Business Context and Reporting Period
CMS Energy Corporation filed this unaudited combined Form 10-Q with its subsidiary Consumers Energy Company for the quarter and nine months ended September 30, 2020. CMS Energy comprises regulated Michigan electric and gas utility operations, non-utility energy businesses, and EnerBank, a consumer-lending bank. Consumers is the regulated utility. Unless noted, financial amounts are in millions of dollars.
Financial Performance and Position
| CMS Energy consolidated | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Operating revenue | $1,575 | $1,546 | $4,882 | $5,050 |
| Operating income | $369 | $351 | $1,010 | $928 |
| Net income available to common stockholders | $218 | $207 | $597 | $513 |
| Diluted EPS | $0.76 | $0.73 | $2.09 | $1.81 |
| Operating margin, calculated | 23.4% | 22.7% | 20.7% | 18.4% |
For the nine months, CMS operating cash flow was $1,144, down from $1,395; investing cash outflow was $2,298, versus $2,212; and financing cash inflow was $1,555, versus $1,075. Capital expenditures were $1,697. The $531 pension contribution materially weighed on operating cash flow; a comparable contribution was not reported for 2019.
At September 30, CMS reported cash and cash equivalents, including restricted cash, of $558; current and long-term debt carrying amounts totaled approximately $15,074. It had $545 available under its revolving credit facility. Consumers reported $223 of cash including restricted cash, approximately $8,015 of current and long-term debt, and $1.092 billion available under revolving credit facilities. No commercial paper was outstanding, and both companies reported compliance with financial covenants.
Consumers’ nine-month operating revenue was $4,524 (down from $4,706), operating income $913 (up from $822), and net income available to its common stockholder $624 (up from $536). Its calculated operating margin was 20.2%, compared with 17.5%.
Material Changes Versus the Prior Comparable Period
- CMS nine-month common income rose $84 and diluted EPS increased $0.28. Benefits included utility rate increases, lower operating expenses, favorable electric sales and weather, and lower gas costs; partly offsetting them were higher depreciation and the absence of 2019 asset-sale gains.
- CMS nine-month revenue declined $168, primarily reflecting lower gas utility revenue and lower electric deliveries. Electric deliveries were 26.9 billion kWh versus 27.9 billion; gas deliveries were 194 bcf versus 217 bcf.
- Consumers’ electric deliveries were about 7% lower from April through September on a weather-normalized basis, with commercial and industrial deliveries down about 14% and residential deliveries up about 8%. Management attributed the pattern in part to pandemic-related economic disruption.
- CMS debt and capital investment increased. Nine-month debt proceeds were $2,353 versus $2,076, while debt retirements were $1,294 versus $1,170. CMS issued $417 of membership interests to a tax-equity investor in the Aviator Wind project.
- Adoption of the expected-credit-loss standard increased EnerBank’s allowance and reduced CMS nine-month pretax income by $15; CMS recorded a $51 after-tax cumulative-effect reduction to opening retained earnings.
Outlook, Management Commentary, Risks, and Unusual Items
- COVID-19: Management expects near-term commercial and industrial electric delivery weakness and increased uncollectible accounts and workforce costs. Consumers deferred $5 of incremental pandemic-related uncollectible-account expense as a regulatory asset. CMS and Consumers said liquidity was adequate after financing actions, but the pandemic’s ultimate effects on operations, cash flows, capital spending, and collections remained uncertain.
- Capital plan and clean energy: Consumers expects $12.2 billion of capital expenditures from 2020–2024, including $9.4 billion for gas and electric distribution infrastructure and $2.8 billion primarily for renewable electric supply. Its longer-term plan anticipates $25 billion of investment over ten years and annual rate-base growth of 6%–8%. Some projects were rescheduled due to COVID-19; management said the long-term program was unchanged.
- Utility outlook: Consumers expects weather-normalized electric deliveries to decrease slightly and gas deliveries to remain stable over the next five years. Its 2019 gas-rate-case settlement approved a $144 annual revenue increase effective October 1, 2020, at a 9.9% authorized return on equity. A $230 annual electric-rate increase request remained pending at period-end.
- Energy transition: Consumers’ plan calls for retiring D.E. Karn units 1 and 2 in 2023 and evaluating Campbell units 1 and 2 for retirement in 2025 or earlier. Consumers targets net-zero carbon emissions by 2040 and net-zero methane emissions from its gas delivery system by 2030. Renewable project timing and costs remain exposed to supplier force-majeure notices and regulatory approvals.
- EnerBank: Its loan portfolio was $2.9 billion, funded primarily by $2.8 billion of certificates of deposit; its 12-month rolling average net default rate was 1.2%. Management expected lending growth to continue near term and average about 7% annually over five years, while warning of possible pandemic-related slower growth, higher write-offs, and loan modifications.
- Notable accounting and contingencies: A pension remeasurement produced a $36 settlement loss, of which $35 was deferred as a regulatory asset; the plan liability increased by $252 at CMS. CMS recorded a $44 liability for Bay Harbor environmental obligations. A disputed Equatorial Guinea tax claim is $152 plus potentially substantial penalties and interest; CMS contests the claim and cannot predict the outcome. Consumers also disclosed environmental remediation obligations and unresolved regulatory and legal proceedings. The MCV Partnership and Consumers had a settlement in principle subject to MPSC approval.
- Other items: CMS purchased a 51% interest in the 525-MW Aviator Wind project, which became operational in September; 420 MW was committed under long-term power-purchase agreements. Consumers completed a transmission-asset sale in October 2020 and expected to recognize a gain in Q4. No material changes to previously disclosed market risk were reported.
Important Facts for Investors to Verify
- Whether Consumers’ pending electric rate case and other requested cost-recovery matters receive approval, and the timing and terms of any orders.
- How pandemic-related customer collections, commercial and industrial demand, uncollectible accounts, and EnerBank credit performance develop.
- Whether the $12.2 billion five-year capital plan, renewable projects, and stated rate-base growth remain achievable within expected costs and financing capacity.
- The eventual cash and earnings effects of pension funding and remeasurement, environmental remediation, and the Equatorial Guinea tax claim.
- Whether reported cash, available credit, debt maturities, and covenant headroom remain sufficient as capital spending and financing needs continue.