CMS Energy Corporation — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. The combined filing covers CMS Energy and its wholly owned regulated utility, Consumers Energy. CMS Energy also operates non-utility energy businesses. Amounts are in U.S. dollars; financial figures are generally in millions unless noted. Interim results are seasonal and are not necessarily indicative of full-year results.
Financial performance
| CMS Energy consolidated | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Operating revenue | $1,371 | $1,350 | $3,172 | $3,461 |
| Operating income | $285 | $204 | $621 | $601 |
| Net income available to common stockholders | $124 | $67 | $288 | $269 |
| Diluted EPS | $0.45 | $0.25 | $1.04 | $0.98 |
| Operating margin | 20.8% | 15.1% | 19.6% | 17.4% |
Operating margins are calculated as operating income divided by operating revenue. CMS Energy declared common dividends of $0.31 per share in Q2 and $0.62 per share for the first half, compared with $0.29 and $0.58, respectively, in 2015.
- Cash flow: First-half cash from operating activities was $1,101, down from $1,262 in 2015. Capital expenditures were $817; net cash used in investing was $910. Net cash used in financing was $72, versus $210 in 2015.
- Cash and liquidity: At June 30, CMS Energy had $385 cash and cash equivalents plus $18 restricted cash (total $403 including restricted cash). Its revolving facility had $549 available. Consumers had $135 cash including $18 restricted cash and $893 available under its facilities; no commercial paper was outstanding.
- Debt and covenants: CMS Energy reported $8,486 of long-term debt and $918 of current debt, capital leases, and financing obligations. CMS Energy parent debt/EBITDA was 4.4x against a 6.0x limit; Consumers debt/capital was 0.46x against a 0.65x limit. Both were in compliance.
- Consumers utility results: Net income available to common stockholders was $131 in Q2 versus $83 in 2015, and $303 for the first half versus $298. Electric utility earnings rose to $204 for the first half from $176; gas utility earnings fell to $99 from $122.
Material changes versus prior period
- Q2 CMS Energy earnings increased $57, primarily reflecting higher electric and gas utility earnings, rate increases, lower operating and maintenance costs, and favorable Q2 weather. First-half earnings increased $19; rate increases and lower operating costs were partly offset by weak gas deliveries in the unusually warm winter.
- CMS Energy’s first-half revenue declined $289, while operating income rose $20. Lower gas revenue and cost of gas sold contributed to the revenue decline; utility earnings benefited from rate increases and lower operating costs.
- First-half operating cash flow decreased $161. Management cited lower customer collections, lower gas prices, and higher energy-optimization spending, partly offset by lower benefit-plan contributions.
- Capital expenditures increased to $817 from $675, primarily reflecting greater utility investment. CMS Energy issued $300 of 3.0% senior notes due 2026 and raised $60 through its at-the-market equity program in March 2016.
- Consumers retired seven coal-fueled generating units totaling 950 MW in April 2016. The company said it expects to meet full-service customer capacity needs through 2020 using existing resources, efficiency and demand-management programs, renewables, and other planned capacity.
Outlook, risks and unusual items
- Consumers expects weather-adjusted electric deliveries to grow 0.5%–1.0% in 2016 and average about 0.5% annually over five years. Weather-adjusted gas deliveries are expected to rise about 2.0% in 2016, with stable deliveries over five years.
- Consumers plans approximately $8.5 billion of capital investment in 2016–2020 and about $17 billion in 2016–2025. It expects annual rate-base growth of 5%–7% while seeking to keep base-rate increases at or below inflation, excluding power and gas cost recovery charges.
- Consumers filed for a $225 annual electric rate increase in March 2016 and later submitted a plan to self-implement a $170 annual increase beginning September 2016. Its gas case settlement authorized a $40 annual increase; a $10 customer refund was recorded at June 30.
- CMS Energy and Consumers estimated a $10–$15 charge in 2016 for a voluntary employee separation program, with expected future staffing-cost savings. A Michigan tax settlement provides Consumers a $60 refund; $13 was received in June, with the balance scheduled for 2017 and 2018.
- Environmental compliance remains a material exposure, including emissions, coal ash, water, and potential greenhouse-gas requirements. Consumers estimated $0.6 billion of environmental capital expenditures for 2016–2020 and said recovery in customer rates is expected but not assured. The Clean Power Plan was stayed by the Supreme Court pending litigation.
- Recorded environmental obligations include $108 for Consumers’ former manufactured-gas-plant sites and $53 for CMS Energy’s Bay Harbor obligations. CMS Energy also faces an Equatorial Guinea tax claim of $152 plus penalties and interest, which it contests; no loss estimate is provided. Natural-gas price-reporting litigation remains pending and potential liability is described as highly speculative.
- Management expects liquidity and borrowing capacity to be sufficient for planned investment and obligations. If capital-market access were restricted, contingency measures could include reduced capital spending. The filing identifies regulatory decisions, weather, commodity prices, operations, environmental matters, pension performance, and litigation as risks.
Important facts for investors to verify
- Progress and final outcomes in the pending electric rate case, including the self-implemented increase and requested investment-recovery mechanism; confirm the gas-rate refund reconciliation.
- Whether operating cash flow and available credit remain adequate as capital spending continues to rise, and how debt levels and covenant headroom evolve.
- Actual electric and gas delivery trends relative to management’s forecasts, particularly the effects of weather and energy-efficiency programs.
- Costs, timing, and rate recovery for environmental compliance and remediation, including coal ash and former gas-plant sites.
- Developments in the Equatorial Guinea tax claim, gas price-reporting litigation, and other material contingencies.
- Execution and realized savings from the employee separation program and Consumers’ generation-capacity plan after the coal-unit retirements.