CMS Energy Corporation — Q1 2017 Form 10-Q
Period: Three months ended March 31, 2017; balance-sheet amounts are as of March 31, 2017 unless otherwise stated. This combined filing covers CMS Energy and its wholly owned regulated utility, Consumers Energy. Amounts are in millions of dollars except per-share data, percentages, and operating volumes.
Business context and financial performance
CMS Energy is a Michigan-focused energy holding company. Its principal businesses are Consumers Energy’s regulated electric and gas utilities and CMS Enterprises’ power-generation operations. Results are seasonal and affected by weather, regulation, energy prices, and operating conditions.
| CMS Energy consolidated | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Operating revenue | $1,829 | $1,801 | +$28 |
| Operating income | $388 | $326 | +$62 |
| Net income available to common stockholders | $199 | $164 | +$35 |
| Diluted EPS | $0.71 | $0.59 | +$0.12 |
| Operating margin | 21.2% | 18.1% | +3.1 percentage points |
CMS reported revenue growth of about 1.6% and net income growth of about 21%. Management cited electric and gas rate increases, higher electric deliveries, a property-tax settlement, cost reductions, and higher Enterprises earnings. Higher depreciation and property taxes partly offset those gains. Electric utility net income was $124 (up $33); gas utility net income was $87 (up $6); Enterprises net income was $12 (up $6). Corporate interest and other losses widened to $24 from $14, principally reflecting elimination of an intercompany gain.
Consumers’ operating revenue was $1,737 versus $1,723; operating income was $359 versus $308; and net income was $211 versus $172. Electric deliveries were 9.2 billion kWh versus 9.1 billion; gas deliveries were 119 bcf versus 121 bcf. The filing attributes the electric improvement chiefly to rates and deliveries; gas results benefited from lower operating costs and rates, partly offset by higher depreciation.
Cash flow, debt, and liquidity
- CMS operating cash flow was $646, up from $632; capital expenditures were $365, down from $407. Investing cash outflow was $346 versus $444. Financing cash outflow was $94 versus $270. Cash, including restricted cash, ended at $463, including $30 restricted.
- Consumers operating cash flow was $648, down from $665; capital expenditures were $361 versus $406. Investing cash outflow was $382 versus $425; financing cash outflow was $206 versus $255. Cash, including restricted cash, ended at $212, including $30 restricted.
- CMS’s balance sheet reported $9,129 of long-term debt and $812 of current portion of long-term debt, leases, and financing obligations. Consumers reported $5,419 of long-term debt and $327 of current portion. CMS total liabilities were $17,216 and total equity $4,407.
- Available revolving-credit capacity was $549 for CMS and $893 for Consumers. Consumers had no commercial paper outstanding. Both companies reported compliance with financial covenants and no defaults; CMS parent-only debt-to-EBITDA was 4.2x against a 6.0x limit, and Consumers debt-to-capital was 0.47x against a 0.65x limit.
Material changes, outlook, and notable items
- Rates and regulation: The MPSC authorized a $113 annual electric-rate increase in February 2017, below Consumers’ $225 request; $16 was accrued for customer refunds at quarter-end. Consumers filed a new electric-rate case seeking $173 annually. Its gas-rate request was reduced to $80 annually, with $20 self-implemented subject to refund. The 2016 Michigan Energy Law took effect in April 2017 and changes renewable-energy, energy-efficiency, rate-case, and capacity-planning rules.
- Operating outlook: Consumers expects weather-adjusted electric deliveries to rise about 1% in 2017 and average about 0.5% annual growth over five years; gas deliveries are expected to remain broadly stable. It plans $18 billion of capital investment over 2017–2026 and expects annual rate-base growth of 6%–8%. The filing provides no CMS full-year EPS guidance in the supplied text.
- Generation and Palisades: Consumers and Entergy agreed to end the Palisades power-purchase agreement in May 2018, four years early, for a $172 termination payment. The agreement depends on MPSC approval of rate recovery by September 30, 2017; otherwise it may become void and the original agreement could continue through April 2022. Expected customer savings depend on market conditions. Consumers issued a request for proposals for up to 800 MW of gas generation.
- Investment plans: Consumers expects $9.0 billion of capital investments in 2017–2021, including reliability, base-system, and environmental investments. Its Smart Energy deployment is targeted for completion by the end of 2017; by quarter-end it had upgraded 1.5 million electric customers and installed 470,000 gas-meter communication modules.
- Environmental and legal exposure: Consumers estimates $0.5 billion of environmental capital expenditures in 2017–2021, with recovery through rates expected but not assured. Recorded environmental liabilities included $106 for gas sites, principally former manufactured-gas-plant sites, and $3 for estimated electric-site remediation. CMS recorded $51 for Bay Harbor remediation, with $64 undiscounted. CMS is contesting an Equatorial Guinea tax claim of $152 plus potentially substantial penalties and interest; the outcome cannot be predicted.
- Other financing and accounting matters: CMS issued $350 of 3.45% senior notes and Consumers issued $350 of 3.95% first-mortgage bonds; Consumers retired $250 of 5.15% bonds. CMS extended its $180 term loan maturity by one year to April 2019 after quarter-end. The companies early-adopted pension-cost presentation and restricted-cash accounting standards; management said the pension standard had no material effect on net income, cash flows, or financial position.
Most important facts for investors to verify
- Whether the MPSC approves recovery of the $172 Palisades termination payment by the stated deadline, and the resulting capacity plan and realized customer savings.
- Final outcomes and timing of the electric and gas rate cases, including potential refunds and requested rate mechanisms.
- Execution, funding, and rate recovery for Consumers’ planned capital program and environmental compliance spending.
- Debt maturities, borrowing costs, covenant headroom, and the availability of parent and utility liquidity under changing market conditions.
- Developments in the Equatorial Guinea tax claim, Bay Harbor matter, gas-site remediation estimates, and other proceedings whose losses may be uncertain.