Consumers Energy Company — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012; comparisons are with the same periods in 2011. The filing is jointly presented with parent CMS Energy, but Consumers’ figures below refer to the regulated utility unless otherwise noted. Amounts are in U.S. dollars.
Business context and financial performance
Consumers is a Michigan electric and natural gas utility. Its results are seasonal and affected by weather, customer demand, energy prices, and regulatory decisions; interim results are not necessarily indicative of full-year results.
| Consumers metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Operating revenue | $1.448 billion | $1.397 billion | $4.405 billion | $4.688 billion |
| Operating income | $334 million | $305 million | $777 million | $812 million |
| Net income available to common stockholder | $162 million | $154 million | $359 million | $398 million |
| Net margin | 11.2% | 11.0% | 8.1% | 8.5% |
| Cash from operating activities | Not presented separately for the quarter | $1.025 billion | $1.245 billion |
Operating margin for the nine-month period was approximately 17.6%, versus 17.3% a year earlier. Consumers’ reported quarterly net income was higher year over year, while nine-month net income declined.
Cash flow, debt, and liquidity
- Nine-month operating cash flow fell $220 million year over year to $1.025 billion, mainly reflecting lower gas sales and a smaller working-capital reduction.
- Capital expenditures were $857 million, compared with $618 million in the prior-year period; net investing cash use was $900 million.
- Net financing cash use was $153 million, versus $260 million in 2011. Consumers issued $725 million of long-term debt and repaid $703 million of debt; CMS Energy contributed $150 million.
- At September 30, cash and cash equivalents were $57 million, with another $30 million classified as restricted. Current assets were $2.227 billion and current liabilities $1.130 billion.
- Balance-sheet long-term debt was $4.308 billion, with $62 million of current debt and lease obligations. The debt note reports $4.348 billion carrying value for long-term debt including its current portion.
- Consumers had $648 million available across revolving facilities, after letters of credit; a separate $250 million receivables program was available, with no receivables transferred at quarter-end. The company reported compliance with covenants and a debt-to-capital ratio of 0.48 against a 0.65 limit.
Material changes versus the prior comparable period
- Nine-month revenue declined $283 million, chiefly because gas deliveries were lower in unusually mild weather. Gas deliveries fell 16% to 172 bcf; electric deliveries rose 1.4% to 29.1 billion kWh.
- Electric utility nine-month net income decreased $12 million to $297 million. Higher rate-related and delivery revenues were partly offset by a $59 million write-off of the electric decoupling regulatory asset, lost prior-year decoupling revenue, and increased depreciation and taxes.
- Gas utility nine-month net income declined $27 million to $61 million, primarily due to lower deliveries; the three-month gas utility loss narrowed to $3 million from $5 million.
- Depreciation and amortization increased $35 million for Consumers over nine months, while interest charges declined $15 million, primarily due to lower average debt and interest rates.
- Operating cash flow weakened while capital expenditures increased substantially, increasing reliance on financing and parent contributions to support investment and obligations.
Outlook, regulation, risks, and unusual items
- Rates: The MPSC authorized a $118 million annual electric rate increase in June 2012, with a 10.3% authorized return on equity. Consumers filed a new case in September seeking $148 million annually, based on a 10.5% return; 85% of the request relates to reliability, environmental, and technology investments. A proposed mechanism could permit recovery of a further $83 million for 2014 investments, subject to reconciliation.
- Gas rates and decoupling: The MPSC approved a $16 million annual gas rate increase. Consumers recorded a $2 million regulatory liability for a required gas-rate refund. It also recorded a $33 million gas decoupling regulatory asset while seeking $33 million of recovery; rejection or delay could require a write-off. Electric decoupling faced adverse court and MPSC decisions, following the $59 million write-off.
- Capital and demand: Consumers expects electric sales growth of about 1% annually through 2017 and gas sales to remain broadly stable. It plans $6.5 billion of capital investment for 2013–2017, including distribution, reliability, environmental, renewable-energy, and Smart Energy projects; rate recovery and execution are important assumptions.
- Generation and environmental exposure: Consumers canceled a planned 830-MW coal plant and planned to mothball seven smaller coal units in 2015. Potential closures could create a capacity shortfall of up to 1,500 MW as early as 2015. Estimated environmental-compliance expenditures are $1.5 billion from 2012–2018; expected rate recovery is not assured. New air, water, and waste rules and related litigation could change costs or plant operations.
- Gas supply: Trunkline proposed ceasing service on one of two principal pipelines supplying Michigan. More than 60% of Consumers’ gas supply is delivered through those pipelines; if approved, the proposal could raise prices or reduce availability. Consumers protested before FERC.
- Other contingencies: Consumers recorded a $125 million liability for former manufactured-gas-plant and other gas-site remediation, with $137 million undiscounted; it also recorded $4 million for NREPA sites and $2 million for other Superfund sites. The potential Kalamazoo River cleanup share is not estimable from the filing. A DOE nuclear-fuel settlement is subject to an MPSC proceeding; an administrative law judge recommended a $44 million customer refund, which Consumers contested.
- Unusual parent-company items: CMS Energy’s results included the $59 million electric decoupling write-off and the absence of a 2011 tax benefit related to Michigan tax-law changes. These affect parent consolidated comparisons, not Consumers’ standalone net income in the same way.
Important facts for investors to verify
- Outcome of Consumers’ pending $148 million electric rate case, including requested adjustment mechanisms and the proposed $83 million 2014 investment recovery.
- Disposition of the $33 million gas decoupling asset, rate reconciliation refunds, and the DOE settlement allocation.
- Whether Trunkline’s proposed pipeline abandonment is approved and its effect on Consumers’ gas supply and costs.
- Final environmental requirements, compliance spending, cost recovery, and plans for coal-unit closures or replacement capacity.
- Cash generation relative to the elevated capital program, debt maturities and financing needs, and the continued availability of credit facilities.