CMS Energy Corporation — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This combined filing covers CMS Energy and its principal subsidiary, Consumers Energy; annual results are not the same as standalone fourth-quarter results. CMS Energy is primarily a Michigan energy company, with regulated electric and gas utilities and a smaller non-utility segment.
Financial performance
| CMS Energy consolidated | 2018 | 2017 | Change |
|---|---|---|---|
| Operating revenue | $6.873 billion | $6.583 billion | Up 4.4% |
| Operating income | $1.162 billion | $1.338 billion | Down 13.1% |
| Net income available to common stockholders | $657 million | $460 million | Up 42.8% |
| Diluted EPS | $2.32 | $1.64 | Up $0.68 |
| Cash provided by operations | $1.703 billion | $1.705 billion | Nearly unchanged |
| Capital expenditures, excluding capital leases | $2.074 billion | $1.665 billion | Up 24.6% |
| Long-term debt, excluding current portion | $10.615 billion | $9.123 billion | Up $1.492 billion |
| Cash and cash equivalents, including restricted cash | $175 million | $204 million | Down $29 million |
Calculated operating margin was approximately 16.9%, versus 20.3% in 2017; calculated net margin was approximately 9.6%, versus 7.0%. The divergence reflects lower operating income but substantially lower income tax expense and higher nonoperating retirement-benefit income. CMS Energy’s effective tax rate was 14.9%, down from 47.9%, with 2017 including significant TCJA-related tax expense. The filing does not provide a single comparable adjusted-earnings measure that isolates recurring performance.
Consumers Energy reported 2018 revenue of $6.464 billion, net income of $705 million, and operating cash flow of $1.449 billion, compared with $6.222 billion, $632 million, and $1.715 billion, respectively, in 2017. Consumers’ long-term debt excluding current maturities was $6.779 billion, up from $5.561 billion. Its cash, including restricted cash, was $56 million.
CMS Energy’s 2018 fourth-quarter revenue was $1.829 billion and net income available to common stockholders was $108 million, or $0.38 diluted EPS. In fourth-quarter 2017, revenue was $1.778 billion and the company reported a $3 million common-stockholder loss, or a $0.01 per-share loss.
Cash, debt and liquidity
- Operating cash flow was essentially flat year over year, while capital spending rose materially; simple operating-cash-flow less capital-expenditures arithmetic indicates a roughly $371 million cash shortfall before other investing and financing flows.
- Total principal debt outstanding was $11.683 billion at year-end, compared with $10.265 billion in 2017. The filing reports $10.615 billion of non-current long-term debt on the balance sheet; these measures differ because of current maturities and other adjustments.
- Available revolving credit at year-end was $519 million for CMS Energy and $843 million for Consumers. Consumers also had $97 million of commercial paper outstanding under its $500 million program.
- Management said expected operating cash flow and access to financing were anticipated to be sufficient for contractual obligations in 2019 and beyond. Both companies were in compliance with debt covenants at year-end.
- CMS Energy declared dividends of $1.43 per common share for 2018, versus $1.33 in 2017.
Key changes, outlook and commentary
- CMS Energy’s earnings improvement reflected higher electric and gas sales, rate increases, OPEB-plan changes and the absence of much of the prior-year TCJA accounting impact. These benefits were partly offset by higher depreciation, maintenance and operating costs. Consumers’ utility tax reductions were substantially passed through to customers through lower rates or bill credits.
- Consumers’ 2018 electric rate settlement was approved in January 2019: it included a nominal annual rate decrease of $24 million, but, with expiration of a $113 million TCJA bill credit, management described the net annual rate effect as an $89 million increase. The settlement deferred recovery of certain distribution investments and bars a new electric rate case before January 2020.
- Consumers plans $11.2 billion of capital expenditures from 2019 through 2023; CMS Energy’s total plan, including enterprises, is $11.7 billion. Management expects Consumers’ rate base to grow 6%–8% annually. The program emphasizes gas and electric infrastructure, reliability, renewable generation and environmental compliance.
- Consumers expects weather-normalized electric deliveries to remain stable and gas deliveries to increase slightly through 2023. Its 2018 integrated resource plan proposes retiring all coal generation by 2040 and increasing renewable energy to 25% by 2025, over 35% by 2030 and over 40% by 2040. These are proposals subject to regulatory review, not assured outcomes.
- Key risks include regulatory cost recovery and rate-case outcomes, the 10% cap on retail electric choice and possible changes to it, large capital requirements, environmental compliance and remediation, weather and commodity volatility, financing access, pension/OPEB assumptions, cyber and operational disruptions, and potential litigation liabilities.
Contingencies and unusual items
- On January 30, 2019, a fire at Consumers’ Ray Compressor Station impaired Ray Storage Field operations during extreme cold, prompting voluntary customer load reductions, contingency gas purchases and temporary curtailments for some industrial and large commercial customers. The measures ended February 1; the ultimate financial and regulatory impact was not yet predictable.
- CMS Energy recorded a $46 million liability for remaining Bay Harbor environmental obligations; the undiscounted estimate was $58 million. Consumers recorded $73 million for former manufactured-gas-plant remediation, with a $133 million related regulatory asset. Recovery of remediation costs through rates is expected but not guaranteed.
- The government of Equatorial Guinea claims $152 million in taxes from a 2002 asset sale, plus potentially substantial penalties and interest. CMS Energy contests the claim; the outcome and financial impact are uncertain.
- Gas price-reporting litigation remains unresolved, and the company said a potential loss could not be reasonably estimated. Separately, in January 2019 an arbitration panel rejected the MCV Partnership’s Clean Air Act-related claim, which represented most of its claim estimated at more than $270 million; other claims remained unresolved.
- Consumers had $9.930 billion of contractual PPA obligations, including $3.880 billion for the MCV PPA and $1.280 billion for the Palisades PPA. These commitments are important to assess alongside planned investment and debt service.
Important facts for investors to verify
- How much of the 2018 earnings increase reflects recurring utility operations versus tax accounting, OPEB changes and other nonrecurring or timing effects.
- Whether planned capital spending earns timely regulatory recovery, and how the 2019–2020 electric and gas rate proceedings affect customer rates and cash flow.
- The funding plan for the $11.7 billion 2019–2023 investment program, including debt growth, equity issuance and dividend capacity.
- The cost and operational consequences of the Ray Compressor Station incident, and progress on pipeline integrity and storage reliability.
- Updates on the Equatorial Guinea tax claim, gas price-reporting litigation, environmental remediation estimates and the remaining MCV arbitration claims.