Consumers Energy Company 2018 Form 10-K Summary
Business context and reporting period
Consumers Energy is a regulated Michigan electric and natural gas utility serving approximately 6.7 million residents. This combined 10-K reports the fiscal year ended December 31, 2018; it also provides unaudited fourth-quarter results. Consumers is wholly owned by CMS Energy, and the companies’ financial results should be distinguished when evaluating either issuer.
Financial performance and position
| Consumers Energy, $ millions unless stated | 2018 | 2017 | Change |
|---|---|---|---|
| Operating revenue | $6,464 | $6,222 | +3.9% |
| Operating income | $1,065 | $1,252 | -14.9% |
| Net income | $705 | $632 | +11.6% |
| Net income available to common stockholder | $703 | $630 | +11.6% |
| Cash provided by operations | $1,449 | $1,715 | -15.5% |
| Capital expenditures, excluding assets under capital lease | $1,822 | $1,632 | +11.6% |
| Long-term debt, excluding current portion | $6,779 | $5,561 | +21.9% |
- Revenue increased in both electric and gas utilities. Electric deliveries to end-use customers rose to 38.2 billion kWh from 37.4 billion kWh; gas deliveries rose to 310 bcf from 287 bcf. Management attributed higher sales partly to favorable weather and cited rate increases.
- Operating margin, calculated as operating income divided by revenue, declined to about 16.5% from 20.1%. Higher maintenance and other operating costs and depreciation contributed to the decline. Net income nevertheless increased, with lower income tax expense and higher non-operating retirement benefit income among the factors.
- Fourth-quarter revenue was $1.712 billion versus $1.686 billion in 2017; net income was $131 million versus $136 million. The filing provides no separate Q4 cash-flow figure.
- Year-end cash and cash equivalents were $56 million, including $17 million restricted. Consumers had $843 million available under revolving credit facilities and $97 million of commercial paper outstanding. Its debt-to-capital covenant ratio was 0.49 against a maximum of 0.65.
- Consumers paid $531 million in common dividends to CMS Energy during 2018. Its total assets were $22.025 billion at year-end, compared with $21.099 billion in 2017.
Material changes and outlook
- Consumers plans $11.2 billion of capital expenditures from 2019 through 2023, including $5.1 billion for gas infrastructure and $4.2 billion for electric distribution. Management expects annual rate-base growth of 6% to 8% and projects weather-normalized electric deliveries to remain stable and gas deliveries to increase slightly through 2023.
- Consumers’ 2018 integrated resource plan proposes eliminating coal-fired generation by 2040, reducing carbon emissions 80% by 2040, and increasing renewable energy to 25% by 2025, over 35% by 2030, and over 40% by 2040. These plans and proposed generation retirements require regulatory consideration and execution.
- In January 2019, the MPSC approved an electric-rate settlement providing a $24 million annual rate decrease, but ending a $113 million TCJA bill credit; together these changes amount to an $89 million annual rate increase relative to rates including that credit. The settlement defers recovery of certain distribution investments and bars a new electric rate case before January 2020.
- The 2017 gas-rate settlement authorized an $11 million annual increase; ending a $49 million TCJA bill credit makes the resulting annual rate change a $60 million increase. It also established revenue-decoupling and investment-recovery mechanisms. A separate gas rate case filed in November 2018 sought a $229 million annual increase; its outcome was pending.
- Long-term power-purchase obligations total $9.93 billion, including an estimated $1.049 billion due in 2019. Coal purchase and transportation obligations and environmental compliance spending add further commitments.
Risks, contingencies, and unusual items
- On January 30, 2019, a fire at the Ray Compressor Station disrupted the Ray Storage Field during extreme cold, reducing gas supply and delivery capacity. Customer load reductions and industrial and large-commercial curtailments ended February 1. The company could not estimate the financial impact and warned of possible material effects and increased regulatory scrutiny.
- Environmental liabilities include $73 million for 23 former manufactured-gas-plant sites at Consumers and a $46 million Bay Harbor liability at CMS Energy. Cost recovery through customer rates is expected by management but is not assured. Estimated Consumers capital and removal expenditures for ash, water, and air compliance total approximately $289 million for 2019–2023.
- Consumers faces regulatory and legal uncertainty, including cost-recovery appeals, environmental requirements, potential changes to alternative-supplier access, and MCV Partnership arbitration. In January 2019, an arbitration panel dismissed the MCV Partnership’s Clean Air Act damages claim, which represented most of its claim estimated above $270 million; other claims remained unresolved.
- Other material risks include weather and service disruptions, fuel and purchased-power costs, major capital-project execution, access to capital, pension assumptions and investment returns, cybersecurity, and the ability to recover costs through regulated rates.
- Management reported effective disclosure controls and internal control over financial reporting; the independent auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Track the disposition of the pending gas rate case, TCJA-related customer refunds and deferred-tax treatment, and any subsequent electric-rate proceedings.
- Monitor the Ray Compressor Station investigation, storage-field reliability, any repair or remediation costs, and regulatory follow-up.
- Assess whether the $11.2 billion investment plan, proposed generation transition, and projected rate-base growth remain achievable and recoverable through rates.
- Review debt maturities, financing needs, liquidity, and large power-purchase obligations alongside the decline in operating cash flow and increase in debt.
- Follow environmental remediation estimates and unresolved litigation, including former gas-plant sites, Bay Harbor, and remaining MCV claims.