CMS Energy Corporation — Q3 2018 Form 10-Q
Business context and reporting period. This unaudited combined filing covers the quarter and nine months ended September 30, 2018, and includes CMS Energy and its wholly owned regulated utility, Consumers Energy. CMS Energy also operates non-utility power and renewable-energy businesses. Unless noted, amounts are in millions of dollars.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| CMS Energy operating revenue | $1,599 | $1,527 | $5,044 | $4,805 |
| CMS Energy operating income | $294 | $330 | $912 | $959 |
| CMS Energy net income available to common | $169 | $172 | $549 | $463 |
| CMS Energy diluted EPS | $0.59 | $0.61 | $1.94 | $1.65 |
| Consumers operating revenue | $1,502 | $1,437 | $4,752 | $4,536 |
| Consumers net income available to common | $180 | $181 | $573 | $495 |
| Consumers operating cash flow | — | — | $1,255 | $1,209 |
- CMS Energy’s nine-month revenue rose about 5%, while net income increased $86 and diluted EPS rose $0.29. Management attributed gains principally to rate increases, higher sales, OPEB plan changes, and lower tax expense, partly offset by higher depreciation, maintenance, and other costs.
- Q3 CMS Energy net income slipped $3; operating income fell $36. Consumers’ electric utility income increased to $199 for the quarter and $468 year to date, while its gas utility recorded a Q3 loss of $19, compared with income of $5 a year earlier; nine-month gas utility income was $105 versus $101.
- CMS Energy operating cash flow was $1,565 for the first nine months, up from $1,199. Investing used $1,815, including $1,572 of capital expenditures; financing provided $412. Consumers’ investing used $1,435, including $1,339 of capital expenditures, and financing provided $153.
- At September 30, CMS Energy had $366 of cash and restricted cash; Consumers had $38. Available revolving credit was $541 at CMS Energy and $1,068 at Consumers. Consumers also had $279 of commercial paper outstanding.
- CMS Energy reported $8,869 of long-term debt and $1,971 of current debt, capital leases, and financing obligations. Consumers reported $5,239 of long-term debt and $898 of current debt, capital leases, and financing obligations. CMS Energy’s parent-only debt-to-EBITDA covenant ratios were 4.5x and 4.3x against limits below 6.0x and 6.25x; Consumers’ debt-to-capital ratio was 0.47x against a limit below 0.65x. Both were in compliance.
- CMS Energy declared dividends of $0.3575 per share for Q3, versus $0.3325 in Q3 2017. Nine-month declared dividends were $1.0725 per share, versus $0.9975.
Material changes and management outlook
- Nine-month earnings improved, but the quarter was weaker: favorable weather, sales, and rate increases supported results, while storm restoration, operating costs, and depreciation pressured earnings. Tax benefits from the Tax Cuts and Jobs Act (TCJA) were largely passed through to utility customers through lower rates and credits.
- Consumers expects weather-normalized electric and gas deliveries to remain stable through 2022. Its 2018–2022 capital plan totals $10.1 billion: $4.9 billion for gas infrastructure, $3.5 billion for electric distribution, and $1.7 billion for electric supply. Management expects annual rate-base growth of 6%–8%.
- Consumers’ June 2018 integrated resource plan proposes eliminating coal-fired generation by 2040, with staged unit retirements, and renewable-energy levels of 25% by 2025, over 35% by 2030, and over 40% by 2040. These are proposals subject to regulatory review, not guaranteed outcomes.
- Regulatory developments include a $72 annual electric rate increase authorized in the 2017 case and an $11 annual gas rate increase approved in August 2018. Consumers’ 2018 electric case sought $44 annually after revision, plus investment-related increases of $49 in 2020 and $48 in 2021, subject to approval and reconciliation.
- Consumers requested $31 in gas and $70 in electric customer refunds related to TCJA bill credits. In October 2018, it also sought approval to return $1.6 billion of net regulatory tax liabilities through future rates. These refunds and rate treatments remain subject to regulatory processes.
- Post-quarter financing: CMS Energy issued an additional $30 of junior subordinated notes and redeemed $300 of 6.25% senior notes due 2020 in October. Consumers issued $500 of first mortgage bonds in October at rates from 3.68% to 4.28%. The filing also notes a $250 CMS Energy equity-offering program; no third-quarter activity occurred under it.
Risks, contingencies, and unusual items
- Environmental compliance, pipeline integrity, severe weather, commodity prices, regulatory decisions, customer demand, financing access, pensions, and cyber or operational disruptions could affect results. Consumers estimates $0.4 billion of environmental capital expenditures for 2018–2022 and cautions that recovery in rates is not assured.
- Consumers faces an MCV Partnership arbitration claim seeking more than $270 in damages and interest over the power purchase agreement; Consumers says the claim is without merit but cannot predict the outcome.
- CMS Energy’s Equatorial Guinea tax dispute involves a claimed $152, plus potentially substantial penalties and interest. CMS Energy contests the claim and cannot predict the outcome.
- CMS Energy recorded a $46 Bay Harbor remediation liability; the EPA separately seeks $8 plus interest and costs, which CMS Energy disputes. Consumers recorded $78 for gas-site remediation, primarily former manufactured-gas-plant sites.
- Consumers estimates up to $10 of potential additional costs if required to remove damaged, retired underwater cables in the Straits of Mackinac. It reported no substantive evidence of contamination and is pursuing recovery from the vessel owners.
- Q3 and year-to-date results include higher OPEB plan credits following 2017 plan amendments. Other items included storm restoration expense, an unplanned Enterprises plant outage, and a write-off of capital costs related to a proposed Filer City plant conversion. The proposed PPA amendment ceased to be effective after FERC’s August 2018 determination; the original PPA continues through 2025.
- Management stated that liquidity and expected operating cash flows should be sufficient for contractual obligations. The filing warns that interim results are seasonal and not necessarily indicative of full-year results.
Important facts for investors to verify
- Track decisions and timing for Consumers’ electric rate case, TCJA-related customer refunds and deferred-tax treatment, and the pending integrated resource plan.
- Assess the scale, funding, and customer-rate recovery of the $10.1 billion investment program, alongside rising depreciation, maintenance, and financing costs.
- Monitor cash generation, near-term debt maturities, commercial-paper usage, credit-facility availability, and compliance with debt covenants.
- Follow developments and possible exposures in the MCV arbitration, Equatorial Guinea tax claim, Bay Harbor matter, environmental remediation, and other regulatory proceedings.
- Distinguish reported earnings growth for the nine-month period from the Q3 decline, and evaluate the contribution of favorable weather, tax effects, rate changes, and OPEB credits.