Business context and reporting period
Consumers Energy Company is a regulated Michigan electric and natural gas utility and a wholly owned subsidiary of CMS Energy. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2014; comparisons are with the corresponding 2013 periods. Results are seasonal and interim performance is not necessarily indicative of full-year results.
Financial results and key metrics
| Consumers Energy, $ millions except percentages | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Operating revenue | 1,359 | 1,386 | 5,128 | 4,647 |
| Operating income | 245 | 314 | 871 | 860 |
| Operating margin | 18.0% | 22.7% | 17.0% | 18.5% |
| Net income available to common stockholder | 119 | 152 | 448 | 413 |
| Net margin | 8.8% | 11.0% | 8.7% | 8.9% |
| Operating cash flow | Not separately presented for quarter | 948 | 1,134 | |
| Capital expenditures | Not separately presented for quarter | 1,123 | 895 |
For the nine months, gas utility net income was $121 million versus $97 million, while electric utility net income was $326 million versus $315 million. Consumers reported no diluted EPS because it is a wholly owned subsidiary; the filing does not provide a comparable utility EPS measure.
At September 30, 2014, cash and cash equivalents were $200 million and restricted cash was $37 million. Long-term debt was $5.230 billion, with $81 million classified as current debt; debt therefore totaled about $5.311 billion before capital leases and financing obligations. Total assets were $16.919 billion and total equity was $5.251 billion. Consumers had $650 million available on its principal revolving credit facility and $250 million of eligible receivables under its sales program. Its separate $30 million revolver was fully committed to letters of credit. No commercial paper was outstanding.
Material changes versus prior comparable periods
- Q3 revenue fell $27 million and common-stockholder income fell $33 million. Electric delivery revenue declined, including lower sales to higher-margin customers; operating and maintenance costs also increased.
- Nine-month revenue rose $481 million and common-stockholder income rose $35 million. Colder winter weather boosted gas sales: gas deliveries were 234 bcf versus 206 bcf. Electric deliveries were 28.3 billion kWh versus 27.8 billion kWh.
- Nine-month operating cash flow declined $186 million, principally because of higher gas and power supply underrecoveries following severe winter weather and lower initial gas inventory levels. Higher customer collections partly offset the decline.
- Investing cash outflow increased to $1.182 billion from $945 million, mainly reflecting higher utility capital expenditures. Financing cash inflow increased to $416 million from $5 million, reflecting debt issuance and a $317 million stockholder contribution, partly offset by dividends and debt repayments.
- Long-term debt increased from $4.579 billion at December 31, 2013 to $5.230 billion. Consumers issued $878 million of debt during the nine months, including $378 million of securitization bonds and $500 million of first mortgage bonds.
Outlook, management commentary, risks and contingencies
- Consumers expects weather-adjusted 2014 electric deliveries to grow 2.0%–3.0% versus 2013, with average annual growth of about 0.5%–1.0% over five years. Weather-adjusted gas deliveries are expected to rise 1.0%–2.0% in 2014 and remain relatively stable over five years.
- Consumers expects approximately $7 billion of capital investment from 2014 through 2018, including $0.9 billion for environmental compliance. Management expects rate-base growth of 5%–7% annually while seeking to keep base-rate increases, excluding recovery charges, at or below inflation.
- A July 2014 gas rate filing seeks an annual increase of $88 million, based on a requested 10.7% return on equity, effective in 2015 if approved. It also seeks mechanisms for annual revenue reconciliation and potential recovery of another $92 million for planned 2016–2017 investments. Approval and timing are uncertain.
- Consumers recorded $62 million of gas cost recovery underrecovery and $47 million of power supply cost recovery underrecovery at September 30, 2014. Recovery depends on regulatory reconciliation. The MPSC had approved a temporary gas-factor increase; Consumers self-implemented a revised 2014 power-supply factor in July.
- Consumers issued $378 million of securitization bonds to recover the remaining book value of ten smaller generating units it plans to retire by April 2016. The MPSC-approved charges are collected from retail electric customers, subject to exceptions.
- Consumers estimates $0.9 billion in environmental expenditures from 2014–2018 and expects rate recovery, but cannot assure it. Key uncertainties include evolving air, greenhouse-gas, coal-ash, water and PCB requirements; the proposed Clean Power Plan; and possible additional compliance costs or generating-unit changes.
- A September 2014 EPA/Justice Department settlement concerning air-permit matters requires pollution controls, specified emissions outcomes, surrender of allowances, $7.7 million of environmental mitigation projects, unit retirements or repowering, and a $2.75 million civil penalty. The consent decree remained subject to court entry after public comment.
- Consumers recorded a $117 million liability for gas-related environmental remediation, principally at 23 former manufactured-gas-plant sites, against a $147 million regulatory asset. The undiscounted liability was $132 million. Other environmental claims include CERCLA matters for which potential liability cannot be estimated in some cases.
- Electric deliveries under retail open access were at the statutory 10% limit. Proposals to increase or remove the cap, or deregulate generation service, could materially affect Consumers; outcomes are uncertain.
- Consumers expects sufficient liquidity and borrowing capacity to fund obligations and investment plans. It was in compliance with financial covenants at quarter-end; its debt-to-capital ratio was 0.48 against a maximum of 0.65.
- Other exposures include pension and OPEB assumptions, severe weather and supply disruption, regulatory decisions, and litigation. The MPSC-approved OPEB settlement requires contributions of $25 million in 2014 and $29 million in February 2015, with further contributions suspended pending future rate-case determinations.
Most important facts for investors to verify
- Whether the MPSC approves the requested gas-rate increase and proposed adjustment mechanisms, and when any approved recovery begins.
- Timing and collectability of the $109 million combined gas and power-supply underrecoveries reported at quarter-end.
- Whether the planned unit retirements, replacement capacity and environmental compliance investments proceed on schedule and within estimated costs.
- Actual cash generation and financing needs against the elevated capital-spending program and increased debt balance.
- Developments in environmental proceedings, including court entry of the EPA settlement and the final form and cost of new environmental rules.
- Whether the ROA cap or Michigan generation-market rules change, and the resulting impact on utility earnings and customer rates.