CONSUMERS ENERGY CO quarterly report, Q2 FY2016

Consumers Energy Company — Q2 2016 Form 10-Q

Business context and reporting period: Consumers is a Michigan-regulated electric and gas utility and a wholly owned subsidiary of CMS Energy. This unaudited filing covers the quarter and six months ended June 30, 2016; comparisons are with the corresponding 2015 periods. Amounts are in millions of dollars unless stated otherwise. Utility results are seasonal and the filing cautions that interim results are not necessarily indicative of full-year results.

Financial performance

Consumers consolidated	Q2 2016	Q2 2015	Six months 2016	Six months 2015
Operating revenue	$1,293	$1,281	$3,016	$3,309
Operating income	$264	$192	$581	$571
Net income available to common stockholder	$131	$83	$303	$298
Operating margin	20.4%	15.0%	19.3%	17.3%

Consumers’ six-month revenue fell 8.9%, largely reflecting lower gas revenue amid unusually warm winter weather and lower gas prices. Operating income and net income nevertheless increased modestly. Electric utility income rose to $204 million for the half-year from $176 million; gas utility income declined to $99 million from $122 million. Q2 common income improved year over year in both utilities.

Cash flow: Six-month operating cash flow was $1.132 billion, down from $1.251 billion. Investing cash outflow was $864 million, including $813 million of capital expenditures; financing cash outflow was $201 million. Cash and cash equivalents were $117 million at June 30, excluding $18 million restricted cash.
Debt and liquidity: At June 30, Consumers reported $469 million of current long-term debt and $4.922 billion of long-term debt, excluding capital leases and financing obligations. Available revolving credit totaled $893 million; no commercial paper was outstanding. Consumers reported covenant compliance, including debt-to-capital of 0.46 against a maximum of 0.65.
Capital investment: Consumers spent $813 million on capital expenditures in the first half. It expects approximately $8.5 billion of investment over 2016–2020 and approximately $17 billion over 2016–2025.

Parent-company context: CMS Energy reported Q2 common net income of $124 million and diluted EPS of $0.45, versus $67 million and $0.25 a year earlier. For the first half, common net income was $288 million and diluted EPS was $1.04, versus $269 million and $0.98. CMS Energy’s six-month operating cash flow was $1.101 billion, capital expenditures were $817 million, and cash and cash equivalents were $385 million, including $18 million restricted.

Material changes and operating drivers

Electric deliveries were 9.1 billion kWh in Q2 versus 8.8 billion kWh, with favorable weather, the December 2015 rate increase, and lower operating costs contributing to stronger quarterly electric results. First-half deliveries were 18.2 billion kWh versus 18.3 billion.
Gas deliveries were 49 bcf in Q2 versus 44 bcf, but first-half deliveries fell to 170 bcf from 196 bcf, primarily because of unfavorable weather earlier in the year. Gas revenue for the first half declined $35 million year over year.
Consumers retired seven coal-fueled generating units totaling 950 MW in April 2016. The company expects to meet full-service customer capacity needs through 2020 using existing resources, a 540-MW gas plant acquired in 2015, upgrades, renewables, efficiency and demand-management programs, and potentially MISO capacity auctions.
Lower maintenance costs included reduced costs at retired coal units and lower postretirement benefit expense following a change in calculation methodology. Higher depreciation and property taxes reflected increased plant investment.

Outlook, regulation, risks and contingencies

Demand outlook: Consumers expects 2016 weather-adjusted electric deliveries to rise 0.5%–1.0% from 2015, with average growth of about 0.5% annually over five years. It expects 2016 weather-adjusted gas deliveries to increase about 2%, while planning for stable gas deliveries over five years. Management expects sufficient borrowing capacity and liquidity to fund planned investment and obligations.
Rates: A March 2016 electric rate filing sought a $225 million annual increase and an investment recovery mechanism. In July, Consumers submitted a plan to self-implement a $170 million annual increase beginning September 2016. A gas rate settlement approved a $40 million annual increase; a $10 million customer refund was reserved at June 30.
Environmental and regulatory exposure: Consumers estimates $600 million of environmental capital expenditures for 2016–2020, with recovery through customer rates expected but not assured. Environmental rules and litigation—including emissions, greenhouse-gas, coal-ash, water and PCB matters—could require further spending or operational changes. The Clean Power Plan was stayed by the U.S. Supreme Court while litigation proceeds.
Recorded obligations and claims: Consumers recorded $108 million for remediation at 23 former manufactured-gas-plant sites, with a related $137 million regulatory asset. CMS Energy recorded $53 million for Bay Harbor obligations. CMS Energy also faces a $152 million Equatorial Guinea tax claim plus penalties and interest; management contests the claim and cannot predict the outcome. Certain other litigation losses cannot be reasonably estimated.
Unusual items: A Michigan tax settlement is expected to return $60 million to Consumers, including $13 million received in June and $47 million recorded as a receivable. A voluntary employee separation program is expected to produce a $10 million–$15 million charge in 2016, with anticipated future savings. CMS Energy and Consumers early adopted share-based-payment guidance; CMS recorded a $33 million opening accumulated-deficit adjustment, and the companies recognized $6 million of excess tax benefits in first-half net income.
Key risks: Rate-case and cost-recovery outcomes, weather and demand, environmental compliance, capital-project execution, commodity and financing markets, pension assumptions, and legal proceedings may materially affect results, liquidity or financial condition.

Investor verification priorities

Review the full cash-flow and debt disclosures, including debt maturities, restricted cash, and the distinction between Consumers and CMS Energy liquidity.
Track decisions on the pending electric rate filing and the final reconciliation of gas-rate collections and customer refunds.
Assess whether capital spending and environmental compliance costs are recovered in rates as management expects.
Monitor remediation estimates for former gas-manufactured sites and Bay Harbor, plus developments in the Equatorial Guinea tax claim and other litigation.
Check the effects of coal-unit retirements, capacity planning, and demand assumptions on reliability, fuel mix, and future costs.