CMS ENERGY CORP quarterly report, Q3 FY2014

Business context and reporting period

CMS Energy Corporation filed this combined, unaudited Form 10-Q for the quarter ended September 30, 2014; it also reports results for the nine months ended on that date. CMS Energy is a Michigan-focused energy holding company. Its principal subsidiary, Consumers Energy, is a regulated electric and gas utility; CMS Energy also has non-utility businesses, including EnerBank and power-generation investments. Amounts below are in millions of dollars unless stated otherwise.

Financial performance and position

CMS Energy consolidated	Q3 2014	Q3 2013	Nine months 2014	Nine months 2013
Operating revenue	$1,430	$1,445	$5,421	$4,830
Operating income	$236	$317	$879	$878
Net income available to common stockholders	$94	$126	$381	$350
Diluted EPS	$0.34	$0.46	$1.39	$1.29

• Q3 revenue was down $15 million and operating income down $81 million year over year, while nine-month revenue rose $591 million and operating income was nearly flat. Nine-month diluted EPS increased 8%.
• For the first nine months, CMS Energy generated $962 million of operating cash flow, used $1,347 million in investing activities, and received $706 million from financing activities. Capital expenditures were $1,125 million. Operating cash flow declined from $1,118 million in 2013, primarily reflecting gas and power supply underrecoveries after severe winter weather and lower initial gas inventory levels.
• At September 30, CMS Energy reported $493 million of cash and cash equivalents plus $37 million of restricted cash; the MD&A describes these together as $530 million of consolidated cash. Consumers reported $200 million plus $37 million restricted, or $237 million combined.
• CMS Energy long-term debt carrying value was $8,711 million, including the current portion, versus $7,642 million at year-end 2013. Consumers’ comparable carrying value was $5,290 million versus $4,622 million. CMS Energy had $548 million available on its revolving facility; Consumers had $650 million available on its main facility. Both were in compliance with stated financial covenants, with no reported defaults.
• Consumers’ nine-month net income available to its common stockholder was $448 million, up from $413 million. Its operating cash flow was $948 million, down from $1,134 million.

Material changes and management commentary

• Colder winter weather increased Consumers’ nine-month gas deliveries to 234 bcf from 206 bcf and contributed to improved gas utility earnings. Consumers’ nine-month electric deliveries rose to 28.3 billion kWh from 27.8 billion kWh, but Q3 deliveries fell to 9.6 billion kWh from 9.8 billion kWh; lower sales to higher-margin customers pressured quarterly electric results.
• Consumers’ earnings benefited from a new MPSC accounting treatment that accelerated the flow-through of tax benefits, reducing income tax expense by $30 million for the first nine months. Management said this and cost initiatives helped avoid electric and gas base-rate increases in 2014.
• Consumers had $62 million of gas cost underrecovery and $47 million of power supply cost underrecovery at September 30. Recovery depends on regulatory processes and customer charges.
• CMS Energy recorded a $15 million charge in September to increase its Bay Harbor environmental liability; the remaining recorded liability was $63 million, with an undiscounted estimate of $82 million. Enterprises reported a $3 million nine-month loss, compared with $1 million of income a year earlier, primarily reflecting the Bay Harbor charge.
• Consumers issued $378 million of securitization bonds in July to recover the remaining book value of ten generating units planned for retirement by April 2016. It also issued $500 million of first mortgage bonds in August. CMS Energy issued $550 million of senior notes and completed a $30 million at-the-market equity sale.

Guidance, outlook, risks, contingencies and unusual items

• Consumers expected weather-adjusted electric deliveries to grow 2%–3% in 2014 and average 0.5%–1.0% annually over the following five years. Gas deliveries were expected to rise 1%–2% in 2014 and remain relatively stable over five years. The filing does not provide a clear CMS Energy full-year EPS guidance figure.
• Consumers projected about $7 billion of capital investment from 2014 through 2018, including $0.9 billion of environmental investments. Management expected annual rate-base growth of 5%–7%, while aiming to keep sustainable customer base-rate increases at or below inflation, excluding power- and gas-cost recovery charges.
• Consumers’ July 2014 gas rate-case application sought an $88 million annual increase, based on a requested 10.7% authorized return on equity, and additional recovery mechanisms. The request was pending; approval and timing were not assured.
• Management identified potential generation-capacity shortfall risk in 2016 following planned coal-unit retirements and possible tightening of the MISO capacity market. Consumers had contracted to buy a 540-MW gas plant for $155 million, subject to approvals, and had completed a capacity auction for 2015–2016 subject to MPSC approval.
• Environmental rules and proceedings pose material cost and operating uncertainties, including carbon-emissions requirements, coal ash disposal, water and effluent standards, and air-pollution controls. Consumers estimated $0.9 billion of environmental spending through 2018 and said rate recovery was expected but not assured.
• A September 2014 EPA/DOJ settlement concerning alleged air-permit violations required pollution-control work, emission-rate targets, surrender of emission allowances, $7.7 million of environmental mitigation projects, and a $2.75 million civil penalty. The consent decree remained subject to court entry.
• Other significant contingencies include a $142 million Equatorial Guinea tax claim plus penalties and interest, which CMS Energy contests; gas-index-price litigation with potential losses not estimable; Bay Harbor environmental obligations; and Consumers’ environmental remediation, including a $117 million recorded liability for gas-related sites. CMS Energy also disclosed $450 million of estimable maximum indemnity obligations, of which $7 million was carried as a liability.
• Consumers’ OPEB settlement called for contributions of $25 million in 2014 and $29 million in February 2015, followed by suspension of further contributions pending future MPSC determinations. Lower discount-rate assumptions increased projected retirement-benefit costs for 2015 and 2016.

Important facts for investors to verify

• Whether Consumers can obtain timely, adequate recovery of winter-related gas and power underrecoveries and the outcome of its pending gas-rate case and other regulatory proceedings.
• Whether capital spending, environmental compliance costs, and generation-capacity needs remain within management’s plans, and whether those costs are recoverable in customer rates.
• Debt growth, cash generation relative to capital expenditures, and continued access to credit facilities and capital markets.
• Developments in Bay Harbor, Equatorial Guinea, gas-index litigation, the EPA settlement, and other environmental or legal contingencies, including potential impacts not currently estimable.
• Actual demand, weather, commodity-price, and retirement-benefit outcomes versus management’s assumptions and outlook.