CMS Energy Corporation — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing is a combined annual report for CMS Energy and its wholly owned utility subsidiary, Consumers Energy; figures below identify the entity where relevant. The filing also provides unaudited quarterly data, including Q4.
Business context and reporting period
CMS Energy is a Michigan-focused energy holding company. Consumers Energy, its principal subsidiary, provides regulated electric and natural gas service; CMS Enterprises operates non-utility power-generation and energy-marketing businesses. Consumers served about 1.8 million electric and 1.7 million gas customers.
Key financial metrics
| Metric | CMS Energy consolidated | Consumers Energy |
|---|---|---|
| 2015 revenue | $6.456 billion | $6.165 billion |
| 2015 operating income | $1.163 billion | $1.122 billion |
| 2015 net income available to common | $523 million | $592 million |
| 2015 diluted EPS | $1.89 | Not applicable; privately held subsidiary |
| Cash from operating activities | $1.640 billion | $1.794 billion |
| Capital expenditures, excluding assets under capital lease | $1.564 billion | $1.537 billion |
| Cash and cash equivalents at year-end | $266 million, plus $19 million restricted | $50 million, plus $19 million restricted |
| Long-term debt, excluding current portion | $8.441 billion | $5.206 billion |
| Total assets at year-end | $20.340 billion | $18.658 billion |
CMS Energy’s calculated operating margin was approximately 18.0% (16.0% in 2014); net income available to common as a share of revenue was approximately 8.1% (6.6% in 2014). Cash from operations less reported capital expenditures was approximately $76 million for CMS Energy and $257 million for Consumers; this simple calculation excludes other investing activity, including Consumers’ plant acquisition.
CMS Energy reported Q4 2015 revenue of $1.509 billion, net income available to common of $106 million, and diluted EPS of $0.38, compared with Q4 2014 revenue of $1.758 billion, net income of $96 million, and diluted EPS of $0.35.
Material changes versus prior comparable period
- CMS Energy revenue fell 10.1% from $7.179 billion in 2014, while net income available to common rose 9.6% to $523 million and diluted EPS increased from $1.74 to $1.89.
- Consumers revenue declined 9.3% to $6.165 billion, while net income available to common increased from $565 million to $592 million.
- Lower gas sales revenue, chiefly reflecting milder winter weather than in 2014, was a major contributor to the revenue decline. Lower commodity costs also reduced reported revenue and operating costs; utility fuel and purchased-gas costs are substantially addressed through recovery mechanisms.
- Electric utility net income increased $53 million; gas utility net income declined $25 million. Higher electric and gas rates and lower operating and maintenance costs supported results, offset in part by weaker gas sales, higher depreciation, and employee-benefit costs.
- Operating cash flow increased from $1.447 billion to $1.640 billion at CMS Energy and from $1.338 billion to $1.794 billion at Consumers. Management cited lower gas purchase costs, improved collections, and higher earnings, partly offset by increased postretirement benefit contributions.
- Long-term debt excluding current maturities increased from $8.016 billion to $8.441 billion at CMS Energy and from $5.154 billion to $5.206 billion at Consumers. CMS Energy’s capital expenditures were slightly lower year over year; Consumers also acquired a generating plant.
Outlook, management commentary, risks, and unusual items
- Management expected CMS Energy and Consumers to have sufficient liquidity and borrowing capacity for planned needs, subject to market access and credit conditions. At year-end, available revolving credit was $549 million for CMS Energy and $891 million for Consumers; Consumers had $249 million of commercial paper outstanding. Both were in compliance with disclosed financial covenants.
- Consumers forecast approximately $8.4 billion of capital investment from 2016–2020, including utility reliability, infrastructure, smart-meter, and environmental projects; it projected annual rate-base growth of 5%–7%. It expected electric deliveries to grow 1.5%–2.0% in 2016 and 0.5%–1.0% annually over the next five years; gas deliveries were expected to rise 0.5% in 2016 and remain broadly stable over five years.
- Consumers completed a $155 million purchase of a 540-MW natural-gas generating plant in Jackson, Michigan, in December 2015, anticipating retirement of seven smaller coal units by April 2016. Management said existing resources should meet full-service capacity requirements through 2020.
- Consumers’ electric rate case was resolved in November 2015 with an authorized $165 million annual increase, to be reduced by $39 million after the planned coal-unit retirements. A gas rate case seeking $85 million annually remained pending; Consumers self-implemented a $60 million annual increase in January 2016, subject to refund.
- Environmental compliance presents material cost and recovery uncertainty. Consumers estimated about $0.7 billion of environmental capital expenditures over 2016–2020. Coal-ash rules led to a $68 million increase in its asset-retirement obligation in 2015. Management expects environmental costs to be recovered through rates but cannot assure recovery.
- Notable contingencies include CMS Energy’s $58 million recorded Bay Harbor remediation liability (with $74 million undiscounted remaining costs), Consumers’ $114 million recorded liability for former manufactured-gas-plant sites, and an Equatorial Guinea tax claim of $152 million plus penalties and interest in arbitration. Potential losses in natural-gas price-reporting litigation could not be estimated clearly.
- Michigan legislation could change retail open access (ROA); Consumers’ program was at its statutory 10% limit, and management warned that an increased limit or deregulation could materially affect results. Other principal risks include rate-regulatory outcomes, environmental rules and permitting, weather, commodity supply and prices, capital-market access, pension assumptions, cyber incidents, and litigation.
- CMS Energy’s 2015 results included a $37 million Consumers use-tax settlement benefit and other specific items; a 2015 increase in pension contributions also affected operating cash flow. The filing states that Consumers received a $37 million settlement involving tax and interest refunds and recorded related plant and tax adjustments.
Most important facts for investors to verify
- Whether Consumers’ planned capital program is completed on schedule and within budget, and whether regulators authorize timely recovery of resulting investment and environmental costs.
- The final outcome and refund exposure for self-implemented electric and gas rates, and the effect of any Michigan energy legislation changing ROA.
- Debt maturities, credit availability, and the parent company’s dependence on subsidiary dividends; Consumers’ financing and dividend capacity is subject to legal and covenant restrictions.
- Updates to environmental obligations, particularly coal-ash closure requirements, Bay Harbor remediation, former gas-plant cleanup, and the Equatorial Guinea claim.
- Whether operating cash flow can support high capital spending, dividends, and benefit obligations without materially increasing leverage.