Consumers Energy Company 10-Q Summary
Business context and reporting period. Consumers Energy is a regulated Michigan electric and natural gas utility and a wholly owned subsidiary of CMS Energy. This combined, unaudited filing covers the three months ended March 31, 2017; comparisons are with the same 2016 period. Utility results are seasonal and the quarter is not necessarily indicative of full-year performance.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 / prior date |
|---|---|---|
| Operating revenue | $1.737 billion | $1.723 billion |
| Operating income | $359 million | $308 million |
| Operating margin | 20.7% | 17.9% |
| Net income | $211 million | $172 million |
| Net margin | 12.2% | 10.0% |
| Cash from operations | $648 million | $665 million |
| Capital expenditures | $361 million | $406 million |
| Cash and cash equivalents, including restricted cash | $212 million at March 31, 2017 | $152 million at December 31, 2016 |
| Long-term debt | $5.419 billion at March 31, 2017 | $5.253 billion at December 31, 2016 |
Operating cash flow less capital expenditures was approximately $287 million. The $212 million cash balance includes $30 million of restricted cash. Current maturities of long-term debt, capital leases and financing obligations totaled $327 million. Consumers had $893 million available under revolving credit facilities; no commercial paper was outstanding. Its debt-to-capital covenant ratio was 0.47 against a maximum of 0.65.
Material changes versus the prior period
- Net income rose $39 million, while operating income increased $51 million. Higher electric deliveries and rate increases, lower maintenance and other operating costs, and lower general taxes contributed; higher depreciation and income taxes partly offset gains.
- Electric deliveries to end-use customers were 9.2 billion kWh versus 9.1 billion kWh. Gas deliveries were 119 bcf versus 121 bcf.
- Cash from operations declined $17 million, partly reflecting lower customer collections and the absence of a prior-year postretirement-benefit reimbursement. Capital spending was $45 million lower.
- Consumers issued $350 million of first mortgage bonds at 3.95% and retired $250 million of bonds at 5.15% during the quarter. It also received a $250 million contribution from CMS Energy.
Outlook, management commentary and key risks
- Investment and demand: Consumers expects to invest $18 billion from 2017 through 2026, with annual rate-base growth of 6%–8%. It projects weather-adjusted electric deliveries to rise about 1% in 2017 and average roughly 0.5% annual growth over five years; gas deliveries are expected to remain broadly stable. These are operating expectations, not earnings guidance.
- Rates and regulation: The MPSC authorized a $113 million annual electric rate increase in February 2017, below the $225 million requested. Consumers filed a new electric rate case seeking $173 million annually. Its gas-rate request was reduced to $80 million; $20 million had been self-implemented subject to refund. Rate recovery and regulatory decisions remain important uncertainties.
- Palisades PPA: Consumers and Entergy agreed to end the power purchase agreement in May 2018, four years early, for a $172 million termination payment. The agreement depends on MPSC approval of recovery through securitization by September 30, 2017; otherwise, it may be void and the PPA would continue to April 2022. Consumers was pursuing alternative generation capacity.
- Environmental and other contingencies: Consumers recorded $106 million for remediation at 23 former manufactured-gas-plant sites, with a related $138 million regulatory asset. It estimated $3 million of probable NREPA liabilities and recorded $3 million for its share of known CERCLA sites. CMS Energy recorded a $51 million Bay Harbor remediation liability and disclosed a disputed $152 million Equatorial Guinea tax claim, plus potentially substantial penalties and interest. Environmental rules, remediation estimates, and cost recovery could affect costs and investment needs.
- Other notable items: In April 2017, Consumers agreed, subject to MPSC approval, to transfer two retired coal plants and pay $63 million for decommissioning and cleanup; it estimates customer savings of $30 million. The 2016 Energy Law took effect in April 2017, changing renewable-energy, efficiency, rate-case, and capacity-planning requirements.
- Management stated that cash flows, borrowing capacity, and other liquidity sources should be sufficient for planned requirements. Risks include regulatory outcomes, weather, demand and commodity prices, generation capacity, environmental obligations, financing access, and operational or cyber disruptions.
Important facts for investors to verify
- Whether the MPSC approves the Palisades termination-payment recovery and whether Consumers secures replacement capacity on acceptable terms.
- Outcomes and timing of the electric and gas rate cases, including potential refunds of self-implemented rates and recovery of planned investment.
- Execution, funding, and customer-rate implications of the $18 billion investment plan and environmental compliance spending.
- Changes in remediation estimates, regulatory recovery, and significant legal exposures, including Bay Harbor and the Equatorial Guinea tax claim.
- Liquidity and debt trends, including cash generation relative to capital expenditures and the availability and cost of refinancing.