Leases And Palisades Financing

12 Months Ended

Dec. 31, 2017

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 two to 15 years, expiring without extension provisions over the next six years and with extension provisions over the next nine 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 fair market value 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 four years at December 31, 2017. The capital lease for the gas transportation pipeline to Zeeland was extended in 2017forfive 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 leases range between one and 15 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, 2017,  2016, and 2015, all of CMS Energy’s minimum lease expense and contingent rental expense were attributable to Consumers.

In Millions
Years Ended December 31	2017			2016			2015
Consumers
Minimum operating lease expense
PPAs		$	5		$	6		$	6
Other agreements			15			14			19
Contingent rental expense1			96			82			82

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, 2017. All of CMS Energy’s non‑cancelable leases at December 31, 2017 were attributable to Consumers.

In Millions
	Capital Leases			Palisades  Financing			Operating Leases
Consumers
2018		$	15		$	16		$	15
2019			15			15			9
2020			12			14			9
2021			12			14			9
2022			8			3			4
2023 and thereafter			21			-			7
Total minimum lease payments		$	83		$	62		$	53
Less imputed interest			25			7
Present value of net minimum lease payments		$	58		$	55
Less current portion			9			13
Non-current portion		$	49		$	42

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 $17million for the year ended December 31, 2017,  $17 million for the year ended December 31, 2016, and $18 million for the year ended December 31, 2015. At December 31, 2017, the Palisades asset and financing obligation both had a balance of $55million.

In December2016, Consumers agreed to pay Entergy $172 million to terminate their PPA in May 2018, contingent upon the MPSC’s approval. In September 2017, the MPSC issued an  order authorizing Consumers to recover only $137 million of the $172 million termination payment. As a result, Consumers and Entergy agreed not to terminate the PPA, which is now expected to continue until April 2022 under its original terms.

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 two to 15 years, expiring without extension provisions over the next six years and with extension provisions over the next nine 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 fair market value 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 four years at December 31, 2017. The capital lease for the gas transportation pipeline to Zeeland was extended in 2017forfive 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 leases range between one and 15 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, 2017,  2016, and 2015, all of CMS Energy’s minimum lease expense and contingent rental expense were attributable to Consumers.

In Millions
Years Ended December 31	2017			2016			2015
Consumers
Minimum operating lease expense
PPAs		$	5		$	6		$	6
Other agreements			15			14			19
Contingent rental expense1			96			82			82

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, 2017. All of CMS Energy’s non‑cancelable leases at December 31, 2017 were attributable to Consumers.

In Millions
	Capital Leases			Palisades  Financing			Operating Leases
Consumers
2018		$	15		$	16		$	15
2019			15			15			9
2020			12			14			9
2021			12			14			9
2022			8			3			4
2023 and thereafter			21			-			7
Total minimum lease payments		$	83		$	62		$	53
Less imputed interest			25			7
Present value of net minimum lease payments		$	58		$	55
Less current portion			9			13
Non-current portion		$	49		$	42

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 $17million for the year ended December 31, 2017,  $17 million for the year ended December 31, 2016, and $18 million for the year ended December 31, 2015. At December 31, 2017, the Palisades asset and financing obligation both had a balance of $55million.

In December2016, Consumers agreed to pay Entergy $172 million to terminate their PPA in May 2018, contingent upon the MPSC’s approval. In September 2017, the MPSC issued an  order authorizing Consumers to recover only $137 million of the $172 million termination payment. As a result, Consumers and Entergy agreed not to terminate the PPA, which is now expected to continue until April 2022 under its original terms.