Consumers Energy Company — Q2 2022 Form 10-Q
Business and period: Consumers Energy is a regulated Michigan electric and natural gas utility and a wholly owned subsidiary of CMS Energy. This unaudited filing covers the quarter and six months ended June 30, 2022; dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Operating revenue | $1,802 | $1,493 | $4,085 | $3,430 |
| Operating income | $241 | $257 | $703 | $686 |
| Net income available to common stockholder | $172 | $189 | $555 | $525 |
| Cash provided by operating activities | Not separately stated for Q2 | $1,159 | $1,400 | |
| Capital expenditures | Not separately stated for Q2 | $1,040 | $873 |
Six-month electric utility earnings were $307, down from $309; gas utility earnings were $252, up from $217. Higher gas deliveries and favorable weather supported revenue and gas earnings. For Q2, electric utility earnings fell to $140 from $154, while gas utility earnings were $36 in both periods. Higher operating expenses, including distribution, transmission and generation costs, depreciation, property taxes and service restoration, weighed on results. Gas costs and power supply costs rose sharply; regulatory recovery timing affected cash flow.
Cash, debt and liquidity at June 30: Cash and cash equivalents were $8; restricted cash was $18. Long-term debt was $7,738, with $674 of current portions of long-term debt, finance leases and other financing on the balance sheet; notes payable were $45 and related-party notes payable were $32. Cash from operations declined year over year, principally reflecting an unfavorable $333 working-capital impact from higher gas purchases and power-supply underrecoveries. Consumers had $1.026 billion available under revolving credit facilities and $45 of commercial paper outstanding. Debt-to-capital was 0.45, below the 0.65 covenant limit. In July, Consumers entered a $1 billion delayed-draw term loan facility, not drawn as of July 28.
Material changes and notable items
- Six-month revenue increased $655, while net income available to the common stockholder increased $30. Higher gas and electric deliveries and rate increases contributed; expense increases and working-capital needs remain important offsets.
- At June 30, Consumers recorded a $153 power-supply cost underrecovery and a $23 gas-cost underrecovery. It expected to include the power-supply underrecovery in its 2023 plan; it sought a higher gas-cost recovery factor for October 2022.
- Consumers recorded a $10 impairment charge for Ray Compressor Station restoration costs it agreed not to seek to recover at that time. The station is operating at full capacity.
- Consumers reclassified $1.3 billion of projected remaining book value for the J.H. Campbell coal units to a regulatory asset following MPSC approval of the 2021 integrated resource plan (IRP).
- The filing reports increased uncollectible accounts expense: $18 for the six months, compared with $11 in 2021. The combined companies recorded an $8 after-tax voluntary separation program charge in Q2.
Outlook, regulation and risks
- The MPSC approved Consumers’ 2021 IRP in June. It calls for retiring the D.E. Karn coal units in 2023 and J.H. Campbell coal units in 2025, purchasing a 1,176 MW natural-gas facility for $815 million subject to approvals, and adding renewable capacity, including nearly 8,000 MW of solar by 2040. The IRP also advances battery storage.
- Consumers expects weather-normalized electric and gas deliveries to remain stable over the next five years. It anticipates $25 billion of capital investment over ten years and six-to-eight-percent annual rate-base growth. The company identified $14.3 billion of planned investment for 2022–2026, with the IRP potentially adding nearly $1 billion.
- Consumers’ April 2022 electric rate application sought a $272 annual increase; the filing does not report a final decision. After quarter-end, in July, the MPSC approved a $170 annual gas rate increase, effective October 1, 2022, with a 9.9% authorized return on equity.
- Key risks include regulatory disallowance or delay in recovering capital and fuel costs, commodity-price volatility, inflation and supply constraints, severe weather, environmental requirements, and litigation. The filing describes an electric rate-case risk that some capital costs could be disallowed and litigation involving the Ludington overhaul and J.H. Campbell retirement; outcomes are uncertain.
- Consumers’ environmental goals include net-zero carbon emissions from its electric business by 2040 and net-zero methane emissions from its gas delivery system by 2030. The company notes that future regulatory requirements and cost recovery are uncertain. Solar-module availability and project timing were also under review amid U.S. trade inquiries, although potential duties were paused in June.
Investor verification priorities
- Track MPSC decisions on the pending electric rate case and recovery of the $153 power-supply and $23 gas-cost underrecoveries.
- Confirm the terms, drawdown and use of the post-quarter $1 billion term loan and assess refinancing needs against the debt maturity profile.
- Monitor execution costs and approvals for the IRP, including the New Covert purchase, coal retirements, solar buildout and planned capital spending.
- Review developments and potential exposure in the Ludington contract and Campbell retirement disputes, and any further Ray Compressor Station recovery decisions.
- Assess whether higher operating costs, customer affordability and weather-normalized delivery assumptions affect earnings, cash generation and planned rate-base growth.