CMS

CMS Energy Corporation & Consumers Energy Company - Q1 2009 10-Q Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 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. Consumers operates as a combination electric and gas utility serving Michigan's Lower Peninsula. The reporting period reflects the impact of a severe economic downturn in Michigan, particularly affecting the automotive sector, and ongoing regulatory proceedings regarding rate recovery and environmental compliance.

Key Financial Metrics

Material Changes vs. Prior Period

• Net Income Decline: Net income available to common stockholders decreased by $33 million (32%) to $69 million. This was driven by a $29 million drop in Electric Utility earnings and a $3 million drop in Gas Utility earnings.
• Revenue Drivers:
  • Electric Utility: Revenue decreased due to lower deliveries (down 4.3% to 9 billion kWh) reflecting unfavorable economic conditions and a new rate design structure that lowers winter rates to encourage conservation. These were partially offset by a June 2008 rate order and favorable sales mix.
  • Gas Utility: Deliveries decreased 4.7% to 131 bcf. Revenue impact was mitigated by a December 2008 gas rate order.
• Expense Increases: Operating expenses rose due to higher uncollectible accounts ($7 million increase), increased pension and OPEB expenses ($7 million), and planned plant maintenance outages. The absence of a $12 million gain from sulfur dioxide allowance sales in 2008 also contributed to the decline.
• Cash Flow: Operating cash flow for CMS Energy increased $131 million compared to 2008, primarily due to the absence of a $275 million contract termination payment made in 2008. However, Consumers' operating cash flow decreased $105 million due to lower net income and timing differences in receivables.

Guidance, Outlook, and Risks

• 2009 Outlook: Consumers expects electric deliveries to decline 3% and gas deliveries to decline 5% in 2009 compared to 2008. The company projects slower growth in the longer term due to the Michigan economic downturn and energy efficiency programs.
• Rate Matters: Consumers plans to self-implement an electric rate increase of $179 million annually beginning May 14, 2009, pending regulatory approval. An electric rate case filed in November 2008 sought $214 million in annual revenue increases. There is uncertainty regarding the Michigan Supreme Court's review of transmission cost recovery mechanisms.
• Capital Projects: Consumers is pursuing a "Balanced Energy Initiative" with a forecast investment of over $6 billion from 2009 through 2013. This includes a planned 800 MW clean coal plant (targeting 2017 operation) and 500 MW of renewable energy capacity by 2015. An air permit application for the coal plant is under public comment.
• Environmental & Regulatory Risks:
  • Carbon Regulation: Potential federal cap-and-trade legislation or EPA regulation of greenhouse gases could materially impact costs.
  • Bay Harbor: Ongoing environmental remediation at the Bay Harbor site carries a recorded liability of $59 million, with potential for additional costs if remediation techniques or regulatory requirements change.
  • DOE Litigation: Consumers is pursuing damages from the Department of Energy for failure to accept spent nuclear fuel, with $129 million in regulatory assets recorded for related storage and decommissioning costs.
• Liquidity: In March 2009, Consumers issued $500 million in First Mortgage Bonds to strengthen liquidity. The company maintains access to credit markets but monitors the volatile financial environment closely.

Investor Verification Checklist

• Rate Case Outcome: Verify the final resolution of the electric rate case and the self-implementation of the $179 million rate increase, including any potential refunds or delays imposed by the MPSC.
• Transmission Cost Recovery: Monitor the Michigan Supreme Court's decision regarding the recovery of transmission charges through the Power Supply Cost Recovery (PSCR) process versus general rate cases.
• Environmental Liabilities: Review updates on the Bay Harbor remediation costs and the status of the EPA's investigation into Routine Maintenance, Repair, and Replacement (RMRR) classifications at coal plants.
• Coal Plant Permitting: Track the approval status of the air permit for the proposed 800 MW clean coal plant and any impact from Michigan's executive directive on fossil fuel reduction.
• Bad Debt Exposure: Assess the impact of the automotive sector downturn on uncollectible accounts, noting the company's estimate of potential $15-$30 million charge-offs if major automotive customers declare bankruptcy.