CMS Energy Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2017. The combined filing covers CMS Energy and its wholly owned utility subsidiary, Consumers Energy. Unless stated otherwise, amounts are in millions of dollars. Interim results are seasonal and are not necessarily indicative of full-year results.
Business context
CMS Energy is a Michigan-focused energy holding company. Its principal businesses are Consumers Energy’s regulated electric and gas utilities and CMS Enterprises’ power-generation activities. Consumers’ utility results are affected by regulation, weather, customer demand, energy prices, and infrastructure investment.
Financial performance and liquidity
- Third quarter: CMS Energy revenue was $1,527, down 3.8% from $1,587. Operating income was $330 versus $375; net income available to common stockholders was $172 versus $186, and diluted EPS was $0.61 versus $0.67. Operating margin was approximately 21.6%, compared with 23.6%.
- Nine months: Revenue was $4,805, up 1.0% from $4,759. Operating income decreased to $959 from $976; net income available to common stockholders was $463 versus $474, and diluted EPS was $1.65 versus $1.70. Operating margin was approximately 20.0%, compared with 20.5%.
- Cash flow, nine months: Operating cash flow was $1,199, down from $1,241. Capital expenditures were $1,208, making operating cash flow less capital expenditures negative $9. Net cash used in investing was $1,354; financing provided $71. Cash and cash equivalents, including restricted amounts, were $173 at September 30, 2017.
- Debt and liquidity: The balance sheet reported $9,024 of long-term debt and $980 of current long-term debt, capital leases, and financing obligations. Consumers had $230 of commercial paper outstanding. Available revolving credit was $549 for CMS Energy and $893 for Consumers. Both companies reported compliance with financial covenants and no covenant defaults.
- Dividends: CMS Energy declared $0.3325 per common share in the quarter, up from $0.3100; nine-month dividends were $0.9975 versus $0.9300.
Material changes versus prior comparable periods
- Mild summer weather reduced electric sales; mild winter weather also reduced gas sales. Rate increases and higher weather-adjusted deliveries partly offset the impact.
- Depreciation and amortization rose $55 for the nine months, primarily because of increased plant in service. Consumers also incurred higher electric service-restoration costs following severe storms.
- A $15 CMS Energy income-tax benefit and $16 Consumers benefit were recognized after a review of state tax apportionment, including anticipated refunds for prior years. Consumers’ effective tax rate also benefited from regulatory treatment that accelerates income-tax benefits to customers.
- CMS Enterprises’ nine-month net income increased to $27 from $17, primarily reflecting higher capacity and demand revenue at Dearborn Industrial Generation. Corporate interest and other net expenses increased to $59 from $40.
Outlook, regulation, risks, and unusual items
- Outlook: Consumers expected weather-adjusted electric deliveries to grow about 0.5% in 2017 and average roughly 0.5% annually over five years; weather-adjusted gas deliveries were expected to remain stable through 2021. Consumers planned $9 billion of capital expenditures from 2017–2021, within an expected $18 billion infrastructure and electric-supply investment program for 2017–2026. The filing excerpt does not provide a specific CMS Energy full-year EPS forecast.
- Rates and policy: Consumers’ gas rate case resulted in a $29 annual rate increase effective August 2017, with investment-related increases of $18 in 2018 and $18 in 2019 subject to reconciliation. In October 2017, after quarter-end, Consumers self-implemented a $130 annual electric rate increase subject to refund, interest, and potential penalties. The 2016 Michigan Energy Law increased renewable-energy requirements and changed rate-case and capacity-planning rules.
- Palisades agreement: The MPSC authorized recovery of only $137 of the negotiated $172 payment to terminate the Palisades power-purchase agreement. Consumers and Entergy consequently did not terminate it; the agreement was expected to continue until April 2022.
- Other post-quarter event: In October 2017, Consumers completed the sale of retired coal units and recorded a $63 liability for decommissioning and cleanup, offset by a reduction in a regulatory liability. Consumers estimated the sale would save customers $30 in decommissioning costs.
- Environmental and legal exposure: Consumers recorded $93 for gas-site remediation, including former manufactured-gas-plant sites, and CMS Energy recorded $49 for Bay Harbor remediation. The Equatorial Guinea government asserted a $152 tax claim plus potentially substantial penalties and interest; CMS Energy contests it. Wisconsin gas-price-reporting litigation remained unresolved, with potential loss not estimable. Environmental compliance, remediation, and regulatory cost recovery remain material uncertainties.
- Accounting: CMS Energy and Consumers early adopted pension-cost presentation guidance in 2017; management said it did not materially affect net income, cash flows, or financial position. Revenue-recognition guidance effective in 2018 was not expected to have a material financial impact, though additional disclosures were anticipated.
- Management stated that available cash, expected operating cash flows, and liquidity sources were expected to cover contractual obligations for 2017 and beyond. It also identified regulatory outcomes, weather, operating disruptions, commodity and financing markets, environmental requirements, and litigation as risks to results.
Important facts for investors to verify
- Whether the October 2017 electric rate increase is ultimately approved, and whether any portion must be refunded or faces penalties.
- Actual cash generation relative to the utility’s substantial capital program, and the implications of debt issuance, maturities, and refinancing.
- Progress and cost recovery for environmental remediation, particularly the recorded Bay Harbor and former gas-plant obligations.
- Developments in the Equatorial Guinea tax arbitration and Wisconsin gas-price litigation, for which potential losses were not clearly quantifiable.
- Execution of renewable-generation, grid-modernization, and gas-pipeline plans, including regulatory approvals and customer-rate impacts.