CMS Energy Corporation — Q1 2014 Form 10-Q
Business context and period: Combined quarterly filing for CMS Energy Corporation and its wholly owned utility subsidiary, Consumers Energy Company, for the three months ended March 31, 2014. CMS Energy operates regulated electric and gas utilities and non-utility businesses; Consumers is a Michigan electric and gas utility. Results are seasonal and not necessarily indicative of full-year performance.
Financial performance
| Metric | CMS Energy | Consumers Energy |
|---|---|---|
| Operating revenue | $2.523 billion, versus $1.979 billion | $2.382 billion, versus $1.919 billion |
| Operating income | $408 million, versus $329 million | $399 million, versus $319 million |
| Net income | $204 million, versus $144 million | $221 million, versus $162 million |
| CMS diluted EPS | $0.75, versus $0.53 | Not applicable |
| Operating cash flow | $611 million, versus $725 million | $646 million, versus $713 million |
| Capital expenditures | $304 million, versus $274 million | $302 million, versus $273 million |
CMS operating margin was approximately 16.2% versus 16.6% a year earlier; net margin was approximately 8.1% versus 7.3%. These are calculated from reported revenue and income figures. CMS reported cash and cash equivalents of $758 million plus $31 million restricted cash at March 31; Consumers reported $178 million plus $31 million restricted cash.
At March 31, CMS reported $7.536 billion of long-term debt and $666 million of current debt, leases, and financing obligations. Consumers reported $4.567 billion of long-term debt and $65 million of current debt, leases, and financing obligations. CMS had $548 million available under its revolving facility; Consumers had $650 million available under its principal facility. Both companies reported compliance with their financial covenants.
Changes versus Q1 2013
- CMS net income increased $60 million and diluted EPS increased $0.22. Management attributed the improvement mainly to colder-weather-driven gas and electric deliveries and an electric rate order.
- Electric utility net income rose $34 million to $100 million; gas utility net income rose $25 million to $121 million. Enterprises income declined $2 million to $2 million, mainly because extreme cold raised fuel and operating costs.
- Consumers electric deliveries increased to 9.6 billion kWh from 9.1 billion kWh; gas deliveries increased to 157 bcf from 132 bcf, primarily due to colder weather. The 2013 electric rate increase also supported results.
- CMS operating cash flow fell $114 million, chiefly reflecting the absence of a $69 million government grant received in 2013 and increased gas and power-supply underrecoveries. Capital spending increased.
Outlook, risks, and unusual items
- Consumers expected to avoid electric and gas base-rate increases through 2014 through cost reductions and regulatory treatment, while pursuing approximately $7 billion of capital investment from 2014–2018. It projected annual rate-base growth of 5%–7% and sought to keep sustainable base-rate increases at or below inflation.
- Consumers forecast 2014 weather-adjusted electric deliveries to increase about 1.5% versus 2013; average annual electric delivery growth of 0.5%–1.0% over five years; and gas deliveries to remain broadly stable.
- Severe winter weather drove an $84 million gas-cost underrecovery and a $104 million power-supply underrecovery at March 31. Consumers sought approval to raise recovery factors; the resulting customer recovery timing and approvals remained uncertain.
- A regulatory accounting order reduced Consumers’ Q1 income tax expense by $16 million, with benefits to be returned to customers over time. CMS’s effective tax rate was 34.0%, down from 39.7%.
- Consumers planned to issue up to $389 million of securitization bonds in 2014, subject to market conditions, to recover costs for ten generating units planned for retirement by April 2016. Management estimated initial annual customer savings of $15 million. A planned $155 million purchase of a 540-MW gas plant was expected to close in late 2015, subject to approvals; Consumers deferred a proposed 700-MW plant.
- Consumers identified a potential generation capacity shortfall of up to 1,500 MW in 2016, depending on retirements and MISO capacity-market conditions. Environmental compliance spending was estimated at $0.9 billion for 2014–2018; recovery through rates was expected but not assured.
- Other material uncertainties include possible changes to Michigan’s 10% retail open-access limit, environmental rules and litigation, gas pipeline availability and costs, and unresolved legal matters. CMS recorded a $51 million Bay Harbor liability; an Equatorial Guinea tax claim seeks $142 million plus penalties and interest, with outcome uncertain. Certain gas-price-reporting litigation could have a material adverse impact, but potential loss could not be estimated.
- Management stated that available cash, operating cash flows, and liquidity sources were expected to fund obligations. CMS’s maximum estimable indemnity obligation was $469 million; the maximum for some other indemnities could not be estimated.
Key facts for investors to verify
- Whether the $188 million combined gas and power-supply underrecoveries are approved for recovery, and when they will affect cash flow and customer bills.
- Actual 2014 operating cash flow and liquidity after elevated winter costs, capital spending, debt issuance, and planned retirements or refinancing.
- Progress and final economics of the securitization and 540-MW plant purchase, including regulatory approvals and capacity adequacy.
- Environmental compliance costs, regulatory cost recovery, and outcomes of significant litigation and contingent claims.
- Whether weather-normalized delivery growth and the expected avoidance of base-rate increases are achieved.