CMS Energy Corporation (CMS) — Q2 2012 Form 10-Q
Business context and reporting period. The combined filing covers CMS Energy and its wholly owned regulated utility, Consumers Energy, for the quarter and six months ended June 30, 2012. CMS operates electric and gas utilities in Michigan and non-utility energy businesses. Unless noted, amounts below are in millions of dollars.
Financial performance
| CMS Energy consolidated | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Operating revenue | $1,333 | $1,364 | $3,076 | $3,419 |
| Operating income | $260 | $207 | $448 | $513 |
| Net income available to common stockholders | $100 | $100 | $167 | $235 |
| Diluted EPS | $0.37 | $0.38 | $0.62 | $0.90 |
| Net cash from operating activities | Not separately provided | Not separately provided | $943 | $1,216 |
- CMS operating margin was approximately 19.5% in Q2 versus 15.2% a year earlier, and 14.6% for the first half versus 15.0%. These are calculated from reported operating income and revenue.
- Consumers’ first-half net income available to its common stockholder was $197 versus $244; operating cash flow was $1,013 versus $1,245. Consumers’ first-half capital expenditures were $572 versus $394.
- At June 30, CMS reported $187 cash and cash equivalents plus $28 restricted cash; Consumers reported $154 plus $27 restricted cash. CMS had $6,221 long-term debt and $653 of current debt and lease obligations; Consumers had $3,967 long-term debt and $62 current debt and lease obligations.
- Available revolving credit was $523 for CMS and $647 for Consumers across its facilities. CMS and Consumers reported compliance with financial covenants and no defaults. CMS debt-to-EBITDA was 4.7x against a 6.0x limit; Consumers debt-to-capital was 0.46x against a 0.65x limit.
Changes, outlook, and notable items
- First-half CMS earnings fell $68 and diluted EPS declined $0.28 year over year. Key contributors were the $59 Consumers electric revenue-decoupling regulatory-asset write-off and the absence of a $32 tax benefit recognized in 2011 after Michigan’s corporate income tax change. Lower gas deliveries also weighed on results.
- In Q2, electric utility earnings improved, aided by rate increases, higher electric deliveries, and recovery of canceled coal-plant development costs. Gas utility earnings increased in Q2 but declined for the first half, primarily because unusually warm weather reduced gas deliveries. Enterprises earnings were lower, mainly because the prior-year tax benefit did not recur.
- The MPSC approved an annual electric rate increase of $118, based on a 10.3% return on equity, and an annual gas increase of $16, also based on a 10.3% return. The gas order requires a refund of the difference between self-implemented and approved rates, subject to reconciliation.
- Management expected Michigan economic conditions to improve; Consumers projected electric deliveries to grow about 1% annually through 2016 and gas deliveries to remain stable over five years. Consumers planned $6.6 billion of capital investment from 2012–2016, including environmental, reliability, distribution, renewable-energy, and Smart Grid projects. Management said liquidity and expected cash flows should be sufficient for obligations and planned investment.
- Consumers canceled plans for an 830-MW coal plant and planned to mothball seven smaller coal units in 2015. Environmental rules and pending litigation could affect compliance spending, plant operations, and recovery of costs in customer rates. Consumers estimated $1.5 billion of environmental expenditures for 2012–2018.
- Notable contingencies include CMS’s $68 recorded Bay Harbor remediation liability (with $89 undiscounted remaining obligation), Consumers’ $128 liability for former manufactured-gas-plant sites, and an unresolved $142 tax claim from Equatorial Guinea plus interest. The filing reports $512 of maximum estimable indemnity obligations; many other potential obligations cannot be quantified.
- CMS recorded a $12 charge for a voluntary separation program covering 232 employees. Consumers recorded a $14 regulatory asset and corresponding earnings benefit for recovery of canceled coal-plant development costs. CMS also recognized a $7 after-tax benefit in discontinued operations after a Panhandle indemnification liability expired.
Key facts for investors to verify
- Whether Consumers can recover electric decoupling revenues despite the Michigan Court of Appeals ruling; the $59 asset has already been written off. Also monitor the separate $33 gas-decoupling regulatory asset and pending recovery request.
- Final regulatory treatment of the $120 DOE spent-nuclear-fuel settlement, including customer refunds and the requested recovery of recorded assets.
- Environmental compliance costs, remediation estimates, and the extent to which costs can be recovered in rates, particularly Bay Harbor and Consumers’ former gas-plant sites.
- Debt refinancing and liquidity after the quarter: the filing describes July 2012 borrowings and planned December 2012 Consumers bond issuance. Confirm execution and resulting debt costs.
- Actual earnings and cash-flow trends against management’s delivery, investment, and liquidity outlook; the filing notes interim results are seasonal and not necessarily indicative of full-year results.