Why did CMS Energy swing from a loss in 1992 to a profit in 1993?

The main driver was the MPSC's March 31, 1993 Settlement Order, which let Consumers recover substantially all of its payments for 915 MW of capacity from the MCV Partnership. Consumers had taken a $343 million after-tax loss in December 1992 when the order was issued, so 1993 results benefited from no comparable charge and from a $126 million pretax improvement in electric earnings tied to MCV cost recovery. Higher electric and gas sales and growth in non-utility businesses also contributed.

What are the biggest legal and regulatory risks disclosed?

The largest near-term risk is the lawsuit by the MCV Facility lessors against CMS Energy, Consumers and CMS Holdings, which alleges damages in excess of $1 billion; the companies say the suit is without merit. An arbitration with the MCV Partnership over whether Consumers can exercise its regulatory out on fixed energy charges is also unresolved, and ABATE and the Attorney General are appealing the Settlement Order. Other risks include a pending SEC request to revoke CMS Energy's PUHCA exemption, which could force divestiture of a utility business, and the NRC's diagnostic evaluation of the Palisades nuclear plant.

Is the dividend sustainable, and can Consumers resume paying common dividends?

Consumers paid $133 million in common dividends in 1993 after completing a quasi-reorganization as of December 31, 1992 that eliminated its $574 million accumulated deficit against paid-in capital. It declared a $16 million dividend in January 1994 from 1993 earnings. CMS Energy paid $49 million in dividends to its shareholders in 1993, up from $38 million, and its dividend was increased by $0.24 per share annually starting in the third quarter of 1993. Continued payments depend on earnings, the pending rate case, and the outcome of the MCV disputes.

How much capital does the company need, and how will it be funded?

CMS Energy estimates capital expenditures of $792 million in 1994, $690 million in 1995 and $714 million in 1996, and it plans to retire about $796 million of long-term debt over 1994 to 1996. Management expects operating cash flow to cover a large share of these needs and plans to tap capital markets. Financing sources include a filed $250 million shelf registration for unsecured debt, a planned $200 million Consumers preferred stock issuance in 1994, a $470 million working capital facility, and a $500 million receivables sale program with $335 million sold as of February 1994.

What does the pending electric rate case mean for future earnings?

Consumers requested a $133 million annual electric rate increase for 1994 plus $38 million for 1995. In March 1994, an ALJ recommended about $83 million for 1994, no increase for 1995, and an 11.75% return on common equity, versus the 13.25% Consumers proposed. The ALJ also recommended cutting cross-subsidization of residential customers by commercial and industrial customers by 50% immediately. The MPSC is not bound by the recommendation, and its final order is still pending, so the outcome will significantly affect 1994 and later electric earnings.

CMS ENERGY CORP 10-K FY1993 Annual Report

01—Abstract

Summary

Summary of the 10-K filed March 18, 1994. Cited figures are marked; the original filing is the authoritative source.

CMS Energy Corporation's 1993 combined Form 10-K (filed with Consumers Power Company) shows a turnaround year.

Consolidated net income was $155 million^a, or $1.90 per share, versus net losses of $297 million ($3.72 per share) in 1992 and $276 million in 1991. The swing is driven mainly by the March 1993 MPSC Settlement Order on power purchases from the Midland Cogeneration Venture (MCV). That order let Consumers recover substantially all payments for 915 MW of MCV capacity, and Consumers resumed common dividends after a quasi-reorganization as of December 31, 1992.

Operating revenue rose 11% to $3.48 billion^b, electric sales hit a record 31.7 billion kWh, and the pretax income from electric utility operations roughly doubled to $286 million. Book value per share rose to $11.33 from $9.09, and return on average common equity was 18.3%. The filing also highlights meaningful risks.

The lessors of the MCV Facility have sued CMS Energy, Consumers and CMS Holdings for damages in excess of $1 billion^c, and an arbitration with the MCV Partnership over the fixed energy charge is unresolved. ABATE and the Attorney General are appealing the Settlement Order. A pending SEC request could revoke CMS Energy's PUHCA exemption, which could force divestiture of either its gas or electric utility.

The NRC has launched a diagnostic evaluation at the Palisades nuclear plant after a decline in performance ratings. Spent-fuel storage casks face litigation, and a pending rate case seeks about $133 million^d, with an ALJ recommending about $83 million. Investors should weigh the earnings recovery against these legal, regulatory and nuclear uncertainties, along with the capital program of roughly $792 million in 1994 and about $796 million of debt retirements from 1994 to 1996.

02—Key points

Key Highlights

Net income of $155 million ($1.90/share) in 1993, reversing 1992's net loss of $297 million ($3.72/share), largely due to the MPSC's March 1993 Settlement Order on MCV power purchases.
Operating revenue rose 11% to $3.482 billion; electric utility revenue was $2.077 billion (up 11.5%) and gas utility revenue was $1.160 billion (up 3%).
Electric system sales reached a record 31.7 billion kWh (up 3.8%), and gas deliveries reached 411 bcf (up 6.9%).
Book value per share increased to $11.33 from $9.09; return on average common equity was 18.3% versus a loss in 1992.
Consumers resumed common dividends after a December 31, 1992 quasi-reorganization; CMS Energy's dividend rose to $0.60 per share in 1993 from $0.48.
Major legal exposure: MCV lessors' lawsuit seeking over $1 billion in damages, pending MCV arbitration on fixed energy charges, and a pending SEC request to revoke CMS Energy's PUHCA exemption.
Pending electric rate case: Consumers requested $133 million, and an ALJ recommended about $83 million in 1994 with an 11.75% return on equity; the MPSC order is still to come.

03—Questions

Frequently Asked Questions

Why did CMS Energy swing from a loss in 1992 to a profit in 1993?
The main driver was the MPSC's March 31, 1993 Settlement Order, which let Consumers recover substantially all of its payments for 915 MW of capacity from the MCV Partnership. Consumers had taken a $343 million after-tax loss in December 1992 when the order was issued, so 1993 results benefited from no comparable charge and from a $126 million pretax improvement in electric earnings tied to MCV cost recovery. Higher electric and gas sales and growth in non-utility businesses also contributed.
What are the biggest legal and regulatory risks disclosed?
The largest near-term risk is the lawsuit by the MCV Facility lessors against CMS Energy, Consumers and CMS Holdings, which alleges damages in excess of $1 billion; the companies say the suit is without merit. An arbitration with the MCV Partnership over whether Consumers can exercise its regulatory out on fixed energy charges is also unresolved, and ABATE and the Attorney General are appealing the Settlement Order. Other risks include a pending SEC request to revoke CMS Energy's PUHCA exemption, which could force divestiture of a utility business, and the NRC's diagnostic evaluation of the Palisades nuclear plant.
Is the dividend sustainable, and can Consumers resume paying common dividends?
Consumers paid $133 million in common dividends in 1993 after completing a quasi-reorganization as of December 31, 1992 that eliminated its $574 million accumulated deficit against paid-in capital. It declared a $16 million dividend in January 1994 from 1993 earnings. CMS Energy paid $49 million in dividends to its shareholders in 1993, up from $38 million, and its dividend was increased by $0.24 per share annually starting in the third quarter of 1993. Continued payments depend on earnings, the pending rate case, and the outcome of the MCV disputes.
How much capital does the company need, and how will it be funded?
CMS Energy estimates capital expenditures of $792 million in 1994, $690 million in 1995 and $714 million in 1996, and it plans to retire about $796 million of long-term debt over 1994 to 1996. Management expects operating cash flow to cover a large share of these needs and plans to tap capital markets. Financing sources include a filed $250 million shelf registration for unsecured debt, a planned $200 million Consumers preferred stock issuance in 1994, a $470 million working capital facility, and a $500 million receivables sale program with $335 million sold as of February 1994.
What does the pending electric rate case mean for future earnings?
Consumers requested a $133 million annual electric rate increase for 1994 plus $38 million for 1995. In March 1994, an ALJ recommended about $83 million for 1994, no increase for 1995, and an 11.75% return on common equity, versus the 13.25% Consumers proposed. The ALJ also recommended cutting cross-subsidization of residential customers by commercial and industrial customers by 50% immediately. The MPSC is not bound by the recommendation, and its final order is still pending, so the outcome will significantly affect 1994 and later electric earnings.

04—Continue

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