Consumers Energy Company — Q2 2014 Form 10-Q
Business and period. Consumers Energy is a Michigan-regulated electric and natural gas utility and a wholly owned subsidiary of CMS Energy. This unaudited quarterly report covers the three and six months ended June 30, 2014; comparisons are with the corresponding 2013 periods. Utility results are seasonal and are not necessarily indicative of full-year performance.
Financial performance and position
- Revenue: Q2 operating revenue was $1.387 billion, up 3.4% from $1.342 billion. First-half revenue was $3.769 billion, up 15.6% from $3.261 billion, with higher electric and gas deliveries contributing.
- Earnings: Q2 net income available to common stockholder was $108 million versus $99 million. First-half net income available to common stockholder was $329 million versus $261 million. First-half operating income was $626 million versus $546 million; operating margin was approximately 16.6% versus 16.7% (operating income divided by revenue).
- Cash flow: First-half operating cash flow was $916 million, down from $1.085 billion. Capital expenditures were $660 million, and net cash used in investing was $694 million. Cash and cash equivalents were $98 million at June 30; an additional $31 million was restricted.
- Debt and liquidity: Long-term debt, including its current portion, had a carrying amount of approximately $4.622 billion at June 30. Consumers had $650 million available under its principal revolving credit facility and $250 million of receivables eligible for its secured borrowing program. It reported compliance with debt covenants, including a debt-to-capital ratio of 0.47 against a limit below 0.65.
- Balance sheet: Total assets were $16.387 billion and total equity was $5.250 billion at June 30. These compare with $16.179 billion and $4.857 billion, respectively, at December 31, 2013.
Changes and drivers versus 2013
- First-half electric deliveries rose to 18.7 billion kWh from 18.0 billion; electric utility earnings increased by $39 million. Higher deliveries and the 2013 electric rate increase helped, partly offset by higher depreciation and property taxes.
- First-half gas deliveries increased to 205 bcf from 179 bcf, primarily due to colder weather. Gas utility earnings rose by $29 million.
- OPEB plan changes reduced first-half maintenance and operating costs, while increased plant in service raised depreciation expense.
- Operating cash flow declined primarily because of higher gas and power supply underrecoveries after severe winter weather, and the absence of the $69 million renewable-energy grant received in 2013. Lower benefit-plan contributions partly offset the decline.
Outlook, developments, and risks
- Rates and recovery: In July 2014, Consumers filed for an $88 million annual gas base-rate increase, citing investment needs and a requested 10.7% return on equity. It also sought rate mechanisms, including recovery of an additional $92 million tied to 2016–2017 investments. Approval is not assured. Consumers also requested a $28 million annual increase in depreciation expense and its recovery.
- Winter cost underrecoveries: At June 30, Consumers recorded an $84 million underrecovery under its 2013–2014 gas cost recovery plan and a $72 million gas underrecovery. It also had an $80 million power supply cost recovery underrecovery. The utility requested or implemented higher recovery factors; timing and full recovery depend on regulatory action and customer collections.
- Financing and retirements: In July 2014, after quarter-end, a Consumers subsidiary issued $378 million of securitization bonds to recover the remaining book value of seven smaller coal units and three smaller gas units planned for retirement by April 2016. Retail customer charges are intended to repay the bonds.
- Investment and demand: Consumers expects approximately $7 billion of capital investment from 2014 through 2018, including $0.9 billion of environmental investments. It projects 2014 weather-adjusted electric delivery growth of 1.5%–2.5%; gas deliveries are expected to rise 1.5%–2.0%, with gas deliveries relatively stable over five years. A potential generation-capacity shortfall of up to 1,500 MW in 2016 is a planning concern. Consumers agreed to buy a 540-MW gas plant for $155 million, subject to approvals, and deferred a proposed 700-MW plant.
- Environmental and legal exposure: Environmental rules may require significant additional spending, and cost recovery in rates is not guaranteed. Consumers estimated $0.9 billion of environmental investment for 2014–2018. Its recorded gas-site remediation liability was $118 million, with an associated $148 million regulatory asset. Other matters include air-permit disputes, coal-ash regulation, greenhouse-gas rules, and environmental claims; outcomes and costs may be material or uncertain.
- Market and regulatory risks: Electric deliveries under the retail open-access program were at the statutory 10% limit. Proposed legislation to increase or remove the cap, or deregulate generation service, could materially affect Consumers. Other key sensitivities include weather, fuel and purchased-power prices, regulatory decisions, infrastructure execution, and access to capital markets.
Important facts for investors to verify
- Whether regulators approve the gas-rate filing, depreciation recovery, and requested cost-recovery mechanisms, and how quickly underrecoveries are collected.
- How winter-driven gas and power supply costs, customer collections, and cash flow develop in the second half of 2014.
- Final costs, timing, approvals, and capacity benefits of the 540-MW plant purchase and planned generating-unit retirements.
- Environmental compliance spending, cost recovery, and developments in material environmental and legal matters.
- Capital-spending execution, financing needs, and maintenance of covenant compliance and available liquidity.