Consumers Energy Company — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Financial statements are unaudited. Consumers is a Michigan-regulated electric and gas utility and a wholly owned subsidiary of CMS Energy.
Financial results and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Operating revenue | $1.450 billion | $1.429 billion | $4.524 billion | $4.706 billion |
| Operating income | $338 million | $319 million | $913 million | $822 million |
| Net income available to common stockholder | $230 million | $213 million | $624 million | $536 million |
| Operating margin | 23.3% | 22.3% | 20.2% | 17.5% |
| Cash from operating activities | — | — | $1.085 billion | $1.251 billion |
| Capital expenditures | — | — | $1.595 billion | $1.559 billion |
At September 30, Consumers had $223 million in cash and cash equivalents, including $24 million restricted; $8.015 billion of debt, comprising $557 million current and $7.458 billion long-term; and $1.092 billion available under revolving credit facilities. No commercial paper was outstanding. Consumers reported compliance with its debt covenants; its debt-to-capital ratio was 0.48 against a maximum of 0.65.
Changes versus the prior comparable period
- Q3 revenue rose 1.5% and common-stockholder net income rose $17 million. Higher rates, favorable weather and sales mix, and lower operating costs contributed; the absence of a prior-year transmission-asset sale gain partly offset improvements.
- For the first nine months, revenue fell 3.9%, while operating income increased $91 million and net income increased $88 million. Gas revenue and deliveries declined, including from unfavorable weather; gas rate increases, lower operating expenses, and electric results supported earnings.
- Operating cash flow declined $166 million year over year, principally reflecting $518 million of pension contributions in 2020, partly offset by higher earnings and working-capital effects. Investing outflows increased to $1.700 billion, and financing cash inflows were $810 million.
- Debt increased from $7.269 billion at December 31, 2019 to $8.015 billion at September 30, 2020. The company issued $1.528 billion of debt and retired $773 million during the first nine months.
Outlook, regulation and key risks
- COVID-19: Weather-normalized electric deliveries from April through September were about 7% below the prior-year period, including a roughly 14% decline for commercial and industrial customers and an 8% increase for residential customers. Management anticipated a full-year 2020 commercial and industrial delivery decline of less than 10%. Higher uncollectible accounts and other pandemic-related costs, economic uncertainty, and possible effects on capital projects and liquidity remain risks. The MPSC authorized deferral of incremental pandemic-related uncollectible expense; $5 million was recorded as a regulatory asset at quarter-end.
- Rates: In September, the MPSC approved a $144 million annual gas rate increase, effective October 1, 2020, with a 9.9% authorized return on equity; Consumers agreed not to file another gas rate case before December 2021. The 2020 electric rate case sought a revised $230 million annual increase, plus specified recovery items; it remained pending in the filing.
- Investment and energy transition: Consumers projected $12.2 billion of capital spending for 2020–2024, including $9.4 billion for gas and electric distribution infrastructure and $2.8 billion primarily for renewable generation. Its longer-term plan calls for $25 billion of investment over ten years and expected annual rate-base growth of 6%–8%. Management expects weather-normalized electric deliveries to decrease slightly and gas deliveries to remain stable over five years.
- Environmental and operating exposure: Consumers targets net-zero carbon emissions by 2040 and net-zero methane emissions from its gas delivery system by 2030. Environmental compliance costs, permitting, remediation, extreme weather, and regulatory changes could affect results; recovery of all costs in customer rates is not assured.
- Unusual items and contingencies: Pension-plan remeasurement produced a $35 million settlement loss at Consumers, all deferred as a regulatory asset to be amortized over nine years. The MPSC disallowed $7 million of gas purchases related to the 2019 Ray Compressor Station fire; further repair-cost disallowances or customer claims remained possible. Consumers disclosed environmental liabilities, including $57 million for former manufactured-gas-plant sites, and a pending settlement of disputes under the MCV power purchase agreement subject to MPSC approval.
Important facts for investors to verify
- Progress and final outcomes of the pending electric rate case, including the requested recovery items and proposed distributed-generation tariff.
- Whether pandemic-related commercial and industrial demand, customer collections, and uncollectible accounts follow management’s expectations.
- Capital spending, financing needs, debt maturities, and the continued availability of credit markets and revolving facilities.
- Regulatory cost recovery and final costs for environmental obligations, gas pipeline safety work, pension benefits, and the Ray Compressor Station matter.
- Execution and timing of renewable projects, planned coal-unit retirements, and achievement of emissions targets.