CMS ENERGY CORP 10-K

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. CMS Energy was also the parent holding company of EnerBank, an industrial bank located in Utah, until October 1, 2021 when EnerBank was acquired by Regions Bank as described below. Consumers’ electric utility operations include the generation, purchase, 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 primarily 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. On October 1, 2021, EnerBank was acquired by Regions Bank. CMS Energy received proceeds of over $1 billion from the transaction and recognized a pre-tax gain of $657 million. CMS Energy intends to use the proceeds from the sale to fund key initiatives in its core energy business related to safety, reliability, and its clean energy transformation. 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. As a result of the sale described above, EnerBank is no longer included in the composition of CMS Energy’s reportable segments. EnerBank’s results of operations through the date of the sale are presented as income from discontinued operations. 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, CMS Energy and Consumers employ the “CE 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 CMS Energy and Consumers create for customers and investors, but also their responsibility to social and environmental goals. The triple bottom 51 Table of Contents line balances the interests of employees, customers, suppliers, regulators, creditors, Michigan’s residents, the investment community, and other stakeholders, and it reflects the broader societal impacts of CMS Energy’s and Consumers’ activities. CMS Energy’s Environmental, Social, Governance and Sustainability Report, which is available to the public, describes CMS Energy’s and Consumers’ 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 they 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. Since 2010, Consumers’ OSHA recordable incident rate has decreased by 40 percent. In response to the COVID-19 pandemic, CMS Energy and Consumers have issued a response plan that is focused on the health, safety, and well-being of their co-workers, customers, and communities. CMS Energy and Consumers have aligned with safety and health guidelines from the CDC, OSHA, MIOSHA, and the Michigan Department of Health and Human Services in order to protect their employees, customers, and contractors to ensure the continued delivery of critical energy services. In addition, while CMS Energy and Consumers have not yet experienced significant labor or supply chain disruption as a result of the COVID-19 pandemic, they continue to monitor minor disruptions and take steps to mitigate against future impacts in order to continue to provide safe and reliable service to customers. 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. In 2021, Consumers filed an updated Electric Distribution Infrastructure Investment Plan with the MPSC, which outlines a five-year strategy to improve its electric distribution system and the reliability of the grid. The plan dedicates over $1 billion annually to projects that will reduce the number and duration of power outages to customers through investment in infrastructure upgrades, forestry management, and grid modernization. 52 Table of Contents 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 and PPAs with a cost-efficient mix of renewable energy and energy waste reduction and demand response programs • targeted infrastructure investment to reduce maintenance costs and improve reliability and safety • supply chain optimization • economic development to increase sales and reduce overall rates • information and control system efficiencies • employee and retiree health care cost sharing • workforce productivity enhancements In addition, Consumers’ gas commodity costs declined by 52 percent over the last ten years, 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 compliance with various state and federal environmental, health, and safety laws and regulations. Management considers climate change and other environmental risks in strategy development, business planning, and enterprise risk management processes. 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, CMS Energy and Consumers have: • decreased their combined percentage of electric supply (self-generated and purchased) from coal by 13 percentage points since 2015 • reduced carbon dioxide emissions by over 30 percent since 2005 • reduced the amount of water used to generate electricity by nearly 30 percent since 2012 • reduced landfill waste disposal by over 1.6 million tons since 1992 • reduced methane emissions by nearly 20 percent since 2012 53 Table of Contents Since 2005, Consumers has reduced its sulfur dioxide and particulate matter emissions by over 90 percent and its nitrogen oxide emissions by over 80 percent. Consumers began tracking mercury emissions in 2007; since that time, it has reduced such emissions by nearly 90 percent. Presented in the following illustration are Consumers’ reductions in these emissions: The 2016 Energy Law: • raised the renewable energy standard to 15 percent in 2021; Consumers met the 15-percent requirement in 2021 and expects to meet the requirement in future years with a combination of newly generated RECs and previously generated RECs carried over from prior years • established a goal of 35 percent combined renewable energy and energy waste reduction by 2025; Consumers achieved 30 percent combined renewable energy and energy waste reduction through 2021 • authorized incentives for demand response programs and energy efficiency programs, referring to the combined initiatives as energy waste reduction programs • established an integrated planning process for new capacity and energy resources Consumers’ Clean Energy Plan details its strategy to meet customers’ long-term energy needs. The Clean Energy Plan was originally outlined in Consumers’ 2018 IRP, which was approved by the MPSC in 2019. Under its Clean Energy Plan, Consumers 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. 54 Table of Contents In June 2021, Consumers filed its 2021 IRP with the MPSC, proposing updates to the Clean Energy Plan. Within its 2021 IRP, which is subject to MPSC approval, Consumers outlines its long-term strategy for delivering clean, reliable, resilient, and affordable energy to its customers, including plans to: • end the use of coal-fueled generation in 2025, 15 years sooner than initially planned • purchase existing natural gas-fueled generating units, providing an additional 2,177 MW of nameplate capacity and allowing Consumers to continue providing controllable sources of electricity to customers • expand its investment in renewable energy, adding nearly 8,000 MW of solar generation by 2040 These steps are expected to enable Consumers to meet and exceed the 2016 Energy Law renewable energy requirements and fulfill increasing customer demand for renewable energy. The 2021 IRP is also expected to allow Consumers to exceed its breakthrough goal of at least 50 percent combined renewable energy and energy waste reduction by 2030. Consumers has a goal of achieving net-zero carbon emissions from its electric business by 2040. This goal includes not only emissions from Consumers’ owned generation, but also emissions from the generation of power purchased through long-term PPAs and from the MISO energy market. Consumers expects to meet 90 percent of its customers’ needs with clean energy sources by 2040 through execution of its 2021 IRP. Carbon offset measures including, but not limited to, carbon sequestration, methane emission capture, and forest preservation and reforestation may be used to close the gap to achieving net-zero carbon emissions. Presented in the following illustration is Consumers’ 2021 capacity portfolio and its future capacity portfolio as projected in the 2021 IRP. This illustration includes the effects of purchased capacity and energy waste reduction and uses the nameplate capacity for all energy sources: 1 Does not include RECs. In 2020, Michigan’s Governor signed an executive order creating the Michigan Healthy Climate Plan, which outlines goals for Michigan to achieve economy-wide net-zero greenhouse gas emissions and to be carbon neutral by 2050. The executive order aims for a 28-percent reduction below 2005 levels of 55 Table of Contents greenhouse gas emissions by 2025. Consumers has already surpassed the 28-percent reduction milestone for its owned electric generation and previously announced a goal of achieving net-zero carbon emissions from its electric business by 2040. In addition to Consumers’ efforts to reduce the electric utility’s carbon footprint, it is also making efforts to reduce the gas utility’s methane footprint. In 2019, Consumers released its Methane Reduction Plan, which set a goal of net-zero methane emissions from its natural gas delivery system by 2030. Consumers plans to reduce methane emissions from its system by about 80 percent by accelerating the replacement of aging pipe, rehabilitating or retiring outdated infrastructure, and adopting new technologies and practices. The remaining emissions will be offset by purchasing and/or producing renewable natural gas. In December 2021, Consumers announced plans to begin development of a renewable natural gas facility that will capture methane from manure generated at a neighboring farm and convert it into renewable natural gas. The facility, expected to start production in 2023, will reduce methane emissions from the dairy farm and allow Consumers to deliver renewable natural gas as a cost-effective clean alternative fuel for customers. Additionally, to advance its environmental stewardship in Michigan and to minimize the impact of future regulations, Consumers announced the following five‑year targets during 2018: • to reduce its water use by one billion gallons; since 2017, Consumers reduced its water usage by over 1.3 billion gallons cumulatively • to enhance, restore, or protect 5,000 acres of land; since 2017, Consumers enhanced, restored, or protected over 6,000 acres of land cumulatively • to reduce the amount of waste taken to landfills by 35 percent; compared to 2017, Consumers reduced its landfill waste by 44 percent in 2021 Consumers exceeded each of these targets and is evaluating new targets for the coming years. 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 affect them materially, 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 their 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 2021, CMS Energy’s net income available to common stockholders was $1,348 million, and diluted EPS were $4.66. This compares with net income available to common stockholders of $755 million and diluted EPS of $2.64 in 2020. In 2021, the gain on the sale of EnerBank, along with benefits from gas and electric rate increases and higher electric sales were offset partially by higher service restoration costs, higher distribution, transmission, generation, and compression expenses, and increased depreciation and property taxes, reflecting higher capital spending. 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. Over the next five years, Consumers expects weather-normalized electric and gas deliveries to remain stable relative to 2021. This outlook reflects the effects of energy waste reduction programs offset largely by modest growth in electric and gas demand. 56 Table of Contents Performance: Impacting the Triple Bottom Line CMS Energy and Consumers remain committed to achieving world class performance while delivering hometown service and positively impacting the triple bottom line of people, planet, and profit. During 2021, CMS Energy and Consumers: • realized approximately $55 million in cost reductions by leveraging the CE Way and through other initiatives • introduced a new economic development rate designed to attract new business to Michigan and encourage existing businesses to expand their operations • achieved five-year planet goals, set in 2018, to save one billion gallons of water; enhance, restore or protect 5000 acres of land in Michigan; and reduce waste sent to landfills by 35 percent • introduced a new three-year electric vehicle pilot program designed to help fleet owners transition to electric vehicles • announced plans to begin development of a renewable natural gas facility that will convert agricultural waste into clean, renewable natural gas • expanded their renewable energy programs that assist both business and residential customers in meeting their sustainability goals • received recognition as #1 utility company in the U.S. for America’s Best Employers for Women and America’s Best Employers for Diversity by Forbes ® CMS Energy and Consumers will continue to utilize the CE 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 capital investments of $25 billion over the next ten years. Over the next five years, Consumers expects to make significant expenditures on infrastructure upgrades and replacements and electric supply projects. 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 measures, should allow Consumers to maintain affordable customer prices. 57 Table of Contents The 2021 IRP, which is subject to MPSC approval, would add over $1 billion of capital expenditures to the $14.3 billion that Consumers already expects to make from 2022 through 2026, which are presented in the following illustration: Of this amount, Consumers plans to spend $10.8 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, reduce energy waste on those systems, and facilitate its clean energy transformation. The gas infrastructure projects comprise $6.4 billion to sustain deliverability, enhance pipeline integrity and safety, and reduce methane emissions. The electric distribution projects comprise $4.4 billion to strengthen circuits and substations, replace poles, and interconnect clean energy resources. Consumers also expects to spend $2.8 billion on new clean generation, which includes investments in wind, solar, and hydro electric generation resources, and $0.7 billion on other electric supply projects. 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. 2021 Electric Rate Case: In December 2021, the MPSC approved an annual rate increase of $27 million, based on a 9.9 percent authorized return on equity that will be reflected in rates beginning January 1, 2022. In its order, the MPSC disallowed cost recovery for certain categories of recently completed capital expenditures incurred by Consumers. For additional details, see Item 8. Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements—Note 2, Regulatory Matters. 2021 Gas Rate Case: In December 2021, Consumers filed an application with the MPSC seeking an annual rate increase of $278 million, based on a 10.5 percent authorized return on equity and a projected twelve-month period ending September 30, 2023. The filing requests authority to recover new 58 Table of Contents infrastructure investment and related costs that are expected to allow Consumers to improve system safety and reliability and reduce fugitive methane emissions. 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 measures that will allow it to maintain sustainable customer base rates. The CE Way is an important means of realizing CMS Energy’s and Consumers’ purpose of achieving world class performance while delivering hometown service. 59 Table of Contents Results of Operations CMS Energy Consolidated Results of Operations In Millions, Except Per Share Amounts Years Ended December 31 2021 2020 Change Net Income Available to Common Stockholders $ 1,348 $ 755 $ 593 Basic Earnings Per Average Common Share $ 4.66 $ 2.65 $ 2.01 Diluted Earnings Per Average Common Share $ 4.66 $ 2.64 $ 2.02 In Millions Years Ended December 31 2021 2020 Change Electric utility $ 565 $ 554 $ 11 Gas utility 302 261 41 Enterprises 23 36 (13) Corporate interest and other (144) (154) 10 Discontinued operations 602 58 544 Net Income Available to Common Stockholders $ 1,348 $ 755 $ 593 For a summary of net income available to common stockholders for 2020 versus 2019, as well as detailed changes by reportable segment, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations, in the Form 10‑K for the fiscal year ended December 31, 2020, filed February 11, 2021 . 60 Table of Contents Presented in the following table is a summary of after-tax changes to net income available to common stockholders for 2021 versus 2020: In Millions Year Ended December 31, 2020 $ 755 Reasons for the change Consumers electric utility and gas utility Electric sales $ 54 Gas sales (23) Electric rate increase 105 Gas rate increase 74 Lower income tax expense 34 Lower non-operating retirement benefits expenses 33 Absence of 2020 voluntary revenue refund 21 Lower donations 19 Higher service restoration costs (72) Higher distribution, transmission, generation, and compression expenses (43) Higher depreciation and amortization (39) Fleet and other asset impairments 1 (34) Higher forestry costs (23) Higher property taxes, reflecting higher capital spending (17) Higher demand response expenses (11) Absence of 2020 gain on sale of transmission assets, net of voluntary gain sharing (10) Other (16) $ 52 Enterprises (13) Corporate interest and other 10 Discontinued operations 544 Year Ended December 31, 2021 $ 1,348 1 See Note 2, Regulatory Matters. 61 Table of Contents Consumers Electric Utility Results of Operations Presented in the following table are the detailed changes to the electric utility’s net income available to common stockholders for 2021 versus 2020 (amounts are presented pre-tax, with the exception of income tax changes): In Millions Year Ended December 31, 2020 $ 554 Reasons for the change Electric deliveries 1 and rate increases Rate increase, including return on higher renewable capital spending $ 141 Higher revenue due primarily to favorable weather and sales mix 61 Higher energy waste reduction program revenues 21 Absence of 2020 voluntary revenue refund 2 16 Higher other revenues 12 $ 251 Maintenance and other operating expenses Higher service restoration costs (97) Fleet and other asset impairments 2 (34) Higher distribution, transmission, and generation expenses (31) Higher forestry costs (31) Higher energy waste reduction program costs (21) Higher demand response costs (15) Absence of 2020 gain on sale of transmission assets, net of voluntary gain sharing (14) Higher maintenance and other operating expenses (9) (252) Depreciation and amortization Increased plant in service, reflecting higher capital spending (33) General taxes Higher property taxes, reflecting higher capital spending (10) Other income, net of expenses Lower non-operating retirement benefits expenses and other 24 Lower donations 18 Higher other income, net of expenses 5 47 Interest charges 10 Income taxes Higher production tax credits attributable primarily to new wind generation projects 15 Absence of prior years’ research and development tax credits 3 (7) Higher electric utility pre-tax earnings (3) Higher other income taxes (7) (2) Year Ended December 31, 2021 $ 565 1 Deliveries to end-use customers were 36.2 billion kWh in 2021 and 35.4 billion kWh in 2020. 2 Includes $20 million for fleet disallowances, $10 million for other disallowances, and $4 million for fleet held-for-sale impairment. See Note 2, Regulatory Matters. 3 See Note 12, Income Taxes. 62 Table of Contents Consumers Gas Utility Results of Operations Presented in the following table are the detailed changes to the gas utility’s net income available to common stockholders for 2021 versus 2020 (amounts are presented pre-tax, with the exception of income tax changes): In Millions Year Ended December 31, 2020 $ 261 Reasons for the change Gas deliveries 1 and rate increases Rate increase $ 99 Absence of 2020 voluntary revenue refund 12 Higher energy waste reduction program revenues 9 Lower revenue due to unfavorable weather and sales mix (27) Lower other revenues (5) $ 88 Maintenance and other operating expenses Higher distribution, transmission, and compression expenses (27) Fleet and other asset impairments 2 (11) Higher energy waste reduction program costs (9) Higher maintenance and other operating expenses (16) (63) Depreciation and amortization Increased plant in service, reflecting higher capital spending (21) General taxes Higher property taxes, reflecting higher capital spending (13) Other income, net of expenses Lower non-operating retirement benefits expenses and other 20 Lower donations 9 Higher other income, net of expenses 4 33 Interest charges (2) Income taxes Lower income tax expense due primarily to acceleration of tax benefits associated with cost of removal 3 14 Lower income tax expense due primarily to accelerated amortization of excess deferred income taxes 3 13 Higher gas utility pre-tax earnings (6) Absence of prior years’ research and development tax credits 3 (1) Higher other income taxes (1) 19 Year Ended December 31, 2021 $ 302 1 Deliveries to end-use customers were 282 bcf in 2021 and 283 bcf in 2020. 2 Includes $9 million for fleet disallowances and $2 million for other disallowances. See Note 2, Regulatory Matters. 3 See Note 12, Income Taxes. 63 Table of Contents 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 2021 versus 2020: In Millions Year Ended December 31, 2020 $ 36 Reason for the change Lower earnings due primarily to outages at DIG $ (9) Absence of refund for alternative minimum tax credit sequestration 1 (4) Year Ended December 31, 2021 $ 23 1 See Note 12, 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 2021 versus 2020: In Millions Year Ended December 31, 2020 $ (154) Reasons for the change Absence of loss on early extinguishment of debt $ 12 Reduction in state tax liabilities 7 Absence of refund for alternative minimum tax credit sequestration 1 (5) Preferred stock dividends (5) Other 1 Year Ended December 31, 2021 $ (144) 1 See Note 12, Income Taxes. Results of Discontinued Operations On October 1, 2021, EnerBank was acquired by Regions Bank. As a result, EnerBank’s results of operations through the date of the sale are presented as income from discontinued operations on CMS Energy’s consolidated statements of income for 2021 and 2020. For additional details, see Item 8. Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements—Note 20, Exit Activities and Discontinued Operations. Presented in the following table are the detailed after-tax changes to discontinued operations for 2021 versus 2020: In Millions Year Ended December 31, 2020 $ 58 Reason for the change Gain on sale of EnerBank $ 514 Higher earnings at discontinued operations 30 Year Ended December 31, 2021 $ 602 64 Table of Contents Cash Position, Investing, and Financing At December 31, 2021, CMS Energy had $476 million of consolidated cash and cash equivalents, which included $24 million of restricted cash and cash equivalents. At December 31, 2021, Consumers had $44 million of consolidated cash and cash equivalents, which included $22 million of restricted cash and cash equivalents. For specific components of net cash provided by operating activities, net cash used in investing activities, and net cash used in investing activities for 2020 versus 2019, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Cash Position, Investing, and Financing, in the Form 10‑K for the fiscal year ended December 31, 2020, filed February 11, 2021 . Operating Activities Presented in the following table are specific components of net cash provided by operating activities for 2021 versus 2020: In Millions CMS Energy, including Consumers Year Ended December 31, 2020 $ 1,276 Reasons for the change Higher net income $ 578 Non‑cash transactions 1 87 Absence of pension contributions 700 Gain from sale of EnerBank in 2021 2 (657) Lower cash provided by discontinued operations 2 (144) Unfavorable impact of changes in core working capital, 3 due primarily to higher gas prices and the timing of collections on deliveries, offset partially by lower vendor payments (122) Favorable impact of changes in other assets and liabilities, due primarily to the absence of a payment to settle litigation and the timing of payments on higher property taxes 101 Year Ended December 31, 2021 $ 1,819 Consumers Year Ended December 31, 2020 $ 1,218 Reasons for the change Higher net income $ 52 Non‑cash transactions 1 (14) Lower postretirement benefits contributions, primarily absence of pension contributions 681 Unfavorable impact of changes in core working capital, 3 due primarily to higher gas prices and the timing of collections on deliveries, offset partially by lower vendor payments (78) Favorable impact of changes in other assets and liabilities, due primarily to lower income tax payments to CMS Energy and the timing of payments on higher property taxes 123 Year Ended December 31, 2021 $ 1,982 1 Non ‑ cash transactions comprise depreciation and amortization, changes in deferred income taxes and investment tax credits, bad debt expense, and other non‑cash operating activities and reconciling adjustments. 2 For information regarding the sale of EnerBank, see Note 20, Exit Activities and Discontinued Operations. 65 Table of Contents 3 Core working capital comprises accounts 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 2021 versus 2020: In Millions CMS Energy, including Consumers Year Ended December 31, 2020 $ (2,867) Reasons for the change Lower capital expenditures $ 235 Proceeds from sale of EnerBank in 2021 1 , net of cash and cash equivalents sold and transaction costs 898 Absence of proceeds from sale of transmission equipment in 2020 (58) Higher cash provided by discontinued operations 1 563 Other investing activities (4) Year Ended December 31, 2021 $ (1,233) Consumers Year Ended December 31, 2020 $ (2,246) Reasons for the change Lower capital expenditures $ 118 Absence of proceeds from sale of transmission equipment in 2020 (58) Other investing activities 1 Year Ended December 31, 2021 $ (2,185) 1 For information regarding the sale of EnerBank, see Note 20, Exit Activities and Discontinued Operations. 66 Table of Contents Financing Activities Presented in the following table are specific components of net cash provided by (used in) financing activities for 2021 versus 2020: In Millions CMS Energy, including Consumers Year Ended December 31, 2020 $ 1,619 Reasons for the change Lower debt issuances $ (2,844) Lower debt retirements 1,775 Absence of repayments under Consumers’ commercial paper program in 2020 90 Lower issuances of common stock (227) Issuance of preferred stock in 2021 224 Higher payments of dividends on common stock (42) Absence of debt prepayment costs in 2020 59 Absence of 2020 proceeds from the sale of membership interest in VIE to tax equity investor (417) Lower contributions from noncontrolling interest (30) Lower cash provided by discontinued operations 1 (500) Other financing activities, primarily the use of customer advances for construction, offset largely by lower debt issuance costs (2) Year Ended December 31, 2021 $ (295) Consumers Year Ended December 31, 2020 $ 1,035 Reasons for the change Lower debt issuances $ (1,619) Lower debt retirements 1,059 Absence of repayments under Consumers’ commercial paper program in 2020 90 Higher repayments of borrowings from CMS Energy (222) Lower stockholder contribution from CMS Energy (75) Higher payments of dividends on common stock (85) Absence of debt prepayment costs in 2020 43 Other financing activities, primarily the use of customer advances for construction, offset partially by lower debt issuance costs (14) Year Ended December 31, 2021 $ 212 1 For information regarding the sale of EnerBank, see Note 20, Exit Activities and Discontinued Operations. 67 Table of Contents Capital Resources and Liquidity CMS Energy and Consumers expect to have sufficient liquidity to fund their present and future commitments. 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 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 4, Financings and Capitalization—Dividend Restrictions. During the year ended December 31, 2021, Consumers paid $722 million in dividends on its common stock to CMS Energy. On October 1, 2021, EnerBank was acquired by Regions Bank. CMS Energy received proceeds of over $1 billion. CMS Energy intends to use the proceeds from the sale to fund key initiatives in its core energy business related to safety, reliability, and its clean energy transformation. For information regarding EnerBank, see Item 8. Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements—Note 20, Exit Activities and Discontinued Operations. 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, and fund its other obligations. Consumers also uses these sources of funding to contribute to its employee benefit plans. Financing and Capital Resources: CMS Energy and Consumers rely on the capital markets to fund their robust capital plan. Barring any sustained market dislocations or disruptions, CMS Energy and Consumers expect to continue to have ready access to the financial and capital markets and will continue to explore possibilities to take advantage of market opportunities as they arise with respect to future funding needs. 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. In 2020, CMS Energy entered into an equity offering program under which it may sell shares of its common stock having an aggregate sales price of up to $500 million in privately negotiated transactions, in “at the market” offerings, through forward sales transactions, or otherwise. CMS Energy has entered into forward sales transactions under this program, which allow CMS Energy to either physically settle the contracts by issuing shares of its common stock at the then-applicable forward sale price specified by the agreement or net settle the contracts through the delivery or receipt of cash or shares. CMS Energy may settle the contracts at any time through their maturity dates, and presently intends to physically settle the contracts by delivering shares of its common stock. As of December 31, 2021, these contracts have an aggregate sales price of $56 million, maturing through 2022. For more information on these forward sale contracts, see Item 8. Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements—Note 4, Financings and Capitalization—Issuance of Common Stock. At December 31, 2021, CMS Energy had $526 million of its revolving credit facility available and Consumers had $1.1 billion 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 68 Table of Contents 365 days at market interest 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, 2021, there were no commercial paper notes outstanding under this program. For additional details on CMS Energy’s and Consumers’ revolving credit facilities and commercial paper program, see Item 8. Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements—Note 4, Financings and Capitalization. Certain of CMS Energy’s and Consumers’ credit agreements contain covenants that require CMS Energy and Consumers to maintain certain financial ratios, as defined therein. At December 31, 2021, no default had occurred with respect to any financial covenants contained in CMS Energy’s and Consumers’ credit agreements. CMS Energy and Consumers were each in compliance with these covenants as of December 31, 2021, as presented in the following table: Limit Actual CMS Energy, parent only Debt to Capital 1 < 0.70 to 1.0 0.54 to 1.0 Consumers Debt to Capital 2 < 0.65 to 1.0 0.48 to 1.0 1 Applies to CMS Energy’s revolving credit agreement and letter of credit reimbursement agreement. 2 Applies to Consumers’ revolving credit agreements and letter of credit agreement. Material Cash Requirements: Based on the present investment plan, during 2022, Consumers projects capital expenditures of $2.6 billion. Additionally, CMS Energy’s other material cash requirements for 2022 include $2.3 billion of purchase obligations and $843 million of principal and interest payments on long-term debt. Consumers’ other material cash requirements for 2022 comprise $2.2 billion of purchase obligations and $653 million of principal and interest payments on long-term debt. 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 contractual obligations and other material cash requirements for 2022 and beyond. Capital Expenditures: Over the next five years, Consumers expects to make substantial capital investments. Consumers may revise its forecast of capital expenditures periodically due to a number of factors, including environmental regulations, MPSC approval or disapproval, business opportunities, market volatility, economic trends, and the ability to access capital. Presented in the following table are Consumers’ estimated capital expenditures, including lease commitments, for 2022 through 2026: In Billions 2022 2023 2024 2025 2026 Total Consumers Electric utility operations $ 1.5 $ 1.7 $ 1.7 $ 1.5 $ 1.5 $ 7.9 Gas utility operations 1.1 1.2 1.3 1.4 1.4 6.4 Total Consumers $ 2.6 $ 2.9 $ 3.0 $ 2.9 $ 2.9 $ 14.3 69 Table of Contents Other Material Cash Requirements : Presented in the following table are CMS Energy’s and Consumers’ material cash obligations from known contractual and other legal obligations: In Billions Payments Due December 31, 2021 Less Than One Year Total CMS Energy, including Consumers Long-term debt $ 0.4 $ 12.6 Interest payments on long-term debt 0.5 12.3 Purchase obligations 2.3 12.5 AROs — 2.2 Total obligations $ 3.2 $ 39.6 Consumers Long-term debt $ 0.4 $ 8.5 Interest payments on long-term debt 0.3 6.6 Purchase obligations 2.2 12.0 AROs — 2.2 Total obligations $ 2.9 $ 29.3 Purchase obligations arise from long-term contracts for the purchase of commodities and related services, plant purchase commitments, and construction and service agreements. The commodities and related services include long-term PPAs, natural gas and associated transportation, and coal and associated transportation. For more information on CMS Energy’s and Consumers’ purchase obligations, see Item 8. Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements—Note 3, Contingencies and Commitments—Contractual Commitments. 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. For additional details on indemnity and guarantee arrangements, see Item 8. Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements—Note 3, Contingencies and Commitments—Guarantees. For additional details on letters of credit and CMS Energy’s forward sales contracts, see Item 8. Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements—Note 4, Financings and Capitalization. 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; and Item 8. Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements—Note 2, Regulatory Matters and Note 3, Contingencies and Commitments. Consumers Electric Utility Outlook and Uncertainties Clean Energy Plan: Consumers’ Clean Energy Plan details its strategy to meet customers’ long-term energy needs. The Clean Energy Plan was originally outlined in Consumers’ 2018 IRP, which was approved by the MPSC in 2019. In June 2021, Consumers filed its 2021 IRP with the MPSC, proposing 70 Table of Contents updates to the Clean Energy Plan. Under its 2021 IRP, Consumers proposes to eliminate the use of coal-fueled generation in 2025 and expects to meet 90 percent of its customers’ needs with clean energy sources by 2040. Specifically, the 2021 IRP provides for a full transition away from coal-fueled generation by the end of 2025 and includes: • the retirement of the D.E. Karn oil/gas-fueled and coal-fueled generating units, totaling 1,734 MW of nameplate capacity, in 2023 • the retirement of the J.H. Campbell coal-fueled generating units, totaling 1,407 MW of nameplate capacity, in 2025 The MPSC has authorized Consumers to issue securitization bonds to finance the recovery of and return on the D.E. Karn coal-fueled generating units. In the 2021 IRP, Consumers has requested regulatory asset treatment to recover the remaining book value of and return on the other D.E. Karn units and the J.H. Campbell coal-fueled generating units. To bridge the transition away from coal generation, the 2021 IRP proposes: • the purchase of the New Covert Generating Facility, a natural gas-fueled generating unit with 1,176 MW of nameplate capacity in Van Buren County, Michigan, in 2023 • the purchase, in 2025, of the enterprises segment’s three natural gas-fueled generating units, totaling 1,001 MW of nameplate capacity: ◦ the 770-MW DIG plant located in Dearborn, Michigan ◦ a 156-MW peaking generating unit located in Gaylord, Michigan ◦ a 75-MW peaking generating unit located in Comstock, Michigan These investments are expected to allow Consumers to continue providing controllable sources of electricity to customers while expanding its investment in renewable energy. The 2021 IRP forecasts renewable energy capacity levels of 35 percent in 2025, 47 percent in 2030, and 63 percent in 2040, including the addition of nearly 8,000 MW of solar generation. Under its 2021 IRP, Consumers will continue to bid new capacity competitively. The updated plan proposes that Consumers will own and operate at least 50 percent of new capacity, with the remainder being built and owned by third parties. Consumers’ Clean Energy Plan provides the foundation for its goal to achieve net-zero carbon emissions from its electric business by 2040. Under this net-zero goal, Consumers plans to eliminate the impact of carbon emissions created by the electricity it generates or purchases for customers. Through its Clean Energy Plan, Consumers continues to make progress on expanding its customer programs, namely its demand response, energy efficiency, and conservation voltage reduction programs, as well as increasing its renewable energy and pumped storage generation. In support of its Clean Energy Plan, Consumers issued requests for proposals in 2019 and 2020, each to acquire up to 300 MW of new capacity from projects to be operational in Michigan’s Lower Peninsula by May 2023. Specifically, Consumers solicited offers to enter into PPAs with or purchase solar generation projects ranging in size from 20 MW to 150 MW and to enter into PPAs with PURPA qualifying facilities up to 20 MW. Any contracts entered into as a result of the requests for proposals would be subject to MPSC approval. 71 Table of Contents As a result of the requests for proposals, Consumers has entered into PPAs to purchase renewable capacity, energy, and RECs from solar generating facilities and build transfer agreements to purchase solar generating facilities, as presented in the following table: Type of Agreement Capacity (MW) Location of Facility Expected Commercial Operation 1 Date of Agreement Date of MPSC Approval 2019 request PPA (25 years) 140 Calhoun County, Michigan 2022 December 2020 April 2021 Build transfer agreement 150 Southeastern Michigan 2023/2024 January 2021 April 2021 2020 request PPA (20 years) 30 Manistee, Michigan 2022 May 2021 September 2021 PPA (25 years) 2 100 Calhoun County, Michigan 2023 October 2021 November 2021 PPA (20 years) 2 125 Jackson County, Michigan 2023 October 2021 November 2021 Build transfer agreement 150 Southeastern Michigan 2023/2024 October 2021 November 2021 1 For build transfer agreements, represents the date Consumers expects to take full ownership and begin commercial operation. 2 This agreement provides Consumers the option to purchase the associated solar generating facility after ten years. In addition, Consumers issued a request for proposals in September 2021 to acquire up to 500 MW of new capacity from projects to be operational in Michigan’s Lower Peninsula by December 2024. Specifically, Consumers solicited offers to enter into PPAs with or purchase solar generation projects up to 300 MW in size and to enter into PPAs with PURPA qualifying facilities up to five MW in size. Consumers will acquire at least 250 MW through long-term PPAs. Any contracts entered into as a result of the request for proposals would be subject to MPSC approval. Renewable Energy Plan: The 2016 Energy Law raised the renewable energy standard to 15 percent in 2021. 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 met the 15-percent requirement in 2021 and expects to meet the requirement in future years with a combination of newly generated RECs and previously generated RECs carried over from prior years. Under Consumers’ renewable energy plan, the MPSC has approved the acquisition of up to 525 MW of new wind generation projects and authorized Consumers to earn a 10.7 percent return on equity on any projects approved by the MPSC. Specifically, the MPSC has approved the following: • purchase and construction of a 150-MW wind generation project in Gratiot County, Michigan; the project became operational in December 2020 • purchase of a 166-MW wind generation project in Hillsdale, Michigan; the project became operational and Consumers took full ownership in February 2021 72 Table of Contents • purchase of a wind generation project under development, with capacity of up to 201 MW, in Gratiot County, Michigan; Consumers expects to take full ownership and begin commercial operation of the project before 2024 The MPSC also approved the execution of a 20-year PPA under which Consumers will purchase 100 MW of renewable capacity, energy, and RECs from a 149-MW solar generating facility to be constructed in Calhoun County, Michigan; the facility is expected to be operational in 2022. Voluntary Large Customer Renewable Energy Program: Consumers provides 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. In September 2021, the MPSC approved Consumers’ request to amend its renewable energy plan to remove the annual subscription limit associated with this program. The MPSC also approved up to 1,000 MW of new wind and solar generation projects between 2024 and 2027 to meet customer demand for the program. Consumers will competitively solicit for additional renewable energy assets based on customer applications and will construct the assets based on customer subscriptions to the 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. In June 2021, electric residential customers transitioned to a summer peak time-of-use rate that allows them to take advantage of lower-cost energy during off-peak times during the summer months. Thus, customers can reduce their electric bills by shifting their consumption from on‑peak to off‑peak times. In response to the COVID‑19 pandemic, Michigan’s Governor and the Michigan Department of Health and Human Services have issued numerous orders throughout 2020 and 2021 restricting business, educational, and personal activities at varying levels. In June 2021, almost all restrictions were lifted and Consumers expects businesses and residents to continue resuming normal activities and for weather-normalized electric deliveries to stabilize. Over the next five years, Consumers expects weather-normalized electric deliveries to remain stable relative to 2021. This outlook reflects the effects of energy waste reduction programs offset largely by modest growth in electric demand. 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 of Consumers’ sales, with certain exceptions. At December 31, 2021, electric deliveries under the ROA program were at the ten‑percent limit. Of Consumers’ 1.9 million electric customers, fewer than 300, 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 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 2017, the MPSC issued an order establishing a state reliability mechanism for Consumers. Under this mechanism, if an alternative 73 Table of Contents 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. All alternative electric suppliers have demonstrated that they have procured their capacity requirements through the MISO planning year beginning June 1, 2024. During 2017, the MPSC issued orders finding that it has statutory authority to determine and implement a local clearing requirement, which requires 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 April 2020, the Michigan Supreme Court affirmed the MPSC’s statutory authority to implement a local clearing requirement on individual electric providers. In September 2020, ABATE and another intervenor filed a complaint against the MPSC in the U.S. District Court for the Eastern District of Michigan challenging the constitutionality of a local clearing requirement. The complaint requests the federal court to issue a permanent injunction prohibiting the MPSC from implementing a local clearing requirement on individual electric providers. In December 2020, Consumers filed a motion to intervene and defend the local clearing requirement in that federal litigation; this motion was granted in January 2021 and this case remains pending. 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 2, Regulatory Matters and Note 3, Contingencies and Commitments. 2021 Electric Rate Case: In December 2021, the MPSC approved an annual rate increase of $27 million, based on a 9.9 percent authorized return on equity that will be reflected in rates beginning January 1, 2022. In its order, the MPSC disallowed cost recovery for certain categories of recently completed capital expenditures incurred by Consumers. For additional details, see Item 8. Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements—Note 2, Regulatory Matters. Depreciation Rate Case: In March 2021, Consumers filed a depreciation case related to its electric and common utility property. In this case, Consumers requested to increase depreciation expense, and its recovery of that expense by $43 million annually. In December 2021, the MPSC approved a settlement agreement that decreases depreciation expense by $27 million annually based on December 31, 2019 balances. The new depreciation rates will be reflected in rates beginning January 1, 2022, concurrent with rates to be implemented in accordance with Consumers’ recently approved electric rate case. PSCR Plan: Consumers submitted its 2022 PSCR plan to the MPSC in September 2021 and, in accordance with its proposed plan, self-implemented the 2022 PSCR charge beginning in January 2022. Retention Incentive Program: In 2019, Consumers announced a retention incentive program to ensure necessary staffing at the D.E. Karn generating complex through the anticipated retirement of the coal-fueled generating units. Based on the number of employees that have chosen to participate, the aggregate cost of the program through 2023 is estimated to be $35 million. In its order in Consumers’ 2020 electric rate case, the MPSC approved deferred accounting treatment for these costs. Consumers expects to recognize $5 million of retention benefit costs in 2022; this expense will be deferred as a regulatory asset. For additional details on this program, see Item 8. Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements—Note 20, Exit Activities and Discontinued Operations. Within its 2021 IRP, Consumers proposes to retire the J.H. Campbell coal-fueled generating units. No retention incentive costs related to this retirement will be recognized unless Consumers’ 2021 IRP is approved by the MPSC. 74 Table of Contents 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 $255 million from 2022 through 2026 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: Multiple air quality regulations apply, or may apply, to Consumers. CSAPR, which initially became effective in 2015, requires Michigan and many other states to improve air quality by reducing power plant emissions that, according to EPA modeling, contribute to ground-level ozone and fine particle pollution in other downwind states. In 2016, the EPA finalized ozone season standards for CSAPR, which became effective in 2017. In 2020, in response to a court-ordered remand due to litigation, the EPA proposed a revised CSAPR rule to reflect updated emission reductions from electric generating units in 12 states, including Michigan. The EPA finalized this revised rule in March 2021, with continued emission reductions through 2024. Consumers has evaluated its emission compliance strategy for existing units based on the proposed number of allowances allocated to Michigan for 2021 through 2024 and believes the impact of this rule should be minimal. In 2012, the EPA published emission standards for electric generating units, known as MATS, based on Section 112 of the Clean Air Act. Under MATS, all of Consumers’ existing coal-fueled electric generating units were required to add additional controls for hazardous air pollutants. Consumers met the deadline for five coal-fueled units and two oil/gas-fueled units it continues to operate and retired its seven remaining coal-fueled units. In May 2020, the EPA finalized changes to the supporting analysis used to enact the MATS rule. However, in January 2022, the EPA announced a proposed rule to revoke this 2020 finding and reaffirm that it is appropriate and necessary to regulate emissions of hazardous air pollutants from coal- and oil-fueled power plants. The EPA is also considering whether more stringent protections for hazardous air pollution from power plants are feasible and warranted. Consumers will continue to monitor the MATS rule status and any pending litigation. Consumers does not expect any changes to the MATS rule will have a significant impact on its current MATS compliance strategy. In 2015, the EPA lowered the NAAQS for ozone. The 2015 ozone NAAQS made it more difficult to construct or modify power plants and other emission sources in areas of the country that have not met the 2015 ozone standard. In 2018, the EPA designated certain areas of Michigan as not meeting the ozone standard. Specifically, seven counties in southeastern Michigan and three counties in western Michigan were not in attainment with the ozone standard by an August 2021 regulatory deadline, and thus may have their nonattainment designations increased from marginal to moderate. None of Consumers’ fossil-fuel-fired generating units are located in these areas. The State of Michigan has convened industry workgroups to seek implementation and control strategy ideas for statewide compliance of the 2015 ozone standard, which will need to be in place by early 2023. In January 2022, EGLE submitted a request to the EPA for redesignation of the seven counties in southeastern Michigan to be in attainment with the 2015 ozone standard based on the most recent data. EGLE is awaiting the EPA’s response to that request. Consumers will continue to stay engaged with EGLE and the workgroups to assess potential impacts to its generating assets. In August 2020, the EPA proposed to retain the 2015 NAAQS for ozone without revision and finalized this regulatory decision in December 2020. In October 2021, the EPA provided notice that it was going to reconsider the December 2020 ozone NAAQS decision. The EPA believes it will complete this reconsideration by December 2023. Although this action may ultimately result in more ozone nonattainment areas in Michigan, Consumers does not expect that any litigation involving NAAQS for ozone or lowering of the ozone standard will have a material adverse impact on its generating assets. 75 Table of Contents Consumers’ strategy to comply with air quality regulations, including CSAPR, MATS, and NAAQS, 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 EGLE rulemakings, litigation, executive orders, treaties, 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 operated • 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, as well as modified or reconstructed 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 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 would require new coal-fueled generating units to meet a highly efficient steam cycle performance standard. If finalized, Consumers does not expect this proposal to change its existing environmental strategy. The EPA has not formally indicated whether they intend to finalize this rulemaking or instead pursue a new set of regulations. In 2019, the EPA finalized the Affordable Clean Energy rule, which required individual states to evaluate coal‑fueled power plants for heat‑rate improvements that could increase overall plant efficiency. In January 2021, the D.C. Circuit Court of Appeals vacated and remanded this rule to the EPA which, in turn, appealed the rule to the U.S. Supreme Court. In October 2021, the U.S. Supreme Court agreed to hear an appeal of this case. A decision is expected by June 2022. Consumers cannot evaluate the potential impact of the rule until any appeals and EPA actions are resolved. It is anticipated that the EPA will propose a new regulation in 2022 addressing greenhouse gas emissions from existing fossil-fueled electric generating units, potentially under the Clean Air Act; however, Consumers cannot predict the form and extent of such potential regulation as it is likely to be impacted by the U.S. Supreme Court’s decision on the Affordable Clean Energy rule. In 2015, a group of 195 countries, including the U.S., finalized the Paris Agreement, which addresses carbon dioxide reduction measures beginning in 2020. While the U.S. had withdrawn from the Paris Agreement, it rejoined the Paris Agreement in 2021. In April 2021, the U.S. announced it is committing to a nationally determined contribution under the Paris Agreement. Nationally determined contributions are the efforts by each country to reduce national greenhouse gas emissions. The commitment made by the U.S. is to reduce greenhouse gas emissions by 50 to 52 percent from 2005 levels by 2030. In its 2021 IRP, pending MPSC approval, Consumers proposed a 60-percent reduction in its carbon emissions from 2005 levels by 2025. At this time, Consumers does not expect any adverse changes to its environmental strategy as a result of these events, as the nationally determined contribution is not binding without new Congressional legislation. 76 Table of Contents In 2020, Michigan’s Governor signed an executive order creating the Michigan Healthy Climate Plan, which outlines goals for Michigan to achieve economy-wide net-zero greenhouse gas emissions and to be carbon neutral by 2050. The executive order aims for a 28-percent reduction below 2005 levels of greenhouse gas emissions by 2025. Consumers has already surpassed the 28-percent reduction milestone for its owned electric generation and previously announced a goal of achieving net-zero carbon emissions from its electric business by 2040. The order directs EGLE to develop and oversee an action plan for achieving these goals. In addition, the Governor established the Council on Climate Solutions, an advisory group of key stakeholders to be appointed by the Governor that will assist EGLE in implementing the plan. These goals are aspirational in nature and any changes in law or regulation to achieve these goals would need to be approved by Michigan Legislature or the relevant regulatory agency. The MPSC has requested comments from utilities and other stakeholders on how the Governor’s goal should be incorporated into future IRP filings. 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 net-zero carbon reduction goal, and its emphasis on reliable and resilient supply. Consumers will continue to monitor regulatory and legislative activity and related litigation regarding greenhouse gas emissions standards that may affect electric generating units. Increased frequency of severe weather events, including those due to climate change, could materially impact Consumers’ facilities, energy sales, and results of operations. Consumers is unable to predict these events or their financial impact; however, Consumers evaluates the potential physical impacts of climate change on its operations, including increased temperature, increased storm activity, increased rainfall, and higher lake and river levels. Consumers is taking steps to mitigate these risks as appropriate. Litigation, international treaties, executive orders, federal laws and regulations (including regulations by the EPA), and state laws and regulations, if enacted or ratified, could ultimately impact Consumers. Consumers may be required to replace equipment; install additional emission control equipment; purchase emission allowances or credits; curtail operations; arrange for alternative sources of supply; purchase facilities that generate fewer emissions; mothball or retire facilities that generate certain emissions; pursue energy efficiency or demand response measures more swiftly; 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 in rates consistent with the recovery of other reasonable costs of complying with environmental laws and regulations. CCRs: In 2015, the EPA published a rule regulating CCRs under RCRA. This 2015 rule adopts minimum standards for beneficially reusing and disposing of non‑hazardous CCRs. The rule establishes new minimum requirements for CCR unit location, design, structural stability, groundwater monitoring and correction action, flood protection, fugitive dust control, recordkeeping, and public disclosure of certain records, including any groundwater protection standard exceedances. The 2015 rule also sets out conditions under which some CCR units would be forced to cease receiving CCR and non‑CCR wastewater and initiate closure based on the inability to achieve minimum safety standards, meet a location standard, or meet minimum groundwater standards. Due to litigation, many aspects of the 2015 CCR rule have been remanded to the EPA, which has resulted in numerous proposed rules and three final rules. One of the final rules is in litigation. Anticipated litigation related to remanded aspects that have not been addressed will add uncertainty around requirements for compliance and state permit programs. The EPA amended the conditions of forced closure in a rule published in August 2020. The August 2020 rule required all unlined CCR units to initiate closure by mid-April 2021, unless conditions that satisfied an alternate closure schedule were approved by the EPA. Consumers, with agreement from EGLE, 77 Table of Contents completed the work necessary to initiate closure by excavating CCRs or placing a final cover over each of its relevant CCR units prior to the April 2021 closure initiation deadline. Separate from the 2015 or 2020 rules, Congress passed legislation in 2016 allowing participating states to develop permitting programs for CCRs under RCRA Subtitle D. In 2018, the Michigan Legislature adopted standards for a permitting program, which requires the EPA’s authorization. This program should reduce costly, duplicative oversight over CCRs and provide local oversight to CCR issues unique to Michigan. In April 2020, EGLE submitted a regulatory package for Michigan’s permit program to the EPA for its review, which is still pending. Federal rulemaking challenges may delay EPA approval of the Michigan permitting program. Consumers has historically been authorized to recover in electric rates costs related to coal ash disposal sites. Water: Multiple water-related regulations apply, or may apply, to Consumers. The EPA regulates cooling water intake systems of existing electric generating plants under Section 316(b) of the Clean Water Act and the corresponding rules that were revised in 2014. The rules seek to reduce alleged harmful impacts on aquatic organisms, such as fish. In 2018, Consumers submitted to EGLE for approval all required studies and recommended plans to comply with Section 316(b), but has not yet received final approval. In 2015, the EPA released its final effluent limitation guidelines for steam electric generating plants. These guidelines, which are presently being litigated, set stringent new requirements for the discharge from electric generating units into surface waters. The EPA published a final rule in October 2020, with an effective date of December 2020, revising the 2015 guidelines related to the discharge of certain wastewater streams from electric generating units. The rule also allows for extension of the compliance deadline from the end of 2023 to the end of 2025, upon approval by EGLE through the NPDES permitting process. Consumers received such an extension to 2025 for its Campbell generating facility in 2021. Consumers does not expect any adverse changes to its environmental strategy as a result of these revisions to the rule or any litigation of the guidelines. In January 2020, the EPA and the U.S. Army Corps of Engineers finalized a rule under the Clean Water Act that repealed a 2015 definition of “Waters of the United States,” narrowed the scope of federal jurisdiction, and reduced the frequency of dual jurisdiction in states with authority to regulate the same waters; Michigan is one such state. In November 2021, the EPA and the U.S. Army Corps of Engineers proposed to revise the 2020 “Waters of the United States” definition to revert to the 2015 “Waters of the United States” definition, with changes reflecting the EPA’s interpretation of intervening U.S. Supreme Court decisions. The proposed November 2021 rulemaking may change how Consumers interacts with federal jurisdictional waters within Michigan, which may add additional requirements to existing compliance programs, or may require additional permitting for infrastructure projects. However, Consumers does not expect adverse changes to its environmental strategy as a result of the current interpretations. The “Waters of the United States” definition continues to be litigated in multiple jurisdictions. Many of Consumers’ facilities maintain NPDES permits, which are renewed every five years and are vital to the facilities’ operations. Failure of EGLE to renew any NPDES permit, a successful appeal against a permit, a change in the interpretation or scope of NPDES permitting, or onerous terms contained in a permit could have a significant detrimental effect on the operations of a facility. 78 Table of Contents Protected Wildlife: Multiple regulations apply, or may apply, to Consumers relating to protected species and habitats. Statutes like the Endangered Species Act, the Migratory Bird Treaty Act, and the Bald and Golden Eagle Protection Act may impact operations at Consumers’ facilities. In May 2021, the U.S. Fish and Wildlife Service proposed to repeal a January 2021 rule related to incidental take of migratory birds. In November 2021, the U.S. Fish and Wildlife Service published an advanced notice of proposed rulemaking outlining its intent to regulate incidental take under the Migratory Bird Treaty Act. Permitting and monitoring fees and restrictions on operations associated with the rules could impact Consumers’ existing and future operations, including wind and solar generation facilities. Additionally, Consumers is monitoring proposed changes to the listing status of several species within its operational area due to an increase in wildlife-related regulatory activity. A change in species listed under the Endangered Species Act may impact Consumers’ costs to mitigate its impact on protected species and habitats at certain existing facilities as well as siting choices for new facilities. 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 3, 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. Over the next five years, Consumers expects weather-normalized gas deliveries to remain stable relative to 2021. This outlook reflects the effects of energy waste reduction programs offset largely by modest growth in gas demand. Actual delivery levels will depend on: • weather fluctuations • use by power producers • availability and development of renewable energy sources • gas price changes • Michigan’s economic conditions, including population trends and housing activity • the price or demand 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 2, Regulatory Matters and Note 3, Contingencies and Commitments. Gas Rate Case: In December 2021, Consumers filed an application with the MPSC seeking an annual rate increase of $278 million, based on a 10.5 percent authorized return on equity and a projected twelve-month period ending September 30, 2023. The filing requests authority to recover new infrastructure investment and related costs that are expected to allow Consumers to improve system safety and 79 Table of Contents reliability and reduce fugitive methane emissions. Presented in the following table are the components of the requested increase in revenue: In Millions Projected Twelve-Month Period Ending September 30 2022 Components of the requested rate increase Investment in rate base $ 247 Operating and maintenance costs (4) Cost of capital 22 Sales 13 Total $ 278 The filing also seeks approval of a revenue decoupling mechanism that would annually reconcile Consumers’ actual weather-normalized non-fuel revenues with the revenues approved by the MPSC. Depreciation Rate Case: In December 2021, Consumers filed a depreciation case related to its gas utility plant property. In this case, Consumers requested a decrease in depreciation expense of $1 million annually based on December 31, 2020 balances. GCR Plan: Consumers submitted its 2022-2023 GCR plan to the MPSC in December 2021 and, in accordance with its proposed plan, expects to self-implement the 2022-2023 GCR charge beginning in April 2022. Gas Pipeline and Storage Integrity and Safety: The PHMSA has published various rules that expand federal safety standards for gas transmission pipelines and underground storage facilities. To comply with these rules, Consumers will incur increased capital and operating and maintenance costs to install and remediate pipelines and to expand inspections, maintenance, and monitoring of its existing pipelines and storage facilities. The initial requirements in the regulation took effect in July 2020, with future regulation phases to be released over numerous years. Although associated capital or operating and maintenance costs relating to these regulations could be material and cost recovery cannot be assured, Consumers expects to recover such costs in rates consistent with the recovery of other reasonable costs of complying with laws and regulations. Consumers will continue to monitor gas safety regulations and continue implementation of the American Petroleum Institute’s Recommended Practice 1173, Pipeline Safety Management Systems. This program minimizes gas system asset- and performance-related risks by ensuring that there are policies, procedures, work instructions, forms, and records in place to streamline adoption and deployment of any existing or future 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 3, Contingencies and Commitments—Consumers Gas Utility Contingencies—Gas Environmental Matters. Air Quality: In 2015, the EPA lowered the NAAQS for ozone. The 2015 ozone NAAQS made it more difficult to construct or modify power plants and other emission sources in areas of the country that have not met the 2015 ozone standard. In 2018, the EPA designated certain areas of Michigan as not meeting the ozone standard. Specifically, seven counties in southeastern Michigan and three counties in western Michigan were not in attainment with the ozone standard by an August 2021 regulatory deadline, and thus may have their nonattainment designations increased from marginal to moderate. Some of Consumers’ compressor stations are located in these areas. The State of Michigan has convened industry workgroups 80 Table of Contents to seek implementation and control strategy ideas for statewide compliance of the 2015 ozone standard, which will need to be in place by early 2023. In January 2022, EGLE submitted a request to the EPA for redesignation of the seven counties in southeastern Michigan to be in attainment with the 2015 ozone standard based on the most recent data. EGLE is awaiting the EPA’s response to that request. In August 2020, the EPA proposed to retain the 2015 NAAQS for ozone without revision and finalized this regulatory decision in December 2020. In October 2021, the EPA provided notice that it was going to reconsider the December 2020 ozone NAAQS decision. The EPA believes it will complete this reconsideration by December 2023. Consumers will continue to stay engaged with EGLE and the workgroups to assess potential impacts to its compressor stations. Greenhouse Gases: Consumers is making voluntary efforts to reduce its gas utility’s methane emissions. In 2019, Consumers released its Methane Reduction Plan, which set a goal of net-zero methane emissions from its natural gas delivery system by 2030. Under its Methane Reduction Plan, Consumers plans to reduce methane emissions from its system by about 80 percent by accelerating the replacement of aging pipe, rehabilitating or retiring outdated infrastructure, and adopting new technologies and practices. The remaining emissions will be offset by purchasing and/or producing renewable natural gas. In November 2021, the EPA released a proposed rule to regulate methane for the oil and gas sector. This proposed rule is not expected to have a material adverse impact on Consumers’ natural gas storage, compressor stations, and distribution systems, as it applies upstream of Consumers’ facilities. In 2020, Michigan’s Governor signed an executive order creating the Michigan Healthy Climate Plan, which outlines goals for Michigan to achieve economy-wide net-zero greenhouse gas emissions and to be carbon neutral by 2050. The executive order aims for a 28-percent reduction below 2005 levels of greenhouse gas emissions by 2025. These new goals could impact Consumers’ gas business over the long term. Consumers is evaluating decarbonization options for its gas business including energy efficiency, renewable natural gas, carbon offsets, and other decarbonization methods. As one strategy, Consumers recently requested the MPSC’s approval of a proposed program that would allow gas customers to purchase carbon offset credits on a voluntary basis. Similarly, in December 2021, Consumers announced plans to begin development of a renewable natural gas facility that will capture methane from manure generated at a neighboring farm and convert it into renewable natural gas. For additional details on the executive order, see Consumers Electric Utility Outlook and Uncertainties—Electric Environmental Outlook. In 2015, a group of 195 countries, including the U.S., finalized the Paris Agreement, which addresses carbon dioxide reduction measures beginning in 2020. While the U.S. had withdrawn from the Paris Agreement, it rejoined the Paris Agreement in 2021. In April 2021, the U.S. announced it is committing to a nationally determined contribution under the Paris Agreement. Nationally determined contributions are the efforts by each country to reduce national greenhouse gas emissions. The commitment made by the U.S. is to reduce greenhouse gas emissions by 50 to 52 percent from 2005 levels by 2030. In its 2021 IRP, pending MPSC approval, Consumers proposed a 60-percent reduction in its carbon emissions from 2005 levels by 2025. At this time, Consumers does not expect any adverse changes to its environmental strategy as a result of these events, as the nationally determined contribution is not binding without new Congressional legislation. There is increasing interest at the federal, state, and local levels involving potential regulation of greenhouse gases or its sources. Such regulation, if adopted, may involve requirements to reduce methane emissions from Consumers’ gas utility operations and carbon dioxide emissions from natural gas customer use. No such measures apply to Consumers at this time. Consumers continues to monitor these initiatives and comment as appropriate. Consumers cannot predict the impact of any potential future legislation or regulation on its gas utility. 81 Table of Contents Consumers Electric Utility and Gas Utility Outlook and Uncertainties Energy Waste Reduction Plan: The 2016 Energy Law authorized incentives for demand response programs and energy efficiency programs, referring to the combined initiatives as energy waste reduction programs. The law also set a 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 and established a goal of 35 percent combined renewable energy and energy waste reduction by 2025. Consumers achieved 30 percent combined renewable energy and energy waste reduction through 2021. Additionally, the MPSC has approved the recovery of demand response costs and an associated financial incentive based on demand response target performance. 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 1,483 MW of capacity, and to pursue opportunities for the development of renewable generation projects. In June 2021, DIG, CMS Generation Michigan Power, and CMS ERM entered into an agreement with Consumers to sell, for $515 million, subject to certain adjustments, the enterprises segment’s three natural gas-fueled generating units, totaling 1,001 MW of nameplate capacity: • the 770-MW DIG plant located in Dearborn, Michigan • a 156-MW peaking generating unit located in Gaylord, Michigan • a 75-MW peaking generating unit located in Comstock, Michigan The parties plan to close the sale, which is dependent upon regulatory approvals, in 2025. The enterprises segment’s assets may be affected by environmental laws and regulations. The 2015 ozone NAAQS made it more difficult to construct or modify power plants and other emission sources in areas of the country that have not met the 2015 ozone standard. In 2018, the EPA designated certain areas of Michigan as not meeting the ozone standard. The DIG plant 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 • severe weather events and climate change associated with increasing levels of greenhouse gases • 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 • indemnity and environmental remediation obligations at Bay Harbor 82 Table of Contents • indemnity obligations assumed in connection with the purchase or ownership of an interest in one or more facilities that involve tax equity financing • 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 3, Contingencies and Commitments. Other Outlook and Uncertainties 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 2, Regulatory Matters and Note 3, 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, contingencies, and AROs. 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 83 Table of Contents Supplementary Data—Notes to the Consolidated Financial Statements—Note 3, 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. At CMS Energy, if the derivative is accounted for as a cash flow hedge, unrealized gains and losses from changes in the fair value of the derivative are recognized in AOCI and subsequently recognized in earnings when the hedged transactions impact earnings. If the derivative is accounted for as a fair value hedge, changes in the fair value of the derivative and changes in the fair value of the hedged item due to the hedged risk are recognized in earnings. For the FTRs at Consumers, changes in fair value are deferred as regulatory assets or liabilities. 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 5, 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 12, 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. 84 Table of Contents Presented in the following table are estimates of credits and cash contributions through 2024 for the DB Pension Plans and OPEB Plan. Actual future costs, credits, 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 Credit Contribution Credit Contribution CMS Energy, including Consumers 2022 $ (10) $ — $ (120) $ — 2023 (31) — (114) — 2024 (52) — (104) — Consumers 1 2022 $ (7) $ — $ (113) $ — 2023 (27) — (107) — 2024 (47) — (97) — 1 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 2022 by $8 million for both CMS Energy and Consumers. Lowering the PBO discount rates by 25 basis points would increase estimated pension cost for 2022 by $5 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 10, 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. Consumers records unbilled revenues as accounts receivable and accrued revenue on its consolidated balance sheet. For additional information on unbilled revenues, see Item 8. Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements—Note 14, Revenue. New Accounting Standards There are no new accounting standards issued but not yet effective that are expected to have a material impact on CMS Energy’s or Consumers’ consolidated financial statements. 85 Table of Contents