Consumers Energy Company — Q1 2015 Form 10-Q
Business context and period. Consumers is a regulated Michigan electric and natural gas utility, wholly owned by CMS Energy. This unaudited report covers the three months ended March 31, 2015, compared with the same quarter of 2014. Utility results are seasonal, and the filing cautions that interim results are not necessarily indicative of full-year performance. Amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Operating revenue | $2,028 | $2,382 | Down $354 (14.9%) |
| Operating income | $379 | $399 | Down $20 |
| Net income | $215 | $221 | Down $6 (2.7%) |
| Cash provided by operating activities | $786 | $646 | Up $140 |
| Cash used in investing activities | $383 | $315 | Outflow increased $68 |
| Cash used in financing activities | $49 | $171 | Outflow decreased $122 |
Operating margin was approximately 18.7% versus 16.7%, and net margin approximately 10.6% versus 9.3%, calculated from reported revenue and income. Revenue and expense movements include commodity-related costs that are generally recovered through customer mechanisms, so these margins should be interpreted in that context.
Electric utility net income was $94 versus $100; gas utility net income was $121 in both periods. Gas delivery revenues increased $22, primarily reflecting the January 2015 rate increase, while end-use gas deliveries declined to 152 bcf from 157 bcf. A $9 gain from donating CMS Energy shares increased Consumers’ other income; this gain was eliminated in CMS Energy’s consolidated results.
Liquidity, debt, and investment
- At March 31, Consumers reported $425 of cash and cash equivalents and $49 of restricted cash. Cash increased from $71 at December 31, 2014; restricted cash was $37 at that date.
- Long-term debt was $5,154, with a $135 current portion. No commercial paper was outstanding. The $650 revolving facility had $640 available; a separate $30 facility was fully covered by outstanding letters of credit. The accounts-receivable program had $250 available for transfer.
- Consumers’ debt-to-capital covenant ratio was 0.47 to 1.0, below the 0.65 limit; the company reported compliance with its financial covenants.
- First-quarter capital expenditures were $345, compared with $302. Management expects approximately $15.5 billion of capital investment during 2015–2024, including $7.4 billion through 2019. Planned environmental expenditures are estimated at $0.8 billion for 2015–2019.
Changes, outlook, and key uncertainties
- Drivers of year-over-year earnings: Less severe winter weather reduced weather-related gas and electric sales. Higher depreciation, property taxes, and employee benefit costs also weighed on results. These pressures were partly offset by the gas rate order, stronger non-weather sales, and other income. Lower gas purchase prices and reduced gas cost recovery underrecoveries contributed to higher operating cash flow; working-capital movements were also significant.
- Rates and regulation: The MPSC approved a $45 annual gas rate increase in January 2015, below the $88 requested. Consumers’ December 2014 electric rate case seeks a $163 annual increase and additional investment recovery of $163 for planned 2016–2017 investments and $78 for 2018, subject to reconciliation. These requests had not been approved in the filing.
- Demand outlook: Consumers expects weather-adjusted electric deliveries to rise 1.0% in 2015 and average about 0.5% annually over the next five years; gas deliveries are expected to remain broadly stable through 2019. Weather, economic conditions, conservation, and efficiency programs may affect actual deliveries.
- Generation and clean energy: Consumers expects existing resources to meet full-service capacity requirements for 2016–2020, subject to forecasts and potential additional actions. It expects to close in early 2016 on the proposed $155 purchase of a 540-MW gas-fired plant, subject to approvals. Seven smaller coal units are planned for retirement in 2016. Consumers says it met its 500-MW renewable capacity requirement ahead of schedule.
- Environmental and legal exposure: Compliance requirements may accelerate coal-ash and other capital spending; recovery of environmental costs in rates is expected but not assured. Consumers recorded $115 for remaining remediation obligations at 23 former manufactured gas plant sites, with an undiscounted estimate of $131, and had a related $145 regulatory asset. Separately, the U.S. Supreme Court’s April 2015 decision in gas price-reporting litigation sent claims involving CMS Energy entities back for further proceedings; liability could not be estimated. The filing also identifies regulatory appeals, environmental remediation, and other litigation as uncertainties.
- Other developments: Electric deliveries under the Retail Open Access program were at the statutory 10% limit. Proposed Michigan legislation could change that limit; an increase could negatively affect Consumers. The company reported a tentative five-year union agreement reached in April 2015, pending ratification.
Most important facts for investors to verify
- Track outcomes and timing of the pending electric rate case and requested investment recovery, as well as implementation of the approved gas rate increase.
- Assess whether higher operating cash flow is sustainable, given the contribution from working-capital movements and lower gas purchase prices.
- Monitor capital spending, financing needs, environmental compliance costs, and whether regulators permit recovery from customers.
- Follow the proposed gas-plant acquisition, planned coal-unit retirements, and Michigan legislation affecting retail open access.
- Review developments in the gas price-reporting litigation and remediation estimates, particularly the former manufactured gas plant obligations.