CMS Energy Corporation — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. This combined filing covers CMS Energy and its wholly owned utility subsidiary, Consumers Energy. CMS Energy operates regulated electric and gas utilities in Michigan and non-utility energy businesses. Amounts below are in U.S. dollars; financial statement amounts are generally in millions.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| CMS Energy revenue | $1,486 | $1,430 | $4,947 | $5,421 |
| CMS Energy operating income | $317 | $236 | $918 | $879 |
| CMS Energy net income available to common stockholders | $148 | $94 | $417 | $381 |
| CMS Energy diluted EPS | $0.53 | $0.34 | $1.51 | $1.39 |
| Consumers net income available to common stockholder | $160 | $119 | $458 | $448 |
- Nine-month CMS Energy revenue declined 9% while operating income rose 4% and common earnings increased 9%. Lower gas costs and purchased-power costs reduced reported revenue and expenses; utility rate increases and higher electric sales also supported earnings.
- Q3 CMS Energy earnings improved by $54 million year over year. The filing attributes the gain principally to weather-related electric sales, rate increases, lower operating costs, and the absence of a prior-year Bay Harbor environmental-liability increase.
- For the first nine months, electric utility earnings were $342 million, down from $326 million? The filing reports $342 million in 2015 versus $326 million in 2014, an increase of $16 million. Gas utility earnings were $115 million versus $121 million; Enterprises earned $10 million versus a $3 million loss.
- CMS Energy’s effective tax rate was 33.6% for the nine-month period, compared with 33.9% in 2014. The filing does not provide a consolidated operating-margin measure.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $1.420 billion at CMS Energy, up from $962 million; Consumers generated $1.427 billion, up from $948 million. The increases reflected lower gas purchase costs, improved recovery-account working capital versus the severe winter impacts in 2014, and higher earnings.
- Capital expenditures were $1.102 billion at CMS Energy and $1.093 billion at Consumers. Net investing cash outflow was $1.340 billion and $1.186 billion, respectively. CMS Energy used $137 million of financing cash, compared with $706 million provided in the prior-year period.
- At September 30, CMS Energy had $202 million in cash and cash equivalents, including $52 million restricted; Consumers had $95 million, including the same $52 million restricted. Balance-sheet cash excluding restricted cash was $150 million and $43 million, respectively.
- CMS Energy reported $7.903 billion of non-current long-term debt and $741 million of current maturities and related obligations. Consumers reported $4.969 billion of non-current long-term debt and $283 million of current maturities and related obligations.
- Available revolving credit was $547 million at CMS Energy and $641 million under Consumers’ main facility. Consumers also had $68 million of commercial paper outstanding and $250 million of eligible receivables available under its receivables program. Both companies reported compliance with financial covenants and no defaults.
- CMS Energy’s debt-to-EBITDA covenant ratio was 4.1x against a maximum of 6.0x; Consumers’ debt-to-capital ratio was 0.47 against a maximum of 0.65.
Material changes and investment plans
- Consumers self-implemented a $110 million annual electric rate increase in June 2015, subject to refund with interest, while its case seeking $163 million remained pending. It also requested an investment recovery mechanism for planned future spending.
- Consumers filed a gas rate case in July 2015 seeking an $85 million annual increase, including $64 million related to infrastructure investment, plus proposed mechanisms for future investment recovery and revenue reconciliation.
- Consumers plans approximately $7.8 billion of investment through 2019 and approximately $15.5 billion from 2015 through 2024. Management expects annual rate-base growth of 5%–7%, while aiming to keep base-rate increases at or below inflation, excluding fuel-recovery charges.
- Consumers expects to complete the purchase of a 540-MW natural-gas generating plant for $155 million in late 2015 or early 2016, subject to remaining approvals. It expects existing resources to cover full-service capacity needs through 2020, including after planned retirement of seven smaller coal units in 2016.
Outlook, risks and unusual items
- Management expects weather-adjusted electric deliveries to be flat in 2015 and average electric delivery growth of approximately 0.5%–1% annually over the next five years. Weather-adjusted gas deliveries are expected to rise 1%–1.5% in 2015; gas deliveries are expected to remain broadly stable over five years.
- Consumers reported achieving cumulative energy-use reductions of 6.5% for electricity and 4.6% for gas by September 30, above statutory targets of 5.6% and 3.9%. It had installed 686,000 electric smart meters and targets 1.8 million by the end of 2017.
- Consumers recorded a $68 million increase in its coal-ash asset-retirement obligation in September, with a corresponding increase in plant assets. CMS Energy’s total recorded ARO rose to $419 million, including $418 million at Consumers.
- CMS Energy had a $59 million recorded Bay Harbor liability, against an undiscounted remaining obligation of $75 million. The company also faces an Equatorial Guinea tax claim of $142 million plus penalties and interest; it contests the claim and cannot predict the outcome. Potential gas-price-reporting litigation losses are not estimable.
- Consumers’ recorded gas environmental liability for former manufactured-gas-plant sites was $112 million, with a $143 million regulatory asset related to those sites. Recovery of environmental costs through customer rates is expected by the company but is not assured.
- Key uncertainties include rate-case outcomes and possible refunds, Michigan legislation that could increase retail choice, environmental rules and litigation (including the Clean Power Plan, MATS and coal-ash requirements), commodity prices, weather, capital-market access, and operating and infrastructure risks. Management stated that liquidity and expected operating cash flows should be sufficient for contractual obligations; future financing access or regulatory cost recovery is not guaranteed.
Important facts for investors to verify
- Whether the MPSC’s final electric-rate decision differs from the $110 million self-implemented increase or requires refunds, and the outcome of the gas-rate case.
- Whether operating cash flow remains strong after the favorable working-capital and gas-cost comparisons with 2014, while the capital program continues.
- Debt maturities, refinancing needs, and access to committed credit, particularly given the increase in current debt maturities and limited unrestricted cash balances.
- Final cost, timing, and rate recovery for coal-ash obligations, MGP remediation, Bay Harbor, and other environmental requirements.
- Developments in the Equatorial Guinea tax arbitration and gas-price-reporting litigation, for which ultimate exposure or outcome is uncertain.
- Execution and approval timing for the 540-MW plant acquisition, coal-unit retirements, and planned utility investment, including whether customer affordability and targeted reliability improvements are achieved.