Consumers Energy Company — 2015 Third-Quarter Form 10-Q
Business context and period: Consumers Energy is a Michigan-regulated electric and natural gas utility and a wholly owned subsidiary of CMS Energy. This combined filing covers the quarter and nine months ended September 30, 2015; results are compared with 2014. Utility results are seasonal, so interim results may not indicate full-year performance.
Key financial metrics
| Metric | Three months ended September 30, 2015 | Nine months ended September 30, 2015 | Comparable 2014 period |
|---|---|---|---|
| Operating revenue | $1.417 billion | $4.726 billion | $1.359 billion; $5.128 billion |
| Operating income | $305 million | $876 million | $245 million; $871 million |
| Net income available to common stockholder | $160 million | $458 million | $119 million; $448 million |
| Cash from operating activities | Not separately provided for the quarter | $1.427 billion | $948 million |
| Cash used in investing activities | Not separately provided for the quarter | $1.186 billion | $1.182 billion |
| Cash from (used in) financing activities | Not separately provided for the quarter | $(269) million | $416 million |
At September 30, Consumers reported $43 million of cash and cash equivalents, plus $52 million of restricted cash. Long-term debt was $4.969 billion and the current portion of long-term debt, leases and financing obligations was $283 million; notes payable were $68 million. Total reported debt fair-value carrying amount, including current debt, was $5.230 billion. Consumers had $641 million available under its principal revolving credit facility, a separate $250 million receivables-transfer capacity, and $68 million of commercial paper outstanding. Its debt-to-capital ratio for covenant purposes was 0.47, below the 0.65 limit; the filing reports covenant compliance.
Changes versus 2014
- Nine-month revenue declined $402 million, largely reflecting lower fuel and gas costs. Those costs are substantially pass-through items; lower revenue did not translate into lower operating income.
- Nine-month operating income increased $5 million and net income available to the common stockholder rose $10 million. Electric utility earnings increased $16 million to $342 million; gas utility earnings decreased $6 million to $115 million.
- Electric delivery revenue increased $67 million in the first nine months, including $38 million from the June 2015 self-implemented rate increase and $24 million from higher sales, primarily weather-related. Gas delivery revenue increased $23 million, including a $32 million rate increase, partly offset by lower sales.
- Operating cash flow increased $479 million, mainly due to lower-priced gas purchases, the absence of large prior-year power and gas cost underrecoveries, and higher earnings. Investing cash use was broadly similar to 2014; financing shifted to net cash use, principally because of lower debt issuance.
- Capital investment increased plant and construction work in progress. Depreciation, property taxes, and interest costs also rose with investment and higher average debt levels.
Outlook, regulatory matters and risks
- Rates: Consumers self-implemented a $110 million annual electric rate increase in June 2015, subject to refund with interest; the filing anticipated a final MPSC order by December 1, 2015. A separate electric rate filing seeks a $163 million annual increase and additional investment recovery, subject to reconciliation. In July 2015, Consumers filed a gas rate case seeking an $85 million annual increase and recovery mechanisms for future investments. The filing also reports that a prior gas case resulted in a $45 million annual increase effective in 2015.
- Investment and demand: Consumers expects about $15.5 billion of capital investment from 2015 through 2024, including $7.8 billion through 2019, and projects annual rate-base growth of 5% to 7%. It aims to keep sustainable base-rate increases at or below inflation, excluding power and gas cost recovery charges. Weather-adjusted 2015 electric deliveries were expected to be flat; gas deliveries were expected to rise 1% to 1.5%.
- Generation and energy transition: Consumers expects to purchase a 540-MW gas-fired plant for $155 million, subject to approvals, with closing anticipated in late 2015 or early 2016. It expects existing resources to meet full-service capacity needs through 2020, including after planned retirements of seven smaller coal units in 2016. Environmental rules and litigation could change compliance costs, operations, fuel mix, or retirement plans.
- Environmental obligations: New information on coal-ash regulation led Consumers to record a $68 million increase in asset-retirement obligations in September 2015, bringing its coal-ash disposal ARO to $192 million. Consumers also reported $112 million of liabilities for former manufactured-gas-plant remediation, with a related $143 million regulatory asset; recovery is through customer rates. Environmental cost recovery is not assured in all cases.
- Other uncertainties: Electric deliveries under the retail open-access program were at the statutory 10% limit; an increase to that limit could adversely affect results. Other material sensitivities include MPSC/FERC decisions, weather, energy prices, reliability and construction execution, environmental regulation, and legal proceedings. Management said liquidity and borrowing capacity were expected to be sufficient for planned needs.
Important facts for investors to verify
- Final outcomes of the electric and gas rate cases, including any refund exposure on the self-implemented electric increase and approval of proposed investment-recovery mechanisms.
- Whether operating cash-flow strength persists, given the significant contribution from working-capital changes, and how it funds planned capital spending and dividends.
- Coal-ash ARO estimates, remediation obligations, and the extent to which environmental and infrastructure costs are recovered in rates.
- Approval and timing of the 540-MW plant acquisition, planned coal-unit retirements, and the adequacy and cost of capacity resources.
- Credit-facility availability, debt maturities and refinancing needs, and compliance with financial covenants.