CMS Energy Corp. Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2022. The filing is unaudited and also reports separately on wholly owned utility subsidiary Consumers Energy. Amounts below are U.S. dollars unless noted.
Business context and financial performance
CMS Energy is a Michigan-focused energy holding company. Its main businesses are Consumers’ regulated electric and gas utilities and NorthStar Clean Energy, which develops and operates independent power and renewable generation. EnerBank was sold in October 2021; its prior-period results are presented as discontinued operations.
| CMS Energy consolidated | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Operating revenue | $2.024 billion | $1.725 billion | $6.318 billion | $5.296 billion |
| Operating income | $258 million | $260 million | $953 million | $942 million |
| Net income available to common stockholders | $163 million | $186 million | $659 million | $711 million |
| Diluted EPS | $0.56 | $0.64 | $2.27 | $2.46 |
| Cash from operating activities | Not separately stated | Not separately stated | $667 million | $1.483 billion |
Nine-month operating margin was approximately 15.1% versus 17.8% in 2021, calculated as operating income divided by revenue. Revenue growth largely reflected higher utility sales and rates, but higher fuel, purchased power and gas costs pressured operating performance. Nine-month CMS common earnings also declined partly because 2021 included EnerBank discontinued-operation earnings. Consumers’ nine-month net income available to its common stockholder increased to $744 million from $711 million; its Q3 result was $189 million versus $186 million.
Cash flow, debt and liquidity
- CMS Energy generated $667 million of operating cash in the first nine months, down from $1.483 billion. The filing attributes much of the decline to working-capital use, including gas purchases at higher prices and underrecovered power supply costs.
- Investing cash outflow was $1.808 billion, including $1.738 billion of capital expenditures. Financing provided $860 million, including $1.349 billion of debt issuance. Cash and restricted cash totaled $195 million at September 30, compared with $476 million at year-end 2021.
- CMS Energy reported $1.000 billion of current debt and $12.685 billion of long-term debt; Consumers reported $1.000 billion current and $8.756 billion long-term. Consumers issued $800 million of first mortgage bonds and drew $550 million under a $1.0 billion SOFR-based term loan. The term loan matures January 2024.
- Available revolving credit was $536 million at CMS Energy and approximately $1.009 billion at Consumers; Consumers had no commercial paper outstanding. Both companies reported compliance with debt covenants and no defaults. Debt-to-capital ratios were 0.57 for CMS Energy and 0.49 for Consumers, within their respective limits.
- Consumers paid $593 million in common dividends to CMS Energy during the nine-month period. CMS Energy had forward equity sale contracts with an aggregate sales price of $493 million, with maturities through February 2024; management stated it presently intended to settle physically by issuing shares.
Changes, outlook and material developments
- Consumers’ gas deliveries were 222 bcf for the first nine months, up from 195 bcf, with favorable weather and sales mix contributing to higher gas utility earnings. Electric deliveries rose to 28.5 billion kWh from 27.5 billion kWh, but weather and sales mix reduced electric revenue compared with the prior period.
- At September 30, Consumers recorded a $375 million power-supply cost underrecovery and a $45 million gas-cost underrecovery. Higher fuel costs also contributed to the sharp working-capital cash outflow. Consumers included its projected 2022 power-cost underrecovery in a 2023 plan filing and self-implemented a higher gas-cost recovery factor in October 2022.
- The MPSC approved a $170 million annual gas-rate increase, effective October 1, 2022, based on a 9.9% authorized return on equity. Consumers revised its pending electric-rate increase request to $292 million; a final order was expected by March 2023. Potential disallowance of some capital expenditures remains a risk.
- Consumers’ approved 2021 integrated resource plan calls for ending coal-fueled generation in 2025, retiring D.E. Karn coal units in 2023 and J.H. Campbell units in 2025, adding renewable generation and storage, and pursuing a $815 million purchase of the New Covert gas-fueled facility, subject to FERC approval. The plan targets nearly 8,000 MW of solar by 2040 and net-zero electric-business carbon emissions by 2040.
- Consumers expects weather-normalized electric and gas deliveries to remain stable over the next five years. It expects $25 billion of capital investment over ten years and annual rate-base growth of 6%–8%. The filing does not provide a specific 2022 earnings or EPS guidance figure.
- Unusual items include a $10 million impairment related to the Ray Compressor Station after Consumers agreed not to seek recovery of restoration costs net of insurance; $19 million of pension settlement losses deferred as a regulatory asset; and an $8 million after-tax voluntary separation-program charge for the nine months. CMS Energy recognized $4 million of additional after-tax EnerBank-related discontinued-operation income in 2022.
Risks, contingencies and management commentary
Key risks include regulatory outcomes and rate recovery, inflation and supply constraints, volatile gas and power prices, interest rates and capital-market access, severe weather, environmental rules and remediation, and execution of the clean-energy investment plan. The filing says rate recovery of environmental and infrastructure costs cannot be assured. Solar import restrictions and permitting may affect project timing; a 150 MW solar PPA was terminated in October 2022 after the developer could not obtain land-use permits.
Consumers is involved in disputes concerning the Ludington overhaul contract, where contractors asserted approximately $15 million in counterclaims, and the J.H. Campbell 3 retirement, where a co-owner sought approximately $37 million in damages. Consumers said it believes the claims lack merit but cannot predict outcomes. The filing also reports a $44 million CMS Energy liability for Bay Harbor remediation and a $63 million Consumers liability for former manufactured-gas-plant remediation. Management stated it expects sufficient liquidity to fund commitments, while noting that reduced capital spending could be a contingency if capital-market access becomes restricted.
Important facts for investors to verify
- Whether the MPSC approves Consumers’ $292 million electric-rate request and whether any capital costs are disallowed.
- How quickly the $420 million combined recorded gas- and power-cost underrecoveries are recovered from customers, and the resulting cash-flow impact.
- Consumers’ financing and regulatory progress on the New Covert acquisition, coal retirements, renewables, and storage projects, including supply, permitting and cost risks.
- Actual liquidity, debt maturities and borrowing costs, including settlement of CMS Energy’s forward equity contracts and the Consumers term loan due in January 2024.
- Developments in the Ludington and J.H. Campbell disputes, environmental liabilities, and other regulatory or legal contingencies.