CMS Energy Corporation (CMS) — Q2 2022 Form 10-Q
Business context and reporting period. This combined quarterly filing covers the three and six months ended June 30, 2022. CMS Energy is a Michigan-focused holding company whose principal business is Consumers Energy, a regulated electric and gas utility; CMS also has non-utility energy businesses. Unless noted, financial results below are CMS Energy consolidated and in millions of dollars.
Financial results and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Operating revenue | $1,920 | $1,558 | $4,294 | $3,571 |
| Operating income | $239 | $252 | $695 | $682 |
| Net income available to common stockholders | $145 | $176 | $496 | $525 |
| Diluted EPS | $0.50 | $0.61 | $1.71 | $1.82 |
| Net cash from operating activities | Not presented for quarter | Not presented for quarter | $1,059 | $1,367 |
| Capital expenditures | Not presented for quarter | Not presented for quarter | $1,088 | $878 |
- Revenue rose 23% in Q2 and 20% for the first half. Operating income was down in Q2 but modestly higher for the first half. CMS did not state operating margin as a headline metric.
- Six-month operating cash flow fell $308 million year over year, primarily reflecting a $343 million unfavorable working-capital impact, including higher-cost gas purchases and underrecovered power-supply costs. Capital spending increased $210 million.
- At June 30, CMS had $96 million of cash and restricted cash; Consumers had $26 million. Available revolving credit was $536 million at CMS parent and approximately $1.026 billion at Consumers. Consumers also had $45 million of commercial paper outstanding.
- CMS balance-sheet debt included $11.667 billion of long-term debt and $674 million of current debt/financing obligations; Consumers reported $7.738 billion and $674 million, respectively. CMS and Consumers were in compliance with debt-to-capital covenants, at 0.54 versus a 0.70 limit and 0.45 versus a 0.65 limit, respectively.
Material changes versus prior comparable periods
- CMS’s six-month common earnings declined $29 million, while diluted EPS declined $0.11. The principal year-over-year drag was the absence of EnerBank earnings: EnerBank was sold to Regions Bank in October 2021 and contributed $52 million of discontinued-operations income in the first half of 2021. The 2022 period included $4 million of additional sale proceeds, net of tax and costs.
- Higher electric and gas sales, largely associated with favorable weather, supported results. For the first half, gas utility earnings increased $35 million to $252 million; electric utility earnings were nearly flat at $307 million versus $309 million.
- Higher distribution, transmission, generation and compression expenses, depreciation and property taxes, service restoration costs, and voluntary separation expenses weighed on utility earnings. CMS recorded a $10 million impairment related to the Ray Compressor Station after agreeing not to seek recovery of certain restoration costs.
- Operating revenue growth reflects, in part, higher fuel and purchased-energy costs; the filing reports significant increases in electric generation and gas costs. Consumers recorded $153 million of power-supply cost underrecovery and $23 million of gas-cost underrecovery at June 30.
Outlook, regulatory matters, and risks
- Consumers expects weather-normalized electric and gas deliveries to remain broadly stable over the next five years versus 2021. Its investment plan anticipates $25 billion of capital investment over ten years and annual rate-base growth of 6%–8%.
- The MPSC approved Consumers’ 2021 integrated resource plan in June 2022. It calls for ending coal generation by 2025, adding nearly 8,000 MW of solar capacity by 2040, and a net-zero carbon goal for the electric business by 2040. Consumers plans to buy the 1,176-MW New Covert gas plant for $815 million, subject to regulatory and other approvals, and to seek about 700 MW of capacity through power-purchase agreements.
- Consumers’ April 2022 electric-rate application requested a $266 million annual increase plus a $6 million surcharge; approval was pending at filing. After quarter-end, in July 2022, the MPSC approved a $170 million annual gas-rate increase, effective October 1, 2022, at a 9.9% authorized return on equity—below the company’s reduced $233 million request.
- Consumers expects to seek recovery of elevated gas costs through a revised gas-cost factor and its 2023 power-supply cost-recovery plan. Recovery depends on regulatory approval and timing.
- Key risks include inflation, supply-chain and labor constraints, weather and severe-weather impacts, energy commodity prices, interest rates and capital-market access, regulatory decisions and cost recovery, environmental requirements, and execution of the clean-energy investment plan. Solar-module trade inquiries could affect project costs or schedules.
- Notable contingencies include disputes related to the Ludington overhaul contract and J.H. Campbell unit retirement; the counterparties asserted claims of approximately $15 million and $37 million, respectively. CMS and Consumers said they could not predict the outcomes. Consumers also recorded a $57 million liability for former manufactured-gas-plant remediation, with a related $107 million regulatory asset.
- In July 2022, Consumers entered into an undrawn $1 billion unsecured term-loan facility, maturing January 2024, for working capital and general corporate purposes. The facility carries a SOFR-based rate and customary covenants.
Most important facts for investors to verify
- Whether Consumers’ pending electric-rate case is approved, and how much requested investment and cost recovery the MPSC allows.
- Whether power-supply and gas-cost underrecoveries are recovered promptly, and whether higher fuel and purchased-power costs continue to pressure cash flow.
- Progress and final cost of the $25 billion investment program, the coal-retirement schedule, New Covert acquisition approvals, and renewable-project execution.
- Cash generation relative to capital spending, debt maturities and financing needs, and available liquidity after any borrowing under the new term loan.
- Developments in the Ludington and J.H. Campbell disputes, environmental remediation obligations, and the regulatory treatment of utility capital expenditures.