CMS Energy Corporation 2017 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017; this is an annual filing, not a standalone fourth-quarter report. The combined filing also reports Consumers Energy Company, CMS Energy’s principal subsidiary. Dollar amounts are in U.S. dollars.
Business context
CMS Energy is a Michigan-focused energy holding company. Its regulated Consumers Energy subsidiary provides electricity and natural gas; CMS Enterprises operates independent power and renewable-energy businesses, and CMS Energy also owns EnerBank. Consumers served approximately 6.7 million Michigan residents.
Financial performance and position
| Metric | CMS Energy consolidated | Consumers Energy |
|---|---|---|
| 2017 revenue | $6.583 billion; up 2.9% from $6.399 billion | $6.222 billion; up 2.6% from $6.064 billion |
| Operating income | $1.338 billion, versus $1.256 billion | $1.252 billion, versus $1.197 billion |
| Net income | $462 million; net income available to common stockholders $460 million | $632 million; net income available to common stockholder $630 million |
| EPS | Diluted $1.64, versus $1.98 | Not applicable; privately held subsidiary |
| Operating cash flow | $1.705 billion, versus $1.629 billion | $1.715 billion, versus $1.681 billion |
| Capital expenditures | $1.665 billion, excluding assets placed under capital lease | $1.632 billion, excluding assets placed under capital lease |
| Debt | $9.123 billion long-term debt, excluding current portion; $10.265 billion total principal amount outstanding, including EnerBank certificates of deposit | $5.561 billion long-term debt, excluding current portion |
| Cash and liquidity | $204 million cash including $22 million restricted; $544 million available under revolving credit facility | $65 million cash including $21 million restricted; $873 million available under revolving facilities |
CMS Energy’s operating income margin was approximately 20.3%, compared with 19.6% in 2016. Cash from operations exceeded reported capital expenditures by approximately $40 million, before other investing and financing activity. At year-end, CMS Energy reported total assets of $23.050 billion and total equity of $4.478 billion. The companies reported compliance with their financial covenants.
Material changes versus 2016
- CMS Energy common earnings fell $91 million and diluted EPS declined from $1.98 to $1.64, despite higher revenue and operating income. The main adverse factors were the Tax Cuts and Jobs Act (TCJA), higher depreciation, and less favorable electric weather effects.
- CMS Energy recorded $148 million of additional deferred income tax expense related to the TCJA; its effective tax rate rose to 47.9% from 33.1%. The tax-law remeasurement reduced consolidated net deferred tax liabilities by approximately $1.3 billion. Consumers recorded a $1.588 billion net regulatory tax liability related to tax benefits expected to be returned to customers.
- Consumers’ net income available to its common stockholder increased $16 million to $630 million. Gas utility earnings improved, while electric utility earnings declined slightly to $455 million.
- CMS Energy operating cash flow increased $76 million. Capital expenditures were nearly flat; total principal debt outstanding increased to $10.265 billion from $9.564 billion.
- Consumers completed deployment of 1.8 million electric smart meters and installed 670,000 gas-meter communication modules in dual-service areas. Its seven smaller coal units had been retired in 2016; coal supplied 28% of Consumers’ 2017 customer energy.
Outlook, risks and unusual items
- Investment and demand: Consumers forecast $10.1 billion of capital expenditures for 2018–2022, including $4.9 billion for gas infrastructure, $3.5 billion for electric distribution, and $1.7 billion for electric supply. Management expects annual rate-base growth of 6%–8%, electric deliveries to be stable or increase slightly through 2022, and gas deliveries to increase moderately. These plans depend on regulatory cost recovery, execution, and financing access.
- Rates and TCJA refunds: Consumers’ 2017 electric rate case sought a $148 million annual increase after revision; it self-implemented $130 million subject to refund. An administrative law judge recommended a $30 million increase, with a final order expected by the end of March 2018. A pending gas case sought a $178 million annual increase. Consumers estimated the TCJA would reduce annual electric and gas revenue requirements by $116 million and $49 million, respectively, and recommended customer bill credits by the end of 2018; timing and refunds remained subject to MPSC orders.
- Fuel and contractual commitments: Consumers disclosed $9.159 billion of future PPA purchase obligations, including $1.042 billion due in 2018. A substantial portion of its electricity supply is purchased through long-term agreements and the MISO market. Its Palisades PPA is expected to continue until April 2022 after the parties abandoned an early termination following limited regulatory cost-recovery approval.
- Contingencies: Consumers faces an MCV Partnership arbitration claim seeking more than $270 million plus interest over the MCV power agreement; Consumers says the claim lacks merit but cannot predict the outcome. CMS Energy faces an Equatorial Guinea tax claim of $152 million plus potentially substantial penalties and interest, as well as unresolved gas-index price-reporting litigation for which a loss estimate is not provided. Recorded environmental liabilities include $48 million for Bay Harbor at CMS Energy and $88 million for Consumers’ former manufactured-gas-plant sites.
- Environmental and regulatory exposure: Consumers estimated $215 million of coal-ash compliance expenditures, $49 million for wastewater rules, $89 million for cooling-water intake requirements, and $14 million for air rules during 2018–2022. It also estimated $0.4 billion of environmental capital expenditures over that period. Recovery through customer rates is expected but not assured. Changes to environmental rules, permits, and the MPSC’s treatment of costs could affect results.
- Other risks and unusual items: Earnings and cash flow are weather-sensitive; exposure also includes rate-case outcomes, the 10% retail-choice cap and related capacity rules, fuel and power prices, outages, cyber incidents, pension assumptions, and capital-market access. A 2017 amendment to retiree health benefits reduced the OPEB obligation by $439 million at CMS Energy. CMS Energy reported a $18 million loss on extinguished debt and $31 million of donations.
Most important facts for investors to verify
- How final MPSC decisions and TCJA-related customer credits or deferred-tax refunds affect Consumers’ revenue, cash flow, and capital recovery.
- Whether Consumers can deliver the $10.1 billion 2018–2022 investment program on schedule and within budget while maintaining projected rate-base growth and affordability.
- The eventual outcome and potential exposure from the MCV arbitration, Equatorial Guinea tax claim, and remaining gas-price litigation.
- How PPA obligations, debt maturities, interest costs, and available revolving-credit capacity evolve as capital spending continues.
- Whether estimated environmental compliance and remediation costs are sufficient and recoverable through customer rates.
- The effect of weather, electric and gas demand, purchased-power costs, and changing energy regulation on reported earnings.