Consumers Energy Company — Q2 2018 Form 10-Q
Business context and reporting period. Consumers Energy is a Michigan-regulated electric and natural gas utility. This unaudited filing covers the three and six months ended June 30, 2018, compared with the same 2017 periods. Results are seasonal and interim results are not necessarily indicative of full-year performance.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Operating revenue | $1.395 billion | $1.362 billion | $3.250 billion | $3.099 billion |
| Operating income | $229 million | $222 million | $563 million | $581 million |
| Net income available to common stockholder | $151 million | $103 million | $393 million | $314 million |
| Net cash from operating activities | Not separately provided for the quarter | Not separately provided for the quarter | $1.098 billion | $1.125 billion |
| Capital expenditures | Not separately provided for the quarter | Not separately provided for the quarter | $859 million | $741 million |
Calculated operating margin was approximately 16.4% in Q2 2018 versus 16.3% in Q2 2017; for the six-month periods it was approximately 17.3% versus 18.7%. Calculated net margin, using net income available to the common stockholder, was approximately 10.8% versus 7.6% for Q2 and 12.1% versus 10.1% for six months.
- Debt and liquidity: At June 30, Consumers reported $5.738 billion of long-term debt and $398 million of current maturities, for $6.136 billion combined, excluding capital leases and financing obligations. Cash and cash equivalents were $254 million, with $17 million restricted; total cash including $5 million of non-current cash equivalents was $276 million. Available secured revolving credit capacity was $1.068 billion; no commercial paper was outstanding.
- Balance sheet: Total assets were $21.283 billion and total equity was $6.888 billion at June 30, 2018. Consumers was in compliance with its financial covenants; its reported debt-to-capital ratio was 0.46 against a maximum of 0.65.
Changes versus prior comparable periods
- Q2 common-stockholder income rose $48 million; six-month income rose $79 million. Higher sales and rate increases were principal contributors, with favorable weather supporting electric and gas deliveries.
- Six-month revenue increased $151 million, while operating income decreased $18 million. Higher operating costs, depreciation and general taxes, including costs associated with increased plant in service, weighed on operating income.
- Six-month operating cash flow declined $27 million despite higher net income, reflecting less favorable changes in other assets and liabilities and working capital.
- Capital expenditures increased $118 million year over year for the six-month period, consistent with higher infrastructure investment.
Outlook, management commentary and material risks
- Management expects weather-normalized electric and gas deliveries to remain stable through 2022. Consumers expects its investment program to produce annual rate-base growth of 6%–8% while prioritizing safety, reliability, affordability and environmental goals.
- Planned capital expenditures for 2018–2022 total $10.1 billion: $4.9 billion for gas infrastructure, $3.5 billion for electric distribution and $1.7 billion for electric supply. Management anticipated sufficient operating cash flow and access to financing to fund obligations.
- Consumers filed an integrated resource plan in June 2018 proposing staged retirements of coal and other generating units, increased energy efficiency and demand response, and expanded renewable generation. Proposed renewable energy levels are 25% by 2025, over 35% by 2030 and over 40% by 2040; these plans require regulatory and project execution.
- Rate proceedings: The 2017 electric rate case ultimately authorized a $72 million annual increase. The 2018 electric case seeks $58 million annually, plus proposed investment-recovery increases beginning in 2020 and 2021. In the pending gas case, an administrative law judge recommended an $11 million annual increase and potential disallowances of historical capital costs; adoption of some recommendations could require write-offs of up to $145 million. A final order was expected by the end of August 2018.
- Tax reform and customer refunds: MPSC-approved TCJA-related annual revenue requirement reductions were $49 million for gas and $113 million for electric, with customer credits beginning in July and August 2018, respectively. Consumers recorded an $88 million liability for amounts over-collected from customers through June 30. Additional proceedings concerning deferred-tax remeasurement and customer impacts were anticipated.
- Litigation and contingencies: The MCV Partnership claims damages and interest exceeding $270 million under a power purchase agreement; Consumers says the claim is without merit but cannot predict the outcome. Environmental remediation liabilities included $83 million for former manufactured-gas-plant sites. Other matters include possible costs of up to $10 million for retired underwater cables and environmental and regulatory exposures.
- Environmental compliance, future regulation, weather, commodity prices, infrastructure execution, customer demand, and regulatory cost recovery remain significant risks. The filing reports no material change in previously disclosed market risks or risk factors.
- In July 2018, after quarter-end, Consumers agreed to issue $500 million of first mortgage bonds, expected to fund in October 2018, with maturities from 2027 to 2057 and interest rates of 3.68%–4.28%.
Most important facts for investors to verify
- The final MPSC gas-rate-case order, especially any historical-cost disallowance and resulting write-off.
- The timing and amount of TCJA-related customer credits, refunds and deferred-tax adjustments.
- Resolution and potential financial exposure from the MCV Partnership arbitration and other environmental matters.
- Whether capital spending, rate-base growth and renewable-generation plans proceed on schedule and receive regulatory approval.
- Consumers’ cash generation, debt funding and liquidity as the infrastructure investment program advances.