CMS Energy Corporation — 2016 Form 10-K
Business context and reporting period. This combined filing covers the fiscal year ended December 31, 2016; it also reports fourth-quarter results. CMS Energy is a Michigan-focused energy holding company. Its wholly owned subsidiary Consumers Energy, a regulated electric and gas utility, accounts for most of CMS Energy’s assets, revenue, and earnings. CMS Energy also operates non-utility power and energy businesses and EnerBank. Amounts below are U.S. dollars; financial figures are in millions unless stated otherwise.
Financial performance and position
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| CMS Energy revenue | $6,399 | $6,456 | Down $57 (about 0.9%) |
| Operating income | $1,297 | $1,163 | Up $134 |
| Net income available to common shareholders | $551 | $523 | Up $28 (about 5.4%) |
| Diluted EPS | $1.98 | $1.89 | Up $0.09 |
| Cash from operations | $1,629 | $1,640 | Down $11 |
| Capital expenditures, excluding capital leases | $1,672 | $1,564 | Up $108 |
| Long-term debt, excluding current portion | $8,640 | $8,400 | Up $240 |
| Cash and cash equivalents, including restricted cash | $257 | $288 | Down $31 |
Operating margin was approximately 20.3% in 2016 versus 18.0% in 2015, calculated as operating income divided by revenue. Net margin was approximately 8.6% versus 8.1%, based on net income available to common shareholders divided by revenue. Operating cash flow was slightly below capital expenditures in 2016. CMS Energy’s balance sheet reported total assets of $21.6 billion and total equity of $4.3 billion at year-end. Current assets were $2.28 billion against current liabilities of $2.66 billion.
Consumers Energy reported 2016 revenue of $6.064 billion, net income of $616 million, operating cash flow of $1.681 billion, capital expenditures of $1.656 billion, and long-term debt (excluding current portion) of $5.253 billion. Its revenue declined from $6.165 billion in 2015, while net income rose from $594 million.
In fourth-quarter 2016, CMS Energy reported revenue of $1.640 billion, operating income of $290 million, net income available to common shareholders of $77 million, and diluted EPS of $0.28. The comparable fourth-quarter 2015 figures were $1.509 billion, $245 million, $106 million, and $0.38, respectively.
Material changes versus prior periods
- CMS Energy’s earnings growth was driven mainly by electric and gas rate increases, higher electric sales—particularly from warmer-than-normal summer weather—and improved enterprise-segment earnings. Higher depreciation and property taxes, donations, and interest costs partly offset the gains. Mild winter weather reduced gas deliveries.
- Revenue fell despite higher electric utility revenue, principally because gas utility revenue declined with lower gas prices and sales. Electric utility revenue was $4.379 billion versus $4.249 billion; gas utility revenue was $1.685 billion versus $1.916 billion.
- Operating cash flow was nearly flat at CMS Energy, but Consumers’ operating cash flow declined $113 million to $1.681 billion, reflecting lower customer collections and higher tax payments to CMS Energy, partly offset by lower benefit-plan contributions and higher income.
- CMS Energy issued $1.049 billion of debt and retired $728 million in 2016. Year-end principal debt outstanding was $9.564 billion, compared with $9.137 billion in 2015. Consumers’ debt principal was $5.661 billion versus $5.409 billion.
- Consumers retired seven smaller coal-fueled units totaling 950 MW in April 2016 and shifted generation mix, with lower coal generation and higher gas generation. It purchased the 540 MW Jackson gas plant in December 2015.
Outlook, management commentary, and risks
- Investment and demand: Consumers planned about $9.0 billion of capital investment for 2017–2021 and $18 billion for 2017–2026. Management expected rate-base growth of 6%–8% annually beginning in 2017, with customer base-rate increases (excluding power and gas cost recovery charges) targeted at or below inflation. The filing projects electric deliveries to rise about 0.5% annually over five years (about 1% excluding energy-efficiency effects) and gas deliveries to remain broadly stable; 2017 weather-adjusted gas deliveries were expected to decline 1%. These are company expectations, not guarantees.
- Liquidity: Management expected cash, operating cash flows, and borrowing access to be sufficient for obligations and investment plans. At year-end CMS Energy had $549 million available under its revolving facility; Consumers had $893 million available. Consumers had $398 million of commercial paper outstanding. Both companies reported compliance with their financial covenants.
- Rates and legislation: Consumers’ electric rate case sought a $225 million annual increase, later reduced to $208 million; it had self-implemented a $170 million increase subject to refund, with a final order then expected in late February 2017. Its gas case sought $90 million annually; Consumers self-implemented $20 million in January 2017, subject to refund. Michigan’s 2016 Energy Law takes effect in April 2017, raises renewable requirements, changes rate-case timing, and eliminates utility self-implementation of rates in general rate cases.
- Palisades agreement: Consumers and Entergy agreed to end the Palisades power purchase agreement in May 2018, four years early. The projected $344 million savings would be split equally between customers and Entergy; Consumers would pay Entergy $172 million. The agreement depends on MPSC approval of rate recovery and reliability/resource-adequacy review. Without timely approval, the original PPA could continue to 2022.
- Environmental obligations and capital needs: Consumers estimated 2017–2021 compliance spending of $255 million for coal ash, $109 million for wastewater rules, $62 million for cooling-water intake requirements, and $22 million for air regulations. It expects recovery through customer rates but cannot assure it. Recorded environmental liabilities included $107 million for Consumers’ former manufactured-gas-plant sites and $51 million for CMS Energy’s Bay Harbor obligations.
- Contingencies: CMS Energy disclosed an Equatorial Guinea tax claim of $152 million plus penalties and interest, which was in arbitration and contested. Natural-gas price-reporting litigation remained pending in Wisconsin; a tentative settlement of Kansas and Missouri cases was described as not material, subject to court approval. Consumers also disclosed environmental proceedings and other regulatory appeals; possible exposure is not clear for certain matters.
- Other risks: Key exposures include regulatory decisions and cost recovery, customer choice and competition, fuel and power prices and supply, weather, large capital-project execution, environmental rules, pension assumptions and asset performance, cyber incidents, counterparty credit, and access to capital markets. CMS Energy depends on subsidiary dividends to service parent-company obligations.
- Unusual items: CMS Energy recorded an $11 million charge for a voluntary separation program; 176 employees were approved for separation, with an expected net reduction of 126 after replacements. Early adoption of share-based-payment accounting contributed $7 million of 2016 excess tax benefits and a $33 million opening accumulated-deficit adjustment. The 2016 results also included an $11 million after-tax loss on early debt extinguishment.
- Guidance: The filing provides operating and capital-investment expectations but no explicit consolidated 2017 EPS or net-income guidance in the text provided.
Most important facts for investors to verify
- Final MPSC decisions on the electric and gas rate cases, refund exposure on self-implemented rates, and approval of recovery for the Palisades termination payment.
- Whether Consumers delivers the expected returns and customer-rate effects from its $9 billion 2017–2021 investment plan, while maintaining liquidity and managing rising debt.
- Realized savings, timing, and reliability effects from the proposed Palisades PPA termination, alongside replacement capacity needs after coal-unit retirements.
- Environmental compliance and remediation costs, rate recovery, and any changes to recorded liabilities—especially coal ash, water rules, Bay Harbor, and former gas-plant sites.
- Developments in the Equatorial Guinea tax arbitration, Wisconsin gas-price litigation, regulatory appeals, and other unquantified contingencies.
- Cash-flow conversion and funding needs: 2016 operating cash flow was below capital expenditures, while planned capital investment remains substantial.