Consumers Energy Company — Q1 2012 Form 10-Q
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 unaudited filing covers the three months ended March 31, 2012, compared with the same period in 2011. The filing also includes separate CMS Energy consolidated results; figures below are for Consumers unless identified otherwise. Utility operations are seasonal, so first-quarter results are not necessarily indicative of full-year results.
Key financial metrics
| Consumers, $ millions except per-share data | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Operating revenue | 1,675 | 1,988 | (313), about (16%) |
| Operating income | 183 | 300 | (117), about (39%) |
| Net income | 76 | 153 | (77), about (50%) |
| Operating margin | 10.9% | 15.1% | Down 4.2 percentage points |
| Net margin | 4.5% | 7.7% | Down 3.2 percentage points |
| Cash provided by operating activities | 681 | 867 | (186) |
| Capital expenditures | 294 | 186 | 108 higher |
| Net cash used in investing activities | (312) | (228) | 85 more used |
Operating and net margins are calculated from reported revenue, operating income, and net income. Operating cash flow less capital expenditures was approximately $387 million in Q1 2012, compared with $681 million in Q1 2011; this is a simple cash-flow measure, not company-reported free cash flow.
- Cash and liquidity: At March 31, 2012, Consumers reported $173 million cash and cash equivalents, plus $28 million restricted cash. It had $649 million available across listed revolving credit facilities and up to $250 million of eligible receivables under its accounts-receivable program; no receivables were transferred under that program at quarter-end.
- Debt: Balance-sheet long-term debt was $3.977 billion, with $63 million of current maturities, or about $4.040 billion combined. The comparable December 31, 2011 combined balance was about $4.350 billion. Consumers retired $310 million of long-term debt in the quarter and received a $150 million capital contribution from CMS Energy.
- Dividends: Consumers paid $115 million in common dividends to CMS Energy during the quarter.
Material changes and drivers
- Milder weather was a major factor in lower customer deliveries and revenue. Gas deliveries were 106.4 bcf, down 20.5% year over year; electric deliveries were 9.2 billion kWh versus 9.3 billion kWh.
- Electric utility net income fell to $21 million from $65 million. Lower deliveries and rate-related items reduced results; a $59 million electric revenue-decoupling regulatory asset write-off was recorded at March 31. The filing attributes an after-tax $36 million earnings impact to this write-off in CMS Energy’s year-over-year earnings bridge.
- Gas utility net income fell to $55 million from $88 million, primarily reflecting $59 million of lower customer deliveries, partly offset by a prior rate increase and other revenues.
- Revenue declines also reflected lower gas costs passed through to customers. Operating expenses decreased overall, but operating income and net income still declined substantially.
- Operating cash flow decreased by $186 million, primarily because of lower gas sales and a smaller reduction in core working capital, including lower gas-inventory usage. Capital spending increased to $294 million.
Outlook, regulatory matters, and risks
- Consumers expected weather-adjusted electric deliveries to rise about 2% in 2012 versus 2011, with average annual growth of about 1% over the following five years. It expected weather-adjusted gas deliveries to remain broadly stable in 2012 and over the next five years.
- Consumers planned $6.6 billion of capital investment from 2012 through 2016, targeting annual rate-base growth of 5%–7% while aiming to keep base-rate increases, excluding power and gas cost recovery charges, at or below inflation. Planned investments include distribution, reliability, environmental compliance, renewables, and Smart Grid deployment.
- Consumers had self-implemented annual rate increases of $118 million for electric service and $23 million for gas service, both subject to refund with interest. An administrative law judge recommended a $43 million annual electric increase; the gas rate case remained pending.
- A Michigan Court of Appeals decision in April 2012 found the MPSC lacked authority to approve electric revenue decoupling. Consumers had already written off its $59 million electric decoupling regulatory asset at March 31 and continued to pursue recovery. Its separate gas decoupling request was $16 million, with a $28 million related regulatory asset recorded.
- Consumers settled spent-nuclear-fuel claims with the U.S. Department of Energy for $120 million and was seeking MPSC approval for the settlement’s regulatory treatment. The MPSC application included recovery of an $85 million regulatory asset and a proposed $23 million customer refund; the filing states the outcome was uncertain.
- Environmental rules and litigation could require significant compliance spending or changes to generation operations. Consumers estimated $1.5 billion of environmental expenditures from 2012 through 2018 and expected rate recovery, but could not guarantee it. Issues include air-emission rules, coal ash, water regulations, and alleged air-permit violations.
- Other contingencies include Consumers’ $128 million recorded liability for gas-site remediation, including former manufactured-gas-plant sites, and unresolved environmental matters for which losses could not be estimated. CMS Energy separately reported a $71 million recorded Bay Harbor liability and a disputed $142 million Equatorial Guinea tax claim.
- Management said existing cash, expected operating cash flows, and available liquidity should fund contractual obligations for 2012 and beyond. Consumers reported covenant compliance and no debt-covenant defaults at quarter-end. The filing identifies regulatory outcomes, weather, Michigan economic conditions, commodity prices, environmental obligations, financing access, and operating disruptions as significant uncertainties.
Important facts for investors to verify
- Whether the MPSC ultimately approves, modifies, or requires refunds of the self-implemented electric and gas rate increases, and how the electric decoupling ruling affects recovery and future accounting.
- The final regulatory treatment and cash allocation of the $120 million DOE settlement, including any customer refunds or earnings recognition.
- Whether environmental compliance costs, remediation obligations, and rate recovery differ materially from management’s estimates, particularly for air rules and former gas-manufacturing sites.
- Whether operating cash flow and customer deliveries improve as weather normalizes, and whether the planned capital program remains financeable within stated liquidity and rate-growth objectives.
- Debt maturities, refinancing needs, restricted cash, and availability of revolving and receivables-based liquidity; the filing states that Consumers’ resources were expected to be sufficient but does not eliminate market-access risk.