Consumers Energy Company — Q2 2010 Form 10-Q Summary
Business context and reporting period
Consumers Energy is a Michigan-regulated electric and natural gas utility and a wholly owned subsidiary of CMS Energy. This unaudited report covers the quarter and six months ended June 30, 2010, compared with the corresponding 2009 periods. The filing notes that results are seasonal and interim results are not necessarily indicative of full-year performance. The filing is a combined report; figures below are Consumers-specific unless otherwise identified.
Financial performance and position
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Operating revenue | $1.276 billion | $1.182 billion | $3.166 billion | $3.216 billion |
| Operating income | $207 million | $174 million | $431 million | $377 million |
| Net income | $88 million | $72 million | $195 million | $171 million |
| Net income available to common stockholder | $87 million | $72 million | $194 million | $170 million |
| Operating margin (calculated) | 16.2% | 14.7% | 13.6% | 11.7% |
- Q2 revenue increased about 8%, operating income 19%, and net income 22% year over year. The six-month revenue decline was about 2%, while operating income and net income increased about 14% each.
- Management attributed much of the improvement to rate-related revenue and decoupling mechanisms, along with lower operating costs in some areas. Q2 electric deliveries rose 7.1% to 9.0 billion kWh; six-month deliveries rose 4.0% to 18.1 billion kWh. Six-month gas deliveries fell 9.1% to 155.9 bcf, largely reflecting milder weather.
- Operating cash flow was $983 million for the first half, up from $853 million. Capital expenditures were $423 million, versus $404 million. Cash flow benefited from customer collections and working-capital movements, as well as noncash expenses.
- At June 30, cash and cash equivalents were $320 million, plus $22 million restricted cash. Current assets were $2.350 billion and current liabilities $1.220 billion. Long-term debt was $4.043 billion; current debt and lease obligations were $61 million. The combined reported debt/lease amounts were approximately $4.104 billion, down from approximately $4.428 billion at year-end 2009.
- Consumers reported $258 million of net cash used in financing in the first half, including $327 million of debt retirements and $168 million of common dividends to CMS Energy, partly offset by a $250 million parent contribution. Available facilities included $165 million under a $500 million revolver and $150 million under a separate facility scheduled for renewal in August 2010. The $30 million letter-of-credit facility was fully committed.
Material changes versus prior comparable periods
- Higher electric rate revenue and surcharges lifted utility revenue; the November 2009 electric rate order and related mechanisms contributed to the year-over-year increase. A May 2010 gas rate order authorized a $66 million annual increase, below the $89 million self-implemented amount.
- Costs rose in some categories, including maintenance and operations, energy optimization, depreciation, and interest. Lower gas costs sold reflected lower gas prices and volumes. Higher electric deliveries and favorable weather supported electric results, while mild weather reduced gas deliveries.
- Consumers’ cash balance increased from $39 million at December 31, 2009 to $320 million at June 30, 2010, while reported total debt and lease obligations decreased. First-half cash generation also reflected collection and working-capital changes.
Outlook, commentary, risks, contingencies, and unusual items
- Consumers forecast weather-adjusted electric deliveries to rise 2% in 2010 and average about 1% annual growth through 2014. It forecast weather-adjusted gas deliveries to decline 1% in 2010 and average 2% annual declines from 2011 through 2015. These are delivery forecasts, not earnings guidance.
- Consumers forecast approximately $7 billion of capital investment from 2010 through 2014, including $650 million for renewable energy. It expects environmental compliance spending of $2.2 billion from 2010 through 2017 and anticipates rate recovery, but cannot assure it.
- In May 2010, Consumers deferred development of its proposed 830 MW coal plant, citing recession-related demand weakness, lower expected gas prices, and projected surplus MISO capacity; it set no timetable for reconsideration. It expects a 100 MW wind project to be operational in late 2012 and has contracted for an additional 243 MW of renewable capacity, with MPSC approval reported in July.
- In July 2010, Consumers self-implemented a $150 million annual electric rate increase, subject to refund with interest. MPSC staff had recommended $90 million, and the commission expressed concern about repeated self-implemented increases before resolving earlier overcollections. Consumers also recorded an $86 million regulatory liability for a customer refund tied to Big Rock decommissioning and is appealing the order.
- Other material exposures include a $35 million recorded liability for a Michigan sales/use tax assessment under appeal; a $163 million liability for spent-nuclear-fuel disposal funding; and gas-site remediation estimates of $33 million to $48 million, with a $33 million recorded liability and a $61 million regulatory asset. Recovery and final costs are uncertain.
- Key risks include Michigan’s weak economy and customer demand, weather, fuel and power prices, rate-case outcomes and cost recovery, environmental rules, plant reliability, and financing-market access. Federal proposals concerning greenhouse gases, coal ash, air emissions, cooling water, and PCBs could require significant expenditures.
- Consumers remeasured retiree health obligations after a new labor agreement; the change reduced its OPEB liability and regulatory asset by $93 million each and was expected to reduce 2010 benefit costs by $13 million. The filing reports no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether the $150 million annual electric rate increase and earlier gas-rate collections are ultimately upheld, retained, or subject to refunds.
- The outcome and timing of the $86 million Big Rock refund appeal and the status of related decommissioning-cost recovery.
- Actual operating cash flow excluding working-capital effects, and progress on debt maturities and the August 2010 credit-facility renewal.
- Whether environmental, nuclear-fuel, and gas-remediation liabilities and planned compliance spending remain recoverable through customer rates.
- Whether delivery forecasts, renewable-project schedules, and the deferred coal-plant decision change with economic, weather, or market conditions.