CMS Energy Corporation — Q1 2011 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2011; results are unaudited. CMS Energy is a Michigan-focused energy holding company whose principal subsidiary, Consumers Energy, operates regulated electric and gas utilities. CMS also owns non-utility energy businesses. Interim results are seasonal and may not indicate full-year performance.
Financial performance and liquidity
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| CMS operating revenue | $2.055 billion | $1.967 billion |
| CMS operating income | $306 million | $239 million |
| CMS net income available to common stockholders | $135 million | $85 million |
| CMS diluted EPS | $0.52 | $0.34 |
| CMS operating cash flow | $841 million | $657 million |
| CMS capital expenditures | $191 million | $190 million |
| Consumers revenue | $1.988 billion | $1.890 billion |
| Consumers net income | $153 million | $107 million |
| Consumers operating cash flow | $867 million | $683 million |
CMS operating margin was approximately 14.9% versus 12.2% a year earlier; net margin was approximately 6.6% versus 4.3%. Consumers is consolidated within CMS, so its results should not be added to CMS totals. CMS reported $831 million of cash and cash equivalents, including restricted cash, at quarter-end; Consumers reported $742 million, also including restricted cash. CMS balance-sheet debt was approximately $7.2 billion ($1.275 billion current and $5.926 billion long-term); this excludes separately presented lease obligations. The carrying amount and fair value of CMS long-term debt were $7.177 billion and $7.936 billion, respectively.
CMS used $228 million in investing activities and $61 million in financing activities. Quarter-end available revolving credit was $547 million for CMS and $350 million across Consumers’ facilities. A further $250 million of receivables was eligible for transfer under Consumers’ sales program, with none transferred at quarter-end. CMS and Consumers were within their respective revolving-credit covenant limits.
Material changes versus the prior period
- CMS net income rose $50 million and diluted EPS increased $0.18. Management attributed improvement mainly to electric and gas rate orders, higher gas deliveries, and favorable weather; higher distribution and storm restoration costs partly offset gains.
- Consumers electric utility net income increased $24 million, supported by the November 2010 rate increase and higher deliveries. Electric deliveries rose 2.2% to 9.3 billion kWh; severe winter storms increased service-restoration costs.
- Consumers gas utility net income increased $22 million. Gas deliveries rose 12.4% to 133.9 bcf, reflecting colder weather and increased usage.
- Enterprises net income declined $6 million, principally from lower electric capacity revenue and mark-to-market gains.
- Operating cash flow increased $184 million. The filing cites higher earnings, no Pension Plan contributions in 2011, and stronger collections. Cash flow also included $477 million from selling gas purchased in the prior year; this and other working-capital movements make the quarterly cash-flow comparison less representative of ongoing earnings.
Outlook, risks, and unusual items
- Management said Michigan economic conditions had stabilized, while noting persistent recession effects, high unemployment, and modest population decline. Consumers expected weather-adjusted electric deliveries to rise 2.5% in 2011, or 1.5% excluding growth from its largest customer; it projected average electric-sales growth of about 1.5% annually through 2016. It expected weather-adjusted gas deliveries to rise 1% in 2011, then decline about 1% annually over five years. No specific CMS EPS guidance is provided in the supplied filing text.
- Consumers planned more than $6 billion of investment over five years, including $600 million for renewable investments through 2015 and $355 million for smart-grid work through 2015. A joint Ludington upgrade is expected to cost Consumers $400 million and run from 2013 through 2019.
- Consumers estimated $1.9 billion of environmental compliance spending from 2011–2018 and expects rate recovery, but cannot guarantee it. Proposed or pending rules on air emissions, coal ash, greenhouse gases, water intake, and PCBs could add costs or prompt unit retirements.
- Consumers’ gas rate case remained unresolved: Consumers sought a $45 million annual increase in its April brief, while MPSC staff recommended $16 million; a settlement was not finalized as of April 28, 2011, though Consumers considered one likely. Consumers also requested $27 million under its electric revenue decoupling mechanism.
- CMS recorded a $94 million liability for remaining Bay Harbor environmental obligations; the undiscounted estimate was $115 million. The EPA also sought $7 million plus interest in response costs, a claim CMS disputed. CMS said cost estimates and timing could change materially.
- Consumers received an EPA request in April 2011 to participate in a Kalamazoo River Superfund removal action and could not yet estimate its potential liability. Its recorded liability for other known Superfund sites was $2 million. Consumers also reported $31–$45 million of estimated undiscounted remaining costs at former manufactured-gas-plant sites.
- Other material uncertainties include regulatory cost recovery and rate decisions, environmental enforcement and compliance, the gas-price-reporting litigation (potential loss not estimable), DOE spent-nuclear-fuel disputes, weather, commodity prices, Michigan economic conditions, and access to capital markets. CMS’s recorded Bay Harbor estimate and other contingencies do not cap possible exposure.
Most important facts for investors to verify
- Reconcile reported operating cash flow to its seasonal and working-capital drivers, particularly the $477 million gas inventory-related inflow and the absence of Pension Plan contributions.
- Track the final Consumers gas-rate-case order or settlement and the disposition of electric decoupling and other regulatory recovery requests.
- Assess the size, timing, and recoverability of environmental obligations, especially Bay Harbor, the Kalamazoo River matter, and the projected $1.9 billion compliance program.
- Review debt maturities, credit-facility availability and covenants, and the impact of any changes in credit-market access or financing costs.
- Monitor whether delivery-growth assumptions, renewable and smart-grid investment plans, and environmental rules change Consumers’ capital needs or customer-rate exposure.