Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Management’s Discussion and Analysis of Financial Condition and Results of Operations is a combined report of CMS Energy and Consumers.

Executive Overview

CMS Energy is an energy company operating primarily in Michigan. It is the parent holding company of several subsidiaries, including Consumers, an electric and gas utility, and CMS Enterprises, primarily a domestic independent power producer and marketer. Consumers’ electric utility operations include the generation, purchase, transmission, distribution, and sale of electricity, and Consumers’ gas utility operations include the purchase, transmission, storage, distribution, and sale of natural gas. Consumers’ customer base consists of a mix of residential, commercial, and diversified industrial customers. CMS Enterprises, through its subsidiaries and equity investments, is engaged in domestic independent power production, including the development and operation of renewable generation, and the marketing of independent power production.

CMS Energy and Consumers manage their businesses by the nature of services each provides. CMS Energy operates principally in three business segments: electric utility; gas utility; and enterprises, its non‑utility operations and investments. Consumers operates principally in two business segments: electric utility and gas utility. CMS Energy’s and Consumers’ businesses are affected primarily by:

•	regulation and regulatory matters

•	state and federal legislation

•	economic conditions

•	weather

•	energy commodity prices

•	interest rates

•	their securities’ credit ratings

The Triple Bottom Line

CMS Energy’s and Consumers’ purpose is to achieve world class performance while delivering hometown service. In support of this purpose, the companies employ the “Consumers Energy Way,” a lean operating model designed to improve safety, quality, cost, delivery, and employee morale.

CMS Energy and Consumers measure their progress toward the purpose by considering their impact on the “triple bottom line” of people, planet, and profit, which is underpinned by performance; this consideration takes into account not only the economic value that the companies create for customers and investors, but also their responsibility to social and environmental goals. The triple bottom line balances the interests of the companies’ employees, customers, suppliers, regulators, creditors, Michigan’s residents, the investment community, and other stakeholders, and it reflects the broader societal impacts of the companies’ activities.

Consumers’ Sustainability Report, which is available to the public, describes the company’s progress toward world class performance measured in the areas of people, planet, and profit.

People: The people element of the triple bottom line represents CMS Energy’s and Consumers’ commitment to their employees, their customers, the residents of local communities in which the companies do business, and other stakeholders.

The safety of employees, customers, and the general public is a priority of CMS Energy and Consumers. Accordingly, CMS Energy and Consumers have worked to integrate a set of safety principles into their business operations and culture. These principles include complying with applicable safety, health, and security regulations and implementing programs and processes aimed at continually improving safety and security conditions. Presented in the following illustration are Consumers’ OSHA recordable incident rates over the last ten years:

CMS Energy and Consumers also place a high priority on customer value and on providing a hometown customer experience. Consumers’ customer-driven investment program is aimed at improving safety and increasing electric and gas reliability, which has resulted in measurable improvements in customer satisfaction.

Central to Consumers’ commitment to its customers are the initiatives it has undertaken to keep electricity and natural gas affordable, including:

•	replacement of coal-fueled generation with cleaner and more efficient natural gas-fueled generation, renewable energy, and energy waste reduction and demand response programs

•	targeted infrastructure investment, including the installation of smart meters

•	information and control system efficiencies

•	employee and retiree health care cost sharing

•	workforce productivity enhancements

In addition, Consumers’ gas commodity costs declined by 60 percent from 2008 through 2018, due not only to a decrease in market prices but also to Consumers’ improvements to its gas infrastructure and optimization of its gas purchasing and storage strategy. These gas commodity savings are passed on to customers.

Planet: The planet element of the triple bottom line represents CMS Energy’s and Consumers’ commitment to protect the environment; this commitment extends beyond complying with the various state and federal environmental and health and safety laws and regulations to which CMS Energy and Consumers are subject. Management considers climate change risk and other environmental risks in the companies’ strategy development, business planning, and enterprise risk management processes. In November 2018, CMS Energy published a climate assessment report of the long-term impacts on the company’s portfolio, of public policies and technological advances that are consistent with limiting global warming to no more than two degrees Celsius over pre-industrial levels.

CMS Energy and Consumers continue to focus on opportunities to protect the environment and to reduce their carbon footprint. As a result of actions already taken by CMS Energy and Consumers, including the retirement of seven of Consumers’ coal-fueled electric generating units in 2016, the companies have decreased their combined percentage of electric supply (self-generated and purchased) from coal by 18 percentage points since 2015. Presented in the following illustration are CMS Energy’s, including Consumers’, sources of electric supply in 2018:

The companies have also:

•	reduced carbon dioxide emissions by over 35 percent since 2005

•	reduced the amount of water used to generate electricity by over 35 percent since 2012

•	reduced landfill waste disposal by over one million cubic yards since 1992

Additionally, over the last 20 years, Consumers has reduced its sulfur dioxide, nitrogen oxide, particulate matter, and mercury emissions by 90 percent.

The 2016 Energy Law:

•	raised the renewable energy standard from the present ten-percent requirement to 12.5 percent in 2019 and 15 percent in 2021

•	established a goal of 35 percent combined renewable energy and energy waste reduction by 2025

•	authorized incentives for demand response programs and expanded existing incentives for energy efficiency programs, referring to the combined initiatives as energy waste reduction programs

•	established an integrated planning process for new generation resources

Consumers filed an IRP with the MPSC in June 2018, detailing its long-term strategy for delivering reliable and affordable energy to its customers through the increased use of energy efficiency and customer demand management programs and additional renewable energy.

In its IRP, Consumers details how it will meet the requirements of the 2016 Energy Law using its clean and lean strategy, which focuses on increasing the generation of renewable energy, helping customers use less energy, and offering demand response programs to reduce demand during critical peak times. Further, Consumers details its plans to replace all of its coal-fueled generation with investment in renewable energy, proposing renewable energy levels of 25 percent by 2025, over 35 percent by 2030, and over 40 percent by 2040. The attainment of these renewable energy levels will enable Consumers to meet and exceed the 2016 Energy Law renewable energy requirements and fulfill increasing customer demand for renewable energy. The IRP supports the following clean energy goals, which Consumers announced during 2018:

•	a breakthrough goal to reduce carbon emissions by 80 percent and to eliminate the use of coal to generate electricity by 2040

•	a target of at least 50 percent combined renewable energy and energy waste reduction by 2030

Additionally, in an effort to advance its environmental stewardship in Michigan and to minimize the impact of future regulations, Consumers announced these five-year targets during 2018:

•	to reduce its water use by one billion gallons; in 2018, Consumers reduced its water usage by 180 million gallons

•	to reduce the amount of waste taken to landfills by 35 percent; in 2018, Consumers reduced its waste to landfills by 12 percent

•	to enhance, restore, or protect 5,000 acres of land; in 2018, Consumers enhanced, restored, or protected nearly 800 acres of land

CMS Energy, through its non‑utility businesses, continues to pursue further opportunities for the development of renewable generation projects. In 2018, CMS Enterprises completed the development and construction of two solar generation projects totaling 24 MW in Michigan; energy produced by these projects is sold under 25‑year PPAs to the Lansing Board of Water and Light, a non‑affiliated utility. CMS Enterprises also purchased a 105-MW wind generation project in northwest Ohio, and the project became operational in September 2018. Renewable energy produced by the wind generation project has been committed to General Motors LLC, a non‑affiliated company, under a 15-year PPA.

CMS Energy and Consumers are monitoring numerous legislative, policy, and regulatory initiatives, including those to regulate greenhouse gases, and related litigation. While CMS Energy and Consumers cannot predict the outcome of these matters, which could have a material effect on the companies, they intend to continue to move forward with their clean and lean strategy.

Profit: The profit element of the triple bottom line represents CMS Energy’s and Consumers’ commitment to meeting financial objectives and providing economic development opportunities and benefits in the communities in which they do business. CMS Energy’s and Consumers’ financial strength allows them to maintain solid investment-grade credit ratings and thereby reduce funding costs for the benefit of customers and investors, to preserve and create jobs, and to reinvest in the communities they serve.

In 2018, CMS Energy’s net income available to common stockholders was $657 million, and diluted EPS were $2.32. This compares with net income available to common stockholders of $460 million and diluted EPS of $1.64 in 2017. In 2018, rate increases, higher sales, and the absence of the impacts of the TCJA were offset partially by higher depreciation and maintenance and other operating expenses. A more detailed discussion of the factors affecting CMS Energy’s and Consumers’ performance can be found in the Results of Operations section that follows this Executive Overview.

Consumers projects that its electric weather-normalized deliveries will remain stable and gas weather-normalized deliveries will increase slightly through 2023. This outlook reflects growth in electric demand offset by the effects of energy waste reduction programs, and growth in gas demand offset partially by energy efficiency and conservation.

Performance: Impacting the Triple Bottom Line

CMS Energy and Consumers remain committed to achieving world class performance while delivering hometown service. Leveraging the Consumers Energy Way, CMS Energy and Consumers accomplished the following during 2018:

•	achieved record-breaking performance in the area of on-time delivery commitments

•	attracted 101 MW of new or expanding load in Consumers’ service territory

•	announced clean energy goals and filed an IRP in support of those goals

•	expanded CMS Enterprises’ renewable portfolio

•	enhanced or restored nearly 800 acres of land in Michigan

•	finished first overall across the electric utility sector in cyber security testing

CMS Energy and Consumers will continue to utilize the Consumers Energy Way to enable them to achieve world class performance and positively impact the triple bottom line. Consumers’ investment plan and the regulatory environment in which it operates also drive its ability to impact the triple bottom line.

Investment Plan: Consumers expects to make significant expenditures on infrastructure upgrades and replacements and electric supply projects from 2019 through 2028. While it has a large number of potential investment opportunities that would add customer value, Consumers has prioritized its spending based on the criteria of enhancing public safety, increasing reliability, maintaining affordability for its customers, and advancing its environmental stewardship. Consumers’ investment program is expected to result in annual rate-base growth of six to eight percent. This rate-base growth, together with cost-control initiatives, should allow Consumers to maintain affordable customer prices.

Presented in the following illustration are planned capital expenditures of $11.2 billion that Consumers expects to make from 2019 through 2023:

Consumers plans to spend $9.3 billion over the next five years to maintain and upgrade its gas infrastructure and electric distribution systems in order to enhance safety and reliability, improve customer satisfaction, and reduce energy waste on those systems. The gas infrastructure projects comprise $5.1 billion to sustain deliverability and enhance pipeline integrity and safety. These projects, which involve replacement of mains and services and enhancement of transmission and storage systems, should reduce the minor quantity of methane emissions released as gas is transported. The electric distribution projects comprise $4.2 billion to strengthen circuits and substations and replace poles. Consumers also expects to spend $1.9 billion on electric supply projects, representing new generation, including renewable generation, and environmental investments needed to comply with state and federal laws and regulations.

Regulation: Regulatory matters are a key aspect of Consumers’ business, particularly rate cases and regulatory proceedings before the MPSC, which permit recovery of new investments while helping to ensure that customer rates are fair and affordable. Important regulatory events and developments not already discussed are summarized below.

•

2017 Electric Rate Case: In March 2017, Consumers filed an application with the MPSC seeking an annual rate increase of $173 million, based on a 10.5 percent authorized return on equity. The filing requested authority to recover new investment in system reliability, environmental compliance, and technology enhancements. In September 2017, Consumers reduced its requested annual rate increase to $148 million. The MPSC issued an order in March 2018, authorizing an annual rate increase of $66 million, based on a 10.0 percent authorized return on equity. In June 2018, as a result of a petition for rehearing filed by Consumers, the MPSC issued an order adjusting the authorized annual rate increase to $72 million by allowing recovery of additional retirement benefit plan costs.

•

2018 Electric Rate Case: In May 2018, Consumers filed an application with the MPSC seeking an annual rate increase of $58 million, based on a 10.75 percent authorized return on equity. In October 2018, Consumers reduced its requested annual rate increase to $44 million. The filing requested authority to recover new investment in system reliability, environmental compliance, and technology enhancements. In January 2019, the MPSC approved a settlement agreement authorizing an annual rate decrease of $24 million, based on a 10.0 percent authorized return of equity. With the elimination of the $113 million TCJA credit to customer bills, the approved settlement agreement results in an $89 million increase in annual rates. In lieu of the investment recovery mechanism requested by Consumers, the settlement agreement provides for deferred accounting treatment for distribution-related capital investments exceeding certain amounts. Consumers also agreed to not file a new electric rate case prior to January 2020.

•

2017 Gas Rate Case: In October 2017, Consumers filed an application with the MPSC seeking an annual rate increase of $178 million, based on a 10.5 percent authorized return on equity. In March 2018, Consumers reduced its requested revenue requirement to $145 million, before taking into consideration any impact of the TCJA. Consumers further reduced its requested revenue requirement to $83 million to reflect the impact of the TCJA, offset partially by an increase in the authorized return of equity to 10.75 percent to compensate for the anticipated negative effects of tax reform on Consumers’ cash flows from operating activities. In August 2018, the MPSC approved a settlement agreement authorizing an annual rate increase of $11 million, based on a 10.0 percent authorized return on equity. With the elimination of the $49 million TCJA credit to customer bills, the approved settlement agreement results in a $60 million increase in annual rates.

The MPSC also approved two rate adjustment mechanisms: a revenue decoupling mechanism and an investment recovery mechanism. The revenue decoupling mechanism will annually reconcile Consumers’ actual weather-normalized non‑fuel revenues with the revenues approved by the MPSC. The investment recovery mechanism will provide for an additional annual rate increase of $9 million beginning in July 2019 and another $10 million beginning in July 2020 for incremental investments that Consumers plans to make in those years, subject to reconciliation. The investment recovery surcharge will remain in effect until rates are reset in a subsequent general rate case.

•	2018 Gas Rate Case: In November 2018, Consumers filed an application with the MPSC seeking an annual rate increase of $229 million, based on a 10.75 percent authorized return on equity. The filing also seeks approval of two rate adjustment mechanisms: a revenue decoupling mechanism and an investment recovery mechanism. The revenue decoupling mechanism would

annually reconcile Consumers’ actual weather-normalized non-fuel revenues with the revenues approved by the MPSC. The investment recovery mechanism would provide for additional annual rate increases of $11 million beginning in October 2020 and another $11 million beginning in October 2021 for incremental investments that Consumers plans to make in those years, subject to reconciliation. These future investments are intended to help ensure adequate system capacity and deliverability. The MPSC previously approved an investment recovery mechanism in August 2018; that mechanism will remain in effect until rates are changed in this proceeding.

•

Tax Cuts and Jobs Act: The TCJA, which changed existing federal tax law and included numerous provisions that affect businesses, was signed into law in December 2017. In early 2018, the MPSC ordered Consumers to file various proceedings to determine the reduction in its electric and gas revenue requirements as a result of the reduction in the corporate income tax rate, and to implement bill credits to reflect that reduction until customer rates could be adjusted through Consumers’ general rate cases. Consumers filed, and the MPSC approved, such proceedings throughout 2018, resulting in credits to customer bills during 2018 to reflect reductions in Consumers’ electric and gas revenue requirements. Additionally, Consumers filed an application to address the December 31, 2017 remeasurement of its deferred income taxes and other base rate impacts of the TCJA on customers. For details on these proceedings, see Item 8. Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements—Note 3, Regulatory Matters.

Looking Forward

CMS Energy and Consumers will continue to consider the impact on the triple bottom line of people, planet, and profit in their daily operations as well as in their long-term strategic decisions. Consumers will continue to seek fair and timely regulatory treatment that will support its customer-driven investment plan, while pursuing cost-control initiatives that will allow it to maintain sustainable customer base rates. The Consumers Energy Way is an important means of realizing CMS Energy’s and Consumers’ purpose of achieving world class performance while delivering hometown service.

Results of Operations

CMS Energy Consolidated Results of Operations

In Millions, Except Per Share Amounts
Years Ended December 31	2018				2017				2016
Net Income Available to Common Stockholders		$	657			$	460			$	551
Basic Earnings Per Average Common Share		$	2.33			$	1.64			$	1.99
Diluted Earnings Per Average Common Share		$	2.32			$	1.64			$	1.98

In Millions
Years Ended December 31	2018				2017				Change				2017				2016				Change
Electric utility		$	535			$	455			$	80			$	455			$	458			$	(3	)
Gas utility		169				173				(4		)		173				155				18
Enterprises		34				(27		)		61				(27		)		17				(44		)
Corporate interest and other		(81		)		(141		)		60				(141		)		(79		)		(62		)
Net Income Available to Common Stockholders		$	657			$	460			$	197			$	460			$	551			$	(91	)

Presented in the following table are specific after-tax changes to net income available to common stockholders for 2018 versus 2017:

In Millions
Year Ended December 31, 2017						$	460
Reasons for the change
Consumers electric utility and gas utility
Electric sales		$	43
Gas sales		20
Electric rate increase		42
Gas rate increase		36
OPEB Plan changes		41
Deferred income tax adjustments due to the TCJA, primarily the absence of the 2017 adjustment1		32
Depreciation and amortization		(32		)
Increased distribution, transmission, and customer operations expenses		(30		)
Absence of state income tax benefit in 2017		(16		)
Other, including absence of 2017 intercompany gain of $9 million		(60		)		$	76
Enterprises
Deferred income tax adjustments due to the TCJA, primarily the absence of the 2017 adjustment1		62
Reduction of corporate income tax rate due to the impacts of the TCJA		6
Higher expenses from legacy obligations, net		(4		)
Lower earnings from operations and equity method investees		(3		)		61
Corporate interest and other
Deferred income tax adjustments due to the TCJA, primarily the absence of the 2017 adjustment1		58
2017 Elimination of an intercompany gain on the donation of CMS Energy stock2		9
Lower fixed charges and administrative and other expenses		2
Lower tax benefit due to the impacts of the TCJA		(9		)		60
Year Ended December 31, 2018						$	657

1	See Note 14, Income Taxes.

2	Gain at segment is eliminated on CMS Energy’s consolidated statements of income.

Presented in the following table are specific after-tax changes to net income available to common stockholders for 2016 versus 2017:

In Millions
Year Ended December 31, 2016						$	551
Reasons for the change
Consumers electric utility and gas utility
Electric sales		$	(15	)
Gas sales		14
Electric rate increase		50
Gas rate increase		16
State income tax benefit in 2017		15
Retirement of coal-fueled power plants in 2016		12
Voluntary separation program costs in 2016		7
Employee benefit costs		1
Depreciation and amortization		(42		)
Deferred income tax adjustment due to the TCJA1		(34		)
Donations		(8		)
Other		(1		)		$	15
Enterprises
Deferred income tax adjustment due to the TCJA1		(57		)
Higher prices for capacity and demand revenue from DIG		13				(44		)
Corporate interest and other
Deferred income tax adjustment due to the TCJA1		(57		)
Elimination of an intercompany gain on the donation of CMS Energy stock2		(9		)
2016 Settlement with Michigan Department of Treasury		(5		)
Higher earnings at EnerBank		3
Lower fixed charges and administrative and other expenses		6				(62		)
Year Ended December 31, 2017						$	460

1	See Note 14, Income Taxes.

2	Gain at segment is eliminated on CMS Energy’s consolidated statements of income.

Consumers Electric Utility Results of Operations

For the year ended December 31, 2018, Consumers electric utility’s net income available to common stockholders was $535 million. This compares with net income available to common stockholders of $455 million for the year ended December 31, 2017. In 2018, higher net income was due primarily to a rate increase and higher sales as a result of favorable weather. These increases were offset partially by higher maintenance and other operating expenses and higher depreciation on increased plant in service. Consumers incurred higher maintenance and other operating expenses due to the execution of additional work in 2018. Lower tax expense in 2018 resulting from the TCJA was offset fully by a reduction in revenue to reflect the pass-through of TCJA-related benefits to customers. Presented in the following table are the detailed changes to the electric utility’s net income available to common stockholders for 2018 versus 2017:

In Millions
Year Ended December 31, 2017						$	455
Reasons for the change
Electric deliveries1 and rate increases
Rate increase, including the impacts of the March 2018 order		$	63
Higher sales due primarily to favorable weather in 2018		59
Higher energy waste reduction program revenues		33
Increase in other revenues		4				$	159
Revenue reserve and lower rates related to the TCJA2						(143		)
Maintenance and other operating expenses
Higher energy waste reduction program costs		(33		)
Increased distribution, transmission, and customer operations expenses		(22		)
Increase in generation operating expenses		(17		)
Higher service restoration costs		(4		)
Higher other maintenance and operating expenses		(4		)		(80		)
Depreciation and amortization
Increased plant in service, reflecting higher capital spending						(28		)
General taxes
Settlement of a property tax appeal related to the Campbell plant in 2018		9
Settlement of a property tax appeal related to the Zeeland plant in 2017		(10		)
Higher property tax, reflecting higher capital spending		(3		)
Higher other general taxes		(3		)		(7		)
Other income, net of expenses
Impact of OPEB Plan changes approved in November 2017		35
Lower donations		33
2017 Gain on the donation of CMS Energy stock3		(9		)
Lower other income, net of expenses		(7		)		52
Interest charges – Due primarily to higher average borrowings						(9		)
Impacts of the TCJA on income taxes
Reduction of the corporate income tax rate		109
Deferred income tax adjustments, primarily the absence of the 2017 adjustment4		24				133
Other changes in income taxes
Lower electric utility pre-tax earnings		18
Research and development tax credits, net4		9
Absence of 2017 state income tax benefit4		(11		)
Absence of 2017 tax benefit associated with deductible lobbying expenses		(6		)
Higher other income taxes		(7		)		3
Year Ended December 31, 2018						$	535

1	Deliveries to end-use customers were 38.2 billion kWh in 2018 and 37.4 billion kWh in 2017.

2	See Note 3, Regulatory Matters.

3	Gain at segment is eliminated on CMS Energy’s consolidated statements of income.

4	See Note 14, Income Taxes.

For the year ended December 31, 2017, Consumers electric utility’s net income available to common stockholders was $455 million. This compares with net income available to common stockholders of $458 million for the year ended December 31, 2016. In 2017, rate increases were offset fully by lower

sales due primarily to mild weather and higher depreciation on increased plant in service. In addition, reductions in state and other income taxes were offset primarily by the recognition of the impacts of the TCJA. Presented in the following table are the detailed changes to the electric utility’s net income available to common stockholders for 2017 versus 2016:

In Millions
Year Ended December 31, 2016						$	458
Reasons for the change
Electric deliveries1 and rate increases
Rate increase, including the impacts of the March 2017 order and the October 2017 self-implemented rate increase		$	82
Higher energy waste reduction program revenues and financial incentives		23
Lower sales and other revenue, due primarily to mild weather in 2017		(50		)		$	55
Power supply costs and related revenue						3
Maintenance and other operating expenses
Higher service restoration costs following severe storms		(15		)
Higher energy waste reduction program costs		(13		)
Higher information technology and other operating and maintenance expenses		(11		)
Higher demand response program costs		(6		)
Absence of a 2016 Michigan use tax settlement benefit		(4		)
Lower coal-fueled electric generating plant costs due to retirement of plants in 2016		19
Lower postretirement benefit costs		10
Lower meter reading expense, reflecting the implementation of smart meters		7
Absence of a 2016 voluntary separation program		6				(7		)
Depreciation and amortization
Increased plant in service, reflecting higher capital spending						(51		)
General taxes
Settlement of property tax appeal related to the Zeeland plant in 2017		10
Higher property taxes, reflecting higher capital spending		(4		)		6
Other income, net of expenses
Reduction in nonoperating retirement benefits credits		(15		)
Higher donations		(10		)
2017 Gain on the donation of CMS Energy stock2		9
Retirement benefit plan changes		6
Higher other income, net of expenses		6				(4		)
Interest charges
Higher PSCR interest expense and other interest charges		(6		)		(6		)
Income taxes
Reduction in effective state income tax rate3		11
Lower non‑deductible donations		10
Lower electric utility earnings and other income taxes		5
Deferred income tax adjustment due to the TCJA3		(25		)		1
Year Ended December 31, 2017						$	455

1	Deliveries to end-use customers were 37.4 billion kWh in 2017 and 37.9 billion kWh in 2016.

2	Gain at segment is eliminated on CMS Energy’s consolidated statements of income.

3	See Note 14, Income Taxes.

Consumers Gas Utility Results of Operations

For the year ended December 31, 2018, Consumers gas utility’s net income available to common stockholders was $169 million. This compares with net income available to common stockholders of $173 million for the year ended December 31, 2017. In 2018, lower net income was due primarily to higher maintenance and other operating expenses and depreciation on increased plant in service. These decreases were offset partially by a rate increase and higher sales as a result of favorable weather. Consumers incurred higher maintenance and other operating expenses due to the execution of additional work in 2018. Lower tax expense in 2018 resulting from the TCJA was offset fully by a reduction in revenue to reflect the pass-through of TCJA-related benefits to customers. Presented in the following table are the detailed changes to the gas utility’s net income available to common stockholders for 2018 versus 2017:

In Millions
Year Ended December 31, 2017						$	173
Reasons for the change
Gas deliveries1 and rate increases
Rate increase, including the impacts of the September 2018 order		$	53
Higher sales due primarily to favorable weather in 2018		31
Higher energy waste reduction program revenues		23
Decrease in other revenues		(2		)		$	105
Revenue reserve and lower rates related to the TCJA2						(66		)
Maintenance and other operating expenses
Increased distribution, transmission, and customer operations expenses		(28		)
Higher energy waste reduction program costs		(23		)
Increased expenses related to pipeline integrity		(21		)
Higher cost associated with leak repair and survey		(5		)
Increased expense associated with the retirement of gas compressor stations		(3		)
Higher other maintenance and operating expenses		(15		)		(95		)
Depreciation and amortization
Increased plant in service, reflecting higher capital spending						(20		)
General taxes
Higher property tax, reflecting higher capital spending						(11		)
Other income, net of expenses
Impact of OPEB Plan changes approved in November 2017		27
Lower donations		6
2017 Gain on the donation of CMS Energy stock3		(5		)
Lower other income, net of expenses		(2		)		26
Interest charges						(6		)
Impacts of the TCJA on income taxes
Reduction of the corporate income tax rate		36
Deferred income tax adjustments, primarily the absence of the 2017 adjustment4		8				44
Other changes in income taxes
Lower gas utility pre-tax earnings		25
Absence of a 2017 state income tax benefit		(3		)
Higher other income taxes		(3		)		19
Year Ended December 31, 2018						$	169

1	Deliveries to end-use customers were 310 bcf in 2018 and 287 bcf in 2017.

2	See Note 3, Regulatory Matters.

3	Gain at segment is eliminated on CMS Energy’s consolidated statements of income.

4	See Note 14, Income Taxes.

For the year ended December 31, 2017, Consumers gas utility’s net income available to common stockholders was $173 million. This compares with net income available to common stockholders of $155 million for the year ended December 31, 2016. In 2017, higher net income was due primarily to increased sales resulting from higher deliveries and a rate increase. These increases were offset partially by the recognition of the impacts of the TCJA and higher depreciation on increased plant in service. Presented in the following table are the detailed changes to the gas utility’s net income available to common stockholders for 2017 versus 2016:

In Millions
Year Ended December 31, 2016						$	155
Reasons for the change
Gas deliveries1 and rate increases
Rate increase		$	27
Higher sales due primarily to higher deliveries		20
Higher other revenues		6
Higher financial incentive associated with energy waste reduction program		3
Lower energy waste reduction program revenues		(5		)		$	51
Maintenance and other operating expenses
Lower postretirement benefit costs		8
Lower energy waste reduction program costs		5
Absence of a 2016 voluntary separation program		4
Lower other operating and maintenance expenses		4				21
Depreciation and amortization
Increased plant in service, reflecting higher capital spending						(18		)
General taxes
Higher property tax, reflecting higher capital spending						(5		)
Other income, net of expenses
Reduction in nonoperating retirement benefits credits		(11		)
Higher donations		(3		)
Higher other expenses		(3		)
2017 Gain on the donation of CMS Energy stock2		5
Retirement benefit plan changes		4				(8		)
Interest charges						(2		)
Income taxes
Higher gas utility earnings		(15		)
Deferred income tax adjustment due to the TCJA3		(9		)
Higher other income taxes		(1		)
Reduction in effective state income tax rate3		4				(21		)
Year Ended December 31, 2017						$	173

1	Deliveries to end-use customers were 287 bcf in 2017 and 282 bcf in 2016.

2	Gain at segment is eliminated on CMS Energy’s consolidated statements of income.

3	See Note 14, Income Taxes.

Enterprises Results of Operations

Presented in the following table are the detailed after-tax changes to the enterprises segment’s net income available to common stockholders for 2018 versus 2017:

In Millions
Year Ended December 31, 2017				$	(27	)
Reason for the change
Deferred income tax adjustments due to the TCJA, primarily the absence of the 2017 adjustment1				$	62
Reduction of corporate income tax rate due to the impacts of the TCJA				6
Higher expenses from legacy obligations, net				(4		)
Lower earnings from operations and equity method investees				(3		)
Year Ended December 31, 2018				$	34

1	See Note 14, Income Taxes.

Presented in the following table are the detailed changes to the enterprises segment’s net income available to common stockholders for 2017 versus 2016:

In Millions
Year Ended December 31, 2016				$	17
Reason for the change
Deferred income tax adjustment due to the TCJA1				$	(57	)
Higher prices for capacity and demand revenue from DIG				13
Year Ended December 31, 2017				$	(27	)

1	See Note 14, Income Taxes.

Corporate Interest and Other Results of Operations

Presented in the following table are the detailed after-tax changes to corporate interest and other results for 2018 versus 2017:

In Millions
Year Ended December 31, 2017				$	(141	)
Reasons for the change
Deferred income tax adjustments due to the TCJA, primarily the absence of the 2017 adjustment1				$	58
2017 Elimination of an intercompany gain on the donation of CMS Energy stock				9
Lower fixed charges and administrative and other expenses				2
Lower tax benefit due to the impacts of the TCJA				(9		)
Year Ended December 31, 2018				$	(81	)

1	See Note 14, Income Taxes.

Presented in the following table are the detailed after-tax changes to corporate interest and other results for 2017 versus 2016:

In Millions
Year Ended December 31, 2016				$	(79	)
Reasons for the change
Deferred income tax adjustment due to the TCJA1				$	(57	)
Elimination of an intercompany gain on the donation of CMS Energy stock2				(9		)
Absence of 2016 settlement with the Michigan Department of Treasury				(5		)
Higher earnings at EnerBank				3
Lower fixed charges and administrative and other expenses				6
Year Ended December 31, 2017				$	(141	)

1	See Note 14, Income Taxes.

2	Eliminated on CMS Energy’s consolidated statements of income.

Cash Position, Investing, and Financing

At December 31, 2018, CMS Energy had $175 million of consolidated cash and cash equivalents, which included $22 million of restricted cash and cash equivalents. At December 31, 2018, Consumers had $56 million of consolidated cash and cash equivalents, which included $17 million of restricted cash and cash equivalents.

Operating Activities

Presented in the following table are specific components of net cash provided by operating activities for 2018 versus 2017:

In Millions
CMS Energy, including Consumers
Year Ended December 31, 2017		$	1,705
Reasons for the change
Higher net income		$	197
Non-cash transactions,1 which included the impacts of the TCJA		(238		)
Higher postretirement benefits contributions		(240		)
Favorable impact of changes in core working capital,2 due to the receipt of alternative minimum tax credit refunds, lower purchases of coal and gas, and higher collections from customers		114
Favorable impact of changes in other assets and liabilities, including higher collections from customers		165
Year Ended December 31, 2018		$	1,703
Consumers
Year Ended December 31, 2017		$	1,715
Reasons for the change
Higher net income		$	73
Non-cash transactions,1 which included the impacts of the TCJA		(37		)
Higher postretirement benefits contributions		(234		)
Favorable impact of changes in core working capital,2 due to lower purchases of coal and gas and higher collections from customers		66
Unfavorable impact of changes in other assets and liabilities, due primarily to higher income tax payments to CMS Energy, offset partially by higher collections from customers		(134		)
Year Ended December 31, 2018		$	1,449

1	Non-cash transactions comprise depreciation and amortization, changes in deferred income taxes, bad debt expense, and other non‑cash operating activities and reconciling adjustments.

2	Core working capital comprises accounts receivable, notes receivable, accrued revenue, inventories, accounts payable, and accrued rate refunds.

Presented in the following table are specific components of net cash provided by operating activities for 2017 versus 2016:

In Millions
CMS Energy, including Consumers
Year Ended December 31, 2016		$	1,629
Reasons for the change
Lower net income		$	(91	)
Non-cash transactions,1 which included the impacts of the TCJA		252
Lower postretirement benefits contributions		96
Unfavorable impact of changes in core working capital,2 largely due to gas purchased at higher prices, offset partially by higher collections from customers		(113		)
Unfavorable impact of changes in other assets and liabilities, due primarily to increased spending on environmental remediation activities		(68		)
Year Ended December 31, 2017		$	1,705
Consumers
Year Ended December 31, 2016		$	1,681
Reasons for the change
Higher net income		$	16
Non-cash transactions,1 which included the impacts of the TCJA		(25		)
Lower postretirement benefits contributions		90
Unfavorable impact of changes in core working capital,2 largely due to gas purchased at higher prices, offset partially by higher collections from customers		(129		)
Favorable impact of changes in other assets and liabilities, due primarily to lower income tax payments to CMS Energy, offset partially by increased spending on environmental remediation activities		82
Year Ended December 31, 2017		$	1,715

1	Non-cash transactions comprise depreciation and amortization, changes in deferred income taxes, bad debt expense, and other non‑cash operating activities and reconciling adjustments.

2	Core working capital comprises accounts receivable, notes receivable, accrued revenue, inventories, accounts payable, and accrued rate refunds.

Investing Activities

Presented in the following table are specific components of net cash used in investing activities for 2018 versus 2017:

In Millions
CMS Energy, including Consumers
Year Ended December 31, 2017		$	(1,868	)
Reasons for the change
Higher capital expenditures		$	(409	)
Changes in EnerBank notes receivable, reflecting growth in consumer lending		(169		)
Purchase of notes receivable by EnerBank in 2018		(225		)
Proceeds from DB SERP investments in 20181		146
Proceeds from the sale of EnerBank notes receivable in 2017		(50		)
Other investing activities, primarily higher costs to retire property		(31		)
Year Ended December 31, 2018		$	(2,606	)
Consumers
Year Ended December 31, 2017		$	(1,751	)
Reasons for the change
Higher capital expenditures		$	(190	)
Other investing activities, primarily higher costs to retire property		(30		)
Year Ended December 31, 2018		$	(1,971	)

1	See Note 7, Financial Instruments.

Presented in the following table are specific components of net cash used in investing activities for 2017 versus 2016:

In Millions
CMS Energy, including Consumers
Year Ended December 31, 2016		$	(1,915	)
Reasons for the change
Lower capital expenditures		$	7
Changes in EnerBank notes receivable		(2		)
Proceeds from the sale of EnerBank notes receivable in 2017		50
Other investing activities, primarily higher costs to retire property		(8		)
Year Ended December 31, 2017		$	(1,868	)
Consumers
Year Ended December 31, 2016		$	(1,768	)
Reasons for the change
Lower capital expenditures		$	24
Other investing activities, primarily higher costs to retire property		(7		)
Year Ended December 31, 2017		$	(1,751	)

Financing Activities

Presented in the following table are specific components of net cash provided by (used in) financing activities for 2018 versus 2017:

In Millions
CMS Energy, including Consumers
Year Ended December 31, 2017		$	110
Reasons for the change
Higher debt issuances		$	1,134
Higher debt retirements		(890		)
Changes in EnerBank certificates of deposit, reflecting higher borrowings		466
Lower repayments under Consumers’ commercial paper program		155
Lower issuances of common stock under the continuous equity offering program		(42		)
Higher payments of dividends on common and preferred stock		(30		)
Higher debt prepayment costs		(14		)
Other financing activities, primarily higher debt issuance costs		(15		)
Year Ended December 31, 2018		$	874
Consumers
Year Ended December 31, 2017		$	(51	)
Reasons for the change
Higher debt issuances		$	1,272
Higher debt retirements		(638		)
Lower repayments under Consumers’ commercial paper program		155
Lower stockholder contribution from CMS Energy		(200		)
Higher payments of dividends on common and preferred stock		(9		)
Higher debt prepayment costs		(16		)
Year Ended December 31, 2018		$	513

Presented in the following table are specific components of net cash provided by (used in) financing activities for 2017 versus 2016:

In Millions
CMS Energy, including Consumers
Year Ended December 31, 2016		$	255
Reasons for the change
Higher debt issuances		$	584
Higher debt retirements		(252		)
Changes in EnerBank certificates of deposit, reflecting lower borrowings		(53		)
Higher repayments under Consumers’ commercial paper program		(377		)
Higher issuances of common stock under the continuous equity offering program		11
Higher payments of dividends on common and preferred stock		(30		)
Higher debt prepayment costs		(4		)
Other financing activities		(24		)
Year Ended December 31, 2017		$	110
Consumers
Year Ended December 31, 2016		$	168
Reasons for the change
Higher debt issuances		$	388
Higher debt retirements		(357		)
Higher repayments under Consumers’ commercial paper program		(377		)
Higher stockholder contribution from CMS Energy		175
Higher payments of dividends on common and preferred stock		(23		)
Higher debt prepayment costs		(4		)
Other financing activities		(21		)
Year Ended December 31, 2017		$	(51	)

Capital Resources and Liquidity

CMS Energy uses dividends and tax-sharing payments from its subsidiaries and external financing and capital transactions to invest in its utility and non-utility businesses, retire debt, pay dividends, and fund its other obligations. The ability of CMS Energy’s subsidiaries, including Consumers, to pay dividends to CMS Energy depends upon each subsidiary’s revenues, earnings, cash needs, and other factors. In addition, Consumers’ ability to pay dividends is restricted by certain terms included in its debt covenants and articles of incorporation and potentially by FERC requirements and provisions under the Federal Power Act and the Natural Gas Act. For additional details on Consumers’ dividend restrictions, see Item 8. Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements—Note 5, Financings and Capitalization—Dividend Restrictions. For the year ended December 31, 2018, Consumers paid $531 million in dividends on its common stock to CMS Energy.

As a result of a provision in the TCJA, CMS Energy is required to recover all alternative minimum tax credits over four years through offsets of regular tax and through cash refunds. CMS Energy expects to be able to offset regular tax through the use of federal net operating loss carryforwards and, accordingly, receive alternative minimum tax credit refunds through 2021. Another provision in the TCJA excludes rate-regulated utilities from 100 percent cost expensing of certain property. This provision will cause Consumers to make higher tax-sharing payments to CMS Energy, which in turn might permit CMS Energy to maintain lower levels of debt in order to invest in its businesses, pay dividends, and fund

its general obligations. Consumers expects to have sufficient funding sources available to issue credits to customers for all impacts of the TCJA.

In August 2018, CMS Energy entered into an equity offering program under which it may sell, from time to time, shares of CMS Energy common stock having an aggregate sales price of up to $250 million. Under this program, CMS Energy may sell its common stock in privately negotiated “at the market” offerings, through forward sales transactions or otherwise. In November 2018, CMS Energy entered into forward equity sale contracts under this program. These contracts allow CMS Energy to either physically settle the contracts by issuing 2.8 million shares of its common stock at the then-applicable forward sale price specified by the agreements or net settle through the delivery or receipt of cash or shares. CMS Energy may settle the contracts at any time through May 2020, and presently intends to physically settle the contracts by delivering shares of its common stock. For more information on the forward sale contracts, see Item 8. Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements— Note 5, Financings and Capitalization.

In December 2018, CMS Energy entered into a $300 million term loan credit agreement. CMS Energy drew the entire amount of the term loan in January 2019.

Consumers uses cash flows generated from operations and external financing transactions, as well as stockholder contributions from CMS Energy, to fund capital expenditures, retire debt, pay dividends, contribute to its employee benefit plans, and fund its other obligations. Accelerated pension funding in prior years and several initiatives to reduce costs have helped improve cash flows from operating activities. Consumers anticipates continued strong cash flows from operating activities for 2019 and beyond.

Access to the financial and capital markets depends on CMS Energy’s and Consumers’ credit ratings and on market conditions. As evidenced by past financing transactions, CMS Energy and Consumers have had ready access to these markets. Barring major market dislocations or disruptions, CMS Energy and Consumers expect to continue to have ready access to the financial and capital markets. If access to these markets were to diminish or otherwise become restricted, CMS Energy and Consumers would implement contingency plans to address debt maturities, which could include reduced capital spending.

At December 31, 2018, CMS Energy had $519 million of its revolving credit facility available and Consumers had $843 million available under its revolving credit facilities. CMS Energy and Consumers use these credit facilities for general working capital purposes and to issue letters of credit. An additional source of liquidity is Consumers’ commercial paper program, which allows Consumers to issue, in one or more placements, up to $500 million in the aggregate in commercial paper notes with maturities of up to 365 days and that bear interest at fixed or floating rates. These issuances are supported by Consumers’ revolving credit facilities. While the amount of outstanding commercial paper does not reduce the available capacity of the revolving credit facilities, Consumers does not intend to issue commercial paper in an amount exceeding the available capacity of the facilities. At December 31, 2018, $97 million of commercial paper notes were outstanding under this program. For additional details on CMS Energy’s and Consumers’ secured revolving credit facilities and commercial paper program, see Item 8. Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements—Note 5, Financings and Capitalization.

Certain of CMS Energy’s and Consumers’ credit agreements, debt indentures, and other facilities contain covenants that require CMS Energy and Consumers to maintain certain financial ratios, as defined therein. At December 31, 2018, no default had occurred with respect to any financial covenants contained in CMS Energy’s and Consumers’ credit agreements, debt indentures, or other facilities. CMS Energy and Consumers were each in compliance with these covenants as of December 31, 2018, as presented in the following table:

	December 31, 2018
Credit Agreement, Indenture, or Facility	Limit		Actual
CMS Energy, parent only
Debt to EBITDA1	<	6.0 to 1.0	4.9 to 1.0
Debt to EBITDA2	<	6.25 to 1.0	4.7 to 1.0
Consumers
Debt to Capital3	<	0.65 to 1.0	0.49 to 1.0

1	Applies to CMS Energy’s $180 million term loan agreement.

2	Applies to CMS Energy’s $550 million revolving credit agreement and its $300 million term loan agreement.

3	Applies to Consumers’ $850 million and $250 million revolving credit agreements and its $35 million and $30 million reimbursement agreements.

Components of CMS Energy’s and Consumers’ cash management plan include controlling operating expenses and capital expenditures and evaluating market conditions for financing and refinancing opportunities. CMS Energy’s and Consumers’ present level of cash and expected cash flows from operating activities, together with access to sources of liquidity, are anticipated to be sufficient to fund the companies’ contractual obligations for 2019 and beyond.

Contractual Obligations: Presented in the following table are CMS Energy’s and Consumers’ contractual obligations. The table excludes all amounts classified as current liabilities on CMS Energy’s and Consumers’ consolidated balance sheets, other than the current portion of long-term debt, capital leases, and financing obligation.

In Millions
	Payments Due
December 31, 2018	Total				Less Than One Year				One to Three Years				Three to Five Years				More Than Five Years
CMS Energy, including Consumers
Long-term debt		$	11,683			$	974			$	1,317			$	1,692			$	7,700
Interest payments on long-term debt		8,134				428				784				683				6,239
Capital leases and financing obligation		91				23				39				13				16
Interest payments on capital leases and financing obligation		26				6				11				4				5
Operating leases		97				16				30				13				38
AROs		1,487				27				52				47				1,361
Deferred investment tax credit		99				4				9				8				78
Environmental liabilities		135				16				45				17				57
Purchase obligations
Total PPAs		9,930				1,049				2,094				1,382				5,405
Other1		2,341				1,276				568				254				243
Total contractual obligations		$	34,023			$	3,819			$	4,949			$	4,113			$	21,142
Consumers
Long-term debt		$	6,862			$	26			$	653			$	1,022			$	5,161
Interest payments on long-term debt		5,233				269				503				452				4,009
Capital leases and financing obligation		91				23				39				13				16
Interest payments on capital leases and financing obligation		26				6				11				4				5
Operating leases		85				14				27				12				32
AROs		1,472				26				52				47				1,347
Deferred investment tax credit		99				4				9				8				78
Environmental liabilities		77				12				37				9				19
Purchase obligations
PPAs
MCV PPA		3,880				330				607				554				2,389
Palisades PPA		1,280				378				788				114				—
Related-party PPAs2		692				85				171				173				263
Other PPAs		4,078				256				528				541				2,753
Total PPAs		9,930				1,049				2,094				1,382				5,405
Other1		2,075				1,237				521				227				90
Total contractual obligations		$	25,950			$	2,666			$	3,946			$	3,176			$	16,162

1	Long-term contracts for the purchase of commodities and related services, and construction and service agreements. The commodities and related services include natural gas and coal and associated transportation.

2	Long-term PPAs from certain affiliates of CMS Enterprises.

CMS Energy and Consumers also have recognized non-current liabilities for which the timing of payments cannot be reasonably estimated. These items, which are excluded from the table above, include regulatory liabilities, deferred income taxes, workers’ compensation liabilities, accrued liabilities under renewable energy programs, and other liabilities. Retirement benefits are also excluded from the table above. For details related to benefit payments, see Item 8. Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements—Note 12, Retirement Benefits.

Off-Balance-Sheet Arrangements: CMS Energy, Consumers, and certain of their subsidiaries enter into various arrangements in the normal course of business to facilitate commercial transactions with third parties. These arrangements include indemnities, surety bonds, letters of credit, and financial and performance guarantees. Indemnities are usually agreements to reimburse a counterparty that may incur losses due to outside claims or breach of contract terms. The maximum payment that could be required under a number of these indemnity obligations is not estimable; the maximum obligation under indemnities for which such amounts were estimable was $153 million at December 31, 2018. While CMS Energy and Consumers believe it is unlikely that they will incur any material losses related to indemnities they have not recorded as liabilities, they cannot predict the impact of these contingent obligations on their liquidity and financial condition. For additional details on these and other guarantee arrangements, see Item 8. Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements—Note 4, Contingencies and Commitments—Guarantees. For additional details on operating leases, see Item 8. Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements—Note 10, Leases and Palisades Financing.

Capital Expenditures: Over the next five years, CMS Energy and Consumers expect to make substantial capital investments. CMS Energy and Consumers may revise their forecasts of capital expenditures periodically due to a number of factors, including environmental regulations, business opportunities, market volatility, economic trends, and the ability to access capital. Presented in the following table are CMS Energy’s and Consumers’ estimated capital expenditures, including lease commitments, for 2019 through 2023:

In Billions
	2019				2020				2021				2022				2023				Total
CMS Energy, including Consumers
Consumers		$	2.2			$	2.4			$	2.2			$	2.2			$	2.2			$	11.2
Enterprises		0.1				0.1				0.1				0.1				0.1				0.5
Total CMS Energy		$	2.3			$	2.5			$	2.3			$	2.3			$	2.3			$	11.7
Consumers
Electric utility operations		$	1.2			$	1.3			$	1.3			$	1.1			$	1.2			$	6.1
Gas utility operations		1.0				1.1				0.9				1.1				1.0				5.1
Total Consumers		$	2.2			$	2.4			$	2.2			$	2.2			$	2.2			$	11.2

Outlook

Several business trends and uncertainties may affect CMS Energy’s and Consumers’ financial condition and results of operations. These trends and uncertainties could have a material impact on CMS Energy’s and Consumers’ consolidated income, cash flows, or financial position. For additional details regarding these and other uncertainties, see Forward-Looking Statements and Information; Item 1A. Risk Factors; Item 8. Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements—Note 3, Regulatory Matters; and Note 4, Contingencies and Commitments.

Consumers Electric Utility Outlook and Uncertainties

Energy Resource Planning: While Consumers continues to experience increasing demand for electricity due to Michigan’s growing economy and increased use of air conditioning, consumer electronics, and other electric devices, it expects that increase in demand to be offset by the effects of energy efficiency and conservation.

In June 2018, Consumers filed an IRP with the MPSC detailing its long-term strategy for delivering reliable and affordable energy to its customers through the increased use of energy efficiency and customer demand management programs and additional renewable energy. The IRP supports Consumers’ clean energy breakthrough goal to reduce carbon emissions by 80 percent and to eliminate the use of coal to generate electricity by 2040.

Specifically, in its IRP filing, Consumers requests the MPSC’s approval of:

•	the retirement of two coal-fueled generating units, totaling 515 MW, in 2023

•	the retirement of two coal-fueled and two oil- and natural gas-fueled generating units, totaling 1,811 MW, in 2031

•	the retirement of its remaining coal-fueled generating unit, totaling 782 MW, in 2039

Consumers proposes replacing the capacity to be retired with:

•	demand response programs

•	increased energy efficiency

•	increased renewable energy generation

•	grid modernization tools

•	battery storage

The IRP proposes renewable energy levels beyond the standard set in the 2016 Energy Law, which raised the renewable energy standard from the present ten-percent requirement to 15 percent in 2021. Specifically, the IRP proposes renewable energy levels of 25 percent by 2025, over 35 percent by 2030, and over 40 percent by 2040, to be achieved mainly through the economic development of up to 6,000 MW of solar generation and 550 MW of wind generation.

The IRP filing also included plans for Consumers to purchase additional electricity from the T.E.S. Filer City plant following a proposed conversion of the plant to use natural gas as its primary fuel instead of coal and biomass. In conjunction with the proposal to convert the plant, T.E.S. Filer City and Consumers had agreed in May 2017 to amend their PPA such that Consumers would purchase the increased capacity and electricity generated by the converted facility for 15 years. The amendment to the PPA was contingent on certain approvals, including a finding by FERC that the converted plant would continue to be an existing qualifying facility under PURPA. In August 2018, FERC concluded that the converted plant would not continue to be an existing qualifying facility under PURPA. As a result, the amendment is no longer effective and the PPA will continue until 2025 under its original terms.

PURPA: PURPA requires Consumers to purchase power from qualifying cogeneration and small power production facilities at a price approved by the MPSC that is meant to represent Consumers’ “avoided cost” of generating power or purchasing power from another source. In November 2017, the MPSC issued an order establishing a new avoided-cost methodology for determining the price that Consumers must pay to purchase power under PURPA. Among other things, the MPSC’s order changes the basis of Consumers’ avoided cost from the cost of coal-fueled generating units to that of natural gas-fueled generating units. The MPSC order also assigns more capacity value to qualifying facilities that are consistently able to generate electricity during peak times. Although the costs Consumers incurs to

purchase power from qualifying facilities are passed on to customers, the order could result in mandated purchases of generation, potentially at above-market prices, and reduce Consumers’ need for new owned generation. This in turn could have a material adverse effect on Consumers’ capital investment plan and the affordability of future customer rates.

In December 2017, Consumers filed a petition with the MPSC requesting corrections to the pricing calculations and capacity purchase model set in the order. Subsequently, the MPSC suspended the implementation of the order and reopened the proceeding. In February 2018, the MPSC issued an order limiting Consumers’ obligation to pay the full avoided capacity cost, which is based on the cost of a natural gas combustion turbine under the new avoided-cost formula, to existing qualifying facilities upon the expiration of outstanding contracts and to the first 150 MW of new generation projects that qualify under PURPA. In October 2018, the MPSC issued an order lifting the suspension on the November 2017 order and thereby making effective the avoided-cost formula set at that time; the use of the full avoided-cost formula is still limited to outstanding contracts that expire and the first 150 MW of new qualifying generation projects. All other qualifying generation projects that establish a legally enforceable obligation are eligible to receive a capacity payment equal to the MISO planning resource auction price and a designated energy price approved in the MPSC’s October order. The MPSC also ruled that the determination of Consumers’ future capacity needs shall take place in the IRP proceeding that Consumers filed in June 2018.

In its IRP filing, Consumers proposed a new method of calculating its avoided cost, based on a competitive bidding process, which will enable Consumers to purchase energy from new generation at the lowest cost and mitigate the risk of forced purchases of renewable generation. In accordance with the 2016 Energy Law, Consumers also proposed a financial compensation mechanism to recognize the financial impacts associated with procuring capacity from third parties and enable Consumers to earn a financial incentive on PPAs entered into through the proposed competitive bidding process.

Renewable Energy Plan: The 2016 Energy Law raised the renewable energy standard from the present ten-percent requirement to 15 percent in 2021, with an interim target of 12.5 percent in 2019. Consumers is required to submit RECs, which represent proof that the associated electricity was generated from a renewable energy resource, in an amount equal to at least the required percentage of Consumers’ electric sales volume each year. Under its renewable energy plan, Consumers expects to meet its renewable energy requirement each year with a combination of newly generated RECs and previously generated RECs carried over from prior years.

In conjunction with its renewable energy plan, Consumers obtained the MPSC’s approval to construct two additional phases at its Cross Winds® Energy Park. Phase II of the park, with a nameplate capacity of 44 MW, became operational in January 2018. Consumers began construction of Phase III, with a planned nameplate capacity of 76 MW, in June 2017 and expects it to be operational in 2020. Both phases of the project are expected to qualify for certain federal production tax credits, which are expected to generate cost savings that will be passed on to customers.

In September 2017, Consumers filed amendments to its renewable energy plan with the MPSC, requesting approval to acquire up to 525 MW of new wind generation projects and up to 100 MW of new solar generation projects in order to meet its renewable energy requirement. In May 2018, as a result of requests for proposals issued in 2017 to acquire wind and solar generation projects within MISO’s service territory, Consumers entered into an agreement to purchase a wind generation project under development, with capacity of up to 150 MW, in Gratiot County, Michigan. Consumers expects to begin construction in May 2019 and that the project will be completed and operational in 2020. The agreement is subject to MPSC approval.

In June 2018, Consumers issued additional requests for proposals to acquire up to 400 MW of wind generation projects ranging in size from 75 MW to 200 MW and up to 100 MW of solar generation projects at least 10 MW in size. The projects are required to be located in Michigan and operational by 2021. Any contracts entered into as a result of the requests for proposals would be subject to MPSC approval.

Voluntary Large Customer Renewable Energy Program: In February 2018, Consumers began providing service under a program that provides large full-service electric customers with the opportunity to advance the development of renewable energy beyond the requirements of the 2016 Energy Law. Under the program, customers may match up to 100 percent of their energy use with renewable energy generated from wind resources. In August 2017, the MPSC conditionally approved the program through October 2018 and instructed Consumers to submit the program for review as a voluntary green pricing program under provisions of the 2016 Energy Law. Consumers submitted this program for review and, in October 2018, the MPSC approved it as a voluntary green pricing program.

Electric Customer Deliveries and Revenue: Consumers’ electric customer deliveries are seasonal and largely dependent on Michigan’s economy. The consumption of electric energy typically increases in the summer months, due primarily to the use of air conditioners and other cooling equipment. In addition, Consumers’ electric rates, which follow a seasonal rate design, are higher in the summer months than in the remaining months of the year.

Consumers expects weather-normalized electric deliveries over the next five years to remain stable relative to 2018. This outlook reflects modest growth in electric demand offset by the effects of energy waste reduction programs and appliance efficiency standards. Actual delivery levels will depend on:

•	energy conservation measures and results of energy waste reduction programs

•	weather fluctuations

•	Michigan’s economic conditions, including utilization, expansion, or contraction of manufacturing facilities, population trends, and housing activity

Electric ROA: Michigan law allows electric customers in Consumers’ service territory to buy electric generation service from alternative electric suppliers in an aggregate amount capped at ten percent, with certain exceptions, of Consumers’ weather-normalized retail sales of the preceding calendar year. At December 31, 2018, electric deliveries under the ROA program were at the ten-percent limit. Of Consumers’ 1.8 million electric customers, 287 customers, or 0.02 percent, purchased electric generation service under the ROA program.

The 2016 Energy Law established a path to ensure that forward capacity is secured for all electric customers in Michigan, including customers served by alternative electric suppliers under ROA. The new law also authorized the MPSC to ensure that alternative electric suppliers have procured enough capacity to cover their anticipated capacity requirements for the four-year forward period. In November 2017, the MPSC issued an order establishing a state reliability mechanism for Consumers. Under this mechanism, beginning June 1, 2018, if an alternative electric supplier does not demonstrate that it has procured its capacity requirements for the four-year forward period, its customers will pay a set charge to the utility for capacity that is not provided by the alternative electric supplier. For the MISO planning year beginning June 1, 2018, all alternative electric suppliers have demonstrated that they have procured their capacity requirements.

In June 2018, the MPSC issued an order requiring all electric suppliers to demonstrate that a portion of the capacity procured to serve customers during peak demand times is located in the MISO footprint in Michigan’s Lower Peninsula. In July 2018, the Michigan Court of Appeals issued a decision that the MPSC does not have statutory authority to implement such a requirement for alternative electric

suppliers. Consumers believes the 2016 Energy Law does give such authorization to the MPSC. The MPSC and Consumers have filed applications for leave to appeal the Court of Appeals’ decision to the Michigan Supreme Court. The Michigan Supreme Court has discretion on whether to grant the applications for leave to appeal.

Electric Rate Matters: Rate matters are critical to Consumers’ electric utility business. For additional details on rate matters, see Item 8. Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements—Note 3, Regulatory Matters.

2018 Electric Rate Case: In May 2018, Consumers filed an application with the MPSC seeking an annual rate increase of $58 million, based on a 10.75 percent authorized return on equity. In October 2018, Consumers reduced its requested annual rate increase to $44 million. The filing requested authority to recover new investment in system reliability, environmental compliance, and technology enhancements. In January 2019, the MPSC approved a settlement agreement authorizing an annual rate decrease of $24 million, based on a 10.0 percent authorized return of equity. With the elimination of the $113 million TCJA credit to customer bills, the approved settlement agreement results in an $89 million increase in annual rates. In lieu of the investment recovery mechanism requested by Consumers, the settlement agreement provides for deferred accounting treatment for distribution-related capital investments exceeding certain amounts. Consumers also agreed to not file a new electric rate case prior to January 2020.

PSCR Plan: Consumers submitted its 2019 PSCR plan to the MPSC in September 2018 and, in accordance with its proposed plan, self-implemented the 2019 PSCR charge beginning in January 2019.

Electric Environmental Outlook: Consumers’ operations are subject to various state and federal environmental laws and regulations. Consumers estimates that it will incur capital expenditures of $0.3 billion from 2019 through 2023 to continue to comply with RCRA, the Clean Water Act, the Clean Air Act, and numerous state and federal environmental regulations. Consumers expects to recover these costs in customer rates, but cannot guarantee this result. Consumers’ primary environmental compliance focus includes, but is not limited to, the following matters.

Air Quality: CSAPR, which became effective in 2015, requires Michigan and 27 other states to improve air quality by reducing power plant emissions that, according to EPA computer models, contribute to ground-level ozone and fine particle pollution in other downwind states. In 2016, the EPA finalized new ozone season standards for CSAPR, which became effective in May 2017. CSAPR is presently being litigated; however, any decision will not impact Consumers’ compliance strategy, as Consumers expects its emissions to be within the CSAPR allowance allocations.

In 2012, the EPA published emission standards for electric generating units, based on Section 112 of the Clean Air Act, calling the final rule MATS. Under MATS, all of Consumers’ existing coal-fueled electric generating units were required to add additional controls for hazardous air pollutants. Consumers met the extended deadline of April 2016 for five coal-fueled units and two oil/gas-fueled units it continues to operate and retired its seven remaining coal-fueled units. MATS is presently being litigated, and the EPA recently proposed changes to the supporting analysis used to justify MATS, but did not propose any changes to the MATS regulations. Any changes resulting from that litigation or rulemaking are not expected to impact Consumers’ MATS compliance strategy because Consumers is still required to comply with the Michigan Mercury Rule, which has similar requirements to MATS. In addition, Consumers must comply with its settlement agreement with the EPA entered into in 2014 concerning opacity and NSR.

In 2015, the EPA released its new rule to lower the NAAQS for ozone. The new ozone NAAQS will make it more difficult to construct or modify power plants in areas of the country that have not met the new ozone standard. In April 2018, the EPA designated certain areas of Michigan as not meeting the new standard with an August 2018 effective date. None of Consumers’ fossil-fuel-fired generating units are

located in these areas. Some of Consumers’ compressor stations are located in areas impacted by the rule, but Consumers expects only minor permitting impacts if those units are modified in the future. The NAAQS for ozone are presently being litigated. Consumers does not expect that any decision will have a material adverse impact on its generating assets.

Consumers’ strategy to comply with air quality regulations, including CSAPR, NAAQS, and MATS, as well as its legal obligations, involved the installation and operation of emission control equipment at some facilities and the suspension of operations at others; however, Consumers continues to evaluate these rules in conjunction with other EPA and MDEQ rulemakings, litigation, and congressional action. This evaluation could result in:

•	a change in Consumers’ fuel mix

•	changes in the types of generating units Consumers may purchase or build in the future

•	changes in how certain units are used

•	the retirement, mothballing, or repowering with an alternative fuel of some of Consumers’ generating units

•	changes in Consumers’ environmental compliance costs

Greenhouse Gases: There have been numerous legislative and regulatory initiatives at the state, regional, national, and international levels that involve the potential regulation of greenhouse gases. Consumers continues to monitor and comment on these initiatives and to follow litigation involving greenhouse gases.

In 2015, the EPA finalized new rules pursuant to Section 111(b) of the Clean Air Act to limit carbon dioxide emissions from new electric generating units. New coal-fueled units would not be able to meet this limit without installing carbon dioxide control equipment using such methods as carbon capture and sequestration. In addition, the EPA finalized new rules pursuant to Section 111(b) of the Clean Air Act to limit carbon dioxide emissions from modified or reconstructed electric generating units. Both of these rules are being litigated.

In December 2018, the EPA proposed a revised Section 111(b) regulation to replace the 2015 standard rule limiting carbon dioxide emissions from new electric generating units, citing limited availability and high costs of carbon capture and sequestration equipment as reasons to change the 2015 rule. The revised Section 111(b) regulation requires new coal-fueled generating units to meet a highly efficient steam cycle performance standard. Consumers does not expect this proposal to change its existing environmental strategy.

Also in 2015, the EPA published final rules pursuant to Section 111(d) of the Clean Air Act to limit carbon dioxide emissions from existing electric generating units, calling the rules the “Clean Power Plan.” The rules required a 32-percent nationwide reduction in carbon emissions from existing power plants by 2030 (based on 2005 levels), and states choosing not to develop their own implementation plans would be subject to the federal plan. Certain states, corporations, and industry groups initiated litigation opposing the proposed Clean Power Plan, and in 2016, the U.S. Supreme Court stayed the Clean Power Plan while the litigation proceeded. In March 2017, the EPA and other federal agencies were directed to review rules and policies that burden domestic energy production, including the Clean Power Plan. The EPA subsequently filed motions to hold the Section 111(b) and Clean Power Plan litigation in abeyance while it reconsiders the rule. In October 2017, the EPA published a proposal to repeal the Clean Power Plan and is reviewing comments received.

In August 2018, the EPA proposed the “Affordable Clean Energy” rule as a replacement for the EPA’s 2015 Clean Power Plan, which the U.S. Supreme Court stayed in 2016. This proposed rule requires individual states to evaluate fossil-fuel-fired power plants for heat-rate improvements that could be

undertaken to increase overall plant efficiency. There is also a proposal to modify the Clean Air Act permitting requirements to promote these efficiency projects. Consumers does not expect that the Affordable Clean Energy rule will have an adverse impact on its environmental strategy.

In 2015, a group of 195 countries, including the U.S., finalized the Paris Agreement, which governs carbon dioxide reduction measures beginning in 2020. Although the U.S. subsequently withdrew from the Paris Agreement, it has stated a desire to renegotiate a new agreement in the future. At this time, Consumers does not expect any adverse changes to its environmental strategy as a result of these events.

While Consumers cannot predict the outcome of changes in U.S. policy or of other legislative or regulatory initiatives involving the potential regulation of greenhouse gases, it intends to continue to move forward with its clean energy plan, its present carbon reduction goal, and its emphasis on supply diversity. Consumers will continue to monitor regulatory and legislative activity and related litigation regarding greenhouse gas emissions standards that may affect electric generating units.

Severe weather events and climate change associated with increasing levels of greenhouse gases could affect the companies’ facilities and energy sales and could have a material impact on the companies’ future results of operations. Consumers is unable to predict these events or their financial impact; however, Consumers plans for adverse weather and takes steps to reduce its potential impact.

Litigation, as well as federal laws, additional EPA regulations regarding greenhouse gases, or similar treaties, state laws, or rules, if enacted or ratified, could ultimately require Consumers to replace equipment, install additional emission control equipment, purchase emission allowances, curtail operations, arrange for alternative sources of supply, or take other steps to manage or lower the emission of greenhouse gases. Although associated capital or operating costs relating to greenhouse gas regulation or legislation could be material and cost recovery cannot be assured, Consumers expects to recover these costs and capital expenditures in rates consistent with the recovery of other reasonable costs of complying with environmental laws and regulations.

CCRs: In 2015, the EPA published a final rule regulating CCRs, such as coal ash, under RCRA. The final rule adopts minimum standards for beneficially reusing and disposing of non‑hazardous CCRs. The rule establishes new minimum requirements for site location, groundwater monitoring, flood protection, storm water design, fugitive dust control, and public disclosure of information, including any groundwater protection standard exceedances. The rule also sets out conditions under which CCR units would be forced to cease receiving CCR and non‑CCR waste and initiate closure based on the inability to achieve minimum safety standards, meet a location standard, or meet minimum groundwater standards. Consumers has aligned with state regulatory authorities on closure plans and has completed work to close some existing ash ponds and replace them with double-lined ash ponds or concrete infrastructure. Consumers will continue to develop additional work plans for submission to the MDEQ to ensure coordination between federal and state requirements.

Furthermore, Congress passed legislation in 2016 that allows participating states to develop permitting programs for CCRs under RCRA. In July 2018, the EPA published preliminary rulemaking which was intended to amend the 2015 final rule. The rulemaking did not change Consumers’ compliance strategy, but demonstrated the EPA’s willingness to allow states to incorporate flexibility into their permitting processes. However, in August 2018, the D.C. Circuit Court issued a decision in CCR litigation that, while also not impacting Consumers’ compliance strategy, could delay the EPA from amending the 2015 final rule. In December 2018, Michigan adopted a permitting program, which would still require the EPA’s authorization. The MDEQ is currently working on an application requesting such authorization for the Michigan permitting program.

Consumers may need to adjust its recorded ARO associated with coal ash disposal sites depending on the outcome of its submissions to the MDEQ and on a future RCRA permitting program under the MDEQ, if

the EPA approves a state-level program. Consumers has historically been authorized to recover in electric rates costs related to coal ash disposal sites.

Water: The EPA’s rule to regulate existing electric generating plant cooling water intake systems under Section 316(b) of the Clean Water Act became effective in 2014. The rule is aimed at reducing alleged harmful impacts on fish and shellfish. In April 2018, Consumers submitted to the MDEQ for review and approval all required studies and recommended plans to comply with Section 316(b).

In 2015, the EPA released its final effluent limitation guidelines. These guidelines, which are presently being litigated, set stringent new requirements for the discharge from electric generating units into wastewater streams. In August 2017, the EPA announced that it will undertake a rulemaking to replace specific portions of the rule. In September 2017, the EPA proposed delaying the compliance start dates for two years, but maintained the compliance end dates. Rulemaking is expected to conclude in early 2019. Consumers does not expect any adverse changes to its environmental strategy as a result of any revisions to the rule.

In 2015, the EPA and the U.S. Army Corps of Engineers published a final rule redefining “waters of the United States,” which designates the EPA’s jurisdiction under the Clean Water Act. Numerous states and other interested parties, including Michigan’s Attorney General, have filed suits in federal courts to block the rule, which subsequently was stayed in 2015 while litigation ensued. In January 2018, the U.S. Supreme Court unanimously ruled that the federal district courts, not the federal appellate courts, had jurisdiction over challenges to the 2015 rule. Consequently, in February 2018, the U.S. Court of Appeals for the Sixth Circuit lifted the stay of the rule. The EPA has published a notice, called the Applicability Rule, that prevents the 2015 rule from going into effect until February 2020 in an attempt to maintain consistency and provide certainty for regulated entities while the agencies continue to consider possible revisions to the 2015 rule. In August 2018, the U.S. District Court for the District of South Carolina set aside the Applicability Rule nationally and, as a result, the 2015 rule again went into effect in 22 states, including Michigan.

In December 2018, the EPA and the U.S. Army Corps of Engineers released a proposed rule re-defining the term “waters of the United States” under the Clean Water Act. This rule is intended to clarify the scope of the EPA and the Corps’ jurisdiction under the Clean Water Act. In 2015, the EPA under President Obama approved a rule expanding the definition, particularly with respect to tributaries, adjacent waters, and wetlands. The EPA’s recently proposed rule narrows the definition of jurisdictional waters. Consumers is currently evaluating the proposed rule and does not expect any adverse changes to its environmental strategy as a result of this proposal.

The 2015 and 2018 rules change the scope of water and wetlands regulations; however, the EPA has delegated authority to manage the Michigan wetlands program to the MDEQ. As a result, regardless of the 2015 and 2018 rules’ ultimate outcome, Consumers will continue to operate under Michigan’s wetlands regulations, and under the applicable state and federal water jurisdictional regulations. Thus, Consumers does not expect any adverse changes to its environmental strategy as a result of these events.

Many of Consumers’ facilities maintain NPDES permits, which are renewed every five years and are vital to the facilities’ operations. Failure of the MDEQ to renew any NPDES permit, a successful appeal against a permit, or onerous terms contained in a permit could have a significant detrimental effect on the operations of a facility.

Other Matters: Other electric environmental matters could have a material impact on Consumers’ outlook. For additional details on other electric environmental matters, see Item 8. Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements—Note 4, Contingencies and Commitments—Consumers Electric Utility Contingencies—Electric Environmental Matters.

Consumers Gas Utility Outlook and Uncertainties

Gas Deliveries: Consumers’ gas customer deliveries are seasonal. The peak demand for natural gas typically occurs in the winter due to colder temperatures and the resulting use of natural gas as heating fuel. Consumers expects weather-normalized gas deliveries over the next five years to increase slightly, relative to 2018. This outlook reflects modest growth in gas demand offset partially by the predicted effects of energy efficiency and conservation. Actual delivery levels from year to year may vary from this expectation due to:

•	weather fluctuations

•	use by power producers

•	availability and development of renewable energy sources

•	gas price changes

•	Michigan economic conditions, including population trends and housing activity

•	the price of competing energy sources or fuels

•	energy efficiency and conservation impacts

Gas Rate Matters: Rate matters are critical to Consumers’ gas utility business. For additional details on rate matters, see Item 8. Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements—Note 3, Regulatory Matters.

Gas Rate Case: In November 2018, Consumers filed an application with the MPSC seeking an annual rate increase of $229 million, based on a 10.75 percent authorized return on equity. The filing requests authority to recover new infrastructure investment and related costs that will allow Consumers to improve system safety, capacity, and deliverability. Presented in the following table are the components of the requested increase in revenue:

In Millions
Components of the requested rate increase
Investment in rate base		$	136
Operating and maintenance costs		81
Cost of capital		29
Working capital		11
Gross margin		(28		)
Total		$	229

The filing also seeks approval of two rate adjustment mechanisms: a revenue decoupling mechanism and an investment recovery mechanism. The revenue decoupling mechanism would annually reconcile Consumers’ actual weather-normalized non-fuel revenues with the revenues approved by the MPSC. The investment recovery mechanism would provide for additional annual rate increases of $11 million beginning in October 2020 and another $11 million beginning in October 2021 for incremental investments that Consumers plans to make in those years, subject to reconciliation. These future investments are intended to help ensure adequate system capacity and deliverability. The MPSC previously approved an investment recovery mechanism in August 2018; that mechanism will remain in effect until rates are changed in this proceeding.

GCR Plan: Consumers submitted its 2019-2020 GCR plan to the MPSC in December 2018 and, in accordance with its proposed plan, expects to self-implement the 2019-2020 GCR charge beginning in April 2019.

Gas Pipeline and Storage Integrity and Safety: In 2016, PHMSA published a notice of proposed rulemaking that would expand federal safety standards for gas transmission pipelines. The rule could cause Consumers to incur increased capital costs to install and remediate pipelines as well as operating and maintenance costs to expand inspections, maintenance, and monitoring of its existing pipelines. PHMSA expects to publish a final rule in 2019.

Also in 2016, PHMSA published an interim final rule that established minimum federal safety standards for underground natural gas storage facilities. As published, the rule could cause Consumers to incur increased capital and operating and maintenance costs to expand inspections, maintenance, and monitoring of its underground gas storage facilities. PHMSA expects to publish a final rule in 2019.

Although associated capital or operating and maintenance costs relating to these regulations could be material and cost recovery cannot be assured, Consumers would expect to recover such costs and capital expenditures in rates consistent with the recovery of other reasonable costs of complying with laws and regulations. Consumers will continue to monitor gas safety regulations.

Gas Environmental Outlook: Consumers expects to incur response activity costs at a number of sites, including 23 former MGP sites. For additional details, see Item 8. Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements—Note 4, Contingencies and Commitments—Consumers Gas Utility Contingencies—Gas Environmental Matters.

Consumers Electric Utility and Gas Utility Outlook and Uncertainties

Energy Waste Reduction Plan: The 2016 Energy Law authorized incentives for demand response programs and expanded existing incentives for energy efficiency programs, referring to the combined initiatives as energy waste reduction programs. The 2016 Energy Law:

•	extended the requirement to achieve annual reductions of 1.0 percent in customers’ electricity use through 2021 and 0.75 percent in customers’ natural gas use indefinitely

•	removed limits on investments under the program and provided for a higher return on those investments; together, these provisions effectively doubled the financial incentives Consumers may earn for exceeding the statutory targets

•	established a goal of 35 percent combined renewable energy and energy waste reduction by 2025

Under its energy waste reduction plan, Consumers provides its customers with incentives to reduce usage by offering energy audits, rebates and discounts on purchases of highly efficient appliances, and other incentives and programs.

Enterprises Outlook and Uncertainties

CMS Energy’s primary focus with respect to its enterprises businesses is to maximize the value of generating assets, its share of which represents 1,234 MW of capacity, and to pursue opportunities for the development of renewable generation projects.

In conjunction with a plan to convert its plant to use natural gas as its primary fuel instead of coal and biomass, T.E.S. Filer City and Consumers had agreed in May 2017 to amend their PPA such that Consumers would purchase the increased capacity and electricity generated by the converted facility for 15 years. The amendment to the PPA was contingent on certain approvals, including a finding by FERC that the converted plant would continue to be an existing qualifying facility under PURPA. In August 2018, FERC concluded that the converted plant would not continue to be an existing qualifying facility under PURPA. As a result, the amendment is no longer effective and the PPA will continue until 2025 under its original terms.

In June and August 2018, CMS Enterprises completed the development and construction of two solar generation projects totaling 24 MW in Delta Township, Michigan; energy produced by these projects is sold under 25‑year PPAs to the Lansing Board of Water and Light, a non‑affiliated utility.

In August 2018, CMS Enterprises purchased a 105-MW wind generation project in northwest Ohio, and the project became operational in September 2018. Renewable energy produced by the wind generation project has been committed to General Motors LLC, a non‑affiliated company, under a 15-year PPA.

The enterprises segment’s assets may be affected by environmental laws and regulations. The new ozone NAAQS will make it more difficult to construct or modify power plants in areas of the country that have not met the new ozone standard. In April 2018, the EPA designated certain areas of Michigan as not meeting the new standard with an August 2018 effective date. The enterprises segment’s independent power plant located in Dearborn, Michigan is in one such area and, as a result, would be subject to additional permitting restrictions in the event of any future modifications. For additional details regarding the new ozone NAAQS, see Consumers Electric Utility Outlook and Uncertainties-Electric Environmental Outlook.

Trends, uncertainties, and other matters related to the enterprises segment that could have a material impact on CMS Energy’s consolidated income, cash flows, or financial position include:

•	investment in and financial benefits received from renewable energy and energy storage projects

•	changes in energy and capacity prices

•	changes in commodity prices and interest rates on certain derivative contracts that do not qualify for hedge accounting and must be marked to market through earnings

•	changes in various environmental laws, regulations, principles, or practices, or in their interpretation

•	the outcome of certain legal proceedings, including gas price reporting litigation

•	indemnity and environmental remediation obligations at Bay Harbor

•	obligations related to a tax claim from the government of Equatorial Guinea

•	representations, warranties, and indemnities provided by CMS Energy in connection with previous sales of assets

For additional details regarding the enterprises segment’s uncertainties, see Item 8. Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements—Note 4, Contingencies and Commitments.

Other Outlook and Uncertainties

EnerBank: EnerBank is a Utah state-chartered, FDIC-insured industrial bank providing primarily unsecured consumer installment loans for financing home improvements. EnerBank represented five percent of CMS Energy’s net assets at December 31, 2018, and six percent of CMS Energy’s net income available to common stockholders for the year ended December 31, 2018. The carrying value of EnerBank’s loan portfolio was $1.9 billion at December 31, 2018. Its loan portfolio was funded primarily by certificates of deposit of $1.8 billion. The 12-month rolling average net default rate on loans held by EnerBank was 1.2 percent at December 31, 2018. CMS Energy is required both by law and by contract to provide financial support, including infusing additional capital, to ensure that EnerBank satisfies mandated capital requirements and has sufficient liquidity to operate. With its self-funding plan, EnerBank has exceeded these requirements historically and exceeded them as of December 31, 2018.

Litigation: CMS Energy, Consumers, and certain of their subsidiaries are named as parties in various litigation matters, as well as in administrative proceedings before various courts and governmental agencies, arising in the ordinary course of business. For additional details regarding these and other legal matters, see Item 8. Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements—Note 3, Regulatory Matters and Note 4, Contingencies and Commitments.

Critical Accounting Policies and Estimates

The following information is important to understand CMS Energy’s and Consumers’ results of operations and financial condition. For additional accounting policies, see Item 8. Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements—Note 1, Significant Accounting Policies.

In the preparation of CMS Energy’s and Consumers’ consolidated financial statements, estimates and assumptions are used that may affect reported amounts and disclosures. CMS Energy and Consumers use accounting estimates for asset valuations, unbilled revenue, depreciation, amortization, financial and derivative instruments, employee benefits, stock-based compensation, the effects of regulation, indemnities, and contingencies. Actual results may differ from estimated results due to changes in the regulatory environment, regulatory decisions, lawsuits, competition, and other factors. CMS Energy and Consumers consider all relevant factors in making these assessments.

Accounting for the Effects of Industry Regulation: Because Consumers has regulated operations, it uses regulatory accounting to recognize the effects of the regulators’ decisions on its financial statements. Consumers continually assesses whether future recovery of its regulatory assets is probable by considering communications and experience with its regulators and changes in the regulatory environment. If Consumers determined that recovery of a regulatory asset were not probable, Consumers would be required to write off the asset and immediately recognize the expense in earnings.

Contingencies: CMS Energy and Consumers make judgments regarding the future outcome of various matters that give rise to contingent liabilities. For such matters, they record liabilities when they are considered probable and reasonably estimable, based on all available information. In particular, CMS Energy and Consumers are participating in various environmental remediation projects for which they have recorded liabilities. The recorded amounts represent estimates that may take into account such considerations as the number of sites, the anticipated scope, cost, and timing of remediation work, the available technology, applicable regulations, and the requirements of governmental authorities. For remediation projects in which the timing of estimated expenditures is considered reliably determinable, CMS Energy and Consumers record the liability at its net present value, using a discount rate equal to the interest rate on monetary assets that are essentially risk-free and have maturities comparable to that of the environmental liability. The amount recorded for any contingency may differ from actual costs incurred when the contingency is resolved. For additional details, see Item 8. Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements—Note 4, Contingencies and Commitments.

Derivative Instruments: CMS Energy and Consumers account for certain contracts as derivative instruments. If a contract is a derivative and does not qualify for the normal purchases and sales exception, it is recorded on the consolidated balance sheets at its fair value. Each quarter, the resulting asset or liability is adjusted to reflect any change in the fair value of the contract. CMS Energy and Consumers recognize unrealized gains and losses on derivatives in net income unless cash flow hedge accounting is applied to the transaction.

The criteria used to determine if an instrument qualifies for derivative accounting or for an exception from derivative accounting are complex and often require judgment in application. Changes in business

strategies or market conditions, as well as a requirement to apply different interpretations of the derivative accounting literature, could result in changes in accounting for a single contract or groups of contracts, which could have a material impact on CMS Energy’s and Consumers’ financial statements. For additional details on CMS Energy’s and Consumers’ derivatives and how the fair values of derivatives are determined, see Item 8. Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements—Note 6, Fair Value Measurements.

Income Taxes: The amount of income taxes paid by CMS Energy is subject to ongoing audits by federal, state, and foreign tax authorities, which can result in proposed assessments. An estimate of the potential outcome of any uncertain tax issue is highly judgmental. CMS Energy believes adequate reserves have been provided for these exposures; however, future results may include favorable or unfavorable adjustments to the estimated tax liabilities in the period the assessments are made or resolved or when statutes of limitation on potential assessments expire. Additionally, CMS Energy’s judgment as to the ability to recover its deferred tax assets may change. CMS Energy believes the valuation allowances related to its deferred tax assets are adequate, but future results may include favorable or unfavorable adjustments. As a result, CMS Energy’s effective tax rate may fluctuate significantly over time. For additional details, see Item 8. Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements—Note 14, Income Taxes.

Pension and OPEB: CMS Energy and Consumers provide retirement pension benefits to certain employees under non‑contributory DB Pension Plans, and they provide postretirement health and life benefits to qualifying retired employees under an OPEB Plan.

CMS Energy and Consumers record liabilities for pension and OPEB on their consolidated balance sheets at the present value of the future obligations, net of any plan assets. The calculation of the liabilities and associated expenses requires the expertise of actuaries, and requires many assumptions, including:

•	life expectancies

•	discount rates

•	expected long-term rate of return on plan assets

•	rate of compensation increases

•	expected health care costs

A change in these assumptions could change significantly CMS Energy’s and Consumers’ recorded liabilities and associated expenses.

In July 2018, CMS Energy and Consumers approved an amendment to the OPEB Plan to improve survivor benefits for certain Medicare-eligible retirees, effective January 1, 2019, resulting in a $26 million increase in the benefit obligation.

Presented in the following table are estimates of costs and cash contributions through 2021 for the DB Pension Plans and OPEB Plan. Actual future costs and contributions will depend on future investment performance, discount rates, and various factors related to the participants of the DB Pension Plans and OPEB Plan. CMS Energy and Consumers will, at a minimum, contribute to the plans as needed to comply with federal funding requirements.

In Millions
	DB Pension Plans									OPEB Plan
	Cost				Contribution					Credit1				Contribution
CMS Energy, including Consumers
2019		$	26			$	—				$	(69	)		$	—
2020		42				—					(63		)		—
2021		44				—					(64		)		—
Consumers2
2019		$	27			$	—				$	(64	)		$	—
2020		42				—					(58		)		—
2021		44				—					(59		)		—

1	As a result of the amendment made to the OPEB Plan in 2018, the estimate of OPEB Plan credits decreased by $4 million for 2019, 2020, and 2021.

2	Consumers’ pension and OPEB costs are recoverable through its general ratemaking process.

Lowering the expected long-term rate of return on the assets of the DB Pension Plans by 25 basis points would increase estimated pension cost for 2019 by $5 million for both CMS Energy and Consumers. Lowering the PBO discount rates by 25 basis points would increase estimated pension cost for 2019 by $4 million for both CMS Energy and Consumers.

Pension and OPEB plan assets are accounted for and disclosed at fair value. Fair value measurements incorporate assumptions that market participants would use in pricing an asset or liability, including assumptions about risk. Development of these assumptions may require judgment.

For additional details on postretirement benefits, including the fair value measurements for the assets of the DB Pension Plans and OPEB Plan, see Item 8. Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements—Note 12, Retirement Benefits.

Unbilled Revenues: Consumers’ customers are billed monthly in cycles having billing dates that do not generally coincide with the end of a calendar month. This results in customers having received electricity or natural gas that they have not been billed for as of the month-end. Consumers estimates its unbilled revenues by applying an average billed rate to total unbilled deliveries for each customer class. For additional information on unbilled revenues, see Item 8. Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements—Note 16, Revenue.

New Accounting Standards

For details regarding new accounting standards issued but not yet effective, see Item 8. Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements—Note 2, New Accounting Standards.