Business Context and Reporting Period
This Form 10-Q is a combined quarterly report for CMS Energy Corporation, Consumers Energy Company, and Panhandle Eastern Pipe Line Company for the period ended June 30, 1999. CMS Energy is the parent holding company; Consumers is the principal electric and gas utility subsidiary serving Michigan; and Panhandle, acquired from Duke Energy in March 1999, is engaged in interstate natural gas transportation and storage. The filing includes results for the three, six, and twelve months ended June 30, 1999, compared to the same periods in 1998.
Key Financial Metrics
CMS Energy Corporation (Consolidated)
- Revenue: Operating revenue for the six months ended June 30, 1999, was $2.891 billion, compared to $2.506 billion in 1998.
- Net Income: Consolidated net income for the six months ended June 30, 1999, was $173 million, up from $153 million in 1998. Net income attributable to CMS Energy Common Stock was $162 million.
- Earnings Per Share (EPS): Basic EPS for CMS Energy Common Stock was $1.50 for the six months ended June 30, 1999, compared to $1.42 in 1998.
- Cash Flow: Net cash provided by operating activities was $440 million for the six months ended June 30, 1999, an increase of $131 million from the prior year. Net cash used in investing activities was $2.441 billion, primarily due to the Panhandle acquisition.
- Debt and Liquidity: Long-term debt carrying amount was $6.7 billion at June 30, 1999. Cash and temporary cash investments totaled $213 million. Senior Credit Facilities utilization was $700 million against a $600 million revolving facility and $125 million term loan.
Consumers Energy Company
- Net Income: Net income available to common stockholders was $177 million for the six months ended June 30, 1999, compared to $162 million in 1998.
- Operating Income: Electric pretax operating income was $256 million; Gas pretax operating income was $94 million for the six-month period.
- Cash Flow: Net cash provided by operating activities was $460 million.
Panhandle Eastern Pipe Line Company
- Net Income: Net income for the six months ended June 30, 1999, was $48 million, down $5 million from the prior year. Results are not fully comparable due to the March 29, 1999 acquisition.
- Revenue: Total operating revenue for the six months was $250 million.
Material Changes vs. Prior Period
- Acquisition Impact: The primary driver of financial changes was the March 1999 acquisition of Panhandle Eastern Pipe Line Company for $1.9 billion in cash plus $300 million in assumed debt. This significantly increased consolidated revenue and assets but also increased interest expense.
- Utility Performance: Consumers' electric utility saw increased deliveries (up 5.0% for six months) and lower power supply costs, boosting earnings. Gas utility earnings increased due to colder temperatures driving higher deliveries and regulatory changes allowing the company to benefit from lower gas costs.
- Accounting Changes: The 1998 period included a $43 million after-tax benefit from a cumulative effect of an accounting change for property taxes, which was absent in 1999. Conversely, 1998 included a $37 million loss related to underrecovery of power costs under the Midland Cogeneration Venture (MCV) Power Purchase Agreement (PPA).
- Segment Results: Natural gas transmission, storage, and processing pretax operating income increased $29 million (132%) for the six months, driven by Panhandle earnings. Oil and gas exploration and production income decreased due to lower commodity prices.
Guidance, Outlook, and Risks
Outlook and Guidance
- Capital Expenditures: CMS Energy estimates capital expenditures of $3.835 billion for 1999 (including $2.2 billion for Panhandle), $1.725 billion for 2000, and $1.515 billion for 2001.
- Growth: Consumers expects electric system deliveries to grow at an average annual rate of 2.3% over the next five years. Gas deliveries are expected to grow between 1% and 2% annually.
- Dividends: In July 1999, CMS Energy declared a quarterly dividend of $0.365 per share on Common Stock and $0.34 per share on Class G Common Stock, representing annualized increases of 10.6% and 4.6%, respectively.
Risks and Contingencies
- Regulatory Restructuring: Electric and gas industry restructuring in Michigan creates uncertainty regarding rate recovery and competition. The Michigan Supreme Court vacated orders regarding mandatory retail wheeling, creating legal uncertainty.
- Environmental Liabilities: Significant potential costs exist for Clean Air Act compliance (estimated $290 million for nitrogen oxide reductions) and remediation of former manufactured gas plant sites (estimated $48 million to $98 million).
- MCV Partnership: Consumers faces potential underrecoveries of power costs from the MCV Facility. An accumulated after-tax shortfall of $17 million existed as of June 30, 1999, with estimated future underrecoveries of $29 million in 1999.
- Year 2000 Compliance: Total estimated cost for Year 2000 remediation is approximately $30 million for CMS Energy ($25 million incurred through June 30, 1999). Risks include potential service interruptions if third-party vendors fail to comply.
- Market Risk: Exposure to commodity price, interest rate, and currency exchange fluctuations is managed through derivatives. A hypothetical 10% adverse shift in currency rates would result in a net cash settlement of approximately $121 million.
Investor Verification Checklist
- Verify the final purchase price allocation and goodwill amortization schedule for the Panhandle acquisition.
- Monitor the status of the Michigan Supreme Court decision regarding electric retail wheeling and its impact on rate recovery.
- Track the resolution of the MCV Partnership underrecovery liability and the outcome of the PECO power sales agreement.
- Review progress on Year 2000 remediation, specifically regarding third-party vendor readiness.
- Assess the impact of the suspended Gas Cost Recovery (GCR) clause on future gas utility margins.
- Confirm the status of the $17 million refund obligation to Trunkline LNG customers resulting from the 1992 settlement.