CMS Energy Corporation 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual filing, not a standalone fourth-quarter report; quarterly figures are identified separately below. CMS Energy is a Michigan-focused energy holding company. Its regulated subsidiary, Consumers Energy, supplies electricity and natural gas, while CMS Energy also operates independent power and renewable-energy businesses and EnerBank, a home-improvement lender. Consumers serves approximately 6.8 million Michigan residents.
Financial performance and position
| CMS Energy consolidated | 2020 | 2019 |
|---|---|---|
| Operating revenue | $6.680 billion | $6.845 billion |
| Operating income | $1.362 billion | $1.239 billion |
| Net income available to common shareholders | $755 million | $680 million |
| Diluted EPS | $2.64 | $2.39 |
| Cash from operating activities | $1.276 billion | $1.790 billion |
| Capital expenditures, excluding finance-lease assets | $2.317 billion | $2.104 billion |
| Long-term debt, excluding current portion | $13.634 billion | $11.951 billion |
| Total assets | $29.666 billion | $26.837 billion |
| Common dividend declared per share | $1.63 | $1.53 |
Operating margin was approximately 20.4% in 2020 versus 18.1% in 2019; net income available to common shareholders as a share of revenue was approximately 11.3% versus 9.9%. These are calculated from reported figures. Cash and cash equivalents, including restricted cash, were $185 million at year-end. CMS Energy reported $532 million available under its revolving credit facility; Consumers reported $1.1 billion available under its facilities. No commercial paper was outstanding, and both companies reported compliance with their financial covenants.
For Consumers Energy, revenue was $6.189 billion, net income was $816 million, operating cash flow was $1.218 billion, capital expenditures were $2.170 billion, and long-term debt excluding current portion was $7.742 billion. Its operating margin was approximately 19.7% and net margin approximately 13.2%, calculated from reported figures.
Fourth quarter: CMS Energy reported revenue of $1.798 billion, net income available to common shareholders of $158 million, and diluted EPS of $0.55. In fourth-quarter 2019, the corresponding figures were $1.795 billion, $167 million, and $0.58.
Material changes versus 2019
- Annual revenue decreased 2.4%, while net income available to common shareholders rose 11.0% and diluted EPS increased from $2.39 to $2.64.
- Management attributed the earnings increase principally to gas and electric rate increases and lower operating and maintenance costs. These benefits were partly offset by higher depreciation and property taxes from increased investment, lower gas sales primarily due to unfavorable weather, and higher donations.
- Operating cash flow fell $514 million. A major factor was $712 million of postretirement-benefit contributions, compared with $10 million in 2019; higher net income and noncash items partly offset the decline.
- Long-term debt excluding current portion increased $1.683 billion, while capital expenditures increased $213 million. CMS Energy’s cash-flow statement reported $3.179 billion of debt issuance and $2.010 billion of debt retirement.
- Consumers’ electric deliveries fell to 35 billion kWh from 37 billion kWh; gas deliveries fell to 360 bcf from 391 bcf. COVID-related weakness in commercial and industrial electric demand was partly offset by higher residential demand.
Outlook, risks, and unusual items
- Investment and transition: Consumers expects approximately $25 billion of capital investment over ten years, including $13.2 billion from 2021 through 2025. It projects annual rate-base growth of 6% to 8%. Management said some projects were rescheduled because of COVID-19 but the long-term investment plan had not changed.
- Demand outlook: Consumers expects weather-normalized electric and gas deliveries to remain stable relative to 2020 over the next five years. EnerBank expects lending growth of approximately 7% annually over five years and said increased lending growth was expected to continue during 2021.
- Clean-energy goals: Consumers targets net-zero carbon emissions from its electric business by 2040 and net-zero methane emissions from its gas delivery system by 2030. Planned generation changes include retiring D.E. Karn units 1 and 2 in 2023; retirement of J.H. Campbell units 1 and 2 is possible in 2031 or earlier. Execution, permitting, project costs, and regulatory recovery remain important uncertainties.
- Regulation: The MPSC approved a $144 million annual gas rate increase in September 2020, with a 9.9% authorized return on equity. It approved a $90 million annual electric rate increase in December 2020, also with a 9.9% authorized return; excluding a $36 million tax-related customer refund, the rate increase was $126 million.
- COVID-19: Consumers reported lower commercial and industrial electric deliveries, increased uncollectible accounts, and higher workforce-related expenses. The MPSC permitted deferral of certain incremental uncollectible-account expenses. Management said the pandemic’s longer-term effects on demand, collections, capital plans, liquidity, and cash flows could not be predicted.
- Accounting and other unusual items: Adoption of the expected-credit-loss standard increased EnerBank’s opening loan-loss allowance by $65 million, net of tax adjustment to retained earnings, and reduced 2020 pretax income by $21 million. CMS Energy made $700 million of pension-plan contributions. A Consumers transmission-equipment sale generated a $14 million pretax gain, with half of the gain to be shared with customers under the approved arrangement. CMS Energy recorded $35 million of donations in 2020 versus $3 million in 2019.
- Contingencies: CMS Energy recorded a $45 million liability for Bay Harbor remediation; Consumers recorded $56 million for former manufactured-gas-plant sites. The Equatorial Guinea government claims $152 million in taxes plus penalties and interest that could equal or exceed the tax claim; CMS Energy contests the claim and cannot predict the outcome. Consumers also reported unresolved matters related to the Ray Compressor Station fire, environmental remediation, and regulatory proceedings.
- Principal risks: Regulatory decisions and cost recovery, high capital requirements and financing access, debt and interest costs, environmental rules and remediation, severe weather, commodity supply and prices, cybersecurity, pension assumptions, customer collections, and the continuing effects of COVID-19. CMS Energy also depends on subsidiary dividends to meet parent-company obligations.
The filing does not provide a specific 2021 earnings or EPS guidance range. Management states that it expects sufficient liquidity to meet contractual obligations, while noting that sustained market disruption could prompt measures such as reduced capital spending. Both registrants reported effective internal control over financial reporting; the independent auditor issued unqualified opinions and identified accounting for new regulatory matters as a critical audit matter.
Important facts for investors to verify
- Whether rate-case and other regulatory outcomes allow Consumers to recover planned investments and costs, and how the substantial regulatory asset balance is supported.
- Whether operating cash flow can recover after the unusually large 2020 pension contribution while funding capital expenditures, dividends, and debt obligations.
- Debt maturity and refinancing needs, available credit, covenant headroom, credit ratings, and the parent company’s reliance on subsidiary dividends.
- Progress, cost, timing, and regulatory approval for the clean-energy investment program and planned coal-unit retirements.
- COVID-19 effects on utility collections and demand, and on EnerBank loan growth, credit losses, and modifications.
- Developments in the Equatorial Guinea tax claim, Ray Compressor Station proceedings, environmental liabilities, and other material contingencies.