Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2008, for CMS Energy Corporation (the parent holding company) and its primary subsidiary, Consumers Energy Company (a combination electric and gas utility serving Michigan's Lower Peninsula). The filing also includes results for the Enterprises segment, which focuses on domestic independent power production. The company operates in a regulated environment heavily influenced by Michigan economic conditions, weather patterns, and federal/state environmental regulations.
Key Financial Metrics
CMS Energy Corporation (Consolidated)
- Net Income Available to Common Stockholders: $79 million for the three months ended Sept 30, 2008 (down $3 million from $82 million in 2007). For the nine months ended Sept 30, 2008, net income was $228 million (up $328 million from a $100 million loss in 2007).
- Earnings Per Share (Diluted): $0.34 for the quarter; $0.96 for the nine-month period.
- Operating Revenue: $1,428 million for the quarter; $4,977 million for the nine months.
- Cash Flow: Net cash provided by operating activities was $183 million for the nine months ended Sept 30, 2008. Net cash used in investing activities was $538 million, primarily due to capital expenditures and the absence of asset sale proceeds seen in 2007.
- Liquidity: Consolidated cash and cash equivalents totaled $162 million at Sept 30, 2008. The company maintains revolving credit facilities totaling $1.05 billion (subject to renewal in 2012) and $350 million (subject to renewal in 2009).
- Debt: Total long-term debt was $5,718 million at Sept 30, 2008.
Consumers Energy Company
- Net Income Available to Common Stockholder: $90 million for the quarter (up $30 million from 2007); $279 million for the nine months (up $63 million from 2007).
- Operating Revenue: $1,307 million for the quarter; $4,661 million for the nine months.
- Cash Flow: Net cash provided by operating activities was $524 million for the nine months ended Sept 30, 2008.
Material Changes Versus Prior Period
Consolidated Results (CMS Energy):
- Quarterly Decline: The $3 million decrease in quarterly net income was primarily driven by the absence of a $75 million insurance reimbursement recognized in 2007 related to the Argentine government's non-payment of an ICSID award. This was partially offset by increased earnings in the Electric Utility segment ($41 million increase) due to favorable Michigan Public Service Commission (MPSC) rate orders and lower corporate interest expenses.
- Year-to-Date Improvement: The $328 million increase in nine-month net income was driven by the absence of impairment charges and losses on discontinued operations recorded in 2007 (related to international asset sales), favorable MPSC rate orders, and lower corporate debt costs.
Segment Performance:
- Electric Utility: Net income increased significantly due to rate increases authorized in December 2007 and June 2008, and the elimination of certain costs under the Midland Cogeneration Venture (MCV) Power Purchase Agreement (PPA). Deliveries decreased slightly due to milder weather and economic conditions.
- Gas Utility: Net income decreased in the quarter ($18 million loss vs. $8 million loss in 2007) due to lower interest income and higher operating expenses, despite revenue increases from rate orders.
- Enterprises: Net income dropped sharply in the quarter ($5 million vs. $58 million in 2007) due to the absence of the 2007 insurance reimbursement. Year-to-date results improved significantly ($13 million vs. $194 million loss in 2007) due to the absence of 2007 impairment charges and discontinued operation losses.
Guidance, Outlook, Risks, and Unusual Items
Outlook and Strategy:
- Capital Expenditures: The company plans to invest approximately $6.7 billion in the utility from 2009 through 2013. For 2009, capital expenditures were reduced by $180 million to $855 million in response to economic conditions.
- Deliveries: Electric deliveries are expected to decline approximately 3% in 2008 compared to 2007. For 2009, a 1% decline (excluding weather) is expected, though growth is anticipated from a major semiconductor/solar customer.
- Regulatory Environment: New Michigan energy legislation signed in October 2008 streamlines the rate-making process, limits alternative energy suppliers to 10% of sales, and mandates 10% renewable energy by 2015.
Risks and Contingencies:
- Environmental Compliance: The company plans to spend $795 million through 2015 to comply with Clean Air Act regulations (NOx and SO2). There is uncertainty regarding the Clean Air Interstate Rule (CAIR) and potential costs for mercury emissions reductions (estimated at $400 million by 2015 if state plans are adopted).
- Legal Proceedings:
- Quicksilver Litigation: An appeal regarding a natural gas contract rescission is pending. If the court grants relief requested by Quicksilver, it could result in a loss in excess of $150 million.
- DOJ Investigation: Ongoing investigation into "round-trip" trading transactions by a former subsidiary (CMS MST).
- Gas Price Reporting: Multiple class-action lawsuits regarding alleged manipulation of natural gas price indices remain pending in various jurisdictions.
- MCV PPA: A settlement agreement approved in June 2008 resolved disputes regarding the MCV Facility power purchase agreement, eliminating an availability cap and providing cost certainty through 2025.
- Market Conditions: The company faces risks from the downturn in the Michigan economy (specifically the automotive sector) and volatility in financial and credit markets.
Important Facts for Investor Verification
- Rate Case Outcomes: Verify the final implementation of the June 2008 MPSC electric rate order ($221 million revenue increase) and the status of the 2008 gas rate case (staff recommended $36 million increase vs. $91 million requested).
- Environmental Capital Requirements: Monitor the status of the CAIR and CAMR regulations and the potential $400 million cost for mercury reductions, as these could impact future cash flows and rate requests.
- Legal Exposure: Track the outcome of the Quicksilver Resources appeal and the DOJ investigation into round-trip trading, as these represent significant contingent liabilities.
- Debt and Liquidity: Confirm the renewal status of the $350 million revolving credit facility due in 2009 and the company's ability to access capital markets given the 2008 financial crisis environment.
- MCV PPA Implementation: Verify the financial impact of the amended MCV PPA effective October 2008 on future operating costs and margins.