CMS ENERGY CORP quarterly report, Q3 FY2010

Business context and reporting period

CMS Energy Corporation filed this combined, unaudited Form 10-Q for the quarter and nine months ended September 30, 2010. CMS Energy is a Michigan-based energy holding company whose principal subsidiary, Consumers Energy, operates regulated electric and gas utilities; CMS also has non-utility generation and other investments. Amounts below are in millions of dollars unless stated otherwise.

Financial performance and condition

CMS Energy’s nine-month net cash from operating activities was $998, versus $634 in 2009; investing activities used $726, including $611 of capital expenditures; financing activities provided $335. Consumers generated $900 from operations, used $640 in investing activities (including $608 of capital expenditures), and used $66 in financing activities.

At September 30, CMS Energy had $719 of cash and cash equivalents including restricted cash; Consumers had $256 on the same basis. CMS Energy reported $6,013 of long-term debt and $1,031 of current maturities of long-term debt and lease obligations. Consumers reported $4,198 of long-term debt and $198 of current maturities and lease obligations. Available revolving-credit capacity was $547 for CMS and $350 for Consumers; Consumers’ $30 letter-of-credit facility was fully utilized. No receivables had been transferred under Consumers’ $250 accounts-receivable program.

Consumers’ nine-month net income was $355, compared with $272 in 2009. Its electric utility net income rose to $283 from $217; gas utility net income rose to $69 from $52.

Material changes versus the prior comparable period

• CMS Energy’s Q3 common earnings increased $67; nine-month earnings increased $87. Higher electric and gas rate revenues and favorable electric-delivery weather were important contributors. Consumers’ electric deliveries rose 12.9% in Q3 and 7.1% year to date; gas deliveries fell 7.6% year to date, largely reflecting milder weather.
• Nine-month results included a $30 after-tax insurance settlement related to a previously sold investment and benefited from the absence of a $22 Bay Harbor remediation charge recorded in 2009. These gains were partly offset by a $17 loss from discontinued operations, compared with $23 income in 2009, including a $10 tax expense from an IRS audit adjustment.
• Consumers’ July 2010 self-implemented electric rate increase was $150 annually, subject to refund with interest. The MPSC’s May gas rate order authorized a $66 annual increase, below the $89 Consumers had self-implemented.
• CMS Energy reduced planned capital investment by $1 billion over five years; Consumers nevertheless expected more than $6 billion of investment over that period. Consumers deferred its proposed 830 MW coal plant, citing weaker demand, lower expected gas prices, and surplus MISO capacity.

Outlook, risks and unusual items

• Management expected 2010 weather-adjusted electric deliveries to rise 1.5% from 2009 and projected average electric-delivery growth of about 2% through 2015. It expected weather-adjusted gas deliveries to be broadly similar in 2010, then decline about 1% annually on average from 2011 through 2015. These are operating expectations, not earnings guidance.
• Consumers planned $650 million of renewable-energy investment through 2014 and was targeting required renewable capacity and renewable-energy credits by 2015. A 100 MW wind farm was expected to enter service in late 2012. Smart-meter deployment was planned to begin in early 2012.
• Consumers estimated $1.9 billion of environmental-compliance spending for 2010–2017, with recovery in customer rates expected but not assured. Proposed and developing rules on emissions, coal ash, water, and pipeline safety could increase costs.
• Key regulatory exposures include Consumers’ appeal of an MPSC order requiring an $85 refund plus interest related to the 2001–2003 rate freeze; the pending electric rate case and rate increase subject to refund; and disputes over power-supply cost recovery. The filing also reports an October 2010 jury verdict of $0.4 in compensatory and $7.5 in punitive damages against Consumers; Consumers sought reduction and said insurance was expected to cover most damages if upheld.
• CMS Energy recorded a $66 liability for remaining Bay Harbor obligations, against an estimated undiscounted obligation of $86, and disputed an EPA demand for $7 plus interest. The company stated that final remediation scope and cost remain uncertain. Other material contingencies include natural-gas price-reporting litigation and legacy indemnity claims; some potential losses cannot be estimated clearly.
• In September, CMS exercised mandatory conversion rights on its 4.50% convertible preferred stock. The balance sheet classified $226 as a current liability at quarter-end; in October, CMS used proceeds from a $250 senior-note issuance largely to pay the cash conversion amount and issued common shares for the remainder. CMS and Consumers said available cash, operating cash flow, and liquidity sources were expected to meet requirements, while noting capital spending could be reduced if market access weakened.

Important facts for investors to verify

1. How much of the earnings and cash-flow improvement is sustainable versus attributable to weather, rate changes, the insurance settlement, and prior-year comparison items.
2. Final MPSC outcomes for electric and gas rate cases, self-implemented rates, customer refunds, and power-supply cost recovery.
3. Actual funding needs and cost recovery for environmental compliance, Bay Harbor remediation, pension and other postretirement benefits, and nuclear-fuel storage.
4. Post-quarter preferred-stock conversion, share issuance, cash payment, and related debt refinancing effects on diluted EPS, debt service, and liquidity.
5. Whether projected utility demand, capital spending, renewable projects, and environmental requirements evolve as management expects; the filing cautions that interim results are seasonal and not necessarily indicative of full-year results.