Business context and reporting period
CMS Energy Corporation filed this combined, unaudited Form 10-Q for the quarter ended March 31, 2019. CMS Energy is a Michigan-focused energy holding company whose principal subsidiary, Consumers Energy, operates regulated electric and gas utilities; CMS Enterprises conducts non-utility power and energy businesses. The quarter’s results are seasonal and are not necessarily indicative of full-year performance.
Financial performance and liquidity
Unless stated otherwise, figures are in millions of dollars. CMS Energy results are consolidated and include Consumers Energy.
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Operating revenue | $2,059 | $1,953 | +5.4% |
| Operating income | $359 | $363 | -$4 |
| Net income available to common stockholders | $213 | $241 | -$28 |
| Diluted EPS | $0.75 | $0.86 | -$0.11 |
| Net cash provided by operating activities | $617 | $708 | -$91 |
| Capital expenditures | $481 | $422 | +$59 |
CMS Energy’s operating margin was approximately 17.4%, versus 18.6% in Q1 2018; net income as a share of revenue was approximately 10.3%, versus 12.3%. These ratios are calculated from reported figures. Higher electric and gas rates and sales supported earnings, but were outweighed by winter-storm restoration costs, higher depreciation and property taxes, and weaker Enterprises results.
Segment net income was $105 million for electric utility (down $34 million), $121 million for gas utility (up $18 million), and $1 million for Enterprises (down $14 million). Corporate interest and other was a $14 million loss, compared with a $16 million loss. Electric deliveries were 9.2 billion kWh in both periods; gas deliveries rose to 142 bcf from 133 bcf, mainly due to colder weather.
At March 31, CMS Energy had $267 million of cash and cash equivalents, including $33 million restricted; Consumers had $64 million, including $27 million restricted. CMS Energy’s operating cash flow declined primarily due to working-capital timing, including increased gas deliveries and collection timing, and customer refunds related to the Tax Cuts and Jobs Act. CMS Energy used $675 million in investing activities, including $481 million of capital expenditures and EnerBank loan activity. Financing activities provided $150 million, including $993 million of debt issuance and $790 million of debt retirement.
CMS Energy reported $11.105 billion of long-term debt on its balance sheet, plus current obligations and $30 million of notes payable; Consumers reported $6.565 billion of long-term debt, plus current obligations and $30 million of notes payable. Current balance-sheet debt and lease obligations are reported together, so these figures do not represent total borrowings. Revolver availability was $546 million for CMS Energy and $1.078 billion for Consumers. Consumers had $30 million of commercial paper outstanding. Both companies reported compliance with financial covenants and no defaults.
Material changes and business developments
- CMS Energy revenue increased 5.4%, while common net income fell 11.6% and operating income declined slightly. Rate increases and higher sales were more than offset by $29 million of higher storm restoration costs at the consolidated level, higher depreciation, and reduced Enterprises earnings.
- Consumers’ January 2019 electric rate order authorized a $24 million annual rate decrease; after expiration of $113 million of TCJA bill credits, the company described the net annual rate effect as an $89 million increase.
- Consumers’ pending gas rate case seeks a $229 million annual increase, a 10.75% return on equity, and revenue-decoupling and investment-recovery mechanisms.
- Consumers’ 2019–2023 investment plan calls for $11.2 billion of capital expenditures, including $9.3 billion for gas infrastructure and electric distribution and $1.9 billion for electric supply and environmental projects. Management expects annual rate-base growth of 6%–8%.
- In April 2019, CMS Energy’s DIG subsidiary sold high-voltage equipment and expects to recognize a $16 million gain in Q2. Consumers expects to sell substation transmission assets in 2019 at a price above book value.
Outlook, risks and unusual items
Management expects Consumers’ weather-normalized electric deliveries to remain stable and gas deliveries to increase slightly through 2023. Consumers expects its available cash, operating cash flows and financing access to fund obligations in 2019 and beyond; it notes that reduced capital spending could be a contingency if capital-market access becomes restricted.
A settlement resolving Consumers’ integrated resource plan was filed in March 2019, but objections were filed in April. The MPSC was expected to approve or reject it by June 10, 2019. The proposed plan includes retiring two coal units totaling 515 MW in 2023, evaluating retirement of two additional units, and expanding demand response, efficiency and renewable generation. The settlement targets elimination of coal generation by 2040 and carbon-emissions reductions exceeding 90% by 2040.
A January 2019 fire at Consumers’ Ray Compressor Station disrupted storage and gas-delivery capacity during extreme cold, prompting temporary customer load reductions and industrial/commercial curtailments. The filing says potential customer claims, regulatory penalties or disallowances cannot yet be reasonably estimated and could materially affect results, financial condition or liquidity.
Other material uncertainties include pending rate and regulatory proceedings; environmental compliance, remediation and cost-recovery risks; litigation over natural-gas price reporting; and a $152 million Equatorial Guinea tax claim, plus potentially substantial penalties and interest, which CMS Energy contests. Consumers recorded a $72 million liability for former manufactured-gas-plant remediation, with a $131 million related regulatory asset. CMS Energy recorded a $45 million Bay Harbor remediation liability. The filing also identifies potential additional costs of up to $10 million related to retired underwater cables. Management states that outcomes of several matters cannot be predicted.
Consumers’ operating lease standard adoption on January 1, 2019 added lease assets and liabilities to the balance sheet but did not affect net income or cash flows. CMS Energy entered into forward equity sale contracts with an aggregate sales price of $250 million and said it presently intends to settle them by issuing shares.
Important facts for investors to verify
- Track the MPSC’s decision on the IRP settlement and the outcome of Consumers’ pending $229 million gas rate case.
- Monitor the financial and regulatory consequences of the Ray Compressor Station fire, including any claims or cost disallowances.
- Assess whether storm-related restoration costs, higher capital spending and working-capital movements persist and how they affect cash generation.
- Review debt maturities, refinancing needs, dividend capacity and any share issuance when CMS Energy settles its forward equity contracts.
- Follow environmental remediation estimates and the outcomes of the Equatorial Guinea tax claim, gas-index litigation and other contingencies.