CMS Energy Corporation 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2020; filed August 3, 2020. This combined, unaudited filing covers CMS Energy and its subsidiary Consumers Energy. CMS Energy is primarily a Michigan energy holding company: Consumers operates regulated electric and gas utilities, while CMS Enterprises develops and operates power assets and EnerBank provides home-improvement loans.
Financial performance
| CMS Energy, $ millions except EPS | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Operating revenue | 1,443 | 1,445 | 3,307 | 3,504 |
| Operating income | 273 | 218 | 641 | 577 |
| Net income available to common | 136 | 93 | 379 | 306 |
| Diluted EPS | $0.48 | $0.33 | $1.33 | $1.08 |
- Six-month revenue fell 5.6%, while operating income rose 11.1% and common net income rose 23.9%. Q2 revenue was essentially unchanged, but operating income and common net income increased.
- Calculated operating margin increased to approximately 19.4% for the first half, from 16.5% a year earlier. Management cited rate increases and lower operating and maintenance costs as key earnings supports; lower gas sales, mainly due to unfavorable first-quarter weather, partly offset gains.
- Consumers’ six-month revenue was $3.074 billion versus $3.277 billion; net income available to its common stockholder was $394 million versus $323 million. Utility earnings benefited from rate increases and lower operating costs, while gas deliveries were affected by weather and electric deliveries by lower commercial and industrial demand.
Cash flow, debt and liquidity
- CMS Energy generated $796 million of operating cash flow in the first half, down from $1.185 billion. The principal year-over-year drag was $531 million of pension contributions, compared with none in the prior-year period.
- Capital expenditures were $946 million; net cash used in investing was $1.168 billion. Financing provided $1.819 billion, including $2.353 billion of debt issuance and $104 million of net common-stock issuance. Cash and cash equivalents, including restricted amounts, ended at $1.604 billion.
- At June 30, CMS Energy reported $13.414 billion of long-term debt and $1.744 billion of current debt, finance leases and other financing. Consumers reported $7.867 billion and $556 million, respectively. The filing’s debt fair-value table gives a higher fair value than carrying value for long-term debt.
- Available revolving credit was $545 million at CMS Energy and $1.1 billion at Consumers; Consumers had no commercial paper outstanding. Both companies reported covenant compliance, with debt-to-capital ratios of 0.61 for CMS Energy and 0.49 for Consumers, below their respective limits.
- Consumers’ operating cash flow was $781 million, down from $1.110 billion, also reflecting $518 million of pension contributions. Its capital expenditures were $936 million. Consumers had $1.229 billion of cash and restricted cash at period-end.
Material changes and outlook
- COVID-19 reduced electric deliveries to commercial and industrial customers, partly offset by higher residential use. Weather-normalized Q2 electric deliveries were approximately 12% below the prior year; commercial and industrial deliveries fell more than 20%, while residential deliveries rose approximately 10%. Consumers anticipated a full-year 2020 decline of more than 10% in commercial and industrial electric deliveries.
- Consumers reported increased uncollectible accounts and workforce-related costs and suspended residential service shut-offs during the pandemic. The MPSC permitted deferral of $9 million of incremental pandemic-related uncollectible expense at June 30, but in July denied deferral for other additional cost categories. Management said the pandemic’s longer-term financial and liquidity effects could not be predicted.
- No specific consolidated earnings or EPS guidance is provided in the supplied filing text. Management expects weather-normalized electric deliveries to decline slightly and gas deliveries to remain stable over the next five years. EnerBank reported a $2.6 billion loan portfolio and a 1.2% rolling-average net default rate; it warned that the pandemic could increase loan losses, modifications, or slow growth.
- Consumers expects $12.2 billion of capital spending in 2020–2024, within a $25 billion ten-year investment plan, and annual rate-base growth of 6%–8%. The five-year plan includes $9.4 billion for gas and electric distribution infrastructure and $2.8 billion primarily for new renewable generation. Some projects were rescheduled due to COVID-19, but management said the long-term plan was unchanged.
- Consumers’ 2019 gas rate case request was reduced to $229 million annually; its 2020 electric rate case request was reduced to $230 million. Both requests, including proposed returns on equity, remained subject to MPSC review. Consumers’ clean-energy plans target net-zero electric carbon emissions by 2040, retirement of the D.E. Karn 1 and 2 coal units in 2023, and net-zero methane emissions from its gas delivery system by 2030.
- Unusual or notable items include adoption of the expected-credit-loss standard, which increased EnerBank’s opening loan-loss reserves by $65 million and reduced CMS Energy’s first-half pretax income by $9 million; and an $8 million after-tax charge for the employee separation program.
Risks and contingencies
- Material risks include prolonged pandemic effects on demand, collections, costs, capital work and financing; regulatory decisions and rate recovery; weather and severe events; environmental requirements; and access to capital markets.
- CMS Energy recorded a $45 million liability for Bay Harbor remediation and faces a $152 million Equatorial Guinea tax claim, plus potentially substantial penalties and interest; management contests the claim and cannot predict the outcome.
- A Wisconsin gas-price-reporting litigation settlement was awaiting a fairness hearing and final court approval. Consumers’ MCV Partnership dispute remained subject to regulatory approval of a settlement in principle. Consumers also faces environmental remediation and permitting uncertainties; disclosed recorded liabilities include $63 million for former gas-manufactured-gas-plant sites.
- Consumers expects $275 million of environmental compliance capital expenditures in 2020–2024 and anticipates recovery in rates, but cannot assure recovery. Costs associated with pipeline safety requirements may also be material, with recovery subject to regulatory treatment.
Investor verification points
- Track whether COVID-19 demand weakness, customer arrears and uncollectible accounts persist, and how much cost recovery regulators ultimately permit.
- Review outcomes and timing of the pending electric and gas rate cases and the resulting authorized returns and rate-base recovery.
- Assess debt maturities and refinancing needs, pension funding, and the sustainability of liquidity after the substantial first-half financing activity.
- Verify progress, costs and schedules for the 2020–2024 capital plan and renewable projects, including any pandemic-related delays or changes in tax-credit eligibility.
- Monitor material litigation, environmental remediation and permit matters, and whether recorded reserves or expected customer recovery change.