Consumers Energy Company — Q1 2018 Form 10-Q
Business context and period. Consumers Energy is a Michigan-regulated electric and natural gas utility and a wholly owned subsidiary of CMS Energy. This filing covers the three months ended March 31, 2018; comparative figures are for Q1 2017. Results are seasonal and may not indicate full-year performance.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Operating revenue | $1.855 billion | $1.737 billion |
| Operating income | $334 million | $359 million |
| Net income | $242 million | $211 million |
| Cash from operating activities | $720 million | $648 million |
| Cash used in investing activities | $444 million | $382 million |
| Cash used in financing activities | $195 million | $206 million |
- Electric and gas utility net income was $139 million and $103 million, respectively, compared with $124 million and $87 million in Q1 2017.
- Net income increased despite lower operating income. Higher gas sales—primarily from colder weather—rate increases, lower income-tax expense under the Tax Cuts and Jobs Act (TCJA), and retirement-benefit plan changes contributed to results. TCJA-related customer refund reserves offset the tax benefit in utility earnings.
- Capital expenditures were $414 million, versus $361 million. Cash and cash equivalents, including restricted amounts, were $146 million at March 31, 2018, compared with $65 million at December 31, 2017.
- Balance-sheet debt included $715 million of current debt and $5.211 billion of long-term debt at quarter-end. Consumers had $878 million available under revolving credit facilities and no commercial paper outstanding. Its debt-to-capital covenant ratio was 0.46, below the 0.65 limit.
Material changes and developments
- Revenue rose to $1.855 billion from $1.737 billion, reflecting higher gas deliveries, rate increases, and energy-waste-reduction program revenues. Electric deliveries were 9.2 billion kWh in both periods; gas deliveries increased to 133 bcf from 119 bcf, primarily because of colder weather.
- Operating income declined to $334 million from $359 million as operating expenses increased, including depreciation and other costs associated with higher capital spending. Net income nevertheless increased, with lower income-tax expense and nonoperating retirement-benefit credits among the contributing factors.
- In March 2018, the MPSC authorized a $66 million annual electric rate increase, below Consumers’ reduced request of $148 million. Consumers recorded a $36 million customer-refund liability related to its earlier self-implemented electric rate increase.
- Consumers reduced its pending gas-rate request to $83 million to reflect the TCJA, and revised requested investment-recovery increases to $25 million in each of July 2019 and July 2020. The proceeding remained pending at quarter-end.
- Consumers estimated the TCJA would reduce annual electric and gas revenue requirements by $116 million and $49 million, respectively, before potential deferred-tax refunds. It recorded a $51 million reserve for customer refunds in anticipation of bill credits.
Outlook, risks, and unusual items
- Consumers expects weather-normalized electric and gas deliveries to remain stable through 2022. Its planned 2018–2022 capital expenditures total $10.1 billion: $4.9 billion for gas infrastructure, $3.5 billion for electric distribution, and $1.7 billion for electric supply. The investment program is expected to support annual rate-base growth of 6%–8%; management expects sustainable customer base-rate increases, excluding recovery charges, at or below inflation.
- Consumers announced a goal to reduce carbon emissions 80% and eliminate coal-fired electricity generation by 2040, with renewable energy and storage expected to provide about 40% of generation. Execution, regulation, project costs, and customer-rate recovery remain relevant uncertainties.
- Material exposures include a disputed MCV Partnership arbitration claim seeking more than $270 million, environmental remediation obligations, and regulatory and environmental proceedings. Consumers recorded an $87 million liability for gas environmental sites, including 23 former manufactured-gas-plant sites; the related regulatory asset was $140 million.
- Other risks include weather and severe storms, fuel and energy-market conditions, rate-case outcomes, environmental compliance and cost recovery, and the timing and cost of infrastructure projects. Management reported no material change in previously disclosed risk factors and no covenant default.
Important facts for investors to verify
- Progress and final MPSC outcomes for the electric and gas rate cases, including refund obligations and treatment of TCJA-related benefits.
- Whether the $10.1 billion five-year investment plan, its projected rate-base growth, and expected customer-rate effects remain on schedule.
- Cash-flow sustainability and debt maturities, particularly the $715 million current debt balance and availability of revolving credit.
- Developments in the MCV arbitration claim and environmental remediation estimates, including whether cost recovery is authorized.
- Delivery trends after weather normalization and whether higher capital spending and operating costs continue to pressure operating income.