Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2008, for CMS Energy Corporation (the parent holding company) and its subsidiary, Consumers Energy Company (a combination electric and gas utility serving Michigan's Lower Peninsula). The report details operations across three segments for CMS Energy: Electric Utility, Gas Utility, and Enterprises (non-utility power production). The company's strategy focuses on utility operations, the "Balanced Energy Initiative" for future capacity, and managing cash flow amidst rising commodity costs and a sluggish Michigan economy.
Key Financial Metrics
CMS Energy Corporation (Consolidated)
- Net Income Available to Common Stockholders: $46 million for the three months ended June 30, 2008 (vs. $33 million in 2007); $149 million for the six months ended June 30, 2008 (vs. a loss of $182 million in 2007).
- Earnings Per Share (Diluted): $0.19 for the quarter; $0.62 for the six-month period.
- Operating Revenue: $1,365 million for the quarter; $3,549 million for the six months.
- Cash Flow: Net cash provided by operating activities was $651 million for the six months ended June 30, 2008. Net cash used in investing activities was $344 million.
- Liquidity: Consolidated cash and cash equivalents totaled $527 million at June 30, 2008.
- Debt: Total long-term debt was $5,520 million at June 30, 2008.
Consumers Energy Company
- Net Income Available to Common Stockholder: $60 million for the quarter; $189 million for the six months.
- Operating Revenue: $1,263 million for the quarter; $3,354 million for the six months.
- Cash Flow: Net cash provided by operating activities was $954 million for the six months.
- Liquidity: Consolidated cash and cash equivalents totaled $443 million at June 30, 2008.
- Debt: Total long-term debt was $3,725 million at June 30, 2008.
Material Changes Versus Prior Period
The significant improvement in net income for the six months ended June 30, 2008, compared to the prior year, is primarily driven by:
- Absence of Impairment Charges: The 2007 period included $280 million in asset impairment charges related to international businesses (TGN, GasAtacama, Jamaica, PowerSmith) which were absent in 2008.
- Discontinued Operations: 2007 included a net loss on the disposal of international businesses. 2008 saw a minimal loss from discontinued operations.
- Regulatory and Contractual Resolutions: Favorable Michigan Public Service Commission (MPSC) rate orders and the elimination of certain costs under the Midland Cogeneration Venture (MCV) Power Purchase Agreement (PPA) boosted utility earnings.
- Enterprises Segment: Improved performance due to reduced fuel costs and the absence of charges associated with the rescission of a contract with Quicksilver Resources.
Utility deliveries decreased slightly due to weather conditions (warmer weather reduced gas demand; lower industrial activity and weather reduced electric demand), partially offset by rate increases.
Guidance, Outlook, Risks, and Contingencies
Outlook and Guidance:
- Electric Deliveries: Anticipated to decrease by approximately 1.5% in 2008, with a projected average annual increase of 1% from 2009 through 2013.
- Gas Deliveries: Expected to decline approximately 1% in 2008 (weather-adjusted) and average a 0.5% annual decline over the next five years.
- Capital Expenditures: Significant investments planned for environmental compliance ($780 million through 2015) and an advanced metering infrastructure ($800 million over seven years).
Key Risks and Contingencies:
- Regulatory Uncertainty: Pending Michigan legislation regarding renewable energy standards and the Customer Choice Act could impact cost recovery. The MPSC approved a $28 million base rate increase for electric utility, lower than requested.
- Environmental Compliance: Significant costs associated with the Clean Air Act, mercury emissions, and greenhouse gas regulations. The EPA vacated the Clean Air Interstate Rule (CAIR) in July 2008, creating uncertainty for future compliance planning.
- Legal Proceedings:
- Quicksilver Resources: A contract rescission dispute remains on appeal; a full rescission could result in a loss exceeding $150 million.
- DOJ Investigation: Ongoing investigation into "round-trip" trading by a former subsidiary (CMS MST).
- Bay Harbor: Environmental remediation obligations with a recorded liability of $72 million.
- Commodity Prices: Rising natural gas and coal prices require additional liquidity due to the lag in cost recovery from customers.
Important Facts for Investor Verification
- Quicksilver Litigation Outcome: Verify the status of the appeal regarding the Quicksilver contract rescission, as a ruling against CMS Energy could result in a material loss exceeding $150 million.
- Regulatory Rate Orders: Monitor the finalization of the 2008 Gas Rate Case and the impact of pending Michigan energy legislation on the recovery of stranded costs and environmental expenditures.
- Environmental Compliance Costs: Track the finalization of new EPA rules following the vacating of CAIR and the implementation of state mercury plans, which could require significant capital investment.
- DOJ Investigation: Watch for updates on the Department of Justice investigation into round-trip trading, which could lead to fines or settlements.
- Discontinued Operations: Confirm that no further charges or gains related to the sale of international assets (Argentina, Middle East, etc.) will impact future earnings.