Consumers Energy Company — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. The interim financial statements are unaudited. Consumers is a Michigan-regulated electric and natural gas utility and a wholly owned subsidiary of CMS Energy. Results are seasonal and this interim period is not necessarily indicative of full-year results.
Financial performance
| Consumers, $ millions except percentages | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Operating revenue | 1,886 | 1,644 | 5,971 | 5,074 |
| Operating income | 252 | 265 | 955 | 951 |
| Net income available to common stockholder | 189 | 186 | 744 | 711 |
| Operating margin | 13.4% | 16.1% | 16.0% | 18.7% |
Revenue rose 15% for the quarter and 18% for the nine months. Higher gas sales and revenues, including favorable weather and sales mix, and electric rate increases supported results. Higher fuel, purchased power, and gas costs increased expenses. Nine-month net income improved despite only slightly higher operating income, helped in part by lower income tax expense and lower non-operating retirement benefit costs.
For the nine months, electric utility net income was $501 million versus $504 million; gas utility net income was $239 million versus $208 million. In Q3, electric utility net income was $194 million versus $195 million, while the gas utility recorded a $13 million loss versus a $9 million loss. Q3 electric deliveries were 10.2 billion kWh versus 10.1 billion; nine-month deliveries were 28.5 billion kWh versus 27.5 billion. Gas deliveries were 31 bcf versus 26 bcf for Q3 and 222 bcf versus 195 bcf for the nine months.
Cash flow, debt, and liquidity
- Operating cash flow: $761 million for the first nine months, down from $1.583 billion. The principal driver was an approximately $891 million unfavorable working-capital movement, mainly higher-priced gas purchases and underrecovered power supply costs.
- Investing cash flow: $1.715 billion used, including $1.642 billion of capital expenditures, compared with $1.519 billion used in the prior period.
- Financing cash flow: $1.020 billion provided, including $1.349 billion of debt issuance and $685 million of parent contributions; Consumers paid $594 million in dividends.
- Cash: $110 million at September 30, including $27 million restricted, versus $44 million at year-end 2021.
- Debt: Long-term debt, including its current portion, was $9.756 billion at September 30, up from $8.424 billion at December 31, 2021. A $1.0 billion unsecured term-loan facility had $550 million drawn; the loan matures in January 2024. Consumers also issued $800 million of first mortgage bonds in August.
- Available liquidity: $1.009 billion remained under revolving credit facilities. No commercial paper was outstanding. Consumers reported compliance with debt covenants; its debt-to-capital ratio was 0.49 against a maximum of 0.65.
Material changes, outlook, and risks
- Rates: The MPSC approved a $170 million annual gas rate increase, effective October 1, 2022, with a 9.9% authorized return on equity and continuation of gas revenue decoupling. Consumers revised its pending electric rate increase request to $292 million; it expected a final MPSC order by March 2023. The requested amount is not an approved increase.
- Cost recovery and working capital: At September 30, Consumers recorded underrecoveries of $45 million for gas costs and $375 million for power supply costs. Recovery timing and amounts depend on regulatory processes. The gas cost recovery factor was increased beginning in October.
- Investment and resource plan: Consumers expects $25 billion of capital investment over ten years, including $14.3 billion planned for 2022–2026, with potentially nearly $1.0 billion of additional IRP-related expenditures. Management expects annual rate-base growth of 6%–8%. The approved 2021 IRP plans to end coal-fueled generation by 2025, purchase a 1,176-MW natural-gas facility for $815 million subject to FERC approval, procure about 700 MW through PPAs, and add nearly 8,000 MW of solar capacity by 2040.
- Demand outlook: Management expects weather-normalized electric and gas deliveries to remain stable over the next five years relative to 2021, with energy efficiency largely offset by modest demand growth.
- Unusual items: Consumers recorded a $10 million impairment related to Ray Compressor Station restoration costs it agreed not to seek in rates. It also recognized a $19 million pension settlement loss, deferred as a regulatory asset. A coal-ash closure estimate revision increased asset-retirement obligations by $129 million in 2022.
- Contingencies and operating risks: The MPSC Staff recommended disallowing certain capital expenditures, and Consumers said some or all could be disallowed. Other notable matters include a disputed Ludington plant overhaul contract, a potential approximately $37 million damages claim related to the J.H. Campbell 3 retirement, environmental remediation obligations, and possible environmental compliance costs. Consumers cannot predict the outcomes of these matters; some adverse outcomes could materially affect results, liquidity, or financial condition.
- Other risks: Management highlights inflation, supply-chain constraints, severe weather, fuel and power price volatility, regulatory decisions, access to capital, and timing or availability of solar equipment as factors that could affect costs, projects, and cash flows.
Investor facts to verify
- Outcome and timing of the pending $292 million electric rate case, including any capital-cost disallowances.
- Recovery timing for the $375 million power supply and $45 million gas cost underrecoveries, and the resulting effect on working capital and cash flow.
- Execution and financing of the capital plan and IRP, including FERC approval and purchase terms for the New Covert generating facility.
- Progress on coal retirements and renewable projects, including permitting, equipment availability, and the terminated 150-MW solar PPA.
- Changes in debt, interest expense, liquidity, and pension and environmental obligations.
- Developments in the Ludington and J.H. Campbell litigation and in environmental and regulatory proceedings.