CMS ENERGY CORP quarterly report, Q2 FY2011

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CMS Energy Corporation — Q2 2011 Form 10-Q

Business context and period: Unaudited results for the quarter and six months ended June 30, 2011, compared with the same periods in 2010. CMS Energy is a Michigan-based energy holding company. Its principal subsidiary, Consumers Energy, operates regulated electric and gas utilities; CMS Enterprises holds non-utility energy businesses. The filing also reports Consumers Energy separately.

Key financial results

CMS Energy consolidatedQ2 2011Q2 2010Six months 2011Six months 2010
Operating revenue$1.364B$1.340B$3.419B$3.307B
Operating income$207M$262M$513M$501M
Net income available to common stockholders$100M$80M$235M$165M
Diluted EPS$0.38$0.32$0.90$0.67
Operating margin, calculated15.2%19.6%15.0%15.1%
  • Q2 revenue rose about 2%; six-month revenue rose about 3%. Net income available to common stockholders increased $20M in Q2 and $70M for the half year.
  • Q2 operating income fell $55M despite higher revenue, largely reflecting the absence of the $50M insurance settlement recorded as a reduction of operating expenses in 2010. Six-month operating income increased $12M.
  • Management attributed improved earnings principally to electric and gas rate orders and higher gas deliveries, partly offset by lower electric delivery revenues and higher depreciation, property taxes, and distribution and service-restoration costs. The May 2011 Michigan Corporate Income Tax (MCIT) enactment generated a tax benefit; the filing identifies $32M of benefit for CMS non-utility differences, while Consumers recorded a related regulatory asset rather than the same earnings benefit.
  • Segment net income available to common stockholders for the six months: electric utility $150M (up $23M); gas utility $93M (up $26M); enterprises $32M (down $10M); corporate interest and other loss $42M (improved $12M).

Cash flow, balance sheet, and liquidity

  • CMS Energy operating cash flow for the first half was $1.216B, versus $1.048B in 2010. Capital expenditures were $399M; investing cash outflow was $471M. Financing cash flow was approximately neutral, compared with an $111M outflow in 2010.
  • At June 30, CMS Energy had $994M cash and cash equivalents and $29M restricted cash, compared with $247M cash at year-end 2010. Current assets were $2.956B and current liabilities $2.241B (calculated current ratio 1.32).
  • CMS Energy’s balance sheet reported $6.184B long-term debt and $1.123B current portion of long-term debt and capital/finance leases. The debt note separately reports $7.283B carrying amount of long-term debt, including $1.099B current debt. Total equity was $3.002B.
  • CMS Energy’s $550M revolving facility had $547M available; Consumers’ $500M facility had $311M available, plus a separate $150M facility. Neither had borrowings under these facilities. Consumers also had $250M of eligible receivables under its sales program. Both companies were within their revolving-credit covenant limits.
  • CMS Energy said cash, operating cash flows, and available liquidity were expected to cover contractual obligations and investment needs. The filing does not provide a consolidated, explicit earnings or EPS forecast.

Consumers Energy highlights

  • Consumers’ Q2 operating revenue was $1.303B versus $1.276B; net income available to its common stockholder was $91M versus $87M. For the first half, revenue was $3.291B versus $3.166B and net income was $244M versus $194M.
  • Consumers generated $1.245B operating cash flow in the first half, compared with $983M in 2010; capital expenditures were $394M. Cash and cash equivalents were $766M at June 30. Its balance sheet showed $4.169B long-term debt and $362M current portion of debt and lease obligations.

Material changes, outlook, and risks

  • Rates and regulation: Consumers received MPSC approval for a $31M annual gas-rate increase in May, below its original $55M request. Its June electric rate case sought $195M annually, based on a 10.7% authorized return on equity; the request remained pending. The MPSC approved a revised renewable plan expected to reduce customer surcharges by $54M annually. Consumers requested $27M recovery under electric revenue decoupling; the request was opposed.
  • Demand outlook: Consumers forecast weather-adjusted electric deliveries to increase 2% in 2011 and average electric delivery growth of about 1.7% annually over five years. It forecast 2011 weather-adjusted gas deliveries to increase 2%, but average gas deliveries to decline about 1% annually over five years, mainly from efficiency and conservation.
  • Capital program: Consumers expected $6.5B investment over five years, including $600M in renewable investments through 2015, a $750M Smart Grid program, and a planned $400M share of the Ludington pumped-storage upgrade. It estimated $1.6B in environmental compliance spending for 2011–2018, with rate recovery expected but not assured.
  • Generation and environmental exposure: Consumers had deferred its proposed 830-MW coal plant, with no timetable for a decision. New EPA emissions rules, including CSAPR and proposed MACT standards, could require additional controls, accelerate unit retirements, or raise costs. The company also cited potential costs from coal ash, water intake, PCB, greenhouse-gas, and pipeline-safety regulation.
  • DOE settlement: In July 2011, after quarter-end, Consumers agreed to settle spent-nuclear-fuel claims with the DOE for $120M and settle a recorded $163M DOE liability. Regulatory treatment was still subject to MPSC determination; potential customer refunds could affect the amount Consumers retains and recognizes in earnings.
  • Contingencies: CMS Energy recorded an $88M remaining liability for Bay Harbor remediation; the undiscounted estimate was $109M. The EPA’s $7M cost-recovery demand was disputed. Consumers could not estimate potential Kalamazoo River Superfund liability. Its estimated remaining costs at 23 former manufactured-gas-plant sites were $28M–$43M undiscounted, with a $28M recorded liability and $55M regulatory asset.
  • Other considerations: Earnings benefited from a one-time tax-law remeasurement. The 2010 $31M insurance recovery did not recur. Weather affected utility sales; severe storms raised service-restoration costs. The filing describes risks from Michigan economic conditions, regulatory cost recovery, environmental compliance, litigation, commodity and credit markets, and pension/postretirement obligations.

Most important facts for investors to verify

  1. Whether Consumers’ pending $195M electric rate request and disputed decoupling recovery are approved, and on what terms.
  2. The MPSC’s treatment of the $120M DOE settlement, including any required customer refunds and resulting earnings impact.
  3. Whether environmental rules, Bay Harbor remedies, and Superfund matters change estimated costs or the prospects for recovery in rates.
  4. Whether cash generation and available credit remain sufficient for debt maturities and the planned capital program, particularly given CMS Energy’s current debt and lease obligations.
  5. How much of reported earnings growth reflects sustainable utility rates and operating performance versus the one-time MCIT benefit and the prior-year insurance settlement comparison.