Consumers Energy Company — Q3 2023 Form 10-Q
Business context and period: Consumers Energy is a regulated Michigan electric and natural gas utility. This unaudited quarterly report covers the three and nine months ended September 30, 2023; comparisons are with the same 2022 periods. The filing is jointly submitted with parent CMS Energy, but the metrics below are for Consumers unless noted.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Operating revenue | $1.596 billion | $1.886 billion | $5.291 billion | $5.971 billion |
| Operating income | $274 million | $252 million | $850 million | $955 million |
| Net income available to common stockholder | $178 million | $189 million | $576 million | $744 million |
| Operating cash flow | Not presented separately for quarter | Not presented separately for quarter | $1.966 billion | $761 million |
| Capital expenditures | Not presented separately for quarter | Not presented separately for quarter | $1.658 billion | $1.642 billion |
Calculated operating margin was approximately 17.2% in Q3 2023 versus 13.4% in Q3 2022, and 16.1% for the first nine months of 2023 versus 16.0% in 2022. These are derived from reported operating income and revenue.
For the first nine months, net cash used in investing activities was $2.592 billion, including $812 million for the Covert Generating Facility acquisition; net cash from financing was $600 million. At September 30, Consumers reported $34 million of cash and cash equivalents, including $27 million restricted, and $1.255 billion available under revolving credit facilities. Current assets of $2.249 billion were below current liabilities of $2.278 billion. Long-term debt was $9.644 billion, including $294 million owed to CMS Energy; current long-term debt was $622 million, and notes payable were $247 million plus $75 million related-party notes. No credit-covenant default was reported; Consumers’ debt-to-capital ratio was 0.50 against a limit below 0.65.
Changes versus the prior comparable periods
- Q3 revenue declined about 15% year over year and nine-month revenue about 11%. Management attributed lower utility sales primarily to unfavorable weather and sales mix; electric and gas rate increases partly offset the decline.
- Q3 net income fell $11 million, while nine-month net income fell $168 million. Nine-month electric deliveries declined to 27.5 billion kWh from 28.5 billion; gas deliveries fell to 198 bcf from 222 bcf.
- Storm-related service-restoration costs reduced nine-month earnings by $93 million versus the prior year. Higher interest charges and depreciation also weighed on results; rate increases and lower other operating costs provided offsets.
- Operating cash flow increased substantially, mainly because of favorable working-capital movements, including higher collections and lower prices for gas purchased. This improvement should be distinguished from underlying earnings growth.
- Consumers completed its $812 million Covert natural-gas generation facility acquisition in May 2023. Long-term debt and capital investment increased during the period.
Outlook, risks, and notable items
- Consumers expects weather-normalized electric and gas deliveries to remain relatively stable over the next five years compared with 2022. Its investment plan anticipates annual rate-base growth of more than 7%, subject to execution and regulatory recovery.
- The MPSC approved a $95 million annual gas rate increase, with a 9.9% authorized return on equity, effective October 1, 2023. The 2023 electric rate case remained pending at quarter-end; Consumers had revised its requested increase to $169 million, including a $9 million surcharge.
- The September-filed Reliability Roadmap proposes $7 billion of electric distribution capital expenditures and $1.7 billion of maintenance and operating spending over five years, above the previously proposed plan. Recovery would be sought in future rate cases. The separate existing plan calls for $15.5 billion of capital expenditures through 2027 and does not include the incremental Roadmap spending.
- Consumers plans to end coal-fueled generation in 2025, expand renewable resources, and pursue net-zero carbon emissions from its electric business by 2040 and net-zero methane emissions from its gas delivery system by 2030. The Clean Energy Plan includes nearly 8,000 MW of additional solar capacity by 2040. Key execution risks include permitting, costs, reliability, and regulatory decisions.
- Consumers retired the D.E. Karn coal units in June 2023 and reported a $655 million regulatory asset for their remaining book value; securitization was expected in Q4 2023. The J.H. Campbell units are planned for retirement in 2025. Environmental compliance costs, including an estimated $210 million of electric environmental capital expenditures for 2023–2027, may be subject to rate-recovery uncertainty.
- Notable legal and regulatory matters include an MPSC investigation and show-cause order concerning malfunctioning meters, estimated billing, and new-service issues; litigation over the Ludington plant overhaul; and a dispute concerning J.H. Campbell Unit 3 retirement. Outcomes and potential financial effects are uncertain.
- Consumers recorded $33 million of pre-tax costs for a voluntary separation program in the first nine months of 2023; more than 400 employees accepted early separation. Management says supply-chain and inflation pressures have occurred and are being mitigated. Severe weather, regulatory outcomes, commodity prices, interest rates, and access to capital remain material risks.
Important facts for investors to verify
- Progress and final decisions in the pending electric rate case, and whether proposed reliability spending is approved and recoverable in rates.
- Whether the expected Q4 2023 D.E. Karn securitization occurred, and the financing terms and resulting customer and cash-flow effects.
- Whether improved operating cash flow persists after the favorable working-capital effects unwind.
- Debt maturities, borrowing costs, liquidity, and funding needs for the capital program, including the effect of higher interest expense.
- Developments in the MPSC meter investigation, major litigation, environmental requirements, and associated potential costs or penalties.
- Execution, cost, and reliability implications of the coal retirements, Covert acquisition, and planned renewable and storage additions.