on the securitization filing by September 2017, after full evaluation of the prudency of the termination payment and of how the termination will impact Michigan’s electric reliability and resource adequacy. If the MPSC does not approve Consumers’ request by September 30, 2017, the agreement will be null and void (unless otherwise extended) and the PPA will continue until April 2022 under its original terms. The amounts shown in the table above reflect the original terms of the PPA.

Because Consumers accounted for its sale of Palisades to Entergy as a financing transaction, the early termination of the PPA represents a substantial modification of the terms of an existing debt instrument, and Consumers will therefore account for the termination agreement as an extinguishment of debt. Accordingly, in the period in which the termination agreement becomes effective, Consumers will remove from its consolidated balance sheets the existing financing obligation and will record a new financing obligation and a regulatory asset. Consumers will amortize the new financing obligation and will continue to depreciate the Palisades asset until the date of the PPA termination in May 2018 (assuming such termination occurs), when it will recognize the sale of Palisades.