Consumers Energy Company — Q1 2019 Form 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 combined filing covers the three months ended March 31, 2019; financial results are unaudited. Utility operations are seasonal, so first-quarter results are not necessarily indicative of full-year performance.
Key financial results
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Consumers revenue | $1.943 billion | $1.855 billion |
| Consumers operating income | $328 million | $334 million |
| Consumers net income | $226 million | $242 million |
| Consumers operating margin | 16.9% | 18.0% |
| Consumers operating cash flow | $619 million | $720 million |
| Consumers capital expenditures | $476 million | $414 million |
| Consumers cash, including restricted cash | $64 million | $56 million at Dec. 31, 2018 |
| Consumers long-term debt | $6.565 billion | $6.779 billion at Dec. 31, 2018 |
Consumers revenue rose about 5%, while net income declined about 7%. Higher gas sales from colder weather and rate increases were partly offset by winter-storm restoration costs, higher depreciation, property taxes, and other costs. Electric deliveries were 9.2 billion kWh in both periods; gas deliveries increased to 142 bcf from 133 bcf.
Consumers’ financing cash flow included a $350 million contribution from CMS Energy, $215 million of debt retirement, and $172 million of dividends to its parent. Its revolving facilities had $1.078 billion available; $30 million of commercial paper was outstanding. Consumers’ debt-to-capital covenant ratio was 0.47 versus a maximum of 0.65, with no reported covenant default.
For context, CMS Energy reported revenue of $2.059 billion, net income available to common stockholders of $213 million, and diluted EPS of $0.75, compared with $1.953 billion, $241 million, and $0.86, respectively, in Q1 2018. CMS operating cash flow was $617 million, versus $708 million.
Material changes, outlook, and notable matters
- Storm and operating impacts: Consumers’ electric utility earnings fell $34 million year over year, with $39 million of higher storm restoration costs among the principal drivers. A January 30 fire at the Ray Compressor Station reduced gas storage and delivery capacity during extreme cold, prompting temporary customer load reductions, contingency gas purchases, and industrial/commercial curtailments. Potential claims, penalties, or cost disallowances cannot yet be estimated.
- Rates and regulation: In January 2019, the MPSC approved an electric-rate settlement that reduced annual rates by $24 million before the ending of a $113 million TCJA customer credit; the company described the net annual rate effect as an $89 million increase. Consumers’ pending gas case seeks a $229 million annual increase and related rate mechanisms. Regulatory outcomes remain uncertain.
- Resource plan: A settlement resolving Consumers’ integrated resource plan was filed in March 2019, but two parties objected. The MPSC was expected to approve or reject it by June 10, 2019. The proposal includes retiring two coal units totaling 515 MW in 2023, evaluating two additional units totaling 608 MW in future plans, and expanding demand response, efficiency, and renewable resources. The filing projects weather-normalized electric deliveries to remain stable and gas deliveries to grow slightly through 2023.
- Investment: Consumers planned $11.2 billion of capital spending for 2019–2023, including $9.3 billion for gas infrastructure and electric distribution and $1.9 billion for electric supply projects. Management expected annual rate-base growth of 6%–8%, subject to regulatory recovery and execution.
- Contingencies: The filing identifies environmental remediation obligations, including a $72 million recorded liability for former gas-manufactured-gas-plant sites and a $45 million Bay Harbor liability at CMS Energy. Consumers also faces unresolved environmental, regulatory, and legal matters. A CMS Energy Equatorial Guinea tax claim of $152 million plus possible penalties and interest remains contested. The filing states that the outcome of the Ray fire matters and certain litigation cannot be predicted.
- Other items: Consumers adopted the new lease accounting standard on January 1, 2019, recognizing lease assets and liabilities without an impact on net income or cash flows. CMS Energy said its April 2019 sale of DIG high-voltage equipment would generate a $16 million gain in Q2; Consumers expected to sell certain substation transmission assets in 2019. These are subsequent-period items, not Q1 earnings.
Important facts for investors to verify
- Progress and regulatory disposition of the gas rate case, electric-rate settlement, TCJA customer refunds, and integrated resource plan settlement.
- Actual costs and any customer claims, regulatory penalties, or disallowances related to the Ray Compressor Station fire.
- Capital spending, rate-base growth, project execution, and recovery of infrastructure and environmental costs in customer rates.
- Trends in storm restoration expense, operating cash flow, working capital, and Consumers’ liquidity and financing needs.
- Developments in environmental remediation and material litigation, including the Equatorial Guinea tax claim and other disclosed contingencies.