Consumers Energy Company — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; unaudited. Consumers is a Michigan regulated electric and natural-gas utility and a wholly owned subsidiary of CMS Energy. Results are seasonal and are not necessarily indicative of full-year performance.
Financial performance and condition
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Operating revenue | $1.988 billion | $1.890 billion |
| Operating income | $300 million | $224 million |
| Net income | $153 million | $107 million |
| Operating margin | 15.1% | 11.9% |
| Net margin | 7.7% | 5.7% |
| Cash from operating activities | $867 million | $683 million |
| Capital expenditures | $186 million | $190 million |
| Net cash used in investing activities | $228 million | $202 million |
| Net cash from financing activities | $3 million | $71 million |
Revenue and income rose primarily with rate increases and higher deliveries. Electric deliveries were 9.3 billion kWh, up 2.2%; gas deliveries were 133.9 bcf, up 12.4%, largely reflecting colder weather and higher customer usage. Electric utility net income increased to $65 million from $41 million; gas utility net income increased to $88 million from $66 million.
At March 31, Consumers reported $713 million of cash and cash equivalents plus $29 million of restricted cash. The MD&A separately describes $742 million of cash including restricted cash. Total assets were $14.957 billion; equity was $4.354 billion. Balance-sheet debt and capital/finance lease obligations totaled approximately $4.722 billion, comprising $4.516 billion of long-term debt and $206 million of lease obligations. The current portion of debt and leases was $361 million.
Consumers had $200 million available under its new $500 million revolving facility and $150 million available under a separate $150 million facility; an additional $30 million letter-of-credit facility was fully committed. It also had $250 million of eligible receivables under its sales program, with none transferred at quarter-end. Consumers was within its new credit agreement covenant: debt-to-capital was 0.50 versus a 0.65 maximum.
Changes versus the prior comparable period
- Operating income increased $76 million and net income increased $46 million year over year. Electric and gas rate orders and increased gas deliveries were key contributors.
- Electric revenue benefited from a November 2010 rate increase. Higher maintenance and operating costs, including $13 million of additional storm-related service restoration expense, partly offset electric earnings gains.
- Cash from operations rose $184 million. Management cited higher net income, increased receivables collections, and lower postretirement-benefit contributions; the cash-flow statement reports $19 million of contributions versus $125 million in Q1 2010. Lower gas-storage inventory also contributed materially to cash generation.
- Investing cash use increased $26 million, mainly reflecting a $20 million Consumers contribution to the SERP. Financing cash provided fell $68 million, primarily because CMS Energy contributed less capital to Consumers.
Outlook, regulatory matters, and risks
- Consumers expected 2011 weather-adjusted electric deliveries to grow 2.5% versus 2010 (1.5% excluding growth from its largest customer); the five-year annual growth outlook was about 1.5%. It forecast 2011 gas deliveries up 1%, but an average annual decline of about 1% over the following five years.
- Consumers expected more than $6 billion of capital investment over five years, including $600 million in renewable investments through 2015 and $355 million for smart grid through 2015. It expected to spend $1.9 billion from 2011 through 2018 on environmental compliance, with rate recovery expected but not assured.
- The 2010 gas rate case remained unresolved as of April 28, 2011. Consumers supported a $45 million annual increase in its April brief; MPSC staff recommended $16 million. A settlement was not finalized, though Consumers believed one was likely. Its amended renewable plan proposed reducing customer surcharges by $55 million annually.
- Key exposures include uncertain environmental rules for coal ash, air emissions, greenhouse gases, water and PCBs; potential additional pipeline-safety costs; and regulatory uncertainty over cost recovery. Consumers estimated former manufactured-gas-plant remediation costs of $31–$45 million undiscounted, with a $31 million recorded liability and $56 million regulatory asset. The EPA’s Kalamazoo River Superfund request could not yet be estimated.
- Other material matters include the $163 million spent-nuclear-fuel disposal liability and related DOE litigation, and an $85 million recorded regulatory asset for Big Rock decommissioning and nuclear-fuel-storage costs. Consumers had refunded $85 million following the MPSC’s Big Rock order and appealed the order.
- Management stated that cash, expected operating cash flow, and liquidity sources should fund contractual obligations for 2011 and beyond. This outlook depends on continued market access, operating performance, regulatory decisions, weather, and recovery of costs in rates.
Investor verification priorities
- Confirm the gas rate-case outcome and any settlement against the differing company and MPSC staff proposals.
- Assess whether operating cash flow is sustainable after seasonal inventory reductions and unusually low benefit-plan contributions.
- Track the $361 million current debt-and-lease balance, refinancing needs, and available revolving-credit capacity.
- Monitor environmental compliance estimates, rate-recovery decisions, and the unquantified Kalamazoo River exposure.
- Verify execution, costs, and regulatory approvals for renewable, smart-grid, and other planned capital projects.