CONSUMERS ENERGY CO annual report, FY2017

Business context and reporting period

Consumers Energy Company’s combined Form 10-K with parent CMS Energy covers the fiscal year ended December 31, 2017; quarterly figures are also reported. Consumers is a regulated Michigan electric and natural-gas utility serving about 1.8 million customers in each business. CMS Energy’s consolidated results include Consumers and non-utility businesses, so figures below distinguish the two where relevant. All amounts are U.S. dollars.

Key financial metrics

Consumers had $873 million of revolving credit capacity available at year-end, alongside $170 million of commercial paper outstanding. Its debt-to-capital covenant ratio was 0.47 versus a maximum of 0.65; CMS Energy’s parent-only debt-to-EBITDA ratio was 4.3 versus a limit of 6.0. Consumers’ 2017 operating cash flow exceeded capital expenditures by $83 million before other investing requirements and financing flows.

Material changes versus prior comparable periods

• Consumers’ revenue increased 2.6% from $6.064 billion in 2016, and net income rose 2.6% from $616 million. Operating income increased from $1.197 billion.
• Consumers’ electric utility net income available to common stockholder declined to $455 million from $458 million; gas utility net income rose to $173 million from $155 million.
• Electric rate increases and higher gas deliveries supported results, but mild weather reduced electric sales. Depreciation and amortization increased $69 million, primarily from a larger plant base.
• CMS Energy consolidated net income available to common stockholders fell to $460 million from $551 million, and diluted EPS declined to $1.64 from $1.98. The principal reported headwind was the Tax Cuts and Jobs Act (TCJA), including a $148 million increase in tax expense; higher depreciation also weighed on results. Consumers’ annual earnings nevertheless increased.
• Operating cash flow rose at Consumers from $1.681 billion in 2016, while capital expenditures were slightly lower. Consumers’ cash including restricted cash declined from $152 million to $65 million.

Outlook, management commentary, risks and unusual items

• Investment and demand: Consumers planned $10.1 billion of capital expenditures for 2018–2022: $4.9 billion for gas infrastructure, $3.5 billion for electric distribution and $1.7 billion for electric supply. Management expected annual rate-base growth of 6%–8%, with customer base-rate increases, excluding fuel-recovery charges, targeted at or below inflation. Weather-adjusted electric deliveries were forecast to rise less than 0.5% in 2018; gas deliveries were expected to remain stable. No specific EPS guidance is stated in the provided filing text.
• Rates and tax: The pending electric rate case sought a $148 million annual increase; Consumers had self-implemented $130 million, subject to refund, and an administrative law judge recommended $30 million. A final order was expected by March 2018. The pending gas case sought $178 million annually. Consumers estimated the TCJA would reduce annual electric and gas revenue requirements by $116 million and $49 million, respectively, and proposed customer bill credits by the end of 2018; timing and deferred-tax refunds remained subject to MPSC decisions. The TCJA also produced a $1.588 billion net regulatory tax liability at Consumers, primarily tied to tax normalization.
• Contract commitments: Consumers’ long-term power purchase agreements totaled $9.159 billion of estimated future payments at year-end, including commitments extending through 2036. The Palisades PPA was expected to continue through April 2022 after the MPSC authorized only partial recovery of a proposed early-termination payment.
• Legal and environmental exposure: The MCV Partnership asserted more than $270 million in damages and interest in arbitration over the MCV PPA; Consumers said the claim lacked merit but could not predict the outcome. Consumers recorded $88 million for former manufactured-gas-plant remediation; CMS Energy recorded $48 million for Bay Harbor remediation. Consumers estimated $215 million of coal-ash compliance capital and removal spending, $49 million for wastewater rules, $89 million for cooling-water intake requirements and $14 million for air regulations from 2018–2022; other environmental outlook disclosures estimate $0.4 billion of electric environmental expenditures over that period. Recovery of these costs in rates is expected by the companies but not assured.
• Other risks and items: Consumers’ electric sales were at Michigan’s 10% retail open-access limit. Key risks include MPSC/FERC rate and cost-recovery decisions, weather, commodity and capacity prices, project execution, environmental regulation, cybersecurity, capital-market access and pension assumptions. CMS Energy also disclosed an unresolved Equatorial Guinea tax claim of $152 million plus potential penalties and interest, and gas-price-reporting litigation for which loss could not be estimated. The filing reports effective internal controls and unqualified audit opinions.

Most important facts for investors to verify

1. Consumers’ electric rate-case final order, including any refund obligation on the $130 million self-implemented increase.
2. MPSC treatment and timing of TCJA customer credits and deferred-tax balances, and the final tax accounting adjustments.
3. Liquidity and refinancing needs against debt maturities, low year-end cash, planned capital spending and the large PPA commitments.
4. Developments in the MCV arbitration, environmental remediation estimates and whether associated costs remain recoverable from customers.
5. Execution of the $10.1 billion investment plan, projected rate-base growth and the effect on customer rates and cash generation.