CMS Energy Corporation (CMS) — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. The combined filing reports CMS Energy, a Michigan energy holding company, and its wholly owned regulated utility subsidiary, Consumers Energy. Utility results are seasonal; the nine-month period is not necessarily indicative of full-year results.
Financial performance and position
| CMS Energy consolidated | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Operating revenue | $1.445B | $1.507B | $4.830B | $4.583B |
| Operating income | $317M | $343M | $878M | $791M |
| Net income available to common | $126M | $148M | $350M | $315M |
| Diluted EPS | $0.46 | $0.55 | $1.29 | $1.17 |
| Operating margin, approximate | 21.9% | 22.8% | 18.2% | 17.3% |
- For nine months, revenue rose about 5.4%, operating income 11.0%, and common net income 11.1%. Growth reflected higher gas deliveries and the absence of a 2012 electric revenue-decoupling asset write-off; the latter contributed $36M after tax to the year-over-year comparison.
- Q3 revenue fell about 4.1% and common net income fell $22M year over year. Milder weather reduced electric deliveries; electric delivery revenues were down $25M. Q3 diluted EPS declined to $0.46.
- Consumers’ nine-month common net income increased to $413M from $359M. Gas utility earnings rose $36M, mainly with colder-weather deliveries; electric utility earnings rose $18M. Consumers’ nine-month electric deliveries were down 1%, while gas deliveries rose 19.8%.
- CMS Energy generated $1.118B of operating cash flow in the first nine months, up from $934M. Investing used $1.004B, including $900M of capital expenditures; financing provided $53M. The $69M Lake Winds renewable-energy grant and improved working-capital contribution helped operating cash flow; higher pension contributions partly offset the increase.
- At September 30, CMS reported $260M cash and $32M restricted cash. Balance-sheet long-term debt was $7.089B, with $532M of current debt and lease obligations; total assets were $16.986B and equity $3.433B. Debt and lease balances increased from year-end 2012.
- CMS had $523M available under its $550M revolving facility. Consumers had $650M available on two revolving facilities, while a separate $30M facility was fully committed to letters of credit. Consumers also had up to $250M of eligible receivables in its borrowing program. Both registrants reported covenant compliance and no defaults.
Material developments, outlook, and risks
- Retirement benefits: A July 2013 OPEB remeasurement reduced CMS’s reported OPEB liability by $638M ($614M at Consumers), eliminated a $580M regulatory asset, and established a $34M regulatory liability. The filing attributes the change to actuarial assumptions, benefit changes, and a planned shift to an employer group waiver drug plan. CMS estimated a $48M reduction in 2013 OPEB cost, including Consumers; this is a significant accounting and cost change, not equivalent to a cash receipt.
- Rates and customers: The MPSC authorized an $89M annual electric rate increase in May 2013, below Consumers’ revised request; Consumers had self-implemented $110M subject to refund and later requested a no-refund finding. A proposed $49M gas rate case was suspended indefinitely. Consumers expects cost reductions and approved tax-benefit accounting changes to help avoid electric and gas base-rate increases through 2014, subject to assumptions. The MPSC authorized return of $211M of tax benefits to electric customers over five years and $264M to gas customers over 12 years, effective January 2014.
- Investment program: Consumers expected about $7B of capital investment over 2013–2017, including reliability, gas infrastructure, environmental, renewable, and smart-meter projects. It was pursuing approval for a proposed 700-MW gas plant estimated at $750M, targeted for 2017, while also soliciting offers to buy existing gas plants. A proposed $454M securitization for retired or planned-to-be-mothballed units could, if approved and completed, produce estimated initial annual customer savings of $24M.
- Generation and regulation: Consumers could face a generation-capacity shortfall of up to 1,500 MW in 2016 if smaller units are suspended and the MISO capacity market tightens. Seven coal units were expected to be mothballed in 2016; environmental requirements and possible plant retirement, conversion, or upgrades remain uncertain. Consumers estimated $1B in environmental spending for 2013–2017, with recovery in rates expected but not assured. Proposed greenhouse-gas, coal-ash, water, and other rules could add costs.
- Renewables and demand: Consumers had contracted or owned 402 MW of renewable nameplate capacity, about 81% of its 2015 requirement, and expected the Cross Winds 105-MW wind project to supply the balance. It expected $100M–$120M in federal production tax credits for that project, to benefit customers. Management forecast average electric delivery growth of 0.5%–1.0% annually through 2017 (1.0%–1.5% excluding efficiency impacts), stable gas sales through 2017, and weather-adjusted gas delivery growth of about 3% in 2013. These are forecasts, not earnings guidance.
- Legal and environmental contingencies: CMS recorded a $55M liability for Bay Harbor remediation (undiscounted $73M); Consumers recorded $121M for gas environmental sites, including former manufactured-gas plants (undiscounted $131M). Natural-gas price-reporting litigation was remanded for further proceedings after an appeals court reversed a dismissal; CMS said potential loss could be material but was not estimable. Equatorial Guinea asserted a $142M tax claim plus penalties and interest, which CMS contests. Consumers also reported unresolved environmental matters and litigation; several outcomes and potential costs could not be estimated.
- CMS stated that cash, expected operating cash flow, and available liquidity should be sufficient for obligations in 2013 and beyond, absent major market disruption. It noted that restricted market access could lead to contingency actions, including lower capital spending. The filing reported no material change in previously disclosed market risks or risk factors.
Key facts for investors to verify
- Whether the electric rate reconciliation results in a refund, and how subsequent rate proceedings and the suspended gas case develop.
- Whether the MPSC approves the proposed securitization and early-retirement accounting treatment, and whether the stated customer savings are realized.
- Final costs, timing, and regulatory recovery for the 2016 generation plan, environmental compliance, and the proposed gas plant versus acquisition alternatives.
- OPEB accounting and future pension/OPEB cash contributions; distinguish the liability remeasurement from operating cash flow and recurring earnings.
- Developments in price-reporting litigation, the Equatorial Guinea tax claim, Bay Harbor remediation, and Consumers’ environmental and gas-site liabilities.
- Cash-flow sustainability and debt growth relative to capital spending, dividends, and the availability of committed credit facilities.