CMS Energy Corporation — Form 10-Q summary
Reporting period: Quarter and nine months ended September 30, 2012. Filed October 25, 2012. The combined filing also reports Consumers Energy Company, CMS Energy’s regulated Michigan utility subsidiary; figures below identify the reporting entity where relevant. Amounts are in millions unless stated otherwise.
Business context and financial performance
CMS Energy is a Michigan-focused energy holding company. Its principal businesses are Consumers’ regulated electric and gas utilities and CMS Enterprises’ non-utility energy investments.
| CMS Energy consolidated | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Operating revenue | $1,507 | $1,464 | $4,583 | $4,883 |
| Operating income | $343 | $316 | $791 | $829 |
| Net income available to common stockholders | $148 | $139 | $315 | $374 |
| Diluted EPS | $0.55 | $0.53 | $1.17 | $1.43 |
CMS Energy’s operating margin was approximately 22.8% in Q3 2012 versus 21.6% in Q3 2011, and 17.3% for the first nine months versus 17.0% in the comparable 2011 period.
For the first nine months, Consumers reported net income available to its common stockholder of $359, down from $398. Electric utility earnings were $297 versus $309; gas utility earnings were $61 versus $88. CMS Energy’s Enterprises earnings were $9 versus $36.
Cash flow, debt and liquidity
- For the first nine months, CMS Energy generated $934 of operating cash flow, down from $1,195; Consumers generated $1,025, down from $1,245. The filing attributes the declines mainly to lower gas sales and a smaller working-capital reduction.
- CMS Energy used $938 in investing activities, including $861 of capital expenditures, versus $752 used in investing in 2011. Consumers’ capital expenditures were $857.
- CMS Energy had $128 of cash and cash equivalents plus $31 of restricted cash at September 30. Consumers had $57 plus $30 restricted. CMS Energy’s cash-flow statement reports $128 of ending cash and cash equivalents.
- CMS Energy reported $6,711 of long-term debt and $510 of current debt; Consumers reported $4,308 and $62, respectively. Debt issuance and repayments were both substantial during the period.
- CMS Energy had $548 available under its $550 revolving facility. Consumers had $648 available across facilities, excluding a separate $30 facility fully encumbered by letters of credit. Consumers also had $250 of eligible receivables under its borrowing program, with none transferred at quarter-end.
- Management said cash, expected operating cash flows and available liquidity should be sufficient for obligations and investment plans. Both companies reported compliance with financial covenants and no covenant defaults.
Material changes, outlook and risks
- CMS Energy’s nine-month common earnings fell $59 and diluted EPS declined $0.26. Main factors included the $59 electric decoupling regulatory-asset write-off (a $36 after-tax earnings impact) and the absence of a $32 tax benefit recognized in 2011 following Michigan tax-law changes. Milder early-2012 weather also reduced gas deliveries; gas volume fell 16% for the nine-month period.
- Consumers received a $118 annual electric rate increase authorized in June 2012 and a $16 annual gas rate increase. A new electric rate case filed in September seeks $148 annually; it also requests rate mechanisms and potential recovery of $83 for incremental 2014 investments. Outcomes remain subject to MPSC review.
- Consumers expects electric deliveries to grow about 1% annually through 2017 and gas deliveries to remain broadly stable. Its planned capital investment is $6.5 billion over 2013–2017. Smart Energy meter deployment began in August 2012; the estimated total project cost is $0.8 billion.
- Consumers estimates $1.5 billion of environmental expenditures for 2012–2018. Environmental rules and litigation could require significant plant-control spending, changes in fuel mix, or closure, mothballing or repowering of generating units. The company estimated potential generation-capacity shortfall of up to 1,500 MW as early as 2015 if units close.
- Key regulatory uncertainties include electric revenue-decoupling reconciliations following a court ruling against electric decoupling authority; $33 of gas decoupling regulatory assets subject to pending recovery; and allocation of the $120 DOE spent-fuel settlement, for which an administrative law judge recommended a $44 customer refund.
- Other contingencies include CMS Energy’s $64 recorded Bay Harbor environmental liability ($85 undiscounted), Consumers’ $125 recorded liability for former manufactured-gas-plant sites, and an asserted $142 tax claim plus interest by Equatorial Guinea. The filing says outcomes or potential losses for several legal matters cannot be predicted or estimated clearly.
- Other notable items: CMS Energy recognized $7 of discontinued-operations income from eliminating a liability related to a prior asset sale. The filing provides no specific consolidated EPS guidance. Management described Michigan economic conditions as improving but still affected by recession and high unemployment.
Important facts for investors to verify
- Progress and final decisions in Consumers’ pending electric rate case, rate-reconciliation requests and DOE settlement allocation.
- Whether the $33 gas decoupling regulatory asset is recoverable and the financial impact of the electric decoupling write-off.
- Environmental compliance costs, generating-unit plans and capacity adequacy as applicable air and water rules evolve.
- Actual capital spending, project execution and funding needs against the stated $6.5 billion 2013–2017 investment plan.
- Updates to major environmental and legal exposures, including Bay Harbor, former gas-plant sites and the Equatorial Guinea tax claim.