CMS Energy Corporation — Q2 2013 Form 10-Q
Business context and reporting period. The combined filing covers CMS Energy Corporation and its wholly owned utility subsidiary, Consumers Energy Company, for the quarter and six months ended June 30, 2013. CMS Energy operates regulated electric and gas utilities in Michigan and non-utility energy businesses. Results are seasonal; the interim period is not necessarily indicative of full-year results.
Financial performance and position
| CMS Energy, consolidated | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Operating revenue | $1.406 billion | $1.333 billion | $3.385 billion | $3.076 billion |
| Operating income | $232 million | $260 million | $561 million | $448 million |
| Net income available to common stockholders | $80 million | $100 million | $224 million | $167 million |
| Diluted EPS | $0.29 | $0.37 | $0.83 | $0.62 |
- Cash flow: Six-month operating cash flow was $1.095 billion, versus $943 million in 2012. Investing cash outflow was $616 million, including $580 million of capital expenditures. Financing cash outflow was $35 million.
- Cash and liquidity: At June 30, CMS Energy reported $537 million cash and cash equivalents plus $29 million restricted cash. It had $548 million available under its $550 million revolving facility. Consumers reported $286 million cash plus $28 million restricted cash, with $648 million available across its facilities.
- Debt and covenants: CMS Energy reported $6.695 billion long-term debt and $758 million current long-term debt, capital and finance lease obligations. Consumers reported $4.276 billion long-term debt and $63 million current debt and lease obligations. Both registrants reported covenant compliance and no defaults; CMS Energy’s debt-to-EBITDA ratio was 4.4x against a limit below 6.0x.
- Consumers: Six-month operating revenue was $3.261 billion versus $2.957 billion; net income available to its common stockholder was $261 million versus $197 million. Q2 common-stockholder income was $99 million versus $121 million.
Changes versus the prior comparable period
- CMS Energy’s first-half net income rose $57 million. Higher gas deliveries and rate effects, and the absence of a 2012 $59 million electric revenue-decoupling asset write-off, were key contributors. First-half gas deliveries rose 23% to 179 bcf, largely reflecting colder weather; electric deliveries excluding the largest customer rose 1%.
- Q2 CMS Energy net income fell $20 million and operating income declined $28 million. Lower electric deliveries, higher restoration and operating costs, and the absence of prior-year recovery of cancelled-plant development costs weighed on results.
- Operating cash flow increased year over year, aided in part by a $69 million renewable-energy grant and working-capital movements; higher pension contributions were an offset.
Outlook, management commentary and risks
- Management expected Consumers’ electric base rates to avoid increases through 2014, subject to regulatory approvals and assumptions. An MPSC partial settlement authorized an annual electric rate increase of $89 million, below the company’s revised $145 million request. Consumers suspended its pending $49 million gas-rate case and planned to update it.
- Consumers planned approximately $7 billion of capital investment during 2013–2017. Projects include a proposed 700-MW gas plant estimated at $750 million, subject to approvals; environmental investment estimated at $1.1 billion through 2018; and grid modernization. Management expected average electric delivery growth of 0.5%–1.0% annually through 2017 and gas sales to remain broadly stable over five years.
- Potential generation-capacity shortfall could reach 1,500 MW in 2016 if coal-unit suspensions and market conditions constrain supply. MATS extensions allow ten coal units to operate as configured until April 2016; environmental compliance costs and cost recovery remain uncertain.
- Environmental, regulatory and legal exposures include possible new air, water and coal-ash requirements; MPSC/FERC proceedings; gas-index-price litigation reinstated for further proceedings by the Ninth Circuit; and unresolved claims involving Bay Harbor and Equatorial Guinea. CMS Energy recorded a $58 million Bay Harbor liability; the Equatorial Guinea tax claim is $142 million plus penalties and interest. The filing does not provide a clear estimate of potential loss for several proceedings.
- After quarter-end, effective July 1, changes to the OPEB plan and actuarial assumptions reduced CMS Energy’s (including Consumers’) reported OPEB liability by $613 million and regulatory asset by $599 million. Management estimated 2013 OPEB cost would decline by $46 million; these are post-period changes, not June 30 balance-sheet amounts.
- Management said cash flows and available liquidity were expected to fund obligations and investment plans, while noting that restricted subsidiary cash flows, capital-market access, regulation, weather, commodity prices, economic conditions and environmental requirements could affect results.
Key facts for investors to verify
- Whether the $89 million electric rate order, refund reconciliation and future base-rate assumptions translate into expected customer revenue and recovery.
- How much of the first-half earnings and cash-flow improvement is recurring versus weather, the grant, working capital and the absence of prior-year charges.
- Actual capital spending, financing needs and progress/approval status for the proposed gas plant, renewable projects and Smart Energy program.
- Updated generation-capacity plans, coal-unit decisions, and the timing and recoverability of environmental compliance costs.
- Developments in material contingencies, particularly Bay Harbor, gas-index litigation and the Equatorial Guinea claim, including any revised loss estimates.
- OPEB remeasurement accounting and subsequent-period effects; the filing does not present these July changes as June 30 balances.