CMS Energy Corporation — Q2 2017 Form 10-Q
Business context and reporting period. The combined filing covers CMS Energy and its wholly owned utility subsidiary, Consumers Energy, for the quarter and six months ended June 30, 2017. CMS Energy operates regulated electric and gas utilities in Michigan and non-utility power-generation businesses. Results are seasonal and should not be viewed as a full-year forecast.
Financial performance
| CMS Energy consolidated | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Operating revenue | $1.449B | $1.371B | $3.278B | $3.172B |
| Operating income | $241M | $275M | $629M | $601M |
| Net income available to common stockholders | $92M | $124M | $291M | $288M |
| Diluted EPS | $0.33 | $0.45 | $1.04 | $1.04 |
| Operating margin | 16.6% | 20.1% | 19.2% | 18.9% |
Cash flow and liquidity. For the six months, operating cash flow was $1.119B, versus $1.101B in 2016; capital expenditures were $746M, versus $817M. Cash and cash equivalents, including restricted cash, totaled $441M at June 30. CMS Energy had $549M available under its revolver; Consumers had $891M available, with no commercial paper outstanding. Management said liquidity and expected operating cash flows should fund contractual obligations and planned investment.
Debt and capital. CMS Energy reported $9.091B of long-term debt and $840M of current maturities at June 30, excluding separately presented lease and financing obligations. The parent issued $350M of 3.45% senior notes; Consumers issued $350M of 3.95% first mortgage bonds and retired $250M of higher-rate bonds. CMS Energy’s covenant debt-to-EBITDA ratio was 4.2x against a maximum of 6.0x; Consumers’ debt-to-capital ratio was 0.46 against a maximum of 0.65. CMS Energy raised $70M net through its at-the-market equity program.
Changes versus prior period
- Q2 revenue increased, but operating income fell $34M and common net income fell $32M. Higher maintenance, storm-restoration, depreciation and property-tax costs outweighed rate-related revenue gains; mild weather reduced utility sales.
- For the first half, common net income increased $3M and diluted EPS was unchanged. Electric utility income rose $14M, while gas utility income declined $3M; Enterprises income increased $10M, partly offset by higher corporate interest and other costs.
- Cash from operations edged higher, while lower capital spending reduced cash used in investing. Financing activity included increased debt issuance and repayment, debt retirements, and repayment of notes payable.
Outlook, material matters and risks
- Investment and demand: Consumers plans $9B of capital investment for 2017–2021 and $18B for 2017–2026, with expected annual rate-base growth of 6–8%. It projects weather-adjusted electric delivery growth of about 0.5% annually through 2021 (about 1.5% excluding energy-waste-reduction impacts) and stable gas deliveries. Management expects customer base-rate increases, excluding PSCR and GCR charges, to remain at or below inflation through cost control and investment priorities.
- Rate cases: Consumers sought a $173M annual electric rate increase in March 2017. Its gas rate request was reduced to $80M; a $20M annual increase had been self-implemented subject to refund, with a final order expected at the end of July 2017.
- Palisades PPA: Consumers agreed to terminate the 798-MW PPA in May 2018, four years early, for a $172M payment. The agreement depended on MPSC approval of recovery through securitization by September 30, 2017; without approval or an extension, the agreement would be void and the PPA would continue to April 2022. Expected customer savings depend on market conditions.
- Energy transition and regulation: Michigan’s 2016 Energy Law took effect in April 2017, raising renewable-energy requirements to 15% by 2021 and establishing a 35% combined renewable-energy and energy-waste-reduction goal by 2025. Consumers is pursuing additional generation and efficiency projects. Environmental rules, permitting, regulatory decisions, and cost recovery remain material uncertainties.
- Contingencies: CMS Energy recorded a $50M Bay Harbor environmental liability; the undiscounted estimate was $63M, and the EPA is seeking $8M plus interest in a related claim. CMS Energy is contesting an Equatorial Guinea tax claim of $152M plus potentially substantial penalties and interest; the outcome cannot be predicted. Consumers recorded $98M for former manufactured-gas-plant remediation, with a related $137M regulatory asset. Some litigation and remediation exposures cannot be reliably estimated.
- Other items: Severe storms increased restoration costs. Early adoption of a pension-cost presentation standard changed expense classification but had no material effect on net income, cash flows, or financial position. Management identified weather, commodity prices, regulatory outcomes, financing conditions, environmental obligations, and operational or cyber disruptions among key risks.
Investor verification priorities
- Check the MPSC decisions on the electric and gas rate cases and the status of any refunds or rate recovery.
- Confirm whether the Palisades termination and securitization received approval by the stated deadline, and assess the resulting payment and customer savings.
- Review debt maturities, financing needs, covenant headroom, and cash available at both CMS Energy and Consumers.
- Track capital spending, rate-base growth, project approvals, and the cost and timing of generation and environmental requirements.
- Monitor updates to Bay Harbor, Equatorial Guinea, manufactured-gas-plant, and other legal or environmental exposures.
- Compare actual utility deliveries, storm costs, and operating results with management’s weather-adjusted outlook.