Consumers Energy Company — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. The filing was signed July 28, 2017. Consumers is a Michigan electric and gas utility and a wholly owned subsidiary of CMS Energy. Unless noted otherwise, figures below are Consumers-only and in millions of dollars.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Operating revenue | $1,362 | $1,293 | $3,099 | $3,016 |
| Operating income | $222 | $254 | $581 | $562 |
| Net income available to common stockholder | $103 | $131 | $314 | $303 |
| Operating margin | 16.3% | 19.6% | 18.7% | 18.6% |
| Net cash from operating activities | Not separately presented quarterly | $1,125 | $1,132 | |
| Capital expenditures | Not separately presented quarterly | $741 | $813 |
Second-quarter revenue rose about 5%, but operating income fell about 13% and common net income fell about 21%. For the first half, revenue rose about 3% and common net income rose about 4%. Electric utility earnings were $218 for the first half versus $204; gas utility earnings were $96 versus $99. The filing does not provide a separate quarterly cash-flow statement.
Cash, debt and liquidity
- At June 30, cash and cash equivalents, including restricted balances, totaled $364; $21 was restricted. Total current assets were $1,912 and current liabilities were $1,583.
- Long-term debt was $5,339, with $394 of current debt, leases and financing obligations; notes payable were zero, compared with $398 at December 31, 2016. The balance sheet’s current-debt line includes leases and financing obligations.
- Consumers had $891 available across its revolving credit facilities. No commercial paper was outstanding under its $500 program. It reported compliance with debt covenants; debt-to-capital was 0.46 against a maximum of 0.65.
- First-half financing included $349 of long-term debt issuance, $263 of debt retirement and a $450 contribution from CMS Energy. Operating cash flow was slightly lower year over year despite higher net income, reflecting changes in working capital and other assets and liabilities.
Changes, outlook and material matters
- Weather and costs: Milder weather reduced electric and gas sales. First-half electric deliveries were 18.2 billion kWh, flat year over year; gas deliveries were 162 bcf versus 170 bcf. Storm restoration costs, operating expenses, and depreciation increased, with depreciation growth primarily reflecting increased plant in service. Rate increases partly offset these pressures.
- Rates and regulation: Consumers sought a $173 annual electric rate increase in March 2017, based on a requested 10.5% authorized return on equity. Its gas request was reduced to $80 annually; a $20 annual increase had been self-implemented subject to refund, with a final order expected at the end of July 2017. The prior electric rate case resulted in a $113 annual increase and a recorded $17 refund reserve.
- Palisades PPA: Consumers and Entergy agreed to terminate the 798-MW PPA in May 2018, four years early, for a $172 payment. The deal depended on MPSC approval of recovery through securitization; without approval by September 30, 2017, it could become void and the PPA would continue to April 2022. Expected customer savings depend on future market conditions.
- Investment and demand: Consumers planned $18 billion of capital investment for 2017–2026, including $9 billion for 2017–2021. It expected annual rate-base growth of 6%–8%, electric delivery growth of about 0.5% annually through 2021 (about 1.5% excluding energy-waste reduction effects), and gas deliveries broadly stable. The filing says these plans and forecasts depend on regulatory outcomes, weather, markets and execution.
- Generation and clean energy: Consumers was pursuing capacity options to address the planned Palisades termination, including a request for proposals for up to 800 MW of gas generation. A proposed 15-year expanded purchase agreement with T.E.S. Filer City and renewable-energy procurements remained subject to approvals. The 2016 Michigan Energy Law raised renewable requirements to 12.5% in 2019 and 15% in 2021.
- Environmental and other contingencies: Consumers recorded $98 for remaining gas-site remediation obligations, including 23 former manufactured gas plant sites, against a $137 regulatory asset for recoverable MGP costs. Environmental cost recovery is not assured. Other disclosed exposures include electric-site cleanup, permitting and emissions requirements; CMS Energy separately disclosed its own Bay Harbor and Equatorial Guinea matters.
- Accounting and controls: Consumers early adopted pension-cost presentation guidance in 2017; management said it had no material effect on net income, cash flows or financial position. Management concluded disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Outcome and timing of the electric and gas rate cases, including the refund exposure on self-implemented rates.
- MPSC approval and financing treatment of the $172 Palisades termination payment, and the resulting capacity and customer-cost implications.
- Whether planned capital spending, rate-base growth and environmental investments receive timely regulatory approval and cost recovery.
- Cash-flow durability, debt maturities and funding needs as investment spending continues; distinguish cash available from restricted cash.
- Updated estimates, recoverability and timing of environmental remediation obligations and other legal contingencies.