Consumers Energy Company — Q1 2016 Form 10-Q
Business context and reporting period
Consumers Energy is a Michigan-regulated electric and natural gas utility. This unaudited report covers the three months ended March 31, 2016, compared with the same period in 2015. Results are seasonal and are not necessarily indicative of full-year performance. The combined filing also covers parent CMS Energy; Consumers’ debt is not an obligation of CMS Energy or its other subsidiaries.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Operating revenue | $1.723 billion | $2.028 billion |
| Operating income | $317 million | $379 million |
| Net income | $172 million | $215 million |
| Cash provided by operations | $665 million | $786 million |
| Capital expenditures | $406 million | $345 million |
| Net cash used in financing | $255 million | $49 million |
- Net income fell $43 million. Electric utility income was $91 million versus $94 million; gas utility income was $81 million versus $121 million.
- End-use electric deliveries declined to 9.1 billion kWh from 9.5 billion kWh; gas deliveries declined to 121 bcf from 152 bcf.
- At March 31, Consumers reported $27 million of cash and cash equivalents plus $28 million of restricted cash. Available revolving credit capacity was $893 million; no commercial paper was outstanding.
- Long-term debt was $4.934 billion. The current portion of long-term debt, capital leases, and financing obligations was $469 million. Total equity was $5.716 billion.
- Consumers paid $155 million in dividends to CMS Energy and received a $150 million capital contribution. It repaid $249 million of notes payable during the quarter.
Changes versus prior year
The principal earnings headwind was unusually mild winter weather—the second-warmest in Consumers’ history—which reduced electric and especially gas sales. Gas delivery revenue declined $53 million, while electric delivery revenue rose $18 million, reflecting rate increases and energy-efficiency program revenue partly offset by lower sales and reduced securitization revenue. Higher depreciation and property taxes also weighed on results. Rate increases and lower income taxes partly offset these factors.
Operating cash flow decreased $121 million, reflecting lower income and working-capital effects, including lower collections of gas-cost underrecoveries. Capital spending increased $61 million. The company’s balance sheet showed no notes payable at quarter-end, compared with $249 million at December 31, 2015.
Outlook, regulation, risks, and unusual items
- Rates: In March 2016, Consumers requested a $225 million annual electric rate increase, based on a 10.7% requested return on equity, and a recovery mechanism for up to $222 million of planned incremental investment in 2017–2019. In April, after quarter-end, the MPSC approved a gas-rate settlement authorizing a $40 million annual increase; Consumers had self-implemented $60 million subject to refund with interest.
- Demand outlook: Consumers expected weather-adjusted electric deliveries to rise 1.5%–2.0% in 2016 and gas deliveries to rise 1.0%. Longer-term planning assumed electric delivery growth of roughly 0.5%–1.0% annually and broadly stable gas deliveries.
- Investment and generation: Consumers planned about $8.4 billion of capital investment through 2020 and approximately $17 billion from 2016 through 2025. In April 2016, it retired seven coal units totaling 950 MW; it expected to meet full-service capacity requirements through 2020 using replacement and other resources, efficiency, and demand management.
- Environmental exposure: Planned environmental capital spending was approximately $700 million for 2016–2020; recovery through rates is expected but not assured. The Clean Power Plan was stayed by the U.S. Supreme Court while litigation proceeds. Other air, water, coal-ash, and remediation requirements may raise costs.
- Contingencies: Consumers recorded $114 million for gas-site remediation, principally 23 former manufactured-gas-plant sites, against a $145 million regulatory asset for related costs deferred for recovery from customers. Recorded liabilities for specified NREPA and CERCLA matters were at the low ends of estimated ranges. The filing says ultimate outcomes and costs for certain environmental matters cannot be estimated clearly.
- Accounting item: Consumers early-adopted share-based payment accounting guidance in January 2016; $6 million of excess tax benefits were recorded in net income. The filing also reports a change in pension and OPEB cost methodology that reduced related service and interest costs.
Most important facts for investors to verify
- Whether the requested electric-rate increase and investment recovery mechanism receive MPSC approval, and how the approved gas-rate settlement affects refunds or revenue.
- Actual weather-normalized demand, customer growth, and the extent to which rate increases offset lower deliveries.
- Capital spending, financing needs, available credit capacity, and compliance with debt covenants as coal retirements and infrastructure plans proceed.
- Environmental compliance and remediation costs, including the recoverability and timing of the MGP regulatory asset and future customer-rate recovery.
- Capacity adequacy following the April 2016 retirement of 950 MW of coal generation and the cost of replacement resources.