Consumers Energy Company — Q2 2011 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 summary focuses on Consumers, not the parent company’s consolidated results. The filing covers the quarter and six months ended June 30, 2011; financial statements are unaudited, and management cautions that seasonal interim results are not necessarily indicative of full-year performance.
Financial performance and liquidity
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Operating revenue | $1.303 billion | $1.276 billion | $3.291 billion | $3.166 billion |
| Operating income | $207 million | $207 million | $507 million | $431 million |
| Net income | $92 million | $88 million | $245 million | $195 million |
| Net income available to common stockholder | $91 million | $87 million | $244 million | $194 million |
| Operating margin | 15.9% | 16.2% | 15.4% | 13.6% |
- Six-month operating cash flow was $1.245 billion, up $262 million year over year. Management attributed the increase mainly to higher earnings, no Pension Plan contributions in 2011, and increased collections of receivables.
- Six-month investing cash outflow was $445 million, including $394 million of capital expenditures. Financing cash outflow was $105 million, including $196 million of common dividends and a $125 million contribution from CMS Energy.
- At June 30, cash and cash equivalents were $766 million, with $28 million of restricted cash. Total assets were $15.101 billion. Long-term debt carrying amount was $4.507 billion, including current maturities; balance-sheet current debt and lease obligations were $362 million, and noncurrent lease obligations were $177 million.
- Available revolving credit: $311 million under Consumers’ $500 million facility after letters of credit, plus $150 million under a separate facility. No amounts were borrowed under these facilities. Up to $250 million of receivables were eligible for the sales program, with none transferred at quarter-end. Consumers was within its credit agreement debt-to-capital limit (0.50 versus 0.65 maximum).
Changes versus the prior comparable period
- For the first half, revenue rose $125 million and net income increased $50 million. Electric utility net income rose $23 million to $150 million; gas utility net income rose $26 million to $93 million.
- Electric utility Q2 net income was nearly flat at $85 million. Revenue effects included a November 2010 rate increase, offset in Q2 by the expiration of prior-year surcharges and lower sales revenue associated with cooler weather and lower decoupling revenue. First-half electric deliveries increased 1.1%.
- Gas utility earnings benefited from higher deliveries and colder weather: first-half deliveries increased 15.1% to 179.5 bcf, contributing to higher revenue. The company expects gas deliveries to trend lower over the next five years as efficiency and conservation continue.
- Higher service-restoration costs from severe storms and increased depreciation and general taxes partly offset the earnings improvement. Interest expense declined, including because 2011 had no interest expense on a Michigan use-tax assessment.
Outlook, regulatory matters, risks, and unusual items
- Outlook: Consumers expected weather-adjusted electric deliveries to increase about 2% in 2011 and average electric delivery growth of about 1.7% annually through 2016. It expected weather-adjusted gas deliveries to increase about 2% in 2011, then decline about 1% annually over five years. Management said cash, operating cash flow, and available liquidity were expected to fund obligations and investment plans.
- Investment: Consumers planned approximately $6.5 billion of capital investment over five years, including $600 million for renewable energy in 2011–2015. It estimated $1.4 billion of environmental investment and $1.2 billion for reliability through 2015. A $750 million Smart Grid program was being phased in, with broader deployment planned to begin in mid-2012. Consumers’ share of the Ludington plant upgrade was expected to be $400 million.
- Rates: The MPSC approved a $31 million annual gas rate increase in May 2011, below Consumers’ original $55 million request. In June, Consumers filed an electric rate case seeking $195 million annually, based on a requested 10.7% return on equity; the request was pending. The MPSC also approved an amended renewable plan that lowers the future annual customer surcharge by $54 million.
- DOE settlement: In July 2011, after quarter-end, Consumers agreed to settle spent-nuclear-fuel claims with the DOE for $120 million, resolving a recorded $163 million liability. Consumers planned to seek MPSC direction on treatment, proposing that $85 million represent recovery of a regulatory asset; customer refunds or earnings recognition depend on the MPSC’s decision.
- Tax item: Michigan enacted the MCIT in May 2011, effective 2012. Consumers remeasured deferred taxes and recorded a $134 million regulatory asset associated with utility temporary differences; the tax-law change also produced a $32 million deferred tax benefit at CMS Energy’s non-utility businesses. This was a material, nonrecurring tax-accounting effect at the parent level.
- Environmental and legal exposure: Consumers estimated $1.6 billion of environmental expenditures from 2011–2018 and expects rate recovery, but cannot assure it. CSAPR emission reductions were scheduled to begin in 2012; proposed MACT and other rules could require additional controls, accelerated spending, or retirement of older units. The EPA’s Kalamazoo River PCB claim had no estimable loss range. Consumers estimated $28–$43 million of remaining costs at former manufactured-gas-plant sites and recorded a $28 million liability.
- Other notable risks: Regulatory recovery of costs and regulatory assets, rate-case outcomes, storm restoration costs, fuel and power supply costs, changing demand and weather, and access to capital markets could affect results. Consumers had also recorded an $85 million regulatory asset for Big Rock and spent $85 million on a prior customer refund; an appeal remained pending. Management reported no material changes to previously disclosed risk factors or market risk.
Most important facts for investors to verify
- Progress and final MPSC decisions on the $195 million electric rate request and unresolved gas-case items.
- MPSC treatment of the $120 million DOE settlement, including the proposed $85 million regulatory-asset recovery and any customer refund.
- Actual environmental compliance spending, regulatory cost recovery, and implications of CSAPR, MACT, and other pending rules.
- Whether operating cash flow and available credit remain adequate for planned capital investment, debt maturities, and dividends.
- Whether storm-related restoration costs, weather-sensitive deliveries, and efficiency-driven gas demand affect earnings differently from management’s outlook.