Consumers Energy Company — Q2 2013 Form 10-Q
Business context and reporting period
Consumers Energy is a regulated Michigan electric and natural-gas utility and a wholly owned subsidiary of CMS Energy. This unaudited report covers the quarter and six months ended June 30, 2013; utility operations are seasonal, so interim results may not indicate full-year performance. Unless stated otherwise, financial amounts below are in millions of dollars.
Financial performance and liquidity
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Operating revenue | $1,342 | $1,282 | $3,261 | $2,957 |
| Operating income | $227 | $260 | $546 | $443 |
| Operating margin | 16.9% | 20.3% | 16.7% | 15.0% |
| Net income | $100 | $122 | $262 | $198 |
| Net income available to common stockholder | $99 | $121 | $261 | $197 |
Operating margins are calculated as operating income divided by revenue. The filing does not report Consumers common-stock EPS; its common stock is privately held by CMS Energy.
- Revenue and earnings: Six-month revenue increased about 10%, and common-stockholder income increased $64 million. Gas deliveries rose 23% to 179 bcf, principally due to colder weather, supporting gas utility results. Q2 common-stockholder income declined $22 million as operating income fell despite higher revenue.
- Cash flow: Six-month operating cash flow was $1,085, up $72 million year over year. Investing cash outflow was $613, including $579 of capital expenditures. Financing cash outflow was $191. Cash and cash equivalents were $286 at June 30, plus $28 of restricted cash.
- Debt and liquidity: Long-term debt was $4,276 and its current portion was $63; capital and finance lease obligations were $144 non-current. Consumers had $648 available under its revolving facilities (including $498 under the $500 million facility and $150 under the $150 million facility); the $30 million facility was fully committed to letters of credit. Up to $250 million of receivables was eligible for its receivables program. Consumers reported covenant compliance and a debt-to-capital ratio of 0.47 against a 0.65 limit.
- Margins and balance sheet: At June 30, total assets were $16,409 and total equity was $4,791. Current assets were $2,153 and current liabilities $1,188.
Material changes versus the prior comparable period
- Six-month electric utility income rose $27 million to $159 million, aided by rate increases and the absence of a $59 million 2012 electric revenue-decoupling write-off. Q2 electric utility income fell $18 million to $93 million, reflecting lower deliveries, restoration costs, and operating expenses.
- Six-month gas utility income increased $37 million to $101 million, with higher deliveries contributing $51 million to gas delivery revenues. Q2 gas utility income decreased $4 million to $5 million; higher operating costs offset revenue gains.
- Six-month operating cash flow benefited from a $69 million federal renewable-energy grant for Lake Winds Energy Park and working-capital changes, partly offset by higher pension contributions.
- Consumers issued $425 million of 3.95% first mortgage bonds due 2043 and retired $425 million of higher-coupon bonds. It also received a $150 million capital contribution from CMS Energy.
Outlook, management commentary, risks and unusual items
- Management expects weather-adjusted 2013 electric deliveries to decline about 3%, mainly because of lower deliveries to its largest customer; excluding that customer, deliveries are expected to remain stable. Over five years, electric delivery growth is projected at about 0.5%–1.0% annually. Weather-adjusted gas deliveries are expected to grow about 3% in 2013 and remain broadly stable over five years.
- Consumers expects about $7 billion in capital investment from 2013 through 2017. Major plans include a proposed 700-MW gas plant costing about $750 million, targeted for operation in 2017 subject to regulatory and environmental approvals, and a 24-mile gas pipeline expected to cost about $120 million and enter service by the end of 2014.
- Consumers expects $1.1 billion of environmental expenditures from 2013 through 2018, with recovery in rates expected but not assured. MATS extensions allow ten coal units to operate as configured until April 2016. Potential environmental rules, coal-unit mothballing, and capacity-market changes could create added costs or a generation shortfall of up to 1,500 MW in 2016.
- The MPSC authorized an annual electric rate increase of $89 million, below the revised $145 million request and the $110 million self-implemented amount. Consumers’ July reconciliation indicated no refund was required. Its $49 million gas-rate application was suspended indefinitely; management planned a revised filing. Management said cost-control measures should allow base rates to avoid increases through 2014, subject to MPSC approvals and underlying assumptions.
- Effective July 1, 2013, postretirement benefit plan changes and a higher discount rate reduced Consumers’ OPEB liability and related regulatory asset by $599 million each. The company expected 2013 OPEB cost to decrease by $45 million. These are post-quarter changes, not June 30 balance-sheet amounts.
- Key contingencies include Consumers’ $121 million recorded liability for former manufactured-gas-plant remediation (undiscounted obligation $130 million), environmental and air-permit matters, and a lawsuit relating to Lake Winds Energy Park. Consumers said it could not predict some outcomes; certain potential environmental costs could be material.
- Other risks include regulatory and rate-case outcomes, proposed changes to Michigan electric choice rules, fuel and weather variability, environmental compliance and recovery, pipeline safety, and the outcome of litigation. Management said present cash, operating cash flows, and liquidity sources should fund obligations, while noting capital spending could be reduced if market access were restricted.
Most important facts for investors to verify
- Whether the $89 million electric rate order and the no-refund reconciliation translate into expected revenues as described, and whether the suspended gas-rate case is replaced by a new application.
- Whether higher six-month earnings and operating cash flow are sustainable, given weather-driven gas deliveries, working-capital effects, and the one-time $69 million grant.
- Progress, total costs, approvals, and funding for the proposed Thetford plant, renewable projects, pipeline work, and broader capital program.
- Environmental compliance spending, potential coal-unit capacity impacts, and the extent to which costs are ultimately recovered from customers.
- Changes in remediation estimates and the status or potential exposure of material litigation and other contingencies.