CMS Energy Corporation — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Unaudited combined filing for CMS Energy and its wholly owned utility subsidiary, Consumers Energy; figures below are CMS Energy consolidated unless specified. Dollar amounts are in millions except per-share data.
Business context and financial performance
CMS Energy operates primarily in Michigan through regulated electric and gas utility businesses and NorthStar Clean Energy. Results are seasonal and affected by weather, regulation, commodity prices, interest rates and operating conditions.
| CMS Energy consolidated | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Operating revenue | $1,555 | $1,920 | $3,839 | $4,294 |
| Operating income | $244 | $239 | $558 | $695 |
| Net income available to common stockholders | $195 | $145 | $397 | $496 |
| Diluted EPS | $0.67 | $0.50 | $1.36 | $1.71 |
| Operating margin | 15.7% | 12.4% | 14.5% | 16.2% |
Q2 net income benefited from an $84 million pretax gain on extinguishment of debt, recorded in other income. Q2 operating revenue fell 19% year over year, while operating income edged higher. For the first half, common earnings declined $99 million; management cited lower electric and gas sales, primarily from unfavorable weather, higher service restoration costs and increased interest expense, partly offset by rate increases and the debt-extinguishment gain. First-half electric deliveries were 17.7 billion kWh versus 18.3 billion; gas deliveries were 168 bcf versus 191 bcf.
Consumers’ Q2 net income available to its common stockholder was $166 million versus $172 million; first-half net income was $398 million versus $555 million. Its first-half operating revenue was $3,695 million versus $4,085 million.
Cash flow, debt and liquidity
- First-half operating cash flow was $1,705 million, up from $1,059 million. The increase mainly reflected favorable working-capital movements, including higher collections and gas inventory/purchase-price effects, and recovery of prior-year power supply costs; it was not driven by higher net income.
- Investing cash outflow was $2,079 million, including $1,187 million of capital expenditures and the $810 million Covert Generating Facility purchase. Financing cash inflow was $598 million, including $2,405 million of debt issuance and $1,465 million of debt retirements.
- At June 30, CMS Energy reported $406 million of cash and restricted cash ($17 million restricted). It had $529 million available under its revolving facility; Consumers had $1.3 billion available and no commercial paper outstanding.
- CMS Energy’s balance sheet showed approximately $15.1 billion of current and long-term debt; Consumers reported $10.4 billion of current and long-term debt, including related-party debt. CMS Energy and Consumers were compliant with debt covenants, with reported debt-to-capital ratios of 0.59 and 0.49, respectively, against limits of 0.70 and 0.65.
- Consumers paid $305 million in common dividends to CMS Energy during the first half. CMS Energy had $441 million of forward equity sale contracts, maturing through December 2024, and said it presently intended physical settlement by issuing shares.
Material changes, outlook and management commentary
- Consumers acquired the 1,200-MW Covert natural-gas generating facility for $810 million in May 2023. The acquisition increased investment needs and supports controllable generation as the company transitions its generation mix.
- Consumers retired the D.E. Karn coal units in June 2023 and plans to retire the J.H. Campbell coal units in 2025. Its Clean Energy Plan targets 90% of customer needs met with clean energy by 2040 and net-zero electric-business carbon emissions by 2040; it also plans nearly 8,000 MW of solar additions by 2040.
- Consumers expects $15.5 billion of capital expenditures from 2023–2027, including $12.4 billion primarily for gas infrastructure and electric distribution and $3.1 billion for clean generation. Management expects annual rate-base growth above 7% and weather-normalized electric and gas deliveries to remain relatively stable over the next five years. No CMS Energy full-year EPS guidance is stated in the provided filing text.
- Consumers’ 2022 electric rate case resulted in a $155 million annual rate increase effective January 20, 2023. Its pending 2023 electric case requests $207 million of annual increase plus a $9 million surcharge. In July 2023, Consumers filed a gas-rate settlement proposing a $95 million annual increase and 9.9% authorized ROE, effective October 1, 2023; the settlement remained subject to regulatory approval.
- A voluntary separation program resulted in a $28 million pretax charge in Q2; the company expects another $6 million charge in Q3. The completed D.E. Karn retention program cost $32 million; the J.H. Campbell program is estimated to cost $50 million through 2025.
Risks, contingencies and unusual items
- Regulatory recovery and timing are significant uncertainties. A July 2023 MPSC investigation into malfunctioning meters, 3G-to-4G transitions, estimated billing and new service installations could lead to penalties or increased scrutiny.
- Consumers has an MPSC distribution-system audit pending. Rate cases, power supply cost recovery, appeals and other regulatory proceedings may affect cost recovery, liquidity or results. Recovery of environmental compliance and infrastructure costs in customer rates is expected by management but is not assured.
- Environmental exposure includes evolving greenhouse-gas, air-quality, water and coal-ash rules. Proposed federal greenhouse-gas rules could affect natural-gas-fired generation; solar module import restrictions and tariff proceedings may affect project availability and timing.
- Material disputes include the Ludington overhaul litigation, where Consumers and DTE seek relief over defective contractor work, and Wolverine Power’s approximately $37 million claim related to the planned J.H. Campbell 3 retirement. Outcomes and potential losses are uncertain. Consumers also records environmental liabilities, including $62 million for gas-related remediation; CMS Energy recorded $44 million for Bay Harbor remediation.
- Extreme weather, supply-chain and inflation pressures, fuel and power prices, capital-market access, cybersecurity, project execution and customer demand are among the disclosed risks. Management states that interim results are not necessarily indicative of full-year results because of seasonality.
Investor verification priorities
- Assess how much of the first-half cash-flow improvement reflects temporary working-capital movements and prior-year cost recovery.
- Track MPSC decisions on the pending electric rate case and gas settlement, plus the meter investigation and distribution audit.
- Verify the cost, financing, regulatory treatment and operating contribution of Covert, and the returns and schedule for the planned capital program.
- Monitor debt and interest costs, forward equity sale settlement and the ability to fund investment while maintaining dividends and credit metrics.
- Follow litigation, environmental remediation estimates, and final rules affecting natural-gas generation and renewable project supply chains.