CMS Energy Corporation — Q1 2015 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2015; unaudited results compared with Q1 2014. CMS Energy is a Michigan-focused energy holding company. Its principal subsidiary, Consumers Energy, operates regulated electric and gas utilities; CMS Enterprises owns and operates non-utility power assets. Consumers’ results are included in CMS Energy’s consolidated results.
Key financial metrics
| CMS Energy, $ millions except per-share data | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Operating revenue | $2,111 | $2,523 | Down $412 |
| Operating income | $397 | $408 | Down $11 |
| Net income available to common stockholders | $202 | $204 | Down $2 |
| Diluted EPS | $0.73 | $0.75 | Down $0.02 |
| Cash from operating activities | $760 | $611 | Up $149 |
| Capital expenditures | $348 | $304 | Up $44 |
| Net cash used in investing activities | $422 | $346 | Use increased $76 |
Operating margin was approximately 18.8% versus 16.2% in Q1 2014; net margin was approximately 9.6% versus 8.1%, calculated from reported revenue and income. Lower commodity-related revenue and costs drove the revenue decline; these margins should be interpreted in the context of utility cost-recovery mechanisms.
At March 31, CMS Energy reported $571 million of cash and cash equivalents including $49 million restricted. Its balance sheet showed $8.143 billion of long-term debt and $543 million of current portion of long-term debt, capital leases, and financing obligations. It had $447 million available on its $550 million parent revolver. Consumers reported $474 million cash including $49 million restricted, $5.154 billion long-term debt, and $640 million available under its $650 million revolver. Consumers also had $250 million of eligible receivables available under its receivables program; no commercial paper was outstanding. Both companies reported compliance with financial covenants and no defaults.
Material changes versus the prior comparable period
- CMS Energy net income declined $2 million and diluted EPS declined $0.02. Higher depreciation and property taxes on new investment and lower weather-related sales were largely offset by the gas rate increase, stronger non-weather sales, and improved Enterprises earnings.
- Segment net income: electric utility $94 million, down $6 million; gas utility $121 million, unchanged; Enterprises $7 million, up $5 million, primarily on improved electric margins at DIG.
- Revenue fell substantially, while operating income declined only modestly. Gas and electric sales were affected by less severe winter weather; lower gas and purchased-power costs also reduced reported revenue.
- Operating cash flow rose mainly because of lower-priced gas purchases and reduced gas cost recovery underrecoveries, partly offset by higher postretirement contributions. Working-capital movements were significant.
- Capital spending increased, and CMS Energy made $25 million of defined-benefit SERP contributions. Financing cash flows shifted to a $23 million use from $321 million provided in Q1 2014, principally due to lower debt issuance.
Outlook, commentary, risks and unusual items
- Consumers planned approximately $15.5 billion of capital investment for 2015–2024, including $7.4 billion through 2019. Management projected annual rate-base growth of 5%–7%, while aiming to keep sustainable customer base-rate increases at or below inflation, excluding power and gas cost recovery charges.
- Consumers’ 2015 electric rate case sought a $163 million annual increase and additional investment recovery mechanisms for planned 2016–2018 spending. A gas-rate settlement approved in January 2015 authorized a $45 million annual increase, below the $88 million requested.
- Management expected weather-adjusted electric deliveries to grow 1.0% in 2015 and average about 0.5% annually over five years; gas deliveries were expected to remain broadly stable. CMS Energy and Consumers expected liquidity and operating cash flows to be sufficient for planned needs, subject to market access and operating conditions. No specific CMS Energy full-year EPS guidance is provided in the supplied filing text.
- Consumers expected to complete its purchase of a 540-MW gas-fired plant for $155 million in early 2016, subject to approvals. Seven smaller coal units were planned for retirement in 2016. Environmental compliance spending was estimated at $0.8 billion for 2015–2019; recovery through customer rates is expected but not assured.
- Regulatory and environmental uncertainties include possible changes to Michigan retail open access, emissions and coal-ash requirements, carbon regulation, water permits, and recovery of utility investments and costs. Consumers’ electric deliveries under retail open access were already at the statutory 10% limit.
- Material contingencies include CMS Energy’s $61 million recorded Bay Harbor liability ($78 million undiscounted), Consumers’ $115 million recorded liability for former manufactured-gas-plant remediation ($131 million undiscounted), and a disputed Equatorial Guinea tax claim of $142 million plus potential penalties and interest. CMS Energy could not estimate potential loss in the gas-price reporting litigation; in April 2015, after quarter-end, the U.S. Supreme Court upheld the appellate ruling allowing the cases to proceed.
- Consumers recognized a $9 million gain on donated CMS Energy shares; this was eliminated in CMS Energy’s consolidated results. Consumers’ rate case and environmental cost recovery, adverse litigation outcomes, weather, commodity prices, and access to capital markets remain important risks.
Most important facts for investors to verify
- Progress and final outcomes of Consumers’ electric rate case, investment recovery requests, and any changes to retail open access.
- Whether operating cash flow remains strong after seasonal working-capital movements and increased capital spending.
- Financing needs, debt maturities, covenant headroom, and the availability of parent and utility liquidity facilities.
- Actual costs, timing, and customer-rate recovery of environmental compliance and remediation obligations.
- Developments in Bay Harbor, Equatorial Guinea, and gas-price litigation, including changes to recorded liabilities or potential exposure.