Consumers Energy Company — Q2 2020 Form 10-Q
Business context and period. Consumers Energy is a regulated Michigan electric and natural gas utility and a wholly owned subsidiary of CMS Energy. This unaudited report covers the three and six months ended June 30, 2020, compared with the same periods in 2019; it was filed August 3, 2020. Seasonal interim results are not necessarily indicative of full-year results.
Financial results
Amounts are in millions, except per-share data and where noted. Consumers’ reported net income available to its common stockholder is distinct from CMS Energy’s consolidated earnings.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Operating revenue | $1,330 | $1,334 | $3,074 | $3,277 |
| Operating income | $246 | $175 | $575 | $503 |
| Net income available to common stockholder | $159 | $97 | $394 | $323 |
| Operating margin | 18.5% | 13.1% | 18.7% | 15.3% |
Operating margins are approximate calculations from reported operating income and revenue; the filing does not present them as a named metric. Earnings improved despite lower six-month revenue, with rate increases and lower operating expenses among the contributors.
- Cash flow: Six-month cash provided by operations was $781, down from $1,110, principally reflecting $518 of pension contributions (none in the comparable 2019 period). Investing used $993, including $936 of capital expenditures; financing provided $1,413. Cash and restricted cash ended the period at $1,229, versus $28 at year-end 2019.
- Debt and liquidity: Long-term debt carrying amount, including current maturities, was $8,404 at June 30, compared with $7,250 at December 31, 2019. Consumers issued $1,528 of debt and retired $363. It had $1.1 billion available under revolving credit facilities, no commercial paper outstanding, and a 0.49 debt-to-capital ratio against a covenant limit below 0.65. Management stated liquidity was expected to be sufficient; pandemic impacts remain uncertain.
- Deliveries: Q2 electric deliveries to end-use customers were 8.0 billion kWh versus 8.6 billion; gas deliveries were 47 bcf versus 49 bcf. Six-month deliveries were 16.8 versus 17.8 billion kWh for electricity and 167 versus 191 bcf for gas.
Material changes and drivers
- Six-month revenue fell about 6% year over year, primarily reflecting lower gas sales due mainly to unfavorable weather and reduced electric and gas deliveries. Rate increases partly offset the decline.
- Q2 net income rose $62, while six-month net income rose $71. Electric and gas rate increases and lower distribution, transmission, and other operating expenses supported results; higher depreciation, property taxes and interest costs partly offset those benefits.
- COVID-19 reduced commercial and industrial electric demand. Weather-normalized Q2 electric deliveries were approximately 12% lower year over year, including a decline of more than 20% for commercial and industrial customers, partly offset by approximately 10% higher residential deliveries.
- Consumers contributed $518 to pension plans in January 2020, materially reducing operating cash flow. Adoption of the expected-credit-loss standard increased CMS Energy’s opening loan-loss reserve by $65; the standard reduced CMS Energy pretax income by $9 for the first half. The filing says its impact on Consumers was not material.
Outlook, risks and notable items
- COVID-19: Management anticipates commercial and industrial electric deliveries to remain lower near term and expects full-year 2020 deliveries to those customers to decline more than 10% versus 2019. Increased uncollectible accounts and workforce-related expenses are also risks. Consumers suspended nonpayment shut-offs and extended payment protections. The MPSC permitted deferral of $9 of incremental pandemic-related uncollectible expense; in July it denied deferral for additional cost categories.
- Investment and clean energy: Consumers expects $25 billion of capital investment over ten years, including $12.2 billion in 2020–2024; $9.4 billion is planned for gas infrastructure and electric distribution and $2.8 billion primarily for electric supply projects. Management expects annual rate-base growth of 6%–8%. The long-term plan includes retiring D.E. Karn units 1 and 2 in 2023, eliminating coal-fired generation by 2040, and a goal of net-zero carbon emissions by 2040. Some projects were rescheduled due to the pandemic, but the long-term plan was unchanged at filing.
- Regulatory proceedings: The pending gas rate case seeks a revised annual increase of $229, and the electric rate case seeks $230, both subject to MPSC approval. The gas case also requests revenue decoupling. In July, Consumers filed a depreciation case seeking $17 annual recovery related to Ludington.
- Contingencies: Consumers recorded a $63 liability for gas environmental remediation at former manufactured gas plant sites and a $3 liability for other estimated NREPA/CERCLA matters. The MCV Partnership arbitration was subject to a settlement in principle requiring MPSC approval. The Ray Compressor Station matter includes possible customer claims and potential cost disallowances; the MPSC approved a settlement with a $10,000 civil penalty. Environmental requirements and regulatory cost recovery could affect future costs, and recovery is not assured.
- Other items: The voluntary employee separation program generated an $8 after-tax charge for CMS Energy and Consumers in the first half. The UWUA labor agreement expired in June 2020; Consumers agreed to a 3% pay increase effective June 1 while negotiations were pending. The filing reports effective disclosure controls and no material quarterly change in internal control over financial reporting.
Key investor verification points
- Track pandemic-related commercial and industrial demand, customer collections, uncollectible accounts and any further regulatory accounting or rate relief.
- Review MPSC decisions and timing for the $229 gas and $230 electric rate requests, proposed decoupling, and recovery of capital and deferred costs.
- Monitor financing needs, debt maturities, covenant headroom, capital spending and operating cash flow after the large pension contribution.
- Verify renewable project schedules and costs, including wind-project force majeure notices, and progress toward coal retirement and emissions goals.
- Follow environmental remediation estimates, the MCV settlement approval, Ray Compressor Station claims and other contingencies; some exposures have no clear estimable loss range in the filing.