CMS Energy Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021, compared with the three months ended March 31, 2020. This combined filing reports CMS Energy and its subsidiary Consumers Energy separately; amounts below are in U.S. dollars unless noted. Interim results are seasonal and are not necessarily indicative of full-year performance.
Financial performance
| Metric | CMS Energy | Consumers Energy |
|---|---|---|
| Operating revenue | $2.083 billion, up 11.8% from $1.864 billion | $1.937 billion, up 11.1% from $1.744 billion |
| Operating income | $485 million, versus $368 million | $429 million, versus $329 million |
| Net income available to common stockholders | $349 million, versus $243 million | $336 million, versus $235 million |
| Diluted EPS | $1.21, versus $0.85 | Not applicable; wholly owned subsidiary |
| Operating margin | 23.3%, versus 19.7% | 22.1%, versus 18.9% |
| Cash from operating activities | $832 million, versus $201 million | $841 million, versus $238 million |
| Capital expenditures | $437 million, versus $523 million | $433 million, versus $520 million |
CMS Energy’s utility earnings improved primarily on electric and gas rate increases, higher electric sales, lower income tax expense, and the absence of prior-year voluntary separation costs. Higher depreciation and property taxes partly offset those benefits. EnerBank earnings rose to $33 million from $14 million, including a $7 million gain on sale of notes receivable. Enterprises earnings declined to $14 million from $20 million.
Operating cash flow rose sharply, principally because pension contributions were zero in Q1 2021 versus $531 million for CMS Energy and $518 million for Consumers in Q1 2020. CMS Energy’s cash flow also benefited from higher net income. Investing cash outflow was $283 million, including $437 million of capital expenditures and $263 million of proceeds from EnerBank loan sales. Financing used $210 million; no debt was issued in the quarter, compared with $1.198 billion of CMS Energy debt issuance in Q1 2020.
Debt and liquidity
- At March 31, 2021, CMS Energy reported $524 million of cash and cash equivalents, including $28 million restricted; Consumers reported $34 million, including $25 million restricted.
- CMS Energy’s balance sheet showed $13.561 billion of long-term debt and $1.506 billion current portion. Consumers reported $7.743 billion of long-term debt and $384 million current portion.
- Available revolving credit was $532 million for CMS Energy and $1.087 billion for Consumers. Consumers had no commercial paper outstanding.
- Both companies reported compliance with debt covenants and no defaults. Debt-to-capital ratios were 0.57 for CMS Energy against a 0.70 limit, and 0.48 for Consumers against a 0.65 limit.
- Consumers paid $276 million in common dividends to CMS Energy during the quarter. Management said expected operating cash flows and available financing should be sufficient to fund 2021 commitments and beyond, while noting dependence on continued capital-market access.
Material changes and outlook
- Consumers’ electric and gas utility net income increased to $155 million from $118 million and $181 million from $117 million, respectively. Electric deliveries were 8.7 billion kWh versus 8.8 billion; gas deliveries were 124 bcf versus 120 bcf.
- Consumers expects weather-normalized electric and gas deliveries to remain broadly stable over the next five years relative to 2020. EnerBank expects lending growth of approximately 7% annually over the next five years.
- Consumers plans $13.2 billion of capital expenditures in 2021–2025 and approximately $25 billion over ten years, with expected annual rate-base growth of 6%–8%. Its five-year plan includes $10 billion for gas and electric distribution infrastructure and $2.4 billion for new clean generation.
- In March 2021, Consumers filed for a $225 million annual electric rate increase, based on a requested 10.5% authorized return on equity for the projected year ending December 31, 2022. It also requested a $43 million annual increase in depreciation expense and recovery in a separate depreciation case. These are requests, not approved increases.
- Consumers’ clean-energy strategy includes retiring the D.E. Karn 1 and 2 coal units in 2023 and eliminating coal generation by 2040. The company targets net-zero carbon emissions from its electric business by 2040 and net-zero methane emissions from its gas delivery system by 2030. A new integrated resource plan was due by June 2021.
Risks, contingencies, and unusual items
- COVID-19: Commercial and industrial electric deliveries had declined, partly offset by increased residential deliveries. Past-due customer accounts remained above pre-pandemic levels. Management said the long-term impacts on collections, operations, investment, liquidity, and cash flows remained uncertain.
- Regulatory and rate recovery: Rate cases, cost-recovery proceedings, and appeals could affect results and liquidity. Consumers’ requested customer refunds include a $28 million regulatory liability; it also recorded a $14 million liability for sharing half the gain from a transmission-asset sale with customers.
- Environmental and remediation exposure: CMS Energy recorded a $45 million liability for Bay Harbor remediation (undiscounted estimate $56 million). Consumers recorded a $56 million liability for former manufactured gas plant sites (undiscounted estimate $61 million), with a related $118 million regulatory asset. Recovery of environmental compliance and remediation costs is expected in some cases but is not assured.
- Ray Compressor Station: The MPSC disallowed $7 million of gas-purchase costs related to the 2019 fire; Consumers appealed. Consumers had incurred $17 million in repair and modification capital expenditures and recorded $10 million of insurance recovery. The final outcome and any further cost disallowances were uncertain.
- Other legal exposure: CMS Energy disclosed a $152 million Equatorial Guinea tax claim, plus potentially substantial penalties and interest; management considers material loss remote but cannot predict the outcome. Consumers’ CERCLA and state cleanup liabilities were estimated at $3–$8 million and $2–$4 million, respectively, with minimum amounts recorded.
- EnerBank credit: Its loan portfolio was $2.7 billion, funded primarily by $2.7 billion of certificates of deposit; its 12-month rolling average net default rate was 1.1%. Management reported no pandemic-related increase in delinquency or charge-offs at quarter-end but warned of possible future credit deterioration.
- CMS Energy’s operating cash flow benefited from the absence of prior-year pension contributions; EnerBank’s reported earnings included a $7 million loan-sale gain. These items affect comparisons with Q1 2020.
Investor verification priorities
- Track the MPSC’s decisions on Consumers’ $225 million electric rate request and depreciation case, and whether requested investment costs are recoverable.
- Compare future operating cash flow with the unusually low Q1 2021 pension contributions and the company’s planned capital spending and dividend commitments.
- Monitor customer arrears, uncollectible accounts, and any continuing effects of the pandemic on utility demand and EnerBank loan performance.
- Assess execution, financing, permitting, and cost recovery for the $13.2 billion 2021–2025 investment plan and clean-energy projects.
- Follow developments in the Ray Compressor Station appeal, environmental remediation estimates, and material litigation or regulatory proceedings.