CMS Energy Corporation — Q2 2018 Form 10-Q
Business and period. This combined, unaudited filing covers the quarter and six months ended June 30, 2018, for CMS Energy and its subsidiary Consumers Energy. CMS Energy operates regulated electric and gas utilities in Michigan, alongside non-utility energy businesses. Unless otherwise stated, financial amounts below are in U.S. dollars.
Financial performance and position
- Q2 revenue and earnings: CMS Energy revenue was $1.492 billion, up 3.0% from $1.449 billion. Operating income was $255 million versus $241 million; net income available to common stockholders was $139 million versus $92 million. Diluted EPS was $0.49 versus $0.33.
- First-half results: Revenue was $3.445 billion, up 5.1%; operating income was $618 million versus $629 million. Net income available to common stockholders rose to $380 million from $291 million, and diluted EPS increased to $1.35 from $1.04.
- Margins: CMS Energy’s first-half operating margin was approximately 17.9%, compared with 19.2% in 2017; net margin was approximately 11.0%, compared with 8.9%. These are calculated as operating income or net income available to common stockholders divided by revenue.
- Drivers and segments: First-half net income gains included higher electric and gas sales, rate increases, lower postretirement benefit costs, and lower income-tax expense. Segment net income was $269 million electric utility, $124 million gas utility, and $29 million enterprises, offset by $42 million of corporate interest and other costs.
- Cash flow and investment: First-half operating cash flow was $1.416 billion, up from $1.119 billion. Investing cash outflow was $1.008 billion, including $872 million of capital expenditures. Financing cash outflow was $111 million. CMS Energy ended June with $501 million of cash and restricted cash.
- Debt and liquidity: CMS Energy reported $1.216 billion of current debt, leases and financing obligations and $9.272 billion of long-term debt. Available revolving credit was $549 million at CMS Energy and $1.068 billion at Consumers; Consumers had no commercial paper outstanding. Consumers’ debt-to-capital covenant ratio was 0.46 against a 0.65 limit; CMS Energy reported covenant ratios of 4.2 and 4.1 against respective limits of 6.0 and 6.25.
Changes, outlook, and material matters
- Comparative changes: First-half earnings improved despite lower operating income, with lower income-tax expense under the Tax Cuts and Jobs Act (TCJA) and higher non-operating retirement-benefit credits contributing to the difference. Higher depreciation and increased plant investment weighed on results. CMS Energy’s operating cash flow improved, while Consumers’ declined to $1.098 billion from $1.125 billion.
- Customer refunds and rates: Consumers recorded an $88 million liability for TCJA-related customer refunds at June 30. The MPSC approved annual revenue requirement reductions of $49 million for gas and $113 million for electric service, with bill credits beginning after the quarter. Consumers’ 2017 electric rate case resulted in an authorized annual increase of $72 million. Its pending gas rate case drew an administrative law judge recommendation for an $11 million increase; adoption of some recommended historical-cost disallowances could require a write-off of up to $145 million. Final action was expected by the end of August 2018.
- Business outlook and investment: Consumers expected weather-normalized electric and gas deliveries to remain stable through 2022. Its planned 2018–2022 capital expenditures totaled $10.1 billion, and management expected annual rate-base growth of 6%–8%. Consumers’ June 2018 integrated resource plan proposed coal-unit retirements and greater reliance on efficiency, demand response, renewables, grid modernization, and storage; it targets eliminating coal-fired generation by 2040. These plans require regulatory approvals and execution.
- Financing: Consumers planned a $500 million first-mortgage-bond private placement, expected to fund in October 2018. CMS Energy issued $200 million of junior subordinated notes and Consumers issued $550 million of first-mortgage bonds during the first half. CMS Energy also recorded a $5 million loss on early debt extinguishment.
- Risks and contingencies: Material uncertainties include the Consumers gas-rate-case disallowance risk; MCV Partnership arbitration seeking damages and interest exceeding $270 million; an Equatorial Guinea tax claim of $152 million plus potentially substantial penalties and interest; and ongoing Bay Harbor remediation, for which CMS Energy recorded a $47 million liability. Environmental compliance, permitting, regulatory recovery, weather, energy markets, pension assumptions, cyber incidents, and access to capital are also identified risks. Management stated that it did not consider the gas-case disallowance probable, but could not predict the outcomes of these proceedings.
- Controls: Management concluded disclosure controls were effective at quarter-end and reported no material changes in internal control over financial reporting.
Investor facts to verify
- Track final MPSC decisions on the gas rate case, potential historical-cost disallowances, and TCJA-related customer refunds.
- Review the status and potential financial exposure of the MCV arbitration, Equatorial Guinea tax claim, and Bay Harbor remediation.
- Compare capital spending and rate-base growth with the $10.1 billion five-year investment plan, and assess the related funding and customer-rate implications.
- Monitor debt, cash generation, and liquidity as major infrastructure investment and planned coal retirements proceed.
- Assess whether planned resource transitions and delivery stability assumptions remain achievable under changing regulatory, environmental, demand, and market conditions.