CONSUMERS ENERGY CO quarterly report, Q2 FY2023

Business context and reporting period

Consumers Energy Company is a regulated Michigan electric and natural gas utility and a wholly owned subsidiary of CMS Energy. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2023; amounts are in millions of dollars unless stated otherwise. Results are seasonal and the filing cautions that interim results are not necessarily indicative of full-year performance.

Financial performance and liquidity

• For the first half, operating margin was approximately 15.6%, compared with 17.2% in 2022; net margin was approximately 10.8%, compared with 13.6%.
• First-half operating cash flow was $1.759 billion, versus $1.159 billion. Management attributed the improvement chiefly to working-capital changes, including higher customer collections and lower gas purchase costs, and recovery of prior-year power supply costs.
• First-half capital expenditures were $1.081 billion; the $810 million Covert Generating Facility acquisition brought total investing cash outflow to $1.971 billion.
• At June 30, cash and cash equivalents were $116 million, including $17 million restricted. Current assets were $2.256 billion and current liabilities $2.224 billion. Revolving credit availability was approximately $1.296 billion; no commercial paper was outstanding.
• Balance-sheet debt included $697 million of current debt and finance leases, $9.456 billion of long-term debt, $235 million of long-term related-party debt, and $42 million of noncurrent finance leases. Consumers issued $1.520 billion of debt and retired $1.314 billion during the first half. It was in compliance with its debt-to-capital covenant (0.49 versus a 0.65 maximum).

Changes versus the prior comparable period

First-half revenue fell about 9.5%, while net income available to the common stockholder declined about 28%. Lower sales associated primarily with unfavorable weather were a major factor: electric deliveries were 17.7 billion kWh versus 18.3 billion, and gas deliveries were 168 bcf versus 191 bcf. Rate increases partly offset lower volumes. Lower fuel and purchased-gas costs reduced expenses, but higher maintenance and operating costs, depreciation, property taxes, and interest charges also weighed on results. Higher service-restoration costs reduced first-half electric utility earnings by $58 million versus 2022.

Quarterly common earnings were nearly flat year over year, as electric utility earnings rose to $147 million from $140 million while gas utility earnings fell to $23 million from $36 million. The six-month comparisons were weaker in both utilities: electric earnings were $217 million versus $307 million and gas earnings $177 million versus $252 million.

Outlook, management commentary, risks and unusual items

• Consumers expects weather-normalized electric and gas deliveries to remain relatively stable over the next five years compared with 2022. Its five-year investment plan is $15.5 billion for 2023–2027, including $12.4 billion for gas and electric infrastructure and $3.1 billion for clean generation; management expects annual rate-base growth above 7%.
• The MPSC approved a $155 million annual electric rate increase effective January 20, 2023. A 2023 electric rate case seeks $207 million of annual rate relief plus a $9 million surcharge; the request remained pending in the filing.
• For the 2022 gas rate case, a July 2023 settlement filing proposed a $95 million annual increase and a 9.9% authorized return on equity, effective October 1, 2023. This was a proposed settlement, not an approval reported in the filing.
• Consumers completed the $810 million purchase of the 1,200-MW Covert natural-gas generating facility in May. It retired the D.E. Karn coal units in June 2023 and plans to retire the J.H. Campbell coal units in 2025. Its plan targets net-zero electric-business carbon emissions by 2040 and net-zero methane emissions from gas delivery by 2030.
• CMS Energy and Consumers recorded a combined $28 million pretax charge for a voluntary separation program; more than 400 non-union employees accepted early separation. They expected a further $6 million pretax charge in Q3 2023.
• Key risks include MPSC/FERC rate and cost-recovery decisions, severe weather and service reliability, environmental compliance and remediation, project execution and renewable equipment availability, energy prices, interest rates and capital-market access, and litigation. A newly initiated MPSC investigation into meter handling and related practices could lead to penalties or increased regulatory scrutiny; the outcome was not predictable.
• Consumers’ environmental and remediation exposures include a $62 million recorded liability for former manufactured-gas-plant and other gas sites. Other notable unresolved matters include disputes concerning the Ludington plant overhaul and J.H. Campbell retirement; the filing does not provide a clear estimable loss for these disputes.

Important facts for investors to verify

• Whether the proposed $95 million gas-rate settlement and the pending electric-rate request received regulatory approval, and the timing and allowed returns.
• Whether working-capital-driven cash-flow strength persists, given that first-half operating cash flow benefited materially from collections, commodity-cost movements, and recovery of prior-year power costs.
• Actual spending, financing needs, and customer-rate recovery against the $15.5 billion five-year investment plan and the expected rate-base growth.
• Costs and performance following the Covert acquisition and D.E. Karn retirement, and progress toward the remaining coal retirement and clean-energy targets.
• Developments in the meter investigation, environmental rules and remediation, and the Ludington and J.H. Campbell disputes, including any quantified financial exposure.