Consumers Energy Company — Q1 2020 10-Q
Business context and period. Consumers Energy is a regulated Michigan electric and natural-gas utility and a wholly owned subsidiary of CMS Energy. This unaudited report covers the three months ended March 31, 2020, compared with Q1 2019. Results are seasonal and are not necessarily indicative of full-year performance.
Financial and operating performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Operating revenue | $1.744 billion | $1.943 billion | Down $199 million |
| Operating income | $329 million | $328 million | Up $1 million |
| Net income | $235 million | $226 million | Up $9 million |
| Operating margin | 18.9% | 16.9% | Up about 2.0 percentage points |
| Net cash from operations | $238 million | $619 million | Down $381 million |
| Capital expenditures | $520 million | $476 million | Up $44 million |
Revenue fell chiefly with lower utility deliveries and lower gas commodity costs. Electric deliveries to end-use customers were 8.8 billion kWh versus 9.2 billion kWh; gas deliveries were 120 bcf versus 142 bcf. Rate increases and lower operating and maintenance costs helped offset the sales decline. Net income benefited from rate increases and tax credits, among other items.
At March 31, 2020, Consumers reported $628 million of cash and cash equivalents, including restricted cash. Long-term debt was $8.137 billion, including $521 million classified as current; at December 31, 2019, those amounts were $7.269 billion and $221 million, respectively. Consumers had $1.1 billion available under revolving credit facilities and no commercial paper outstanding. Its debt-to-capital covenant ratio was 0.49 against a maximum of 0.65; the company reported compliance with its financial covenants.
Material changes and notable items
- Operating cash flow declined substantially, principally because of $518 million of pension contributions in Q1 2020, versus none in Q1 2019. Higher collections and other working-capital movements partly offset the impact.
- Consumers issued $300 million of term debt and $575 million of first mortgage bonds in Q1. In April, it redeemed $100 million of bonds due in October 2020; management stated no debt remained scheduled to mature in 2020 after that redemption.
- Consumers recorded $4 million of Q1 expense for a retention program related to the planned retirement of the D.E. Karn coal units; estimated total program cost through 2023 is $35 million.
- A new credit-loss accounting standard increased CMS Energy’s EnerBank allowance by $65 million, net of tax adjustment to retained earnings; it did not materially affect Q1 net income. EnerBank is part of CMS Energy, not Consumers.
Outlook, risks, and contingencies
- COVID-19: Consumers reported weather-normalized commercial and industrial electric demand down more than 20% after Michigan’s stay-at-home order, partly offset by residential load up more than 5%. It anticipated near-term declines in commercial and industrial deliveries and increased uncollectible accounts, but could not estimate the full-year or longer-term effects. Service shut-offs for nonpayment were suspended and payment protections extended through June 1, 2020. The MPSC authorized deferral of qualifying pandemic-related uncollectible expense incurred from March 24; treatment of other pandemic costs remained under discussion.
- Investment and strategy: Consumers planned $12.2 billion of capital expenditures for 2020–2024, including $9.4 billion for gas and electric distribution infrastructure and $2.8 billion primarily for electric supply projects. Its ten-year investment plan is $25 billion, with expected annual rate-base growth of 6%–8%. Some projects were rescheduled due to COVID-19, with no change then announced to the long-term plan. The company’s clean-energy plan targets net-zero carbon emissions by 2040 and net-zero methane emissions from its gas delivery system by 2030.
- Regulatory matters: Consumers’ pending gas rate case seeks an annual $245 million increase; its 2020 electric rate case seeks $244 million annually, plus specified deferred amounts. These are requests, not approved increases. Recovery of environmental and infrastructure costs depends in part on regulatory decisions.
- Contingencies: Consumers recorded a $67 million liability for gas-site remediation, primarily at 23 former manufactured-gas-plant sites, with a related $128 million regulatory asset. The Ray Compressor Station incident could lead to cost disallowances, claims, or penalties; Consumers said the outcome and total loss could not be reasonably estimated. Environmental compliance, permitting, and litigation outcomes also remain uncertain.
- Other risks: Pandemic effects on demand, collections, costs, capital work, and regulatory proceedings; weather and Michigan economic conditions; financing-market access; and environmental, regulatory, and legal developments could materially affect results and liquidity.
Investor verification points
- Track pandemic-related demand, customer collections, bad-debt expense, and any regulatory recovery or deferral orders.
- Check MPSC decisions and timing for the pending electric and gas rate cases, including requested returns and recovery of deferred costs.
- Compare actual capital spending and project schedules with the 2020–2024 plan, particularly renewable projects affected by contractor force-majeure notices.
- Monitor debt maturities, borrowing costs, available credit, covenant headroom, and cash flow after pension contributions and investment spending.
- Review developments in the Ray Compressor Station matter and environmental remediation estimates; the filing does not provide a clear estimate of potential loss for the compressor-station matter.