CMS Energy Corporation — Q1 2020 Form 10-Q
Business context and reporting period
Combined quarterly filing for CMS Energy Corporation and its wholly owned utility subsidiary, Consumers Energy Company, for the three months ended March 31, 2020. CMS Energy also owns non-utility energy businesses and EnerBank, a home-improvement lender. Figures below are unaudited; financial amounts are in millions unless otherwise stated.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| CMS Energy operating revenue | $1,864 | $2,059 | Down $195 (9.5%) |
| CMS Energy operating income | $368 | $359 | Up $9 |
| CMS Energy net income available to common | $243 | $213 | Up $30 (14.1%) |
| CMS Energy diluted EPS | $0.85 | $0.75 | Up $0.10 |
| Consumers revenue | $1,744 | $1,943 | Down $199 |
| Consumers operating income | $329 | $328 | Up $1 |
| Consumers net income | $235 | $226 | Up $9 |
CMS Energy’s calculated operating margin was approximately 19.7%, compared with 17.4% a year earlier; net margin was approximately 13.0%, versus 10.3%. Revenue fell primarily with lower utility deliveries and lower EnerBank financing income, while lower fuel and gas costs reduced expenses. Earnings benefited from electric and gas rate increases, lower service-restoration costs, and tax benefits; unfavorable weather and higher depreciation and property taxes partly offset those gains.
- Operating cash flow was $201, down from $617, largely reflecting $531 of pension contributions (none in Q1 2019). Capital expenditures were $523, making operating cash flow less capital expenditures approximately negative $322.
- CMS Energy ended March with $861 of cash and restricted cash; Consumers had $628. Available revolving credit was $521 at CMS Energy and approximately $1.1 billion at Consumers. No Consumers commercial paper was outstanding.
- CMS Energy balance-sheet long-term debt, including its current portion, was approximately $14.3 billion, versus $13.1 billion at year-end 2019. Consumers’ corresponding balance was approximately $8.1 billion, versus $7.3 billion. These figures exclude finance leases and other financing.
- CMS Energy issued $1,198 of debt and generated $1,062 of financing cash flow. Consumers issued $875 of debt, including $575 of first mortgage bonds, and received a $350 stockholder contribution.
- CMS Energy’s debt-to-EBITDA covenant ratio was 5.1x against a limit below 6.25x; Consumers’ debt-to-capital ratio was 0.49x against a limit below 0.65x. Both reported covenant compliance.
Changes versus the prior comparable period
- Consumers electric deliveries to end-use customers fell to 8.8 billion kWh from 9.2 billion kWh; gas deliveries fell to 120 Bcf from 142 Bcf. Management attributed much of the decline to unfavorable weather.
- CMS Energy’s electric utility segment income rose to $118 from $105; gas utility income declined to $117 from $121. Enterprises income increased to $20 from $7 and EnerBank income to $14 from $11.
- CMS Energy’s effective tax rate decreased to 10.0% from 18.4%, including research and development credits and restoration of previously sequestered alternative minimum tax credits. The new expected-credit-loss standard increased EnerBank’s opening loan-loss allowance by $65, net of tax, through retained earnings; it did not materially affect Q1 net income.
- CMS Energy made $531 of pension contributions, substantially reducing operating cash flow. Q1 after-tax voluntary-separation charges were $8.
Outlook, risks, and notable matters
- COVID-19: Consumers reported weather-normalized commercial and industrial electric demand down more than 20% after Michigan’s stay-at-home order, partly offset by residential load up more than 5%. It expected near-term declines in commercial and industrial deliveries, increased uncollectible accounts and other costs, and could not quantify the full-year or longer-term effects. EnerBank reported slower lending growth and warned of possible higher write-offs and loan modifications. The companies said they had strengthened liquidity and expected sufficient funding, while emphasizing uncertainty.
- In April 2020, the MPSC authorized Consumers to defer certain pandemic-related uncollectible-account expenses. Consumers suspended service shut-offs for nonpayment and extended payment protections through June 1, 2020.
- Consumers planned $12.2 billion of capital expenditures for 2020–2024, including $9.4 billion for gas and electric distribution infrastructure and $2.8 billion primarily for electric supply projects. Its longer-term plan anticipates $25 billion of investment over ten years and annual rate-base growth of 6–8%. Some projects were rescheduled due to COVID-19, but no change to the long-term plan was reported.
- Consumers’ 2020 electric rate case seeks an annual $244 increase in revenue; its 2019 gas rate case seeks $245. Both requests are pending, and recovery is not assured. Consumers also seeks approval to recover retention-program costs.
- Consumers’ clean-energy plans include retiring the D.E. Karn 1 and 2 coal units in 2023, targeting net-zero carbon emissions by 2040 and net-zero methane emissions from its gas delivery system by 2030. The company noted potential project, regulatory, environmental, and cost-recovery uncertainties.
- EnerBank expected 2020 lending growth of up to 5%, with a five-year average target of 9%. Its loan portfolio was $2.4 billion and its 12-month rolling average net default rate was 1.3% at quarter-end.
- Material contingencies include the $152 tax claim by Equatorial Guinea, plus potentially substantial penalties and interest; CMS Energy contests the claim. Consumers recorded a $67 liability for former manufactured-gas-plant remediation, with a $128 related regulatory asset. CMS Energy recorded a $46 Bay Harbor remediation liability. Consumers also reported unresolved regulatory and environmental matters and potential claims related to the 2019 Ray Compressor Station fire.
- CMS Energy’s Wisconsin gas-price-reporting litigation settlement received preliminary court approval in April 2020; a fairness hearing was scheduled for August. Consumers also reported that turbine-supplier and construction-contractor force majeure notices had been received for two wind projects, but it did not then anticipate changes to cost or expected operation dates.
No clear full-year CMS Energy earnings or EPS guidance is provided in the filing. Management’s delivery and investment outlooks are subject to pandemic, weather, economic, regulatory, project-execution, and cost-recovery uncertainties.
Important facts for investors to verify
- Subsequent quarterly disclosures on pandemic-related demand, collections, bad debts, EnerBank credit performance, liquidity, and capital spending.
- Decisions and timing in Consumers’ electric and gas rate cases, including approval of requested increases and recovery of deferred or incentive costs.
- Actual pension funding, operating cash flow, capital expenditures, debt issuance, and covenant headroom as the year progresses.
- Progress and cost implications for renewable projects, coal-unit retirements, emissions targets, and the gas-infrastructure program.
- Developments in the Equatorial Guinea claim, gas-price litigation, environmental remediation obligations, and other regulatory or legal contingencies.