Consumers Energy Company — 2016 Form 10-K
Business context and reporting period. Consumers Energy is a regulated Michigan electric and gas utility serving approximately 6.7 million residents. This filing reports the fiscal year ended December 31, 2016; the company’s fourth-quarter results are also presented separately. Consumers is wholly owned by CMS Energy, but its debt and operating results are distinct from the parent’s.
Key financial results
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Operating revenue | $6.064 billion | $6.165 billion |
| Operating income | $1.234 billion | $1.122 billion |
| Net income | $616 million | $594 million |
| Net income available to common stockholder | $614 million | $592 million |
| Cash from operating activities | $1.681 billion | $1.794 billion |
| Capital expenditures | $1.656 billion | $1.537 billion |
| Cash and cash equivalents, including restricted cash | $152 million | $71 million |
| Long-term debt, excluding current portion | $5.253 billion | $5.183 billion |
| Total assets | $19.946 billion | $18.635 billion |
Operating margin increased to approximately 20.3% from 18.2%; net margin rose to approximately 10.2% from 9.6%. Operating cash flow less reported capital expenditures was approximately $25 million negative in 2016. At year-end, Consumers also had $398 million of commercial paper outstanding and $893 million available under revolving credit facilities. Cash includes $21 million of restricted amounts.
Electric utility revenue was $4.379 billion, up from $4.249 billion; gas utility revenue was $1.685 billion, down from $1.916 billion. Electric deliveries were 37.9 billion kWh versus 37.3 billion; end-use gas deliveries were 282 bcf versus 299 bcf.
Fourth quarter: Revenue was $1.550 billion versus $1.439 billion in Q4 2015; net income was $117 million versus $135 million. Quarterly operating income was $288 million versus $246 million. The filing’s quarterly table does not provide a clear explanation for the year-over-year Q4 net-income decline.
Material changes versus prior year
- Annual revenue declined about 1.6%, primarily reflecting lower gas revenue and commodity costs passed through to customers. Rate increases and higher electric sales supported earnings.
- Net income increased $22 million. Electric utility net income rose $21 million to $458 million; gas utility net income was nearly unchanged at $155 million.
- Operating cash flow declined $113 million, primarily due to lower customer collections, including effects of lower gas prices and sales volumes, and higher income-tax payments to CMS Energy. Lower benefit-plan contributions and higher net income partly offset the decline.
- Capital expenditures rose $119 million. Property, plant and equipment increased, and long-term debt excluding its current portion increased $70 million.
- Consumers retired seven smaller coal units totaling 950 MW in April 2016. Generation mix shifted: owned coal generation fell to 9,739 GWh from 15,833 GWh in 2015, while owned gas generation rose to 6,194 GWh from 3,601 GWh.
Outlook, commentary, risks and unusual items
- Investment and demand: Consumers plans approximately $9 billion of capital investments from 2017 through 2021 and $18 billion from 2017 through 2026. Management expects rate-base growth of 6%–8% annually beginning in 2017. It forecasts average electric delivery growth of about 0.5% annually through 2021, with gas deliveries broadly stable; weather-adjusted gas deliveries were expected to decline 1% in 2017.
- Rates and legislation: A $225 million annual electric-rate increase request was reduced to $208 million; Consumers had self-implemented $170 million, subject to refund, with a final order expected in February 2017. A gas-rate case sought $90 million; the MPSC limited self-implementation to $20 million, also subject to refund. Michigan’s 2016 Energy Law, effective April 2017, raises renewable targets, expands energy-efficiency and demand-response provisions, retains the 10% retail-access cap with exceptions, and ends utility self-implementation of rates in general rate cases.
- Palisades PPA: Consumers and Entergy agreed to terminate the power purchase agreement in May 2018, subject to MPSC approval of recovery of a $172 million termination payment. Management estimated $344 million of total savings, to be shared equally between customers and Entergy; actual savings depend on market conditions. If approval is not obtained by September 30, 2017 (unless extended), the agreement becomes void and the PPA continues under its original terms.
- Long-term commitments: Consumers reported $9.356 billion of PPA obligations, including $3.010 billion for the MCV PPA and $1.994 billion for Palisades under the original contract terms. Total contractual obligations were $21.453 billion. The Palisades figures do not reflect the proposed early termination.
- Environmental exposure: Estimated 2017–2021 compliance spending includes $255 million for coal-ash disposal, $109 million for wastewater rules, $62 million for cooling-water intake requirements, and $22 million for air-quality compliance. Consumers recorded a $107 million liability for 23 former manufactured-gas-plant sites; recovery of environmental costs through rates is expected but not assured. Certain other remediation exposures cannot be estimated clearly.
- Other unusual items: A change to the pension and OPEB discount-rate method reduced 2016 Consumers benefit costs by approximately $33 million. Early adoption of share-based-payment accounting produced $7 million of excess tax benefits at the consolidated CMS Energy level. Consumers recorded an $11 million voluntary-separation-program charge; 176 employees accepted separation, with a projected net reduction of 126 positions after replacements.
- Principal risks: Rate-case outcomes and cost recovery, capital-project execution and financing, energy prices and purchased-power needs, weather and Michigan economic conditions, environmental compliance and remediation, plant reliability, cyber and operational disruption, pension funding, and counterparty performance. Consumers reported covenant compliance at year-end; its debt-to-capital ratio was 0.49 against a maximum of 0.65.
The independent auditor reported that the financial statements were fairly presented in accordance with U.S. GAAP and that internal control over financial reporting was effective as of December 31, 2016.
Important facts for investors to verify
- Final MPSC decisions on the electric and gas rate cases, including refunds or recovery of self-implemented rates.
- MPSC approval and customer-rate recovery for the Palisades termination payment, and realized savings relative to the estimate.
- Funding and execution of the $9 billion five-year capital plan, and whether rate-base growth translates into approved customer returns.
- Trends in operating cash flow, capital spending, debt maturities, commercial paper, and available credit facilities.
- Environmental cost estimates, regulatory recovery, and developments at former MGP sites and coal-ash facilities.