Business context and reporting period
Consumers Energy Company (Consumers), a wholly owned Michigan-regulated electric and gas utility of CMS Energy, filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2012. Comparisons are with the corresponding 2011 periods. Interim results are seasonal and are not necessarily indicative of full-year results.
Financial performance and liquidity
| Consumers, $ millions | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Operating revenue | 1,282 | 1,303 | 2,957 | 3,291 |
| Operating income | 260 | 207 | 443 | 507 |
| Net income available to common stockholder | 121 | 91 | 197 | 244 |
| Operating cash flow | Not stated by quarter | 1,013 | 1,245 | |
| Capital expenditures | Not stated by quarter | 572 | 394 |
- For the six months, operating cash flow less capital expenditures was approximately $441 million, versus $851 million in 2011. Cash flow from operations declined by $232 million, principally reflecting lower gas sales and a smaller working-capital reduction.
- At June 30, cash and cash equivalents were $154 million, plus $27 million restricted cash. Consumers had $647 million available on revolving facilities; an additional $250 million of receivables was eligible under its receivables program, with none transferred at quarter-end.
- Balance-sheet debt comprised $62 million current and $3.967 billion long-term debt. Including $157 million of non-current capital and finance lease obligations, total reported debt and lease obligations were approximately $4.186 billion. The filing reports a 0.46 debt-to-capital ratio against a 0.65 covenant limit; there were no covenant defaults.
- Consumers issued $375 million of first mortgage bonds at 2.85% in May. The filing also reports subsequent events: a $350 million July borrowing under a short-term facility and planned December 2012 private placements of $350 million of first mortgage bonds.
Material changes versus the prior period
- Q2 net income available to the common stockholder increased $30 million, while six-month net income decreased $47 million. Six-month revenue fell $334 million; lower gas deliveries due largely to warmer weather were a major factor.
- Six-month electric utility income was $132 million versus $150 million; gas utility income was $64 million versus $93 million. Q2 electric and gas utility income increased year over year to $111 million and $9 million, respectively.
- Q2 operating income increased despite slightly lower revenue, as operating expenses declined. Year-to-date operating income fell $64 million; lower revenues and higher depreciation contributed.
- The MPSC approved annual electric and gas rate increases of $118 million and $16 million, respectively, each based on a 10.3% return on equity. The gas order requires a refund, subject to reconciliation, of the difference between the interim self-implemented rates and approved rates.
Outlook, risks and unusual items
- Consumers forecast 2012 weather-adjusted electric deliveries to rise 2% versus 2011 and average annual growth of about 1% over five years. It expected gas deliveries to decline 1% in 2012 and remain broadly stable over five years.
- Consumers planned $6.6 billion of capital investments from 2012–2016, including distribution, reliability, environmental, renewable-energy and Smart Grid projects. It estimated $1.5 billion of environmental expenditures for 2012–2018; cost recovery through rates is expected but not assured.
- Consumers wrote off a $59 million electric revenue-decoupling regulatory asset after a Michigan Court of Appeals ruling questioned the MPSC’s authority to approve electric decoupling. Recovery requests remain pending. A separate $33 million gas decoupling regulatory asset remained recorded, with recovery contested.
- Consumers recorded a $14 million regulatory asset and earnings benefit for recovery of costs related to its canceled proposed coal plant. It also canceled the 830-MW project and planned to mothball seven smaller coal units in 2015, while evaluating compliance options.
- Environmental and legal exposures include coal-plant air and water rules, Superfund/NREPA matters, and 23 former manufactured-gas-plant sites. Consumers recorded $128 million for remaining gas-site remediation obligations and a related $154 million regulatory asset. Recovery and ultimate costs remain uncertain.
- Consumers’ $120 million DOE settlement concerning spent nuclear fuel remained subject to MPSC proceedings over its allocation and potential customer refunds. Management stated that available cash, expected operating cash flows and financing access should be sufficient for obligations, while noting that restricted market access could require reduced capital spending.
Important facts for investors to verify
- Follow the MPSC’s treatment of electric and gas decoupling requests, the $59 million electric write-off and the $33 million gas regulatory asset.
- Confirm the final refund and reconciliation effects of the gas rate order and the treatment of the DOE settlement.
- Track environmental compliance spending, rate recovery, and remediation estimates, particularly coal-plant rules and former gas-plant sites.
- Review subsequent financing transactions and capital spending against cash-flow generation, debt levels and covenant headroom.
- Assess actual electric and gas delivery trends against management’s weather-adjusted forecasts and the effects of Michigan economic conditions.