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MarketScreener Homepage  >  Equities  >  Nyse  >  CMS Energy Corporation    CMS

CMS ENERGY CORPORATION

(CMS)
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CMS Energy : Management's Discussion and Analysis of Financial Condition and Results of Operations

10/29/2020 | 10:00am EST
This MD&A is a combined report of CMS Energy and Consumers.
Executive Overview
CMS Energy is an energy company operating primarily in Michigan. It is the
parent holding company of several subsidiaries, including Consumers, an electric
and gas utility; CMS Enterprises, primarily a domestic independent power
producer and marketer; and EnerBank, an industrial bank located in Utah.
Consumers' electric utility operations include the generation, purchase,
transmission, distribution, and sale of electricity, and Consumers' gas utility
operations include the purchase, transmission, storage, distribution, and sale
of natural gas. Consumers' customer base consists of a mix of residential,
commercial, and diversified industrial customers. CMS Enterprises, through its
subsidiaries and equity investments, is engaged in domestic independent power
production, including the development and operation of renewable generation, and
the marketing of independent power production. EnerBank provides primarily
unsecured, fixed-rate installment loans throughout the U.S. to finance home
improvements.
CMS Energy and Consumers manage their businesses by the nature of services each
provides. CMS Energy operates principally in four business segments: electric
utility; gas utility; enterprises, its non­utility operations and investments;
and EnerBank. Consumers operates principally in two business segments: electric
utility and gas utility. CMS Energy's and Consumers' businesses are affected
primarily by:
• regulation and regulatory matters


• state and federal legislation


• economic conditions


• weather


• energy commodity prices


• interest rates

• their securities' credit ratings

COVID­19 Pandemic CMS Energy and Consumers continue to respond to the public health emergency caused by the COVID­19 pandemic by instituting and maintaining measures consistent with guidance provided by local, state, and federal agencies. CMS Energy and Consumers maintain over 60 departmental business continuity plans; these plans were reviewed and enhanced in early 2020 to ensure readiness for the COVID-19 pandemic. CMS Energy and Consumers continue to take steps to protect the safety of employees, customers, and contractors, and have executed their business continuity plans to ensure the continued delivery of critical energy services. Additionally, CMS Energy and Consumers have mitigated the potential impact of the pandemic on their liquidity by completing financing transactions and reducing the need for additional external funding. The COVID­19 pandemic is a continually evolving situation. As a result of the pandemic, Consumers has experienced a decline in electric deliveries to commercial and industrial customers, offset partially by an



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increase in deliveries to residential customers. It has also experienced
increased uncollectible accounts and workforce-related expenses, among other
cost increases directly attributable to the pandemic. Consumers anticipates that
these trends will continue in the near term. In April 2020, the MPSC issued an
order authorizing Consumers to defer incremental uncollectible accounts expense
associated with the pandemic.
Additionally, EnerBank anticipates it could experience slower lending growth,
higher loan write-offs, and increased loan modifications in the future as a
result of the pandemic. The companies cannot predict the long-term impact of the
pandemic on their business, results of operations, financial condition, capital
investment program, liquidity, and cash flows. More detailed discussion of the
near-term impacts of and future uncertainties related to the COVID­19 pandemic
can be found throughout this MD&A and in Part II-Item 1A. Risk Factors.
The Triple Bottom Line
CMS Energy's and Consumers' purpose is to achieve world class performance while
delivering hometown service. In support of this purpose, the companies employ
the "Consumers Energy Way," a lean operating model designed to improve safety,
quality, cost, delivery, and employee morale.
CMS Energy and Consumers measure their progress toward the purpose by
considering their impact on the "triple bottom line" of people, planet, and
profit, which is underpinned by performance; this consideration takes into
account not only the economic value that the companies create for customers and
investors, but also their responsibility to social and environmental goals. The
triple bottom line balances the interests of the companies' employees,
customers, suppliers, regulators, creditors, Michigan's residents, the
investment community, and other stakeholders, and it reflects the broader
societal impacts of the companies' activities.
               [[Image Removed: cms10q20200930_graphic-ppp.jpg]]

Consumers' Sustainability Report, which is available to the public, describes the company's progress toward world class performance measured in the areas of people, planet, and profit. People: The people element of the triple bottom line represents CMS Energy's and Consumers' commitment to their employees, their customers, the residents of local communities in which the companies do business, and other stakeholders. The safety of employees, customers, and the general public is a priority of CMS Energy and Consumers. Accordingly, CMS Energy and Consumers have worked to integrate a set of safety principles into their business operations and culture. These principles include complying with applicable safety, health, and security regulations and implementing programs and processes aimed at continually improving safety and security conditions. Over the last ten years, Consumers' OSHA recordable incident rate has decreased by over 63 percent. In response to the COVID­19 pandemic, CMS Energy and Consumers have issued a response plan that is focused on the health and safety of their co-workers, customers, and communities. CMS Energy and Consumers have aligned with safety and health guidelines from the CDC, OSHA, and the Michigan Department of Health and Human Services in order to protect their employees, customers, and contractors



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to ensure the continued delivery of critical energy services. To align with, and
in addition to, these guidelines, CMS Energy and Consumers have:
•      secured the supply chain necessary to provide front-line workers with
       appropriate personal protective equipment and cleaning supplies


•      when necessary, sequestered employees with critical roles at generating
       plants, gas compression facilities, and electric control rooms


•      implemented a 14­day paid self-quarantine requirement for employees who
       are exhibiting symptoms of COVID-19 or who have come into contact with a
       person suspected to have COVID­19


•      prohibited business-related international travel and instituted a
       mandatory ten­day work remote period for employees who return from
       personal travel to heavily impacted areas

• required employees to work remotely when possible


•      when necessary, reduced service at 13 direct payment offices to drop box
       and drive-through services only


•      initially adjusted work to focus on emergent and critical activities such
       as electric outages, gas leaks, and other public safety and reliability
       work; as work restrictions have gradually lifted in Michigan, the
       companies have resumed normal work with safety measures in place


•      contracted a chief medical officer to guide the companies' response and
       provide rapid support and supplies for the workforce


•      limited access to company facilities, enhanced cleaning protocols, and
       established a mask-wearing policy


•      offered additional paid leave to employees to alleviate child care-related
       burdens and implemented other interim workforce policies to offer
       flexibility and reduce employee concerns


In response to the pandemic, CMS Energy and Consumers initially suspended
shut-offs of service for non-payment and extended payment protection plans for
low-income and senior customers. CMS Energy and Consumers slowly began resuming
shut-offs of service for non-payment in late July 2020 for commercial and
industrial customers and in October 2020 for residential customers. CMS Energy
and Consumers remain committed to assisting customers impacted by the pandemic.
In September 2020, Consumers announced that it will provide $12 million to help
Michigan residents and small businesses who are experiencing difficulty paying
their energy bill due to the pandemic.
CMS Energy and Consumers also place a high priority on customer value and on
providing a hometown customer experience. Consumers' customer-driven investment
program is aimed at improving safety and increasing electric and gas
reliability, which has resulted in measurable improvements in customer
satisfaction.
Central to Consumers' commitment to its customers are the initiatives it has
undertaken to keep electricity and natural gas affordable, including:
•      replacement of coal-fueled generation and PPAs with a cost-efficient mix
       of renewable energy and energy waste reduction and demand response
       programs


•      targeted infrastructure investment to reduce maintenance costs and improve
       reliability and safety


• supply chain optimization


• information and control system efficiencies

• employee and retiree health care cost sharing

• workforce productivity enhancements

In addition, Consumers' gas commodity costs declined by 62 percent from 2009 through 2019, due not only to a decrease in market prices but also to Consumers' improvements to its gas infrastructure and



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optimization of its gas purchasing and storage strategy. These gas commodity
savings are passed on to customers.
Planet: The planet element of the triple bottom line represents CMS Energy's and
Consumers' commitment to protect the environment. This commitment extends beyond
compliance with various state and federal environmental, health, and safety laws
and regulations. Management considers climate change and other environmental
risks in the companies' strategy development, business planning, and enterprise
risk management processes.
CMS Energy and Consumers continue to focus on opportunities to protect the
environment and to reduce their carbon footprint. As a result of actions already
taken by CMS Energy and Consumers, the companies have:
•      decreased their combined percentage of electric supply (self-generated and

purchased) from coal by 18 percentage points since 2015

• reduced carbon dioxide emissions by over 35 percent since 2005


•      reduced the amount of water used to generate electricity by over
       35 percent since 2012

• reduced landfill waste disposal by over 1.3 million tons since 1992

• reduced methane emissions by 12 percent since 2012



Additionally, over the last 20 years, Consumers has reduced its sulfur dioxide,
nitrogen oxide, particulate matter, and mercury emissions by over 90 percent.
The 2016 Energy Law:
•      raised the renewable energy standard to 12.5 percent in 2019 and
       15 percent in 2021; Consumers met the 12.5-percent requirement in 2019
       with a combination of newly generated RECs and previously generated RECs
       carried over from prior years


•      established a goal of 35 percent combined renewable energy and energy
       waste reduction by 2025; Consumers has achieved 22 percent of the combined
       renewable energy and energy waste reduction goal through 2019


•      authorized incentives for demand response programs and expanded existing
       incentives for energy efficiency programs, referring to the combined
       initiatives as energy waste reduction programs

• established an integrated planning process for new generation resources

In 2019, the MPSC approved the IRP that Consumers filed in 2018, which details its Clean Energy Plan. Under its Clean Energy Plan, Consumers will meet the requirements of the 2016 Energy Law using its clean and lean strategy, which focuses on increasing the generation of renewable energy, helping customers use less energy, and offering demand response programs to reduce demand during critical peak times. Further, Consumers plans to replace its coal-fueled generation predominantly with investment in renewable energy, which will enable Consumers to meet and exceed the 2016 Energy Law renewable energy requirements and fulfill increasing customer demand for renewable energy. Through its Clean Energy Plan, Consumers expects to reduce carbon emissions of its owned generation by more than 90 percent from its 2005 levels by 2040. Additionally, the Clean Energy Plan will allow Consumers to achieve a breakthrough goal of at least 50 percent combined renewable energy and energy waste reduction by 2030.



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Presented in the following illustration is Consumers' 2019 capacity portfolio and its future capacity portfolio as projected in the IRP. This illustration includes the effects of purchased capacity and energy waste reduction and uses the nameplate capacity of renewable energy sources:

               [[Image Removed: cms10q20200930_chart-capmix.jpg]]

In September 2020, Michigan's Governor signed an executive order creating the Michigan Healthy Climate Plan, which outlines goals for Michigan to achieve economy-wide net-zero greenhouse gas emissions and to be carbon neutral by 2050. The executive order aims for a 28-percent reduction below 2005 levels of greenhouse gas emissions by 2025. Consumers has already surpassed the 28-percent reduction milestone in its electric business and previously announced, in February 2020, a goal of achieving net­zero carbon emissions by 2040. As part of this net-zero goal, Consumers will significantly reduce its carbon emissions from its electric business and offset any remaining emissions through strategies including, but not limited to, carbon sequestration, landfill methane capture, and large-scale tree planting. The goal includes not only emissions from Consumers' owned generation, but also emissions from the generation of power purchased through long-term PPAs and from the MISO energy market. In addition to Consumers' efforts to reduce the electric utility's carbon footprint, it is also making efforts to reduce the gas utility's methane footprint. In October 2019, Consumers set a goal of net­zero methane emissions from its natural gas delivery system by 2030. Consumers' Methane Reduction Plan, released in November 2019, outlines its plan to reach this net-zero emissions goal. Consumers plans to reduce methane emissions from its system by about 80 percent by accelerating the replacement of aging pipe,



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rehabilitating or retiring outdated infrastructure, and adopting new
technologies and practices. The remaining emissions will be eliminated by
purchasing and/or producing renewable natural gas.
Additionally, to advance its environmental stewardship in Michigan and to
minimize the impact of future regulations, Consumers announced the following
five­year targets during 2018:
•      to reduce its water use by one billion gallons; during 2018 and 2019,
       Consumers reduced its water usage by over 400 million gallons


•      to reduce the amount of waste taken to landfills by 35 percent; during
       2018 and 2019, Consumers reduced its waste to landfills by ten percent


•      to enhance, restore, or protect 5,000 acres of land; during 2018 and 2019,
       Consumers enhanced, restored, or protected over 2,200 acres of land


CMS Energy, through CMS Enterprises, continues to pursue further opportunities
for the development of renewable generation projects. In July 2020,
CMS Enterprises purchased an ownership interest in Aviator Wind, a 525­MW wind
generation project in Coke County, Texas. The project was completed and became
operational in September 2020.
CMS Energy and Consumers are monitoring numerous legislative, policy, and
regulatory initiatives, including those to regulate greenhouse gases, and
related litigation. While CMS Energy and Consumers cannot predict the outcome of
these matters, which could have a material effect on the companies, they intend
to continue to move forward with their clean and lean strategy.
Profit: The profit element of the triple bottom line represents CMS Energy's and
Consumers' commitment to meeting their financial objectives and providing
economic development opportunities and benefits in the communities in which they
do business. CMS Energy's and Consumers' financial strength allows them to
maintain solid investment-grade credit ratings and thereby reduce funding costs
for the benefit of customers and investors, to preserve and create jobs, and to
reinvest in the communities they serve.
For the nine months ended September 30, 2020, CMS Energy's net income available
to common stockholders was $597 million, and diluted EPS were $2.09. This
compares with net income available to common stockholders of $513 million and
diluted EPS of $1.81 for the nine months ended September 30, 2019. In 2020, the
benefits from electric and gas rate increases, higher electric sales due
primarily to favorable weather, and lower operating and maintenance expenses
were offset partially by lower gas sales due primarily to unfavorable weather in
the first quarter, higher depreciation and amortization, and the absence of a
2019 gain on sale of transmission assets. A more detailed discussion of the
factors affecting CMS Energy's and Consumers' performance can be found in the
Results of Operations section that follows this Executive Overview.
Consumers has experienced and anticipates it will continue to experience a
decline in electric deliveries to commercial and industrial customers in the
near term as a result of the COVID­19 pandemic. Over the next five years,
Consumers expects weather-normalized electric deliveries to decrease slightly
and weather­normalized gas deliveries to remain stable. This outlook reflects
the effects of energy waste reduction programs offset largely by modest growth
in electric and gas demand.


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Performance: Impacting the Triple Bottom Line
CMS Energy and Consumers remain committed to achieving world class performance
while delivering hometown service and positively impacting the triple bottom
line of people, planet, and profit. During 2020, CMS Energy and Consumers:
•      realized over $100 million in cost reductions by leveraging the Consumers
       Energy Way and through other initiatives


•      named a Chief Diversity Officer responsible for setting and monitoring the
       companies' diversity, equity, and inclusion strategy


•      announced a new parental leave policy for employees, allowing six months
       of paid leave to mothers and four months of paid leave to a nonbirthing
       parent


•      pledged to join five other energy companies in facilitating the
       construction of a Midwest electric vehicle charging network

CMS Energy and Consumers will continue to utilize the Consumers Energy Way to enable them to achieve world class performance and positively impact the triple bottom line. Consumers' investment plan and the regulatory environment in which it operates also drive its ability to impact the triple bottom line. Investment Plan: Consumers expects to make capital investments of $25 billion over the next ten years. Over the next five years, Consumers expects to make significant expenditures on infrastructure upgrades and replacements and electric supply projects. While it has a large number of potential investment opportunities that would add customer value, Consumers has prioritized its spending based on the criteria of enhancing public safety, increasing reliability, maintaining affordability for its customers, and advancing its environmental stewardship. Consumers' investment program is expected to result in annual rate-base growth of six to eight percent. This rate-base growth, together with cost-control measures, should allow Consumers to maintain affordable customer prices.



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Presented in the following illustration are planned capital expenditures of $12.2 billion that Consumers expects to make from 2020 through 2024:

              [[Image Removed: cms10q20200930_chart-plncpex.jpg]]
Of this amount, Consumers plans to spend $9.4 billion over the next five years
to maintain and upgrade its gas infrastructure and electric distribution systems
in order to enhance safety and reliability, improve customer satisfaction, and
reduce energy waste on those systems. The gas infrastructure projects comprise
$5.0 billion to sustain deliverability and enhance pipeline integrity and
safety. These projects, which involve replacement of mains and services and
enhancement of transmission and storage systems, should reduce the minor
quantity of methane emissions released as gas is transported. The electric
distribution projects comprise $4.4 billion to strengthen circuits and
substations and replace poles. Consumers also expects to spend $2.8 billion on
electric supply projects, primarily new renewable generation. In response to the
COVID­19 pandemic, Consumers has rescheduled some capital investment projects,
but has not made any changes to its long-term capital investment program at this
time.
Regulation: Regulatory matters are a key aspect of Consumers' business,
particularly rate cases and regulatory proceedings before the MPSC, which permit
recovery of new investments while helping to ensure that customer rates are fair
and affordable. Important regulatory events and developments not already
discussed are summarized below.
•      2019 Gas Rate Case: In December 2019, Consumers filed an application with
       the MPSC seeking an annual rate increase of $245 million, based on a 10.5
       percent authorized return on equity. In May 2020, Consumers reduced its
       requested annual rate increase to $229 million. In September 2020, the
       MPSC approved a settlement agreement authorizing an annual rate increase
       of $144 million, based on a 9.9 percent authorized return on equity,
       effective October 1, 2020. As part of that agreement, Consumers agreed not
       to file a new gas rate case prior to December 2021. The MPSC also approved
       the continuation of a revenue decoupling mechanism, which annually
       reconciles Consumers' actual weather-normalized non-fuel revenues with the
       revenues approved by the MPSC.




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•      2020 Electric Rate Case: In February 2020, Consumers filed an application
       with the MPSC seeking an annual rate increase of $244 million, based on a
       10.5 percent authorized return on equity. In July 2020, Consumers reduced
       its requested annual rate increase to $230 million. The filing also seeks
       approval to recover $13 million associated with Consumers' deferral of
       depreciation and property tax expense and the overall rate of return on
       distribution-related capital investments exceeding certain threshold
       amounts. Additionally, the filing seeks approval of a method of recovering
       amounts earned under the financial compensation mechanism approved by the
       MPSC in Consumers' IRP. This mechanism allows Consumers to earn a
       financial incentive on PPAs approved by the MPSC after January 1, 2019.
       Consumers also proposes in the filing a new distributed generation tariff
       to replace the current net metering tariff, pursuant to the 2016 Energy
       Law.

Looking Forward CMS Energy and Consumers will continue to consider the impact on the triple bottom line of people, planet, and profit in their daily operations as well as in their long-term strategic decisions. Consumers will continue to seek fair and timely regulatory treatment that will support its customer-driven investment plan, while pursuing cost-control measures that will allow it to maintain sustainable customer base rates. The Consumers Energy Way is an important means of realizing CMS Energy's and Consumers' purpose of achieving world class performance while delivering hometown service.



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