CMS Energy Corporation — 2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019; filed February 6, 2020. This is an annual filing, not a standalone fourth-quarter report. It also presents separate financial statements for Consumers Energy, CMS Energy’s regulated utility subsidiary. Amounts below are in U.S. dollars.
Business context
CMS Energy operates primarily in Michigan through Consumers Energy’s electric and gas utilities, alongside domestic power and energy-marketing businesses and EnerBank, a consumer-lending bank. Consumers served approximately 1.8 million electric and 1.8 million gas customers. Its results make up the substantial majority of CMS Energy’s assets, income, and revenue.
Financial performance and position
| CMS Energy consolidated | 2019 | 2018 |
|---|---|---|
| Operating revenue | $6.845 billion | $6.873 billion |
| Operating income | $1.239 billion | $1.162 billion |
| Net income | $682 million | $659 million |
| Net income available to common shareholders | $680 million | $657 million |
| Diluted EPS | $2.39 | $2.32 |
| Cash from operations | $1.790 billion | $1.703 billion |
| Capital expenditures, excluding finance-lease assets | $2.104 billion | $2.074 billion |
| Long-term debt, excluding current portion | $11.951 billion | $10.615 billion |
- Revenue declined 0.4%, while operating income rose 6.6%, net income rose 3.5%, and diluted EPS increased 3.0%. Operating margin was approximately 18.1%, up from 16.9%; net margin was approximately 10.0%, versus 9.6%.
- Cash from operations less reported capital expenditures was negative $314 million, compared with negative $371 million in 2018. This is a simple cash-flow measure and excludes finance-lease additions.
- Year-end cash and cash equivalents were $140 million, plus $17 million restricted cash. CMS Energy reported $544 million available on its revolver; Consumers had approximately $1.083 billion available across its facilities. Consumers also had $90 million of commercial paper outstanding.
- CMS Energy’s total debt principal was $13.188 billion, including current maturities and EnerBank certificates of deposit. The company and Consumers were in compliance with reported financial covenants at year-end.
Consumers Energy: 2019 revenue was $6.376 billion versus $6.464 billion; net income was $743 million versus $705 million; operating cash flow was $1.601 billion versus $1.449 billion; and capital expenditures, excluding finance-lease assets, were $2.085 billion versus $1.822 billion. Long-term debt excluding current maturities was $7.048 billion.
Material changes and management commentary
- CMS Energy’s utility earnings benefited from electric and gas rate increases, colder-weather gas sales, cost controls, and a transmission-equipment sale. These were partly offset by lower electric sales associated with unfavorable weather, higher depreciation and maintenance, storm restoration costs, lower Enterprises earnings, and a legal accrual.
- Electric utility segment earnings fell to $509 million from $535 million; gas utility earnings rose to $233 million from $169 million. EnerBank earnings increased to $49 million from $38 million, while Enterprises earnings were $33 million versus $34 million.
- Consumers’ electric deliveries declined to 36.8 billion kWh from 38.2 billion kWh, with unfavorable weather cited as a key factor. Gas deliveries to end-use customers increased to 313 bcf from 310 bcf, primarily reflecting colder weather.
- The fourth-quarter figures reported in the annual filing show CMS Energy revenue of $1.795 billion and common net income of $167 million, compared with $1.829 billion and $108 million, respectively, in fourth-quarter 2018.
Outlook, risks, and unusual items
- Consumers projected $25 billion of investment over ten years and $12.2 billion of capital expenditures, including lease commitments, for 2020–2024. Management expected annual rate-base growth of 6%–8%; the plan depends on project execution and regulatory cost recovery.
- The approved Clean Energy Plan targets eliminating coal-fired generation by 2040 and reducing emissions from Consumers-owned generation by more than 90% from 2005 levels by 2040. Consumers plans to retire the D.E. Karn 1 and 2 coal units in 2023 and is assessing earlier retirement of J.H. Campbell 1 and 2. Consumers also set a goal of net-zero methane emissions from its gas delivery system by 2030.
- Consumers expected weather-normalized electric deliveries to decline slightly and gas deliveries to remain stable through 2024. No specific CMS Energy full-year 2020 EPS guidance is stated in the supplied filing text.
- Consumers filed a gas rate request seeking $245 million in annual revenue, based on a requested 10.5% return on equity. The request remained subject to MPSC review. Its 2018 gas case had been approved for a $144 million annual increase; the 2018 electric settlement produced a net annual rate increase of $89 million after the expiration of customer tax credits.
- CMS Energy recorded a $30 million liability for probable settlement of remaining gas-index price-reporting litigation; final settlement terms and court approval were uncertain. Other significant exposures include the Equatorial Guinea tax claim of $152 million plus potential penalties and interest, and environmental remediation obligations, including $46 million at Bay Harbor and $68 million for Consumers’ former manufactured-gas-plant sites.
- A January 2019 fire at Consumers’ Ray Compressor Station disrupted gas supply during extreme cold. The station returned to full capacity; Consumers reported $7 million of incremental gas costs and $12 million of restoration capital expenditures. Potential cost disallowances, customer claims, or penalties were not yet determinable.
- Consumers reported $9.336 billion of future PPA purchase obligations, and CMS Energy reported total contractual obligations of $38.855 billion. Environmental compliance, weather, commodity prices, pension funding, regulation, cybersecurity, and access to capital are among the disclosed risks.
- Effective January 1, 2020, the new expected-credit-loss accounting standard was expected to increase EnerBank’s loan-loss reserve by $65 million, with the initial adjustment recorded to retained earnings net of tax. The filing also reported a $531 million CMS Energy pension contribution made in January 2020.
Important facts for investors to verify
- Whether Consumers can obtain timely regulatory approval and recover the planned capital investment and environmental costs through rates.
- Progress, spending, and execution risks for the Clean Energy Plan, coal retirements, renewable projects, and methane-reduction target.
- The outcome and final cost of gas-index litigation, the Equatorial Guinea tax claim, environmental matters, and the Ray Compressor Station review.
- Debt growth, refinancing needs, liquidity, pension contributions, and EnerBank credit quality, including the effects of the new credit-loss standard.
- How weather, electric demand, customer conservation, ROA competition, and long-term power-purchase commitments affect utility earnings and cash flow.
Independent auditors issued unqualified opinions on both companies’ financial statements and internal control over financial reporting as of December 31, 2019. The CMS Energy audit identified accounting for new regulatory matters as a critical audit matter, reflecting judgment involved in assessing recovery of regulatory assets and settlement of regulatory liabilities.