Business context and reporting period
Consumers Energy Company is a Michigan-regulated electric and natural gas utility and a wholly owned subsidiary of CMS Energy. This combined Form 10-Q reports the quarter and nine months ended September 30, 2019; financial figures below are for Consumers unless identified otherwise. Interim results are seasonal and may not indicate full-year performance.
Financial results and liquidity
| Consumers, $ millions except margins | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Operating revenue | 1,429 | 1,502 | 4,706 | 4,752 |
| Operating income | 319 | 271 | 822 | 834 |
| Net income available to common stockholder | 213 | 180 | 536 | 573 |
| Operating margin, calculated | 22.3% | 18.0% | 17.5% | 17.5% |
| Net margin, calculated | 14.9% | 12.0% | 11.4% | 12.1% |
- Cash flow: Nine-month operating cash flow was $1.251 billion, compared with $1.255 billion. Investing used $1.583 billion versus $1.435 billion, including $1.559 billion in capital expenditures. Financing provided $560 million versus $153 million.
- Cash and liquidity: At September 30, Consumers had $284 million of cash and restricted cash, including $259 million unrestricted. Revolving credit facilities had $1.068 billion available; no commercial paper was outstanding.
- Debt: Long-term debt was $7.087 billion, with $122 million reported as current debt, finance leases, and other financing. Long-term debt was $6.779 billion and the current portion $48 million at December 31, 2018. Consumers reported covenant compliance and no defaults.
- Rates and balance sheet: The MPSC approved a $144 million annual gas-rate increase in September, including a $13 million adjustment to return tax benefits. Consumers reported total assets of $22.938 billion and equity of $7.736 billion at September 30.
Material changes versus the prior comparable period
- Third-quarter revenue fell $73 million (about 5%), while net income rose $33 million (about 18%). Operating income increased $48 million.
- For the first nine months, revenue declined $46 million (about 1%) and net income declined $37 million (about 6%). Electric utility net income fell to $418 million from $468 million; gas utility net income rose to $119 million from $105 million.
- Electric deliveries declined to 27.9 billion kWh from 29.1 billion kWh over nine months, with unfavorable weather cited as a key factor. Gas deliveries rose to 217 bcf from 211 bcf, primarily due to colder weather.
- Quarterly results included a $34 million pre-tax gain on the sale of substation transmission equipment. Nine-month electric earnings also reflected higher 2019 storm restoration costs, increased depreciation and property taxes, and the absence of certain 2018 tax benefits.
- Consumers adopted the new lease accounting standard in 2019, recognizing lease assets and liabilities; the filing says it did not affect net income or cash flows.
Outlook, management commentary, risks and contingencies
- Investment and growth: Consumers expects $25 billion of capital investment over 2019–2028, including $11.8 billion over 2019–2023. It projects annual rate-base growth of 6%–8%. Planned near-term spending emphasizes gas and electric infrastructure, reliability, safety, and renewable generation.
- Energy transition: The MPSC-approved Clean Energy Plan targets retirement of the D.E. Karn 1 and 2 coal units in 2023 and continued assessment of J.H. Campbell 1 and 2 for retirement in 2025 or earlier. Management expects over 90% carbon-emissions reduction by 2040 and plans to replace coal capacity through renewables, efficiency, demand response, and other resources. These plans depend on approvals, execution, and cost recovery.
- Demand outlook: Weather-normalized electric deliveries are expected to remain stable and gas deliveries to increase slightly through 2023, reflecting modest demand growth offset by efficiency and conservation.
- Customer tax refunds and rate recovery: The MPSC authorized return of $0.4 billion of net regulatory tax liabilities to gas customers and $1.2 billion to electric customers through future rates; a temporary $32 million electric bill credit was also authorized. Rate-case outcomes and recovery of investments and compliance costs remain important uncertainties.
- Operational and regulatory risks: A January 2019 fire at the Ray Compressor Station disrupted gas storage and delivery during extreme cold. The MPSC requested further reporting; potential customer claims, penalties, or cost disallowances cannot yet be estimated. Consumers also faces an MPSC proceeding alleging more than 20,000 late or incomplete underground-facility marking responses; possible fines are capped at $5,000 per violation, and a decision was not expected until mid-2020.
- Other contingencies: Consumers reported a $70 million recorded liability for gas environmental remediation, including former manufactured-gas-plant sites, and a $3 million recorded liability for certain electric environmental sites. Costs and recovery may change. The filing also describes pending regulatory, environmental, and legal matters whose outcomes may affect results; some potential losses cannot be estimated.
- Post-quarter item: In October 2019, Consumers announced a retention program for staffing through the planned Karn retirement, estimated to cost $35 million through 2023, including $6 million of retention and severance expense expected in late 2019. Consumers intends to seek recovery from customers.
Important facts for investors to verify
- Whether electric and gas rate orders, tax refunds, and future rate cases permit timely recovery of planned capital spending and operating costs.
- Actual spending, rate-base growth, project costs, and timing under the $25 billion investment plan and Clean Energy Plan, including coal-unit retirement and replacement capacity.
- Whether weaker electric deliveries and higher storm-related costs persist, and how weather affects both utility earnings and cash flow.
- Developments and potential financial effects from the Ray Compressor Station fire and the underground-facility marking proceeding.
- Environmental remediation estimates, other legal contingencies, and the affordability and availability of financing for the investment program.