Consumers Energy Company — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Consumers is a Michigan-regulated electric and gas utility and a wholly owned subsidiary of CMS Energy. The filing also reports CMS Energy results; figures below are for Consumers unless identified otherwise. Dollar amounts are in millions unless noted.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Operating revenue | $1,502 | $1,437 | $4,752 | $4,536 |
| Operating income | $271 | $308 | $834 | $889 |
| Net income available to common stockholder | $180 | $181 | $573 | $495 |
| Operating margin | 18.0% | 21.4% | 17.5% | 19.6% |
| Net income margin | 12.0% | 12.6% | 12.1% | 10.9% |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $1,255 | $1,209 |
| Capital expenditures | Not stated for quarter | Not stated for quarter | $1,339 | $1,196 |
- Revenue and earnings: Nine-month revenue increased 4.8% and net income rose 15.8% year over year. Higher electric and gas sales and rate increases supported results, while depreciation, maintenance and operating expenses increased. Q3 net income was nearly flat; operating income declined.
- Segment results: Nine-month electric utility income increased to $468 from $394. Gas utility income was $105 versus $101, despite a Q3 gas utility loss of $19 compared with income of $5 in Q3 2017. Favorable weather contributed to higher nine-month deliveries.
- Cash flow and liquidity: Nine-month operating cash flow was $1.255 billion, compared with $1.209 billion. Investing cash outflow was $1.435 billion, including $1.339 billion of capital expenditures; financing provided $153 million. At September 30, cash and cash equivalents were $9 million and restricted cash was $28 million.
- Debt and funding: Balance-sheet current debt, leases and financing obligations were $898 million; long-term debt was $5.239 billion. Commercial paper outstanding was $279 million. Available capacity was $843 million under the $850 million revolver and $225 million under the $250 million revolver; a separate $30 million facility was fully committed by letters of credit. Consumers reported compliance with debt covenants, including a debt-to-capital ratio of 0.47 against a 0.65 limit.
- Dividends: Consumers paid $392 million in common dividends to CMS Energy in the first nine months.
Material changes versus the prior period
- Higher sales and rate increases benefited nine-month utility earnings. Electric deliveries were 29.1 billion kWh versus 28.2 billion; gas deliveries were 211 bcf versus 189 bcf.
- Higher operating costs and depreciation weighed on operating income. Q3 maintenance and other operating expenses increased by $60 million; nine-month costs rose by $90 million.
- The federal tax rate reduction lowered tax expense, but Consumers passed tax-related benefits to customers through lower rates and credits. The effective tax rate for the first nine months fell to 16.2% from 30.3%.
- Operating cash flow improved, while capital expenditures increased. Current portions of debt, leases and financing obligations rose to $898 million from $365 million at year-end 2017.
Outlook, regulatory matters and risks
- Investment plan: Consumers projected $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%.
- Rates: The MPSC approved an annual electric rate increase of $72 million in 2018. A gas rate-case settlement authorized an $11 million annual increase, plus investment recovery increases of $9 million in July 2019 and $10 million in July 2020, subject to reconciliation. A new electric case sought a revised $44 million annual increase and additional investment recovery mechanisms; an order was expected by March 2019.
- Tax-related customer refunds: Consumers requested refunds of $31 million to gas customers and $70 million to electric customers and recorded a liability reflecting the proposed refunds. In October 2018, it sought approval to return net regulatory tax liabilities through future rates, including $0.4 billion through gas rates and $1.2 billion through electric rates.
- Demand and generation outlook: Management expected weather-normalized electric and gas deliveries to remain stable through 2022. Consumers’ proposed integrated resource plan called for retiring coal generation in stages through 2039 and replacing capacity with renewables, efficiency, demand response, grid modernization and storage. The plan and proposed projects require regulatory approvals.
- Contingencies: The MCV Partnership claimed damages and interest exceeding $270 million in an arbitration over the power purchase agreement; Consumers said the claim lacked merit but could not predict the outcome. Gas environmental remediation liability was $78 million, with a related $135 million regulatory asset. Other exposures include environmental cleanup, retired underwater cables with potential removal costs up to $10 million, and regulatory and permitting matters.
- Other risks and unusual items: Weather, commodity prices, regulation, environmental requirements, infrastructure execution, financing access, and litigation may affect results. The filing says interim results are not necessarily indicative of full-year results because utility operations are seasonal. It reports no material change in previously disclosed market risks or risk factors.
Important facts for investors to verify
- Progress and final MPSC decisions on the electric rate case, investment recovery mechanisms, and TCJA-related customer refunds and tax-liability treatment.
- Consumers’ ability to fund its substantial capital program while maintaining liquidity, managing debt maturities and sustaining operating cash flow.
- Outcome and potential exposure from the MCV Partnership arbitration and environmental remediation matters.
- Approval and implementation of the integrated resource plan, proposed generation retirements, and renewable projects.
- Whether cost increases, weather effects and customer bill credits continue to pressure operating margins.