Consumers Energy Company — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. The filing is a combined report for Consumers Energy and parent CMS Energy; figures below distinguish the two where relevant. Consumers is a regulated Michigan electric and gas utility. Results are seasonal and interim performance is not necessarily indicative of full-year results.
Financial performance and liquidity
| Metric | Consumers | Comparison |
|---|---|---|
| Revenue, Q3 | $1.386 billion | Down 4.3% from $1.448 billion |
| Revenue, nine months | $4.647 billion | Up 5.5% from $4.405 billion |
| Net income available to common stockholder, Q3 | $152 million | Down from $162 million |
| Net income available to common stockholder, nine months | $413 million | Up from $359 million |
| Operating income, nine months | $860 million | Up from $777 million |
| Operating cash flow, nine months | $1.134 billion | Up from $1.025 billion |
| Capital expenditures, nine months | $895 million | Up from $857 million |
| Cash at September 30 | $230 million, including $31 million restricted | Balance-sheet cash and cash equivalents were $199 million |
| Long-term debt at September 30 | $4.591 billion | Compared with $4.297 billion at December 31, 2012; current debt was $63 million |
Derived operating margin was approximately 22.7% in Q3 versus 23.1% a year earlier, and 18.5% for the first nine months versus 17.6%. The filing reports no separate Consumers EPS. Consumers had $650 million available under its revolving credit facilities; covenant compliance was reported, with debt-to-capital of 0.49 against a maximum of 0.65. Its $250 million receivables program was available, subject to eligibility.
Material changes versus prior periods
- Nine-month earnings improved mainly on higher gas deliveries and the absence of the 2012 electric revenue-decoupling asset write-off. Consumers’ electric and gas utility net income was $315 million and $97 million, respectively, compared with $297 million and $61 million.
- Q3 earnings declined, reflecting lower electric deliveries, principally due to milder weather; electric deliveries excluding the largest customer fell 3%. The May 2013 electric rate increase partly offset the revenue decline.
- Nine-month gas deliveries increased 19.8% to 206 bcf, primarily because of colder weather; the gas utility reported a $56 million increase in delivery revenues.
- Capital spending and depreciation increased. Consumers’ plant, property and equipment rose to $12.076 billion from $11.475 billion at year-end 2012.
- Operating cash flow benefited from higher earnings, a $69 million renewable-energy grant, and working-capital changes, partly offset by higher pension contributions. Investing used $945 million; financing provided $5 million.
Outlook, significant events, and risks
- Rates and customer costs: An electric rate settlement authorized an annual $89 million increase in May 2013, below the amount Consumers had sought. The gas rate case seeking $49 million annually was suspended indefinitely. The MPSC approved accelerated return of $211 million of electric and $264 million of gas income-tax benefits to customers, beginning January 2014.
- Generation and investment: Consumers expects about $7 billion of capital investment from 2013–2017, including $1.0 billion for environmental compliance. It plans a 700-MW gas plant estimated at $750 million, subject to regulatory and environmental approvals, with expected operation in 2017; it is also evaluating purchases of existing gas plants. Seven smaller coal units are planned for mothballing in 2016. A potential capacity shortfall of up to 1,500 MW was identified for 2016.
- Renewables and demand: The company expects electric sales growth of roughly 0.5%–1.0% annually through 2017 (1.0%–1.5% excluding energy-efficiency impacts) and gas sales to remain broadly stable. It expects renewable capacity requirements to be met through owned and contracted resources. Cross Winds construction began in October 2013; expected federal production tax credits are $100–$120 million, with customer savings dependent on project production.
- Rate outlook: Cost-reduction initiatives were expected to allow Consumers to avoid electric and gas base-rate increases through 2014, subject to assumptions and regulatory outcomes. Management said liquidity should be sufficient for planned requirements; no specific earnings guidance is provided in the supplied filing text.
- Retirement-benefit remeasurement: July plan changes and actuarial updates reduced Consumers’ OPEB liability by $614 million, eliminated a $580 million regulatory asset, and established a $34 million regulatory liability. The discount rate increased from 4.4% to 5.1%. Consumers expected OPEB cost to decrease by $46 million in 2013; the filing also reports a $144 million reduction in deferred tax assets offset by a reduction in regulatory income-tax liabilities.
- Environmental and legal exposure: MATS and Michigan mercury-rule extensions allow ten coal units to operate as configured until April 2016; environmental rules, permitting, and potential compliance costs remain uncertain. Consumers estimates $121 million of remaining gas environmental obligations, undiscounted at $131 million, and expects $1.0 billion of environmental spending in 2013–2017. Recovery of costs in rates is expected but not assured. Other matters include the Kalamazoo River Superfund site, coal-plant permit disputes, a Lake Winds wind-park lawsuit, and pipeline transportation uncertainty.
- Gas incidents: Following investigations into two gas explosions, Consumers established a $900,000 customer assistance fund, committed $50,000 each to a safety study and safety training, and paid $430,000 in MPSC fines in 2013.
Most important facts for investors to verify
- Whether Consumers can maintain the planned investment program while managing higher debt and recovering costs through rates.
- Regulatory outcomes and timing for the proposed $454 million securitization, unit-retirement cost recovery, and future electric and gas rates.
- Actual capacity needs and the cost and approval status of the proposed Thetford plant versus potential purchases of existing generation.
- Environmental compliance spending, cost recovery, and the eventual requirements for coal ash, water, air emissions, and greenhouse gases.
- Whether OPEB cost and liability reductions translate into sustained cash savings, and how pension contributions and actuarial assumptions evolve.