CMS Energy Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. CMS Energy is a Michigan-based energy holding company; its principal subsidiary, Consumers Energy, operates regulated electric and gas utilities. Amounts are in U.S. dollars; financial figures are in millions unless stated otherwise.
Financial performance
| CMS Energy consolidated | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Operating revenue | $1,801 | $2,111 | -$310 |
| Operating income | $336 | $397 | -$61 |
| Net income available to common stockholders | $164 | $202 | -$38 |
| Diluted EPS | $0.59 | $0.73 | -$0.14 |
| Operating cash flow | $632 | $760 | -$128 |
| Capital expenditures | $407 | $348 | +$59 |
Operating margin was approximately 18.7%, versus 18.8% a year earlier; net margin was approximately 9.1%, versus 9.6%. Revenue fell 14.7% and net income fell 18.8% year over year. Lower electric and gas deliveries, primarily due to the second-warmest winter in Consumers’ history, drove the earnings decline; rate increases partly offset the impact. Lower gas sales and lower gas costs also reduced reported revenue.
- Segment net income: Electric utility $91 (prior year $94); gas utility $81 ($121); enterprises $6 ($7); corporate interest and other loss $14, improved from a $20 loss.
- Utility deliveries: Consumers electric deliveries were 9.1 billion kWh, down from 9.5 billion; gas deliveries were 121 bcf, down from 152 bcf.
- Cash flow and investment: Operating cash flow less capital expenditures was $225, compared with $412 in Q1 2015. Operating cash flow was affected by lower earnings and lower collections of gas-cost underrecoveries. Capital spending rose, mainly for utility investment.
- Cash and debt: At March 31, CMS Energy had $205 of cash and cash equivalents, including $28 restricted. Reported debt carrying value was $9,099, including current maturities. Consumers had $55 of cash including restricted cash and $5,382 of debt carrying value.
- Liquidity: Available revolving credit capacity was $549 at CMS Energy and $893 at Consumers. Consumers had no commercial paper outstanding. Both companies were in compliance with their financial covenants; CMS parent debt/EBITDA was 4.5x against a 6.0x limit, and Consumers debt/capital was 0.47 against a 0.65 limit.
Material changes and unusual items
- Electric utility earnings benefited from a December 2015 rate increase, partly offset by weather-related lower sales, higher storm-restoration costs, and higher depreciation and property taxes.
- Gas utility earnings were most affected by weather-related lower deliveries; a January 2016 rate increase provided a partial offset.
- CMS Energy early-adopted share-based payment accounting guidance. It recorded $6 of excess tax benefits in Q1 net income and a $33 cumulative adjustment to opening accumulated deficit. The reported effective tax rate declined to 31.1% from 33.1%.
- A change in the pension and postretirement benefit cost calculation reduced Q1 service and interest costs by $9 for the plans combined.
- CMS Energy issued approximately 1.45 million shares in March under its at-the-market equity program, receiving $60 net proceeds. The program permits up to $100 of aggregate sales; $90 had been issued through March 31.
Outlook, regulation, risks and contingencies
- Outlook: The filing provides no clear full-year CMS Energy earnings or EPS guidance. Consumers expected 2016 weather-adjusted electric deliveries to grow 1.5%–2.0% and gas deliveries to grow 1.0%. Longer-term plans assumed average electric delivery growth of 0.5%–1.0% annually and broadly stable gas deliveries.
- Capital program: Consumers expected to invest about $8.4 billion over five years and about $17 billion from 2016 through 2025. Management projected annual rate-base growth of 5%–7%, while aiming to keep base-rate increases, excluding recovery charges, at or below inflation.
- Rates: Consumers filed in March 2016 for a $225 annual electric rate increase and an investment recovery mechanism covering up to $222 over 2017–2019, subject to reconciliation. In April 2016, the MPSC approved a $40 annual gas rate increase, below the $85 requested. The MPSC also reduced the previously authorized electric increase from $165 to $126 annually after the April retirement of seven coal units.
- Generation and environment: Consumers retired seven coal-fueled units, totaling 950 MW, in April 2016, after quarter-end. It expected to meet full-service capacity needs through 2020 using existing resources, a recently purchased 540-MW gas plant, upgrades, renewables, efficiency and demand management. Consumers estimated $0.7 billion of environmental capital expenditures for 2016–2020; recovery in rates is expected but not assured. The Clean Power Plan was stayed by the U.S. Supreme Court while litigation proceeds.
- Contingencies: CMS Energy recorded a $54 liability for Bay Harbor remediation (undiscounted estimate $69); the EPA separately seeks $8 plus interest in a disputed claim. CMS Energy is contesting a $152 tax claim from Equatorial Guinea, plus penalties and interest; the ultimate exposure is uncertain. Consumers recorded $114 for gas environmental obligations, principally 23 former manufactured-gas-plant sites, with $130 undiscounted; associated regulatory assets were $145. Certain natural-gas price-reporting litigation also remains unresolved, and the filing says potential loss cannot presently be estimated.
- Funding and operations: Management expected liquidity and market access to remain sufficient, while noting restricted subsidiary dividend transfers, credit-market access, weather, energy prices, regulation, environmental requirements, infrastructure execution and cyber incidents as risks. CMS Energy extended its $180 term loan maturity by one year to April 2018 in April 2016.
Important facts for investors to verify
- Whether utility deliveries and earnings recover from the unusually warm winter, and the extent to which future results depend on weather.
- The outcome and timing of the electric rate case and investment recovery mechanism, and implementation of the approved gas rate settlement.
- Capital spending, environmental compliance costs, and the rate recovery ultimately permitted for those expenditures.
- Developments in the Equatorial Guinea tax claim, Bay Harbor and former gas-plant remediation, and unresolved gas price-reporting litigation.
- Liquidity, debt maturities, covenant headroom, and the effect of CMS Energy’s equity issuance and subsidiary dividend restrictions on parent funding.