CMS ENERGY CORP quarterly report, Q2 FY2015

Business context and reporting period

CMS Energy Corporation filed this combined, unaudited Form 10-Q for the quarter and six months ended June 30, 2015. CMS Energy is a Michigan-focused energy holding company; its principal subsidiary, Consumers Energy, operates regulated electric and natural gas utilities. CMS Energy also has domestic power-generation businesses and EnerBank. Results are seasonal and interim results are not necessarily indicative of full-year performance.

Financial performance and position

CMS Energy consolidated	Q2 2015	Q2 2014	Six months 2015	Six months 2014
Operating revenue	$1.350 billion	$1.468 billion	$3.461 billion	$3.991 billion
Operating income	$204 million	$235 million	$601 million	$643 million
Net income available to common stockholders	$67 million	$83 million	$269 million	$287 million
Diluted EPS	$0.25	$0.30	$0.98	$1.05

Calculated operating margin was approximately 15.1% in Q2 2015 versus 16.0% in Q2 2014, and 17.4% for the first half versus 16.1% a year earlier. First-half net margin was approximately 7.8% versus 7.2%. Revenue fell 13.3% in the first half; lower gas costs and lower utility sales contributed to the decrease.

Drivers: First-half common earnings declined $18 million. Lower electric and gas sales—partly due to milder weather—and higher depreciation, property taxes, and employee benefit costs more than offset utility rate increases. The absence of an $8 million prior-year debt-extinguishment loss partly cushioned the decline.
Cash flow: First-half operating cash flow was $1.262 billion, up from $937 million. The company attributed the improvement mainly to lower-priced gas purchases and the absence of large prior-year power and gas cost-recovery underrecoveries. Capital expenditures were $675 million; operating cash flow less capital expenditures was approximately $587 million.
Liquidity: CMS Energy reported $517 million of cash and cash equivalents including $40 million restricted; the balance sheet separately shows $477 million unrestricted cash and $40 million restricted. Consumers reported $437 million including $40 million restricted, corresponding to $397 million and $40 million on its balance sheet. CMS Energy had $547 million available on its parent revolver; Consumers had $640 million available on its $650 million facility. Consumers also had $250 million available under its receivables program and no commercial paper outstanding.
Debt and covenants: CMS Energy’s balance sheet reported $8.040 billion of long-term debt and $519 million of current debt, capital leases, and financing obligations. Consumers reported $5.141 billion of long-term debt and $122 million current. Both were in covenant compliance: CMS Energy debt/EBITDA was 4.3x against a limit below 6.0x; Consumers debt/capital was 0.47x against a limit below 0.65x.
Consumers utility results: First-half electric utility net income was $176 million versus $198 million; gas utility net income was $122 million versus $130 million. Consumers’ first-half revenue was $3.309 billion versus $3.769 billion, and net income available to its common stockholder was $298 million versus $329 million.

Material changes versus the prior comparable period

First-half CMS Energy revenue decreased $530 million and common earnings decreased $18 million; diluted EPS fell $0.07.
First-half operating cash flow increased $325 million, although cash-flow improvement was substantially influenced by working-capital and gas-cost recovery timing.
At June 30, 2015, CMS Energy total assets were $19.238 billion versus $19.185 billion at year-end 2014; equity was $3.855 billion versus $3.707 billion. Consumers’ total assets were $17.867 billion versus $17.847 billion; equity was $5.466 billion versus $5.277 billion.
Consumers self-implemented a $110 million annual electric rate increase in June, subject to refund with interest. Its prior gas-rate proceeding resulted in a $45 million annual increase effective in January 2015.

Outlook, management commentary, risks and contingencies

Outlook: Consumers expected weather-adjusted electric deliveries to be flat in 2015 and to grow about 0.5% annually on average over five years; weather-adjusted gas deliveries were expected to rise 1%–2% in 2015 and remain broadly stable over five years. No CMS Energy full-year EPS guidance is stated in the provided filing text.
Investment: Consumers expected approximately $15.5 billion of capital investment from 2015–2024, including $7.8 billion through 2019. Management projected annual rate-base growth of 5%–7% and aimed to keep base-rate increases, excluding recovery charges, at or below inflation. It expected liquidity and borrowing capacity to support investment plans.
Rates and policy: Consumers’ electric rate case sought a $163 million annual increase and additional investment recovery mechanisms. A July 2015 gas-rate application sought $85 million annually, including $64 million tied to infrastructure investment, and a mechanism for recovery of future investment. These were requests, not approved increases. Michigan legislative proposals could alter utility rate-setting, energy policy, and retail open access; an increased open-access limit could adversely affect Consumers.
Generation and environment: Consumers expected to purchase a 540-MW gas-fired plant for $155 million, subject to approvals, with closing expected in early 2016. It planned to retire seven smaller coal units in 2016 and estimated $0.8 billion of environmental expenditures for 2015–2019; recovery in customer rates was expected but not assured. Environmental rules, litigation, permitting, and compliance costs could affect operations and capital requirements.
Contingencies: CMS Energy recorded a $60 million Bay Harbor liability, with $77 million undiscounted remaining costs; an EPA demand for $8 million plus interest is disputed. The government of Equatorial Guinea claims $142 million in taxes plus penalties and interest; CMS Energy contests the claim. Gas-index price-reporting litigation returned to district court after a 2015 Supreme Court ruling; potential liability is not estimable. Consumers also reported environmental remediation liabilities, including $113 million for 23 former manufactured-gas-plant sites, partly offset by a $144 million regulatory asset.
Other risks: Management cited regulatory outcomes, weather, energy prices and supply, economic conditions, interest rates and credit access, pension investment performance, environmental obligations, infrastructure execution, outages, cyber incidents, and legal proceedings. CMS Energy and Consumers stated that disclosure controls were effective and that there were no material changes to internal control over financial reporting.

Important facts for investors to verify

Progress and final outcomes of Consumers’ electric and gas rate cases, including refund exposure on the self-implemented electric increase.
Whether first-half operating cash-flow gains persist after working-capital and gas-cost recovery timing effects.
Capital spending, financing needs, and the timing and approvals for the 540-MW plant purchase.
Environmental compliance costs and the extent to which regulators permit recovery from customers.
Developments in Bay Harbor, Equatorial Guinea, gas-index litigation, and other unquantified or disputed claims.
Credit metrics, liquidity availability, and restrictions on Consumers’ ability to transfer dividends to CMS Energy.