CMS ENERGY CORP quarterly report, Q2 FY2019

CMS Energy Corporation — Q2 2019 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2019. CMS Energy is a Michigan-focused energy holding company whose principal subsidiary, Consumers Energy, operates regulated electric and gas utilities; CMS Enterprises holds non-utility generation and energy investments. Results are unaudited and interim-period performance is seasonal.

Financial performance

CMS Energy consolidated	Q2 2019	Q2 2018	First half 2019	First half 2018
Operating revenue	$1.445 billion	$1.492 billion	$3.504 billion	$3.445 billion
Operating income	$218 million	$255 million	$577 million	$618 million
Net income available to common shareholders	$93 million	$139 million	$306 million	$380 million
Diluted EPS	$0.33	$0.49	$1.08	$1.35

• Q2 revenue fell about 3%, while net income and diluted EPS each declined about 33%. First-half revenue increased about 2%, but net income fell about 19%.
• First-half segment net income: electric utility $195 million versus $269 million; gas utility $129 million versus $124 million; Enterprises $11 million versus $29 million. Corporate interest and other loss improved to $29 million from $42 million.
• Management attributed the earnings decline principally to lower electric sales from unfavorable weather, winter-storm restoration costs, higher depreciation and utility expenses, and lower Enterprises earnings. Higher gas sales from colder weather and rate increases partly offset these items.
• Consumers’ Q2 revenue was $1.334 billion versus $1.395 billion and net income available to its common shareholder was $97 million versus $151 million. First-half revenue was $3.277 billion versus $3.250 billion, and net income was $323 million versus $393 million.

Cash flow, debt and liquidity

• For the first half, CMS Energy generated $1.185 billion of operating cash flow, down from $1.416 billion. Investing cash outflow was $1.410 billion, including $973 million of capital expenditures; financing provided $384 million. Cash, including restricted cash, was $334 million at June 30.
• Consumers generated $1.110 billion of operating cash flow versus $1.098 billion, used $1.026 billion in investing activities, and received $72 million from financing. Cash, including restricted cash, was $212 million.
• CMS Energy reported $11.236 billion of long-term debt and $1.077 billion of current long-term debt, finance leases and other financing on its June 30 balance sheet. Consumers reported $6.546 billion of long-term debt and $47 million of current debt, leases and other financing.
• Available revolving credit was $548 million at CMS Energy and $1.078 billion at Consumers. Consumers had no commercial paper outstanding. Both companies reported compliance with financial covenants and no defaults.
• CMS Energy’s first-half debt issuance and retirement were $1.455 billion and $1.104 billion, respectively. Consumers issued $297 million and retired $528 million; CMS Energy contributed $675 million to Consumers.

Material developments, outlook and risks

• The MPSC approved Consumers’ integrated resource plan in June 2019. It calls for retiring the 515-MW Karn 1 and 2 coal units in 2023, evaluating retirement of Campbell 1 and 2 in 2025 or earlier, and replacing coal generation with demand response, efficiency, renewables and other resources. Consumers targets eliminating coal generation by 2040 and reducing carbon emissions by more than 90% by 2040.
• Consumers plans $11.2 billion of capital expenditures for 2019–2023, including $9.3 billion for gas and electric distribution infrastructure and $1.9 billion for electric supply projects. Management expects annual rate-base growth of 6%–8%. Weather-normalized electric deliveries are expected to remain stable and gas deliveries to increase slightly through 2023.
• Consumers’ 2018 electric rate settlement authorized a $24 million annual rate decrease, but, with the expiration of a $113 million TCJA bill credit, produced a net annual rate increase of $89 million. Its pending gas rate case seeks a revised annual increase of $204 million; the outcome is uncertain.
• Significant operating and regulatory exposures include the January 2019 Ray Compressor Station fire, customer claims or regulatory penalties and cost disallowances that cannot yet be estimated; an MPSC investigation into more than 20,000 delayed or incomplete underground-facility marking requests; and PURPA disputes over qualifying generation and avoided-cost rates. The filing says any loss estimates for these matters are unclear or not reasonably estimable.
• Other contingencies include CMS Energy’s $45 million recorded Bay Harbor remediation liability and an Equatorial Guinea tax claim of $152 million plus potentially substantial penalties and interest. Consumers recorded $68 million for former manufactured-gas-plant remediation. The MCV Partnership’s claim exceeding $270 million related to Clean Air Act allegations was rejected by an arbitration panel in January 2019; other claims remain unresolved.
• Consumers’ EnerBank loan portfolio was $2.2 billion, primarily funded by $2.1 billion in certificates of deposit; its 12-month rolling average net loan default rate was 1.2%. CMS Energy is obligated to support the bank’s capital and liquidity needs.
• Management said liquidity and expected operating cash flows should fund contractual obligations. The filing reported no material changes to market-risk disclosures or risk factors; actual results remain exposed to regulation, weather, environmental requirements, energy prices, financing conditions and operational disruptions.

Investor verification priorities

• Verify the drivers and persistence of lower electric earnings, including weather effects, storm-restoration expenses, depreciation and utility cost increases.
• Track outcomes and timing for Consumers’ gas rate case, TCJA-related customer refunds, and regulatory recovery of planned infrastructure and generation spending.
• Monitor costs, claims and regulatory consequences from the Ray Compressor Station fire and the underground-facility marking proceeding.
• Assess execution, financing and customer-rate implications of the $11.2 billion investment plan and coal-retirement schedule.
• Review debt maturities, interest costs, dividend capacity and CMS Energy’s planned settlement of its $250 million forward equity contracts.