Business context and reporting period
CMS Energy Corporation, a Michigan-based energy company, filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2019. Its principal businesses are Consumers Energy, a regulated electric and gas utility, and CMS Enterprises, a non-utility power and energy business. Comparisons below are with the corresponding 2018 periods.
Financial performance and liquidity
| CMS Energy, $ millions except per-share data | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Operating revenue | 1,546 | 1,599 | 5,050 | 5,044 |
| Operating income | 351 | 294 | 928 | 912 |
| Net income available to common stockholders | 207 | 169 | 513 | 549 |
| Diluted EPS | $0.73 | $0.59 | $1.81 | $1.94 |
| Net cash provided by operating activities | Not presented quarterly | 1,395 | 1,565 |
Quarterly operating and net margins were approximately 22.7% and 13.4%, respectively, versus 18.4% and 10.6% a year earlier. Nine-month operating margin was approximately 18.4% versus 18.1%; net margin was approximately 10.2% versus 10.9%. These percentages are calculated from reported figures.
CMS Energy reported $433 million of cash and cash equivalents, including restricted cash, at September 30. Balance-sheet long-term debt was $12.04 billion, with a further $1.07 billion current portion; notes payable were zero. Consumers reported $284 million of cash including restricted amounts and $7.09 billion of long-term debt, plus a $122 million current portion. Available revolving credit was $547 million for CMS Energy and $1.068 billion for Consumers; Consumers had no commercial paper outstanding. Both companies were in compliance with financial covenants.
Changes versus the prior comparable periods
- Q3 net income available to common stockholders rose $38 million, while nine-month income fell $36 million. Nine-month diluted EPS declined from $1.94 to $1.81.
- Q3 operating revenue decreased $53 million; nine-month revenue was essentially flat. For the nine months, lower electric deliveries and weaker Enterprises earnings weighed on results, partly offset by utility rate increases, higher gas sales, and a transmission-equipment sale gain.
- Electric utility net income was $418 million for nine months, down $50 million, including lower electric sales, higher storm restoration costs, and higher depreciation. Gas utility income increased $14 million to $119 million, supported by rate increases and colder-weather sales. Enterprises income declined $15 million to $18 million, mainly on lower capacity revenue and higher operating costs.
- Operating cash flow declined $170 million to $1.395 billion. Investing cash use increased to $2.212 billion, while financing cash provided increased to $1.075 billion, including higher debt issuance.
- Total balance-sheet debt, including current maturities, increased from approximately $11.6 billion at year-end 2018 to $13.1 billion at September 30, 2019.
Outlook, management commentary, risks and unusual items
- Consumers expects $25 billion of capital investment from 2019–2028, including $11.8 billion in 2019–2023. Management projects annual rate-base growth of 6%–8%. It expects weather-normalized electric deliveries to remain stable and gas deliveries to increase slightly through 2023; no specific CMS Energy EPS guidance is provided in the supplied filing text.
- The MPSC approved Consumers’ integrated resource plan in June 2019. It calls for retiring the D.E. Karn 1 and 2 coal units in 2023, continued assessment of earlier retirement of J.H. Campbell 1 and 2, and increased reliance on renewables, efficiency and demand response. Consumers targets more than 90% carbon-emissions reduction by 2040.
- In September, the MPSC approved a $144 million annual gas-rate increase and authorized the return of $0.4 billion of net regulatory tax liabilities to gas customers; $1.2 billion related to electric customers is to be addressed in a future electric rate case. A temporary $32 million electric bill credit was authorized. Rate recovery, regulatory proceedings, environmental rules, weather, commodity prices, project execution, financing conditions and litigation remain important uncertainties.
- Q3 results included a $34 million pre-tax gain from Consumers’ sale of substation transmission equipment. DIG separately recognized a $16 million pre-tax gain on a transmission-equipment sale. Consumers recorded a $657 million regulatory asset for the remaining book value of the Karn units planned for retirement, subject to requested future securitization and regulatory approval.
- Notable contingencies include the Ray Compressor Station fire and related potential customer claims, regulatory penalties or cost disallowances; an MPSC investigation over more than 20,000 delayed or incomplete underground-facility marking requests; and unresolved gas-price reporting litigation. CMS Energy also disclosed a $152 million Equatorial Guinea tax claim plus potentially substantial penalties and interest. Consumers’ recorded gas environmental liability for former manufactured-gas-plant sites was $70 million.
- Consumers announced a retention program for the Karn generating complex, estimated to cost $35 million through 2023, with $6 million of expense expected in late 2019; the company intends to seek customer recovery. The filing reported effective disclosure controls and no material change in risk factors or market-risk disclosures.
Important facts for investors to verify
- Whether subsequent electric-rate proceedings permit recovery of investment and the remaining Karn unit book value, and how customer refunds and TCJA tax liabilities affect cash flows.
- Drivers of the divergence between stronger Q3 results and lower nine-month earnings, including weather, storm costs, sale gains and Enterprises performance.
- Debt growth, refinancing needs, capital spending, cash generation and continued access to credit markets.
- Developments and potential financial exposure from the Ray compressor incident, staking investigation, gas-price litigation, Equatorial Guinea tax claim and environmental obligations.
- Execution, cost and regulatory recovery of the Clean Energy Plan and the stated capital and rate-base growth plans.