Consumers Energy Company — Q3 2016 Form 10-Q
Business context and reporting period. Consumers Energy is a Michigan-regulated electric and natural gas utility and a wholly owned subsidiary of CMS Energy. This unaudited quarterly report covers the three and nine months ended September 30, 2016; comparisons are with the same 2015 periods. The filing also reports CMS Energy consolidated results, which include Consumers and other businesses. Utility results are seasonal and interim results are not necessarily indicative of full-year performance.
Financial performance and position
| Consumers Energy, $ millions except per-share data | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Operating revenue | 1,498 | 1,417 | 4,514 | 4,726 |
| Operating income | 365 | 305 | 946 | 876 |
| Net income | 195 | 160 | 499 | 459 |
| Net income available to common stockholder | 195 | 160 | 498 | 458 |
| Operating margin, calculated | 24.4% | 21.5% | 21.0% | 18.5% |
| Operating cash flow | Not separately presented for the quarter | 1,288 | 1,427 |
- Q3 Consumers electric utility net income was $191 million versus $166 million; gas utility income was $3 million versus a $7 million loss. For the first nine months, electric utility income rose to $395 million from $342 million, while gas utility income declined to $102 million from $115 million.
- For CMS Energy consolidated, Q3 net income available to common stockholders was $186 million, or diluted EPS of $0.67, versus $148 million and $0.53. Nine-month results were $474 million and diluted EPS of $1.70, versus $417 million and $1.51.
- Consumers’ cash and cash equivalents were $21 million, plus $28 million restricted cash, at September 30. CMS Energy’s consolidated cash was $339 million, plus $28 million restricted cash.
- Consumers reported long-term debt of $5.365 billion and a $296 million current portion of long-term debt, capital leases and financing obligations. It issued $450 million of 3.25% first mortgage bonds due 2046 and retired $173 million of 5.50% bonds during the period. Consumers had $893 million available under its revolving credit facilities and $75 million of commercial paper outstanding. Its debt-to-capital covenant ratio was 0.48 against a limit below 0.65; the company reported covenant compliance.
Material changes versus prior comparable periods
- Q3 revenue increased 6%, and nine-month revenue decreased 4%. The nine-month decline primarily reflected lower gas sales and commodity-related revenue, including milder winter weather and lower gas prices.
- Q3 earnings improved mainly on higher electric sales from favorable summer weather, electric and gas rate increases, and lower operating and maintenance costs. For nine months, rate increases and higher electric deliveries supported results; lower gas deliveries from the unusually mild winter partly offset those gains.
- Consumers’ nine-month operating cash flow fell $139 million to $1.288 billion, primarily due to lower customer collections and higher energy optimization spending, partly offset by higher net income and lower postretirement contributions. Investing cash use increased to $1.309 billion from $1.186 billion, largely reflecting greater capital expenditures. Financing cash use narrowed to $8 million from $269 million, including new debt and a $275 million CMS Energy contribution.
- Capital expenditures were $1.214 billion for the first nine months, versus $1.093 billion in 2015. Consumers’ total assets were $18.980 billion at September 30, compared with $18.635 billion at year-end 2015; total equity was $5.961 billion versus $5.546 billion.
Outlook, regulatory matters and risks
- Consumers filed a 2016 electric rate case seeking a $225 million annual increase and related investment recovery mechanisms. It self-implemented a $170 million annual increase in September, subject to refund with interest; the company said its recorded refund reserve was adequate. A separate gas case seeks a $90 million annual increase. Outcomes remain subject to MPSC approval.
- Consumers expects about $17 billion of capital investment from 2016 through 2025, including approximately $8.5 billion during 2016–2020, and annual rate-base growth of 6%–8%. It expects weather-adjusted electric deliveries to grow 0.5%–1% in 2016 and gas deliveries about 2%; longer-term plans assume roughly 0.5% annual electric delivery growth and stable gas deliveries.
- Consumers retired seven coal-fueled units totaling 950 MW in April 2016. Management expected to meet full-service customer capacity needs through 2020 using existing and purchased generation, Ludington upgrades, renewables, efficiency and demand management. The company expects to spend $600 million on environmental compliance capital projects during 2016–2020, with rate recovery expected but not assured.
- Major exposures include environmental remediation, regulatory proceedings and litigation. Consumers recorded a $108 million liability for former manufactured gas plant sites, with a $140 million related regulatory asset. CMS Energy recorded a $52 million Bay Harbor liability, with $67 million undiscounted remaining costs. CMS Energy also faces an Equatorial Guinea tax claim of $152 million plus significant penalties and interest; it contests the claim and cannot predict the outcome. Potential losses in the gas price reporting class actions are not estimable.
- Other uncertainties include pending state energy legislation, MISO/FERC capacity proposals, environmental rules and litigation (including the stayed Clean Power Plan), rate recovery, weather, commodity prices, system reliability, pension assumptions and access to capital markets. CMS Energy and Consumers said liquidity and borrowing capacity were expected to remain sufficient; Consumers’ operating cash flow outlook for the rest of 2016 was described as strong.
- An $11 million voluntary separation program charge was recorded in Q3; 176 employees accepted approved separations, with an expected net reduction of 140 positions. Early adoption of share-based payment accounting produced $7 million of excess tax benefits in nine-month net income and a $33 million cumulative adjustment to CMS Energy’s opening accumulated deficit.
Important facts for investors to verify
- Progress and final MPSC decisions on the electric and gas rate cases, including possible refunds on self-implemented rates.
- Whether operating cash flow can support the planned capital program, debt service and dividends as investment spending rises.
- Actual environmental compliance and remediation costs, rate recovery, and changes to the recorded Bay Harbor and former MGP obligations.
- Developments and potential exposure in the Equatorial Guinea tax matter and gas price reporting litigation.
- Capacity adequacy, replacement generation costs and effects of changes to Michigan energy policy and environmental regulation.