CMS Energy Corporation — Q2 2010 Form 10-Q
Business context and period. This combined, unaudited filing covers the quarter and six months ended June 30, 2010, for CMS Energy and its subsidiary Consumers Energy. CMS operates primarily in Michigan through regulated electric and gas utilities and non-utility energy businesses. Results are seasonal and are not necessarily indicative of full-year performance.
Financial results and liquidity
| CMS Energy, consolidated | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Operating revenue | $1.340 billion | $1.225 billion | $3.307 billion | $3.329 billion |
| Operating income | $262 million | $150 million | $501 million | $360 million |
| Net income available to common stockholders | $80 million | $75 million | $165 million | $145 million |
| Diluted EPS | $0.32 | $0.32 | $0.67 | $0.62 |
| Net cash from operating activities | Not separately stated | Not separately stated | $1.048 billion | $800 million |
Operating margin, calculated as operating income divided by revenue, was approximately 19.6% in Q2 2010 versus 12.2% in Q2 2009, and 15.1% for the first half versus 10.8%. First-half revenue declined slightly despite higher operating income. Continuing-operations income available to common stockholders was $96 million for Q2 and $182 million for the first half; discontinued operations reduced reported common income by $16 million and $17 million, respectively.
- Business segments: Q2 electric utility net income was $86 million, up $19 million; gas utility income was $1 million, down $4 million; enterprises earned $33 million versus a $13 million loss. First-half segment income was $127 million for electric, $67 million for gas, and $42 million for enterprises.
- Cash flow and investment: First-half investing cash outflow was $490 million, including $424 million of capital expenditures; financing cash outflow was $111 million. Cash and cash equivalents were $536 million at June 30, plus $22 million restricted; MD&A reports total consolidated cash including restricted cash of $558 million.
- Debt and available liquidity: CMS reported $5.883 billion of long-term debt and $653 million of current debt, capital and finance lease obligations. Its $550 million revolving facility had $547 million available. Consumers reported $4.043 billion of long-term debt and $61 million of current debt and lease obligations; its $500 million revolver had $165 million available, with a separate $150 million facility scheduled for renewal in August 2010. CMS issued $300 million of 6.25% senior notes due 2020 in January.
- Consumers results: Q2 revenue was $1.276 billion versus $1.182 billion and net income was $88 million versus $72 million. First-half revenue was $3.166 billion versus $3.216 billion and net income was $195 million versus $171 million. Consumers generated $983 million of operating cash in the first half and spent $423 million on capital expenditures.
Material changes versus prior period
- CMS’s Q2 earnings improvement included a $30 million after-tax insurance settlement related to a previously sold investment and $22 million from the absence of a 2009 Bay Harbor remediation charge. Rate-related revenue and lower operating costs also contributed.
- Prior-year comparisons included items not repeated in 2010: an $18 million debt-retirement gain and a $31 million benefit related to an indemnity obligation. Discontinued-operations earnings fell $41 million year over year, reflecting the absence of a prior-year indemnity gain and new tax and indemnity charges.
- Consumers’ electric income benefited from rate orders and decoupling, while higher retirement-benefit, energy-efficiency program, depreciation and other costs partly offset revenue gains. First-half gas deliveries fell 9.1%, primarily due to milder weather, while electric deliveries rose 4.0%.
- Cash from operations increased year over year, primarily reflecting improved customer receivable collections and working-capital movements. First-half capital expenditures increased to $424 million from $409 million.
Outlook, risks and unusual items
- Consumers forecast weather-adjusted electric deliveries to grow 2% in 2010 and gas deliveries to decline 1%; it expected electric delivery growth to average about 1% annually through 2014 and gas deliveries to decline about 2% annually from 2011 through 2015. The filing provides no clear CMS consolidated EPS guidance.
- Consumers forecast approximately $7 billion of capital investments from 2010 through 2014, including $650 million for renewable energy. In May 2010 it deferred development of its proposed 830 MW Karn/Weadock coal plant, citing reduced demand, lower expected natural-gas prices and surplus MISO capacity; no new decision timetable was set.
- Consumers self-implemented a $150 million annual electric rate increase in July 2010, subject to refund with interest. The MPSC had authorized a $66 million annual gas-rate increase in May. The MPSC also ordered an $86 million customer refund related to historical decommissioning collections; Consumers recorded the liability and appealed.
- Consumers estimated $2.2 billion of environmental compliance expenditures from 2010 through 2017, with recovery in customer rates expected but not assured. Key uncertainties include greenhouse-gas, coal ash, air, water and PCB rules, as well as regulatory recovery of costs and the effects of Michigan’s economy, weather, customer demand and commodity prices.
- CMS recorded a $70 million Bay Harbor environmental liability at June 30 (estimated undiscounted obligation $91 million; cumulative charges $180 million). Other significant contingencies include Consumers’ $35 million Michigan sales/use-tax assessment, $163 million liability for spent-nuclear-fuel disposal, and $33 million recorded liability for former gas-plant remediation. Certain gas-price reporting litigation and other indemnity claims have outcomes that CMS says it cannot predict.
- Management said available cash, operating cash flow and liquidity sources should meet requirements, while noting that restricted capital-market access could require contingency actions, including reduced capital spending. Both registrants reported effective disclosure controls and no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether the July 2010 electric rate increase is ultimately approved, and the amount and timing of any refund or customer credits.
- Progress on the $86 million decommissioning refund appeal and the recorded Bay Harbor liability, including the eventual scope and cost of the long-term remedy.
- Whether operating cash flow remains strong after working-capital effects, and whether the planned facility renewals and Consumers’ September 2010 bond issuance are completed on expected terms.
- Actual capital spending, renewable-project execution and the timing of any decision on the deferred coal plant, alongside realized electric and gas delivery trends.
- Developments in environmental regulation, litigation and remediation estimates that could affect costs, rate recovery, earnings or liquidity.