Consumers Energy Company — Q3 2011 Form 10-Q
Business context and period. Consumers is a Michigan-regulated electric and natural gas utility and a wholly owned subsidiary of CMS Energy. This unaudited filing covers the three and nine months ended September 30, 2011; comparisons are with the same periods in 2010 unless noted. The filing is combined with CMS Energy’s report, so parent-company figures are not Consumers figures.
Key financial results
| Consumers, $ millions except per-share data | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Operating revenue | 1,397 | 1,370 | 4,688 | 4,536 |
| Operating income | 305 | 304 | 812 | 735 |
| Net income | 155 | 160 | 400 | 355 |
| Net income available to common stockholder | 154 | 159 | 398 | 353 |
| Net cash from operating activities | Not provided by quarter in the supplied text | 1,245 | 900 |
- Approximate operating margin was 21.8% for Q3 (versus 22.2%) and 17.3% year to date (versus 16.2%); approximate net margin was 11.1% for Q3 (versus 11.7%) and 8.5% year to date (versus 7.8%). These percentages are calculated from reported revenue and net income.
- Electric utility net income was $159 million for Q3 and $309 million year to date, compared with $156 million and $283 million. Gas utility results were a $5 million loss for Q3 and $88 million income year to date, compared with $2 million income and $69 million income.
- Consumers’ September 30 cash and cash equivalents were $373 million, plus $28 million restricted cash. Nine-month capital expenditures were $618 million; investing cash flow was negative $683 million and financing cash flow negative $260 million.
- At September 30, reported long-term debt was $3.997 billion, with $362 million of current debt and capital/finance lease obligations and $171 million of non-current lease obligations. The filing reports long-term debt carrying amount, including its current portion, of $4.335 billion; its fair value was $4.901 billion.
Changes versus the prior comparable period
- For the first nine months, common income rose $45 million while revenue increased $152 million and operating income increased $77 million. The filing attributes improved utility performance principally to rate orders and, for gas, higher deliveries during colder weather.
- Q3 common income declined $5 million despite revenue growth; higher maintenance and operating costs, including service restoration and distribution expenses, weighed on results. Nine-month electric service-restoration costs were higher by $27 million, reflecting severe storms.
- Operating cash flow increased $345 million year over year. The filing cites the absence of Pension Plan contributions in 2011, stronger receivable collections, and the absence of customer refunds paid in 2010. This increase should be considered alongside working-capital movements and benefit contributions.
- Consumers’ nine-month cash balance increased to $373 million from $71 million at year-end 2010. Current debt and lease obligations rose to $362 million from $61 million, while long-term debt declined to $3.997 billion from $4.488 billion.
Outlook, regulation, risks, and unusual items
- Rates and recovery: Consumers filed for a $195 million annual electric rate increase in June 2011, based on a requested 10.7% return on equity. In September it filed for a $49 million annual gas increase, also based on 10.7%. These are requests, not approved increases. A May 2011 gas-rate settlement authorized a $31 million annual increase based on a 10.5% return on equity.
- DOE settlement: Consumers settled spent-nuclear-fuel claims with the Department of Energy for $120 million. It asked the MPSC to allow $85 million to recover a regulatory asset and to refund customers $23 million previously collected; the treatment of the remaining $12 million was subject to the commission’s decision.
- Investment plans: Consumers expects $6.6 billion of capital investment from 2012 through 2016, including $1.5 billion for environmental investment, $1.2 billion for reliability, and $500 million for renewable energy. It estimates $1.6 billion of environmental expenditures from 2011 through 2018 and expects rate recovery, but says recovery is not assured.
- Demand and generation: Management expects weather-adjusted electric deliveries to grow 1.5% in 2011 and average more than 1% annually over five years; gas deliveries are expected to rise 3% in 2011 and remain broadly stable over five years. The planned 830-MW Karn/Weadock coal plant was deferred, with no timetable for a new decision; its air-permit extension is being challenged.
- Liquidity and covenants: Consumers had $499 million available under its $500 million revolving facility, plus $150 million available under another facility; a separate $30 million letter-of-credit facility was fully used. It had no borrowings under the receivables program, with $250 million eligible for transfer. Consumers was within its debt-to-capital covenant limit: 0.49 versus a maximum 0.65. Management said cash, operating flows, and available liquidity were expected to fund obligations, while noting that restricted capital-market access could prompt reduced capital spending.
- Contingencies: Consumers reported $28 million of liabilities for remediation at former manufactured-gas-plant sites, with estimated undiscounted remaining costs of $28 million to $42 million and a related $54 million regulatory asset. It also faces unresolved environmental and permitting matters, including EPA proceedings involving power-plant air permits and a Superfund claim for which Consumers could not estimate its potential share.
- The filing says the interim results are not necessarily indicative of full-year results because utility operations are seasonal. Management cited improving Michigan economic conditions but acknowledged recession-related weakness, weather variability, regulatory outcomes, fuel and power prices, environmental requirements, and operating disruptions as risks. No material change to previously disclosed risk factors or market-risk disclosures was reported.
Important facts for investors to verify
- Whether and when the MPSC approves the pending electric and gas rate requests, and the final return and recovery terms.
- The MPSC’s allocation of the $120 million DOE settlement, including the customer refund and regulatory-asset recovery.
- Whether operating cash flow remains strong after accounting for benefit contributions, receivable collections, refunds, and other working-capital changes.
- The timing, financing, and rate recovery of the planned capital program and environmental expenditures.
- Potential costs or operating effects from EPA rules, permit challenges, pipeline-safety requirements, and unresolved remediation matters.
- Debt maturities and refinancing requirements, covenant headroom, and availability of revolving and receivables-based liquidity.