CMS

CMS Energy Corp. & Consumers Energy Co. - Q3 2009 10-Q Summary

Business Context and Reporting Period

This combined Form 10-Q covers the quarterly period ended September 30, 2009, for CMS Energy Corporation (CMS Energy) and its wholly-owned subsidiary, Consumers Energy Company (Consumers). CMS Energy operates primarily in Michigan through three segments: Electric Utility, Gas Utility, and Enterprises (non-utility investments). Consumers operates regulated electric and gas utility services in Michigan's Lower Peninsula. The reporting period reflects continued economic downturns in Michigan, particularly in the automotive sector, and ongoing regulatory proceedings regarding rate cases and environmental compliance.

Key Financial Metrics

Material Changes vs. Prior Period

• Net Income: For the three months ended Sept 30, 2009, net income decreased $5 million to $73 million compared to $78 million in 2008. For the nine months, net income decreased $8 million to $216 million from $224 million in 2008.
• Revenue Drivers: Revenue increases were driven by MPSC rate orders (December 2008 gas rate, May 2009 self-implemented electric rate) and favorable sales mix. These were partially offset by decreased deliveries due to unfavorable economic conditions in Michigan.
• Expenses: Corporate interest and other expenses increased significantly due to premiums paid on the early retirement of debt. Operating expenses rose due to higher pension and OPEB costs, plant maintenance, and increased interest expense.
• Enterprises Segment: Recorded a net loss of $12 million for the nine months ended Sept 30, 2009, compared to income of $13 million in 2008. This was primarily due to a $22 million after-tax expense for increased projected environmental remediation costs at Bay Harbor and lower power demand/prices.
• Discontinued Operations: Contributed $29 million to net income for the nine months ended Sept 30, 2009, primarily due to the expiration of an indemnity obligation related to a 2007 asset sale.

Guidance, Outlook, and Risks

• Rate Cases: Consumers self-implemented an annual electric rate increase of $179 million in May 2009 and plans to self-implement a gas rate increase of $89 million in November 2009. Final orders are pending. An MPSC show-cause order regarding operation and maintenance expenditures for 2006-2008 remains unresolved.
• Deliveries Outlook: Consumers expects weather-adjusted electric deliveries to decline 4% in 2009 and gas deliveries to decline 5% in 2009 compared to 2008, reflecting economic conditions and energy efficiency programs. Modest growth is expected from 2010 through 2014.
• Capital Plan: Consumers forecasts capital investments exceeding $6 billion from 2009 through 2013 under its "Balanced Energy Initiative," focusing on energy efficiency, renewables, and potential new generation (including a proposed 830 MW coal plant, pending regulatory approval).
• Environmental & Regulatory Risks: Significant uncertainties exist regarding federal and state regulations on greenhouse gases, mercury emissions, and coal ash. The EPA's proposed findings on greenhouse gases and potential cap-and-trade legislation could materially impact costs. Consumers is also facing potential costs related to the Bay Harbor remediation and Big Rock decommissioning funding shortfalls.
• Liquidity: Management believes current cash levels and access to capital markets are sufficient to meet requirements, though they are monitoring credit market volatility. CMS Energy and Consumers are in compliance with all debt covenants.

Key Facts for Investor Verification

• Rate Case Outcomes: Verify the final MPSC orders for the self-implemented electric ($179M) and gas ($89M) rate increases, and the resolution of the show-cause order regarding O&M expenditures.
• Bay Harbor Remediation: Monitor updates on the $85 million recorded liability for Bay Harbor remediation, as cost estimates and timing are subject to change based on regulatory agreements and disposal options.
• Environmental Legislation: Track the progress of federal greenhouse gas legislation and EPA rulemakings (CAIR, CAMR, MACT) which could require significant capital expenditures for emission controls.
• Debt Refinancing: Note the significant debt activity in 2009, including the retirement of $320 million in senior notes and the issuance of $473 million in new debt (convertible and senior notes), and monitor future maturities.
• Michigan Economic Impact: Assess the continued impact of the automotive industry downturn on customer load and collections, particularly given the 4-6% projected decline in deliveries.