CMS Energy Corporation (with Consumers Energy Company) — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. CMS Energy is a Michigan energy holding company; its principal subsidiary, Consumers Energy, is a regulated electric and natural-gas utility. Unless indicated otherwise, financial amounts are in millions of dollars.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| CMS operating revenue | $1,468 | $1,406 | $3,991 | $3,385 |
| CMS operating income | $235 | $232 | $643 | $561 |
| CMS net income available to common stockholders | $83 | $80 | $287 | $224 |
| CMS diluted EPS | $0.30 | $0.29 | $1.05 | $0.83 |
| Consumers net income available to common stockholder | $108 | $99 | $329 | $261 |
- Six-month CMS revenue and earnings rose year over year, supported by higher electric and gas deliveries, an electric rate increase, and a $23 million benefit from accelerated flow-through of regulatory tax benefits. Colder winter weather materially increased gas deliveries.
- CMS six-month operating cash flow was $937, down from $1,095. Capital expenditures were $663, up from $580; operating cash flow less capital expenditures was therefore $274, versus $515 in 2013. Drivers of lower cash flow included gas and power-supply underrecoveries, no repeat of a $69 million government grant, and lower working-capital contributions.
- At June 30, CMS reported cash and cash equivalents of $358 and restricted cash of $31. Consumers reported $98 and $31, respectively. CMS long-term debt, including its current portion, was approximately $7,974, compared with $7,663 at December 31, 2013.
- CMS had $548 available under its $550 revolving facility; Consumers had $650 available under its $650 facility. Both registrants reported compliance with financial covenants and no defaults.
Changes and notable items
- CMS six-month common earnings increased $63. Higher gas deliveries contributed $31, electric deliveries $10, the electric rate increase $23, and the regulatory tax accounting change $23; higher depreciation and property taxes partly offset these gains.
- CMS Q2 corporate interest and other expenses worsened by $7, primarily reflecting an $8 loss on early extinguishment of debt. CMS issued $550 of senior notes in February and retired $280 of notes during the first half; the filing reports a $13 debt-extinguishment loss for the retirement of notes.
- Consumers’ six-month electric deliveries were 18.7 billion kWh versus 18.0 billion; gas deliveries were 205 bcf versus 179 bcf, largely due to colder weather. Higher plant depreciation and property taxes partly offset operating improvements.
- In July, after quarter-end, Consumers issued $378 of securitization bonds to recover the remaining book value of ten generating units planned for retirement by April 2016. Also after quarter-end, Consumers filed for an $88 annual gas rate increase.
Outlook, risks and contingencies
- Consumers expects about $7 billion of capital investment from 2014–2018, with targeted annual rate-base growth of 5–7%. It expects weather-adjusted electric deliveries to rise 1.5–2.5% in 2014 and gas deliveries 1.5–2.0%; longer-term gas deliveries are expected to remain relatively stable.
- Consumers had $72 of gas-cost and $80 of power-supply underrecoveries at June 30. It sought recovery through customer charges; the revised power-supply factor was implemented in July. Timing and regulatory approval of recovery affect cash flow.
- Consumers estimated $0.9 billion of environmental expenditures for 2014–2018, with recovery in customer rates expected but not assured. Coal-unit retirements, emissions rules, coal-ash regulation, and potential greenhouse-gas requirements may add costs or affect generation plans.
- Electric deliveries under retail open access were at the statutory 10% limit. Legislative proposals to raise or remove the limit, or deregulate generation service, could materially affect Consumers.
- CMS recorded a $50 Bay Harbor liability; the undiscounted remaining obligation was $68. CMS also faces an unresolved Equatorial Guinea tax claim of $142 plus penalties and interest, and gas-price reporting litigation that the Supreme Court agreed to hear. Potential losses for these matters are not clearly quantifiable in the filing.
- Consumers recorded a $118 liability for gas environmental remediation, principally at 23 former manufactured-gas-plant sites, and a $148 related regulatory asset. CMS disclosed maximum estimable indemnity obligations of $469, while noting that some obligations cannot be estimated.
- Management said liquidity should be sufficient for expected obligations and investment plans. Utility results are seasonal, and interim results are not necessarily indicative of full-year results.
Investor verification priorities
- Confirm the timing and recoverability of the $72 gas and $80 power-supply underrecoveries, and the outcome of Consumers’ pending rate proceedings.
- Track cash flow relative to capital spending, including the effects of weather, working capital, and the absence of the prior-year grant.
- Review debt maturities, financing needs, and the terms and customer-charge recovery associated with the July securitization.
- Assess environmental compliance spending and potential impacts from coal retirements, emissions rules, and customer-rate recovery.
- Monitor ROA legislation and material litigation, including the Equatorial Guinea claim, gas-price reporting cases, and Bay Harbor remediation estimates.