CMS Energy Corporation (with Consumers Energy) — Q1 2018 Form 10-Q
Business and period. The unaudited filing covers the three months ended March 31, 2018, with comparisons to Q1 2017. CMS Energy is a Michigan-based energy holding company; its principal subsidiary, Consumers Energy, operates regulated electric and gas utilities. CMS Energy also has non-utility energy businesses, including EnerBank.
Financial performance and liquidity
| CMS Energy consolidated | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Operating revenue | $1.953 billion | $1.829 billion | Up 6.8% |
| Operating income | $363 million | $388 million | Down $25 million |
| Net income available to common stockholders | $241 million | $199 million | Up $42 million |
| Diluted EPS | $0.86 | $0.71 | Up $0.15 |
| Operating cash flow | $708 million | $646 million | Up $62 million |
| Capital expenditures | $422 million | $365 million | Up $57 million |
CMS Energy’s operating margin, calculated from reported revenue and operating income, was approximately 18.6%, versus 21.2% a year earlier. Net margin was approximately 12.3%, versus 10.9%. Lower income tax expense—$40 million compared with $96 million—supported higher net income despite lower operating income and pretax income.
Consumers reported revenue of $1.855 billion versus $1.737 billion, operating income of $334 million versus $359 million, and net income of $242 million versus $211 million. Consumers’ operating cash flow was $720 million, up from $648 million; capital expenditures were $414 million, up from $361 million.
At March 31, CMS Energy had $227 million in cash and cash equivalents, including restricted cash, and $499 million available under its revolving credit facility. Consumers had $146 million in cash, including restricted cash, and $878 million available across its facilities; no commercial paper was outstanding. CMS Energy’s long-term debt, including current maturities, was approximately $10.3 billion, versus $10.2 billion at December 31, 2017. Consumers’ corresponding debt was approximately $5.9 billion at both dates. Both companies reported compliance with financial covenants and no defaults.
Material changes and management commentary
- CMS Energy’s earnings increased mainly on higher gas sales, electric and gas rate increases, lower postretirement benefit costs, and lower storm-restoration costs. These benefits were partly offset by higher depreciation from increased plant in service.
- Consumers’ electric utility earnings rose to $139 million from $124 million; gas utility earnings rose to $103 million from $87 million. Gas deliveries increased to 133 bcf from 119 bcf, primarily reflecting colder weather. Electric deliveries were 9.2 billion kWh in both periods.
- TCJA-related tax reductions were substantially offset at Consumers by revenue reserves for expected customer refunds. Consumers estimated annual revenue-requirement reductions of $116 million for electric service and $49 million for gas service, before potential deferred-tax refunds. A $51 million reserve for customer refunds was recorded at March 31.
- Operating cash flow improved, but investing outflows increased with capital spending. Net cash used in investing was $456 million at CMS Energy versus $346 million in Q1 2017. Net cash used in financing was $229 million versus $94 million, including lower debt issuance.
Outlook, regulation and risks
- Consumers expects weather-normalized electric and gas deliveries to remain broadly stable through 2022. It expects annual rate-base growth of 6% to 8% and plans $10.1 billion of capital expenditures from 2018 through 2022: $4.9 billion for gas infrastructure, $3.5 billion for electric distribution and $1.7 billion for electric supply. Management says cost controls should support customer base-rate increases at or below inflation, excluding fuel-recovery charges.
- Consumers’ March 2018 electric rate-case order authorized a $66 million annual increase, below its reduced $148 million request. The pending gas rate case seeks an $83 million annual revenue-requirement increase after reflecting tax reform; requested investment-recovery increases were reduced to $25 million annually in July 2019 and July 2020. Outcomes remain subject to MPSC approval.
- Consumers announced a goal to reduce carbon emissions 80% and eliminate coal-fired generation by 2040, with about 40% of energy expected from renewables and storage by then. Its integrated resource plan was expected to be filed in June 2018. Regulatory, permitting, environmental, weather, commodity, financing and execution uncertainties could affect plans and costs.
- Material contingencies include an MCV Partnership arbitration claim seeking damages and interest exceeding $270 million, which Consumers disputes; an Equatorial Guinea tax claim of $152 million plus potentially substantial penalties and interest; and CMS Energy’s $48 million recorded Bay Harbor remediation liability. The filing says the possible loss for the gas-price-reporting litigation cannot presently be estimated. Consumers also reported an $87 million recorded liability for former manufactured-gas-plant remediation.
- CMS Energy reported $153 million of maximum estimable indemnity obligations, of which $7 million was recorded; some other indemnity exposures cannot be estimated. Management cautions that regulatory decisions, environmental obligations, litigation and operational or market disruptions could materially affect results. The companies state that available cash, expected operating cash flows and liquidity are expected to fund contractual obligations, barring major market disruptions.
Investor verification priorities
- Track final MPSC decisions on the pending gas rate case, requested recovery mechanisms, and TCJA customer credits and deferred-tax refunds.
- Assess whether earnings growth is sustainable given lower operating income, higher depreciation and the role of colder-weather gas sales and tax effects.
- Monitor the $10.1 billion 2018–2022 investment plan, funding needs, debt maturities and the stated rate-base and customer-rate objectives.
- Review developments and potential exposure in the MCV arbitration, Equatorial Guinea tax claim, Bay Harbor remediation and other environmental and legal matters.
- Confirm progress on renewable-energy, coal-retirement and emissions goals, and review the forthcoming integrated resource plan and related regulatory approvals.