Consumers Energy Company — Q3 2010 Form 10-Q
Business context and reporting period. Consumers Energy is a Michigan-regulated electric and natural gas utility, wholly owned by CMS Energy. This unaudited filing covers the three and nine months ended September 30, 2010; comparisons are with the corresponding 2009 periods. Results are seasonal and interim performance is not necessarily indicative of full-year results.
Financial performance and position
| Consumers Energy, $ millions except per-share data | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Operating revenue | 1,370 | 1,204 | 4,536 | 4,420 |
| Operating income | 304 | 218 | 735 | 595 |
| Net income | 160 | 101 | 355 | 272 |
| Net income available to common stockholder | 159 | 100 | 353 | 270 |
- Revenue rose 13.8% in Q3 and 2.6% year to date. Operating margin was approximately 22.2% in Q3 versus 18.1%; for nine months it was 16.2% versus 13.5%. Net margin was approximately 11.7% versus 8.4% in Q3 and 7.8% versus 6.2% year to date.
- Electric utility common income was $156 million in Q3, up $45 million, and $283 million for nine months, up $66 million. Q3 electric deliveries increased 12.9% to 10.5 billion kWh; nine-month deliveries rose 7.1% to 28.6 billion kWh. Management attributed gains mainly to rate changes, favorable weather, and stronger deliveries to certain high-margin customers.
- Gas utility common income was $2 million in Q3 versus a $12 million loss, and $69 million for nine months versus $52 million. Nine-month gas deliveries declined 7.6% to 181.2 bcf, primarily reflecting milder weather; rate-order revenue partly offset the decline.
- Cash flow: Nine-month operating cash flow was $900 million versus $699 million. Capital expenditures were $608 million; net investing cash outflow was $640 million. Financing cash outflow was $66 million, and period-end cash was $233 million plus $23 million restricted.
- Debt and liquidity: At September 30, long-term debt was $4.198 billion and current debt, capital and finance lease obligations were $198 million. Consumers had $4.206 billion in equity. Available revolving-credit capacity was $350 million ($200 million on a $500 million facility and $150 million on a separate facility); a $30 million letter-of-credit facility was fully utilized. The $250 million receivables program had no receivables transferred. Consumers reported liquidity sources as sufficient for expected requirements.
Material changes versus the prior comparable period
- Higher electric and gas revenues from rate orders, stronger electric deliveries, and favorable weather drove improved utility earnings. Electric and gas decoupling mechanisms were introduced, subject to conditions.
- Q3 Consumers operating expenses increased overall, including higher electric fuel, purchased power, maintenance, and depreciation; lower gas costs partly offset these increases. Nine-month interest charges rose to $210 million from $199 million, including use-tax assessment-related interest.
- Consumers contributed $250 million of equity from CMS Energy during the first nine months, compared with $100 million in 2009. It issued $300 million of first mortgage bonds in September; a further $300 million private placement and redemption of $137 million of older bonds occurred in October.
- Postretirement benefit obligations and regulatory assets were remeasured following a new labor agreement; the remeasurement lowered Consumers’ OPEB liability and related regulatory asset by $93 million each.
Outlook, commentary, risks and unusual items
- Consumers expects weather-adjusted electric deliveries to increase 1.5% in 2010 and average about 2% annual growth through 2015. It expects weather-adjusted gas deliveries to be roughly flat in 2010, then decline about 1% annually from 2011 through 2015.
- Consumers expects more than $6 billion of capital investment over five years; CMS Energy announced a $1 billion reduction in planned investment over that period. Consumers expects $650 million for renewable-energy investment through 2014 and intends to begin smart-meter deployment in early 2012.
- The proposed 830 MW Karn/Weadock coal plant was deferred, with no timetable for a future decision. The company cited weaker demand, anticipated lower gas prices, and surplus MISO generating capacity. It expects the Lake Winds 100 MW wind project to be operational in late 2012 and has agreements for 243 MW of renewable capacity.
- Consumers estimates $1.9 billion of environmental-compliance expenditures from 2010 through 2017 and expects rate recovery, but cannot guarantee it. Proposed air, greenhouse-gas, coal-ash, water, PCB, and pipeline-safety requirements could add costs or affect operations.
- Regulatory exposure: The MPSC authorized a $66 million annual gas-rate increase in May, below Consumers’ $89 million self-implemented increase; Consumers later sought an $11 million customer refund. A separate $55 million annual gas-rate increase was requested in August. Consumers self-implemented a $150 million annual electric-rate increase in July, subject to refund with interest; the pending case and appeals create uncertainty. The MPSC also ordered an $85 million refund related to 2001–2003 rate-freeze collections; Consumers appealed and had recorded a $44 million regulatory liability at September 30.
- Other contingencies: Gas-site remediation estimates were $32–$47 million, with a $32 million recorded liability and a $59 million regulatory asset; expected costs average $6 million annually over five years. Consumers recorded a $163 million liability for nuclear-fuel disposal amounts collected from customers and had an $85 million regulatory asset for spent-fuel storage and related costs. Recovery and timing depend on regulatory and DOE outcomes.
- In October 2010, after quarter-end, a jury awarded a Consumers employee $0.4 million compensatory and $7.5 million punitive damages. Consumers sought reduction under a statutory cap it believes is $0.3 million and said insurance would cover most damages if upheld.
Important facts for investors to verify
- Final MPSC outcomes, refund obligations, and collection or refund treatment for the electric and gas rate cases, including self-implemented rates and decoupling mechanisms.
- Whether operating cash flow and available credit remain adequate amid capital spending, debt maturities, pension contributions, and customer-payment risks.
- Actual environmental-compliance costs and recovery in rates, particularly the $1.9 billion estimate and potential effects of pending federal rules.
- Changes in electric and gas deliveries, weather normalization, and the effect of Michigan economic conditions and energy-efficiency programs on the company’s forecasts.
- Developments in MGP remediation, nuclear-fuel storage and DOE litigation, the $85 million rate-freeze refund appeal, and the post-quarter employee verdict.