Consumers Energy Company — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015; unaudited. Consumers is a regulated Michigan electric and gas utility and a wholly owned subsidiary of CMS Energy. Amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Three months ended June 30, 2015 | Three months ended June 30, 2014 | Six months ended June 30, 2015 | Six months ended June 30, 2014 |
|---|---|---|---|---|
| Operating revenue | $1,281 | $1,387 | $3,309 | $3,769 |
| Operating income | $192 | $227 | $571 | $626 |
| Net income available to common stockholder | $83 | $108 | $298 | $329 |
| Operating margin | 15.0% | 16.4% | 17.3% | 16.6% |
| Net margin | 6.5% | 7.8% | 9.0% | 8.7% |
Margins are calculated from reported revenue and income figures. Consumers reported six-month operating cash flow of $1,251, up from $916 in 2014; investing cash outflow was $714, including $667 of capital expenditures, and financing cash outflow was $211. Cash and cash equivalents were $397 at June 30, plus $40 of restricted cash. Long-term debt was $5,141, with a current portion of $122; the balance sheet also reports $113 of non-current capital leases and financing obligations.
Liquidity included $640 available under the $650 revolving facility after letters of credit, plus a separate $30 facility fully committed to letters of credit. The $250 accounts-receivable borrowing program was available and unused; no commercial paper was outstanding. Consumers reported compliance with applicable financial covenants, including debt-to-capital of 0.47 versus a maximum of 0.65.
Changes versus the prior comparable periods
- Q2 revenue declined $106 (about 8%) and common net income declined $25 (about 23%). Operating income fell $35.
- For the first six months, revenue declined $460 (about 12%) and common net income declined $31 (about 9%).
- Management attributed utility earnings pressure to milder weather and lower electric and gas sales, along with higher depreciation, property taxes, postretirement benefit costs, and interest. Rate increases partly offset these items. Lower gas commodity costs reduced reported revenue and expense; revenue comparisons therefore should be considered alongside the utility’s cost-recovery mechanisms.
- Electric deliveries to end-use customers were 8.8 billion kWh in Q2 versus 9.1 billion kWh, and 18.3 billion kWh for six months versus 18.7 billion. Six-month gas deliveries were 196 bcf versus 205 bcf.
Outlook, regulation, risks, and unusual items
- Rates: Consumers self-implemented a $110 annual electric rate increase in June, subject to refund with interest, while seeking a $163 annual increase and investment recovery mechanisms in its pending electric case. In July 2015, after quarter-end, it filed for an $85 annual gas rate increase; the filing includes proposed recovery mechanisms for future investment. The MPSC’s final decisions and timing remain uncertain.
- Demand and investment: Management expected 2015 weather-adjusted electric deliveries to be flat year over year and gas deliveries to increase 1–2%. Longer-term plans anticipate modest electric delivery growth and broadly stable gas deliveries. Consumers expected roughly $15.5 billion of capital investment over 2015–2024, including $7.8 billion through 2019; funding and cost recovery depend partly on regulatory outcomes.
- Generation and environment: Consumers expected to purchase a 540-MW gas-fired plant for $155 million, subject to approvals, with closing anticipated in early 2016. It planned to retire seven smaller coal units in 2016 and estimated $0.8 billion of environmental expenditures for 2015–2019. Management expected to recover environmental costs in rates but could not guarantee recovery.
- Regulatory and legal exposure: Michigan legislation under discussion could change retail open access; deliveries under the program were already at its 10% statutory limit. Environmental rules and litigation, remediation obligations, and appeals of regulatory decisions may affect costs or recovery. Consumers recorded $113 for gas-site remediation, including former manufactured-gas-plant sites, and had a $144 regulatory asset for related costs. The filing describes other matters for which potential losses cannot be estimated clearly.
- Other items: Consumers recorded a $9 gain related to donating CMS Energy shares; this gain was eliminated in CMS Energy’s consolidated statements. The interim filing cautions that utility results are seasonal and are not necessarily indicative of full-year results.
Key facts for investors to verify
- Final MPSC outcomes for the pending electric case and the post-quarter gas rate filing, including self-implemented rates and possible refunds.
- Whether operating cash flow remains strong as working-capital benefits—especially inventory and receivables movements—change, and how capital spending is funded.
- Debt maturities, borrowing capacity, covenant headroom, and the effect of capital investment and dividends on Consumers’ credit metrics.
- Actual environmental compliance and remediation costs, rate recovery, and developments in significant legal and regulatory proceedings.
- Progress and approvals for the 540-MW plant purchase and planned coal-unit retirements, together with resulting capacity adequacy and costs.