Business context and reporting period
Consumers Energy Company (Consumers), a wholly owned subsidiary of CMS Energy, filed this combined Form 10-Q for the quarter ended March 31, 2014. Consumers is a Michigan-regulated electric and natural gas utility. Results are seasonal and the first-quarter figures are not necessarily indicative of full-year results.
Financial performance and position
| Consumers Energy | Q1 2014 | Q1 2013 |
|---|---|---|
| Operating revenue | $2.382 billion | $1.919 billion |
| Operating income | $399 million | $319 million |
| Net income | $221 million | $162 million |
| Operating margin | 16.8% | 16.6% |
| Net margin | 9.3% | 8.4% |
| Cash from operating activities | $646 million | $713 million |
| Capital expenditures | $302 million | $273 million |
Margins are calculated from reported revenue and income figures. Consumers’ net income rose 36% year over year, supported by higher utility deliveries, rate increases, and a $16 million income-tax benefit from an MPSC accounting order. Electric deliveries rose to 9.6 billion kWh from 9.1 billion kWh; gas deliveries increased to 157 bcf from 132 bcf, primarily because of colder weather.
At March 31, Consumers had $209 million of cash and restricted cash. Long-term debt, including its current portion, was approximately $4.632 billion, versus $4.643 billion at December 31, 2013; notes payable declined from $170 million to zero. Consumers reported $646 million of operating cash flow, $315 million of investing cash outflow, and $171 million of financing cash outflow. Its $650 million revolving facility was undrawn; $250 million of receivables were eligible for its receivables financing program. Consumers was in compliance with its debt covenants, with debt-to-capital of 0.47 against a 0.65 limit.
For context, CMS Energy reported Q1 net income available to common stockholders of $204 million and diluted EPS of $0.75, compared with $144 million and $0.53 in Q1 2013. These are parent-company figures, not Consumers standalone results.
Material changes versus the prior comparable period
- Consumers’ revenue increased $463 million and operating income increased $80 million. The filing attributes higher electric revenue to a rate increase and increased deliveries, and higher gas revenue principally to colder weather and increased deliveries.
- Higher earnings were partly offset by increased depreciation, taxes, and other costs. The new MPSC tax-benefit accounting treatment reduced Consumers’ income-tax expense by $16 million in the quarter.
- Operating cash flow fell $67 million despite higher net income, primarily because of larger gas and power supply underrecoveries and the absence of a $69 million renewable-energy grant received in Q1 2013. Capital expenditures increased $29 million.
- Severe winter weather drove Consumers to record an $84 million gas-cost underrecovery and a $104 million power-supply-cost underrecovery at quarter-end.
Outlook, risks and unusual items
- Consumers expected weather-adjusted electric deliveries to increase 1.5% in 2014 and average 0.5%–1.0% annual growth over five years; weather-adjusted gas deliveries were expected to remain stable. Management expected cost reductions and the tax accounting order to help avoid electric and gas base-rate increases through 2014.
- Consumers planned approximately $7 billion of capital investments over 2014–2018, including reliability, system maintenance, environmental compliance, Smart Energy, and renewable projects. It expected $0.9 billion of environmental investment during that period; customer recovery of environmental costs is not assured.
- Consumers requested higher GCR and PSCR factors to address elevated fuel and power costs, with the PSCR increase sought to begin in July 2014. The underrecoveries are to be addressed through later recovery plans, subject to regulatory approval.
- Consumers planned to issue up to $389 million of securitization bonds in 2014, subject to market conditions, to recover costs associated with retiring ten smaller generating units by April 2016. It estimated initial annual savings of $15 million for full-service customers. A potential generation-capacity shortfall of up to 1,500 MW in 2016 remains a planning concern.
- Consumers agreed to buy a 540-MW gas-fired plant for $155 million, subject to regulatory approvals, with closing expected in late 2015; it deferred development of a proposed 700-MW plant estimated to cost $700 million.
- Key exposures include changes to Michigan’s electric retail-access limit or deregulation, environmental rules and litigation, fuel and energy-market costs, weather and reliability events, and regulatory recovery of costs. Consumers recorded an $118 million liability for gas environmental obligations, including former manufactured-gas-plant sites; it also disclosed environmental and other legal matters for which potential losses may be uncertain or not estimable.
- CMS Energy disclosed $469 million of maximum estimable indemnity obligations across the consolidated group, with $16 million recorded as a carrying amount. Management considered material losses on unrecorded indemnities unlikely, but could not predict their liquidity or financial impact.
Important facts for investors to verify
- Whether regulators approve the requested GCR and PSCR factor increases and how quickly the $188 million combined underrecovery can be recovered from customers.
- Whether the securitization financing proceeds on expected terms, and whether the planned unit retirements and replacement capacity keep Consumers’ 2016 supply adequate.
- Actual timing, cost, and regulatory approvals for the 540-MW plant purchase and Consumers’ broader 2014–2018 capital program.
- Environmental compliance costs, remediation estimates, and the extent to which Consumers ultimately recovers those costs in rates.
- Whether operating cash flow and available liquidity remain sufficient as capital spending rises and debt maturities and financing needs come due.