CMS Energy Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited. CMS Energy is a Michigan-based energy holding company whose principal subsidiary, Consumers Energy, operates regulated electric and gas utilities. CMS Energy also has non-utility businesses, including EnerBank. Utility results are seasonal, and first-quarter results are not necessarily indicative of full-year performance.
Financial performance and position
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Operating revenue | $1.979 billion | $1.743 billion |
| Operating income | $329 million | $188 million |
| Net income available to common stockholders | $144 million | $67 million |
| Diluted EPS | $0.53 | $0.25 |
| Operating cash flow | $725 million | $635 million |
| Capital expenditures | $274 million | $294 million |
- Operating margin was approximately 16.6%, versus 10.8% a year earlier; net margin was approximately 7.3%, versus 3.8% (calculated from reported revenue and income).
- Operating cash flow less capital expenditures was approximately $451 million, compared with $341 million in Q1 2012. Cash flow benefited from a $69 million renewable-energy grant and higher earnings; higher pension contributions and receivables partly offset the improvement.
- At March 31, CMS reported $586 million of cash and cash equivalents plus $29 million of restricted cash, or $615 million combined. Current assets were $2.528 billion and current liabilities $1.645 billion.
- Reported long-term debt, including its current portion, was approximately $7.452 billion; the balance sheet also included $149 million of non-current capital and finance lease obligations. CMS issued $250 million of 4.70% senior notes due 2043, intending to use proceeds to retire $250 million of 2.75% notes due 2014.
- CMS had $548 million available under its $550 million revolving facility. Its reported debt-to-EBITDA covenant ratio was 4.4x against a maximum of 6.0x; interest coverage was 4.5x against a 2.0x minimum. Management said liquidity and expected cash flows should fund obligations and investment plans.
Changes versus the prior year
- Net income rose $77 million and diluted EPS increased $0.28. Improved gas utility results contributed $41 million to the net-income increase, while electric utility results contributed $45 million.
- Gas delivery revenue increased $55 million, mainly because colder weather increased customer deliveries 25% to 132 bcf. Electric delivery revenue increased $80 million, including the absence of a $59 million electric revenue-decoupling asset write-off recorded in 2012; deliveries excluding the largest customer rose 2%.
- Q1 2013 included a $69 million renewable-energy grant. Higher pension contributions and higher gas-sales receivables partly offset improved operating cash flow.
- CMS common dividends declared increased to $0.255 per share from $0.24.
Outlook, commentary, and material risks
- Consumers expects 2013 weather-adjusted electric deliveries to decline about 3%, primarily due to lower deliveries to its largest customer; excluding that customer, deliveries are expected to remain stable. Longer-term electric delivery growth is projected at about 0.5%–1.0% annually. Weather-adjusted gas deliveries are expected to grow about 3% in 2013, with longer-term gas deliveries expected to remain stable.
- Consumers expects approximately $7 billion of capital investment from 2013–2017. Plans include a proposed 700-MW gas plant estimated at $750 million, a proposed 24-mile gas pipeline estimated at $120 million, environmental and reliability projects, renewable generation, and its Smart Energy program. Major projects depend on regulatory approvals and permits.
- Consumers requested a $145 million annual electric rate increase and self-implemented $110 million in March, subject to refund with interest. It also requested a $49 million annual gas rate increase. Outcomes of rate cases and related regulatory appeals remain uncertain.
- Potential generation capacity shortfall could reach 1,500 MW in 2016 if coal-unit closures coincide with a tighter regional capacity market. Consumers sought to delay mothballing seven smaller coal units by one year and is evaluating continued operation, environmental upgrades, conversion, or retirement.
- Environmental rules and related litigation could require significant generation, emissions-control, waste-disposal, and pipeline investments. Consumers estimates $1.1 billion of environmental expenditures from 2013–2018 and expects rate recovery, but cannot assure it. Its recorded gas environmental liability was $122 million; CMS’s Bay Harbor liability was $60 million, with $78 million undiscounted.
- CMS disclosed $482 million of maximum estimable indemnity obligations, of which $15 million was recorded. Other contingent exposures include the Equatorial Guinea tax claim ($142 million plus penalties and interest) and legacy gas-price-reporting litigation. In April 2013, after quarter-end, the Ninth Circuit reversed a dismissal in that litigation and remanded it; potential losses were not estimable and could be material if the outcome is unfavorable.
- Consumers faces investigations into two gas explosions; the company did not expect a material adverse impact but could not predict the outcome. A landowner lawsuit concerning Lake Winds Energy Park was filed in April 2013.
- Management cited regulation, weather, energy prices, Michigan economic conditions, financing access, pension performance, operational disruptions, and environmental requirements as significant uncertainties. No material change to the previously disclosed risk factors or market-risk disclosures was reported.
Investor verification priorities
- Confirm the drivers and sustainability of earnings growth, especially weather-sensitive gas deliveries and the one-time comparison benefit from the 2012 electric decoupling write-off.
- Track MPSC decisions and refund exposure for the electric rate increase already self-implemented, as well as outcomes of the pending electric and gas rate cases.
- Assess funding, permitting, regulatory recovery, and execution risks for the multi-year capital program and environmental compliance costs.
- Review generation capacity plans, coal-unit decisions, and the proposed gas plant against the potential 2016 capacity shortfall.
- Monitor liquidity, debt maturities, covenant headroom, and contingent exposures, particularly the gas-index litigation and Equatorial Guinea claim.