Business context and reporting period
Consumers Energy Company filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2019. It is a Michigan-regulated electric and natural gas utility and a wholly owned subsidiary of CMS Energy. Unless otherwise stated, financial amounts below are in millions of dollars. Interim results are seasonal and are not necessarily indicative of full-year results.
Financial performance and liquidity
| Consumers Energy | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Operating revenue | $1,334 | $1,395 | $3,277 | $3,250 |
| Operating income | $175 | $229 | $503 | $563 |
| Net income available to common stockholder | $97 | $151 | $323 | $393 |
| Operating margin | 13.1% | 16.4% | 15.4% | 17.3% |
| Net margin | 7.3% | 10.8% | 9.9% | 12.1% |
Margins are calculated from reported revenue and income. For the six months, operating cash flow was $1,110, compared with $1,098 a year earlier. Capital expenditures were $963; net cash used in investing was $1,026, and financing provided $72. Operating cash flow less reported capital expenditures was approximately $147.
At June 30, Consumers had $212 of cash and cash equivalents, including $16 restricted. It had $1,078 available under revolving credit facilities and no commercial paper outstanding. Long-term debt was $6,546, with a $47 current portion; debt-to-capital covenant ratios were 0.45 and 0.46 against a maximum of 0.65. Consumers issued $300 of 3.75% first mortgage bonds and retired $300 of 5.65% bonds during the first half. CMS Energy contributed $675 to Consumers in the period.
Material changes versus the prior comparable period
- Q2 revenue fell $61 and common net income fell $54 year over year; first-half revenue rose $27 while common net income declined $70.
- Electric utility common income was $90 in Q2 versus $130, and $195 for the first half versus $269. Management attributed pressure to unfavorable weather and lower electric sales, higher storm restoration and operating costs, depreciation, and taxes. Electric deliveries were 8.6 billion kWh in Q2 versus 9.2 billion, and 17.8 billion for the half versus 18.5 billion.
- Gas utility common income was $8 in Q2 versus $21, but $129 for the half versus $124. Colder weather increased first-half gas sales; deliveries were 191 bcf versus 183 bcf for the half. Higher infrastructure, pipeline integrity, leak repair, depreciation, and property-tax costs partly offset higher rates and sales.
- First-half electric storm restoration costs reduced electric utility income by $33 after tax. The January Ray Compressor Station fire disrupted gas supply during extreme cold and led to temporary curtailments; the filing does not provide a clear estimate of any resulting loss.
Outlook, management commentary, risks and unusual items
- Consumers expects weather-normalized electric deliveries to remain broadly stable and gas deliveries to increase slightly through 2023. Its $11.2 billion 2019–2023 capital plan includes $9.3 billion for gas infrastructure and electric distribution and $1.9 billion for electric supply projects. Management expects annual rate-base growth of 6%–8%.
- The MPSC approved Consumers’ integrated resource plan in June 2019. It calls for retiring the 515-MW D.E. Karn 1 and 2 coal units in 2023, further assessment of retirement timing for J.H. Campbell 1 and 2, and replacement resources emphasizing demand response, efficiency, renewables, conservation voltage reduction and pumped storage. Consumers targets eliminating coal generation by 2040 and reducing carbon emissions by more than 90% by 2040.
- The 2018 electric rate-case settlement authorized a $24 annual rate decrease, but removal of a $113 TCJA bill credit produced a net annual rate increase of $89. The pending gas rate case seeks a revised annual increase of $204, including infrastructure and operating costs; the outcome remains subject to MPSC approval.
- Consumers plans to seek securitization approval by May 2023 for an estimated $657 of qualified remaining book value for the Karn units. The MPSC approved recording that amount as a regulatory asset in June 2019.
- Notable uncertainties include possible PURPA-mandated power purchases and related developer complaints; environmental compliance and remediation costs; and recovery of investment and operating costs through rates. Consumers also faces potential penalties or cost disallowances related to the Ray fire and an MPSC investigation alleging more than 20,000 delayed or incomplete underground-facility marking responses. The latter proceeding’s outcome was not expected until mid-2020.
- A January 2019 arbitration ruling rejected the MCV Partnership’s Clean Air Act damages claim, which represented most of its claim and had been estimated above $270; remaining claims continue. CMS Energy also disclosed separate parent-level contingencies, including Bay Harbor remediation and a disputed Equatorial Guinea tax claim; these are not Consumers-only obligations.
- Management said expected operating cash flow and available financing should fund obligations. Consumers’ costs and results remain exposed to weather, regulatory decisions and rate recovery, infrastructure execution, environmental requirements, interest rates, and operational incidents.
Important facts for investors to verify
- Progress and final MPSC decisions on the $204 gas rate request, TCJA customer refunds, and other rate-recovery matters.
- Actual storm restoration costs, the consequences of the Ray Compressor Station fire, and any associated customer claims, penalties, or disallowances.
- Capital spending, financing needs, and execution of the $11.2 billion investment plan, including renewable projects and coal-unit retirement plans.
- Developments in PURPA complaints, environmental remediation and compliance, and the underground-facility marking proceeding.
- Consumers’ debt maturities, covenant headroom, liquidity, and ability to fund capital investment while paying dividends to CMS Energy.