Consumers Energy Company — Q2 2021 Form 10-Q
Business context and period: Unaudited results for the quarter and six months ended June 30, 2021. Consumers is a Michigan-regulated electric and natural gas utility and a wholly owned subsidiary of CMS Energy. The filing also includes CMS Energy parent-company information; figures below are for Consumers unless identified otherwise.
Key financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Operating revenue | $1.493 billion | $1.330 billion | $3.430 billion | $3.074 billion |
| Operating income | $257 million | $246 million | $686 million | $575 million |
| Net income available to common stockholder | $189 million | $159 million | $525 million | $394 million |
| Operating margin | 17.2% | 18.5% | 20.0% | 18.7% |
| Net income margin | 12.7% | 12.0% | 15.3% | 12.8% |
Margins are calculated from reported operating income or net income available to the common stockholder divided by operating revenue. Consumers reported no separate diluted EPS because its common stock is privately held by CMS Energy.
- Cash flow, six months: Operating cash flow was $1.400 billion, versus $781 million a year earlier. Capital expenditures were $873 million, compared with $936 million; operating cash flow less capital expenditures was approximately $527 million. Cash flow benefited substantially from lower pension contributions, while working-capital movements were unfavorable.
- Cash and liquidity at June 30: Cash and cash equivalents, including $16 million restricted, totaled $68 million. Consumers reported approximately $1.1 billion available under revolving credit facilities and no commercial paper outstanding. Current assets were $1.719 billion and current liabilities $1.822 billion.
- Debt: Current portion of long-term debt, finance leases and other financing was $381 million; long-term debt was $7.730 billion. The reported debt-to-capital covenant ratio was 0.47, below the 0.65 limit. Consumers was in compliance with its financial covenants.
- Capital investment: Six-month capital expenditures were $873 million. Consumers expects $25 billion of capital investment over ten years and annual rate-base growth of 6%–8%.
Changes versus the prior comparable period
- Q2 revenue rose about 12% and six-month revenue about 12%. Electric revenue reflected rate increases, favorable weather and sales mix, and higher energy-waste-reduction program revenues. Gas revenue benefited from rate increases and program revenue, partly offset by unfavorable weather and sales mix.
- Common-stockholder earnings increased by $30 million in Q2 and $131 million in the first half. Electric utility earnings rose to $154 million from $119 million for Q2 and to $309 million from $237 million for six months. Gas utility earnings were $36 million versus $41 million for Q2, but $217 million versus $158 million for six months.
- Higher depreciation and property taxes reflected increased plant investment. Distribution and transmission expenses and forestry costs also increased. Lower service-restoration costs and lower income-tax expense supported earnings.
- Operating cash flow increased by $619 million year over year for the first half, primarily because pension contributions were substantially lower than in 2020. 2020 included $518 million of Consumers pension contributions; none were reported in the first half of 2021.
- Consumers paid $380 million in common-stock dividends to CMS Energy during the first half, versus $276 million in the prior-year period.
Outlook, regulatory matters and risks
- Clean energy plan: Consumers’ June 2021 integrated resource plan (IRP), pending MPSC approval, proposes ending coal generation by 2025, retiring the D.E. Karn units in 2023 and J.H. Campbell units in 2025, acquiring natural-gas generation, and adding nearly 8,000 MW of solar by 2040. The plan targets net-zero carbon emissions from the electric business by 2040 and 90% of customer needs from clean energy sources by then. These plans depend on regulatory approvals, acquisition and construction outcomes, and reasonable recovery of related costs.
- Rate case: Consumers filed for a $225 million annual electric rate increase in March 2021, then reduced its request to $201 million in July 2021. The request is based on a 10.5% authorized return on equity and is subject to MPSC review. MPSC Staff recommended disallowing recovery of certain completed capital expenditures; Consumers had incurred $39 million of the expenditures at June 30.
- Investment and demand outlook: The company expects weather-normalized electric and gas deliveries to remain stable relative to 2020 over the next five years, with energy-efficiency programs largely offset by modest demand growth. Its five-year plan includes $10.0 billion for gas infrastructure and electric distribution systems, $2.4 billion for new clean generation, and $0.8 billion for other electric-supply projects. The 2021 IRP would add more than $1 billion to previously expected 2021–2025 capital spending.
- Environmental and operating exposures: Consumers estimates $260 million of environmental compliance capital expenditures for 2021–2025 and expects rate recovery, but cannot guarantee it. It reported a $56 million liability for gas-site remediation, including 23 former manufactured-gas-plant sites, and a $115 million related regulatory asset. Environmental rule changes, permitting, severe weather, and cost-recovery decisions could affect results.
- Ray Compressor Station: Consumers had incurred $17 million in repair and modification capital expenditures and recorded $10 million of insurance recoveries. The MPSC disallowed $7 million of incremental gas-purchase costs related to the 2019 fire; Consumers appealed. Further cost disallowances or customer claims remain possible, and the filing says the total potential loss cannot be reasonably estimated.
- Other risks: Regulatory and litigation outcomes, commodity prices and supply, weather, customer collections, capital-market access, cyber incidents, and execution of the clean-energy transition may affect financial results. Management stated that liquidity should be sufficient for commitments, but access to capital markets is important to the investment plan.
Important facts for investors to verify
- Progress and MPSC/FERC decisions on the 2021 IRP, plant purchases and proposed coal-unit retirements, including recovery of undepreciated plant balances.
- The outcome and timing of the electric rate case, including any disallowance of capital costs and the final authorized return and rate increase.
- Whether planned capital spending and rate-base growth are achieved while maintaining affordability, liquidity and covenant compliance.
- Changes in remediation estimates, environmental compliance costs, insurance recoveries and the appeal concerning Ray Compressor Station costs.
- Consumers’ reported cash, restricted cash and available credit capacity, and the effect of dividends and investment requirements on funding needs.