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 three and nine months ended September 30, 2021; comparisons are with the same 2020 periods. Consumers’ results are seasonal and interim results are not necessarily indicative of full-year performance.
Financial performance and liquidity
| Consumers metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Operating revenue | $1.644 billion | $1.450 billion | $5.074 billion | $4.524 billion |
| Operating income | $265 million | $338 million | $951 million | $913 million |
| Net income available to common stockholder | $186 million | $230 million | $711 million | $624 million |
| Operating cash flow | Not separately presented for the quarter | $1.583 billion | $1.085 billion | |
| Capital expenditures | Not separately presented for the quarter | $1.433 billion | $1.595 billion |
Nine-month revenue increased about 12% and common-stockholder net income increased about 14%. Operating income rose about 4%; operating margin was approximately 18.8%, versus 20.2% a year earlier. In Q3, revenue grew about 13%, while operating income and net income declined year over year.
Management attributed nine-month utility earnings improvement principally to electric and gas rate increases and higher electric sales, partly offset by higher distribution, transmission, generation and compression costs, service-restoration costs, depreciation, forestry costs and property taxes. Electric deliveries were 27.5 billion kWh for the nine months, versus 26.9 billion; gas deliveries were 195 bcf, versus 194 bcf. Q3 electric deliveries were 10.1 billion kWh in both years, while gas deliveries were 26 bcf versus 27 bcf.
At September 30, Consumers had $55 million in cash and restricted cash, including $26 million restricted. It had approximately $1.087 billion available under revolving credit facilities and no commercial paper outstanding. Long-term debt was $8.028 billion and current debt was $377 million; the balance-sheet debt-to-capital ratio under its credit agreement was 0.47, below the 0.65 limit. Operating cash flow benefited from lower pension contributions; working capital was a use of cash, mainly reflecting higher gas purchases and collection timing.
Material changes versus the prior comparable period
- Nine-month common-stockholder net income rose $87 million, driven by rate increases, electric sales and lower non-operating retirement-benefit expenses, partly offset by higher operating and capital-related costs.
- Q3 common-stockholder net income fell $44 million. Higher service-restoration, distribution, transmission, generation, forestry and demand-response costs outweighed higher electric revenue and rate increases.
- Operating cash flow increased $498 million for the nine months, principally because pension contributions were $518 million lower at Consumers; this benefit was partly offset by unfavorable working-capital changes.
- Consumers issued $300 million of first-mortgage bonds in August 2021, bearing 2.65% interest and maturing in 2052. Its capital expenditures were lower than in the comparable 2020 period.
Outlook, risks and unusual items
- Rates and regulation: Consumers’ pending 2021 electric rate case seeks a revised annual increase of $201 million, based on a requested 10.5% return on equity. MPSC staff and an administrative law judge supported disallowing recovery of certain completed capital expenditures; $39 million had been incurred at September 30. A final MPSC order was expected in December 2021. Recovery and timing remain uncertain.
- Resource plan and investment: The June 2021 integrated resource plan, subject to MPSC approval, proposes ending coal generation by 2025, acquiring natural-gas generation, and adding nearly 8,000 MW of solar capacity by 2040. Consumers targets net-zero carbon emissions from its electric business by 2040. The plan entails regulatory, permitting, supply-chain, cost and execution risks. Management forecasts stable weather-normalized electric and gas deliveries over the next five years.
- Capital program: Consumers expects approximately $25 billion of investment over ten years and $13.2 billion for 2021–2025 before more than $1 billion of additional spending associated with the proposed 2021 resource plan. Management expects annual rate-base growth of 6%–8%; customer-rate recovery is subject to regulatory decisions.
- Environmental and operating exposures: Compliance, remediation, pipeline integrity, severe weather, commodity prices, and environmental regulation may raise costs or disrupt operations. Consumers recorded $57 million for former manufactured-gas-plant remediation, with an undiscounted obligation of $62 million. It also recorded $2 million for estimated probable NREPA liabilities and $3 million for its estimated share of CERCLA liabilities; actual outcomes and recoveries may differ.
- Other matter: The Ray Compressor Station fire resulted in a $7 million disallowance of incremental gas-purchase costs, which Consumers appealed. The company had incurred $17 million in related capital expenditures and recorded a $10 million insurance recovery; additional claims or cost disallowances remain possible.
- Customer demand and pandemic: The filing reported that most Michigan COVID-19 restrictions had been lifted and no significant labor or supply-chain disruption had yet occurred, but continuing pandemic and economic effects remain risks.
Important facts for investors to verify
- Final MPSC decisions on the $201 million electric rate request and the proposed disallowance of capital costs.
- Approval, cost recovery and implementation milestones for the 2021 integrated resource plan and planned generation acquisitions.
- Whether operating cash flow continues to cover capital investment, debt service and dividends as pension contributions and working capital normalize.
- Actual remediation, environmental-compliance and pipeline-safety costs, and the extent to which these costs are recoverable from customers.
- Future delivery trends, severe-weather impacts, and changes in fuel, purchased-power and gas costs.