Consumers Energy Company — Q1 2013 Form 10-Q
Business context and reporting period
Unaudited results for the three months ended March 31, 2013, compared with Q1 2012. Consumers is a Michigan-regulated electric and natural gas utility and a wholly owned subsidiary of CMS Energy. Utility results are seasonal and the quarter is not necessarily indicative of full-year performance. Amounts below are in millions of dollars unless stated otherwise.
Financial results and liquidity
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Operating revenue | $1,919 | $1,675 | +$244 |
| Operating income | $319 | $183 | +$136 |
| Net income | $162 | $76 | +$86 |
| Operating margin | 16.6% | 10.9% | +5.7 percentage points |
| Net cash from operating activities | $713 | $681 | +$32 |
| Capital expenditures | $273 | $294 | -$21 |
| Cash and cash equivalents at March 31 | $355 | $5 at Dec. 31, 2012 | — |
Revenue and earnings improved primarily because gas deliveries were higher amid colder weather, electric deliveries increased, and Q1 2013 did not include the prior-year $59 million electric revenue decoupling asset write-off. Gas deliveries rose 25% to 132 bcf; electric deliveries to end-use customers, excluding the largest customer, rose 2% to 8.9 billion kWh. Operating cash flow included a $69 million renewable-energy grant and substantial working-capital effects, including inventory changes; it also reflected higher pension contributions and receivables.
At March 31, Consumers reported $4.086 billion of long-term debt and $262 million of current debt and capital/finance lease obligations; the filing does not clearly separate current debt from current lease obligations in that balance-sheet line. It had $648 million available under revolving credit facilities and up to $250 million of eligible receivables under its secured borrowing program. Consumers reported compliance with debt covenants and no defaults. Its debt-to-capital covenant ratio was 0.47 versus a limit below 0.65.
Material changes, outlook, and key risks
- Electric utility net income increased to $66 million from $21 million; gas utility net income rose to $96 million from $55 million. The gas improvement was chiefly weather- and delivery-related. Higher income taxes partly offset both utilities’ earnings gains.
- Consumers self-implemented a $110 million annual electric rate increase in March, out of a pending $145 million request, subject to refund with interest. Its new gas rate case seeks a $49 million annual increase. Both cases include proposed recovery mechanisms and remain subject to regulatory outcomes.
- Management expects 2013 weather-adjusted electric deliveries to decline about 3% versus 2012, largely because of reduced deliveries to its largest customer; excluding that customer, deliveries are expected to remain stable. Over five years, electric delivery growth is forecast at 0.5%–1.0% annually. Gas deliveries are expected to grow about 3% in 2013 and remain stable over five years.
- Consumers expects about $7 billion of capital investment from 2013 through 2017. Major plans include reliability and infrastructure work, environmental compliance, renewable energy, Smart Energy, and a proposed 700-MW gas plant estimated to cost $750 million and targeted for 2017, subject to approvals. A separate proposed 24-mile gas pipeline is estimated at $120 million, subject to MPSC and environmental approvals.
- Generation and environmental uncertainty is significant: Consumers could face a capacity shortfall of up to 1,500 MW in 2016 if planned coal-unit mothballing and market conditions reduce available capacity. Environmental compliance expenditures are estimated at $1.1 billion from 2013 through 2018; recovery in customer rates is expected but not assured. MATS extensions allow ten coal units to run as configured until April 2016.
- Other material uncertainties include pending rate and regulatory appeals; a proposed Michigan change to the electric choice cap; potential changes to environmental rules; a gas-pipeline abandonment proposal that could affect Michigan supply and prices; and litigation or remediation exposure. Consumers recorded $122 million for former manufactured-gas-plant remediation, with a related $151 million regulatory asset. CMS Energy’s separate Bay Harbor liability was $60 million, not a Consumers liability.
- Consumers received a $69 million federal renewable-energy grant, recorded as a regulatory liability to be amortized over the Lake Winds project’s life. A party appealed the MPSC order approving the regulatory treatment of the DOE nuclear settlement. A new Lake Winds-related lawsuit was filed in April 2013.
Most important facts for investors to verify
- Final MPSC decisions on the electric and gas rate cases, including the $110 million self-implemented increase and any refund exposure.
- Whether weather-normalized sales and the largest-customer outlook develop as forecast, and how much of Q1’s gas earnings uplift was weather-driven.
- Capital spending, environmental compliance costs and rate recovery, and the timing and approvals for the proposed generation and pipeline projects.
- Coal-unit retirement or mothballing plans, MISO capacity availability, and the potential 2016 capacity gap.
- Operating cash flow sustainability excluding the one-time $69 million grant and seasonal working-capital movements, plus debt maturities and refinancing needs.