CMS ENERGY CORP quarterly report, Q3 FY2011

CMS Energy Corporation — Form 10-Q Summary

Reporting period: Quarter and nine months ended September 30, 2011. The combined filing reports CMS Energy and its wholly owned regulated utility, Consumers Energy. Amounts are in U.S. dollars; financial figures are in millions unless stated otherwise. Interim results are unaudited and subject to seasonal variation.

Financial performance

CMS Energy	Q3 2011	Q3 2010	Nine months 2011	Nine months 2010
Operating revenue	$1,464	$1,443	$4,883	$4,750
Operating income	$316	$319	$829	$820
Net income available to common stockholders	$139	$134	$374	$299
Diluted EPS	$0.53	$0.53	$1.43	$1.19

CMS Energy’s Q3 net income available to common stockholders increased $5 million, although operating income declined $3 million. Nine-month common earnings increased $75 million. Key year-to-date contributors included rate orders, increased gas deliveries and a $32 million tax benefit associated with Michigan’s corporate income tax law change; offsets included higher restoration costs and the absence of a 2010 insurance recovery.
Consumers’ operating revenue was $1,397 million in Q3 and $4,688 million for nine months, versus $1,370 million and $4,536 million in 2010. Net income available to its common stockholder was $154 million and $398 million, respectively, versus $159 million and $353 million.
CMS segment net income for the first nine months: electric utility $309 million (up $26 million), gas utility $88 million (up $19 million), and enterprises $36 million (down $15 million). Enterprises’ decline principally reflected the absence of a prior-year insurance settlement, partly offset by the tax-law benefit.
Margins: CMS reported operating income of $316 million on $1,464 million revenue in Q3 and $829 million on $4,883 million for nine months. The filing does not present a separately stated margin metric.

Cash flow, balance sheet and liquidity

For the nine months, CMS operating cash flow was $1,195 million, investing cash outflow $752 million, and financing cash outflow $69 million. Capital expenditures were $624 million. Operating cash flow less capital expenditures was approximately $571 million, calculated from the reported figures.
Consumers generated $1,245 million operating cash flow, used $683 million in investing activities, and used $260 million in financing activities; capital expenditures were $618 million. Higher operating cash flow reflected, among other factors, no Pension Plan contributions in 2011, increased receivable collections and the absence of customer refunds paid in 2010.
At September 30, CMS reported cash and cash equivalents of $623 million and restricted cash of $29 million; Consumers reported $373 million and $28 million, respectively.
CMS long-term debt carrying amount, including current maturities, was $7,153 million; Consumers’ was $4,335 million. CMS also reported $171 million of non-current lease obligations. CMS total assets were $15,958 million and equity $3,087 million. Current maturities of debt and lease obligations were $1,140 million at CMS and $362 million at Consumers.
Available revolving credit was $547 million for CMS and $499 million under Consumers’ $500 million facility, plus a separate $150 million Consumers facility. Neither company had borrowings under these facilities; both were within their covenant limits. Consumers had $250 million eligible under its receivables program, with none transferred at quarter-end.

Material changes and business developments

CMS nine-month diluted EPS rose from $1.19 to $1.43; Q3 diluted EPS was unchanged at $0.53. Common earnings in Q3 were affected by the prior-year preferred-stock issuance charge and dividends, while underlying operating income was slightly lower.
Consumers’ nine-month electric deliveries were 28.7 billion kWh versus 28.6 billion; Q3 deliveries were 10.4 billion versus 10.5 billion. Gas deliveries for nine months rose 13.1% to 205.0 bcf, substantially reflecting colder weather; Q3 deliveries fell 1.9% to 25.5 bcf.
Consumers received approval for a $31 million annual gas rate increase in May. It filed for a $195 million annual electric rate increase in June and a further $49 million annual gas rate increase in September; those requests were pending in the filing.
Consumers settled spent-fuel claims with the Department of Energy for $120 million. Its MPSC application sought recovery of an $85 million regulatory asset and a $23 million customer refund; the treatment of the remaining $12 million was unresolved.

Outlook, management commentary and risks

CMS and Consumers said liquidity and expected operating cash flows should be sufficient for obligations and planned investment, while noting dependence on capital-market access and regulatory recovery. No numerical CMS EPS guidance is stated in the provided filing text.
Consumers expected weather-adjusted electric deliveries to increase 1.5% in 2011 and average electric delivery growth to exceed 1% annually over five years. It expected weather-adjusted gas deliveries to rise 3% in 2011 and average gas deliveries to remain stable over five years.
Consumers planned $6.6 billion of capital investment for 2012–2016, including $500 million for renewable energy, $1.5 billion for environmental investment and $1.2 billion for reliability. Its Smart Grid program was estimated at $750 million overall, with deployment planned from the second half of 2012 through 2019.
Consumers estimated $1.6 billion of environmental compliance spending from 2011–2018 and expected rate recovery, but could not assure recovery. EPA air-pollution rules, including CSAPR and proposed hazardous-air-pollutant standards, could drive additional costs, alter generation use or lead to unit retirements.
CMS’s Bay Harbor environmental liability was recorded at $82 million; the estimated undiscounted remaining obligation was $103 million. Costs and timing could change with remediation requirements, permits, litigation or the final remedy.
Other notable exposures include Consumers’ unresolved Kalamazoo River PCB matter, gas-site remediation estimates of $28–$42 million, and CMS’s disputed Equatorial Guinea tax claim of $142 million plus interest. CMS could not predict outcomes or estimate potential loss for several proceedings. Indemnity guarantees include a $512 million maximum obligation, with $21 million carrying amount; the maximum is not an estimate of expected loss.
Consumers’ proposed Karn/Weadock coal plant was deferred with no decision timetable; its air-permit extension was challenged. The Lake Winds wind-project land-use permit was also under appeal. Regulatory rate recovery, weather, Michigan economic conditions, commodity prices, environmental rules and financing access remain important uncertainties.

Most important facts for investors to verify

Track the outcomes and timing of the pending electric and gas rate cases, decoupling recovery requests, and MPSC allocation of the DOE settlement.
Assess whether cash-flow improvement is sustainable: year-to-date operating cash flow benefited from working-capital and pension-contribution timing, while investment and dividend outflows continued.
Review debt maturities, refinancing requirements, and covenant headroom, particularly given the $1.14 billion current debt-and-lease portion reported by CMS.
Monitor environmental compliance costs and rate recovery, especially CSAPR/MACT requirements, Bay Harbor remediation and the Kalamazoo River matter.
Confirm progress against renewable-energy requirements and planned investment schedules, and evaluate project permitting and construction risks.