CMS ENERGY CORP quarterly report, Q3 FY2021

Business context and reporting period

CMS Energy Corporation’s unaudited Form 10-Q covers the quarter and nine months ended September 30, 2021. CMS Energy is the parent of Consumers Energy, a Michigan electric and gas utility, and CMS Enterprises, which has power-generation and energy-marketing businesses. EnerBank is reported as discontinued operations following its merger with Regions Bank, completed October 1, 2021.

Financial performance and liquidity

CMS Energy’s operating margin was approximately 15.1% in Q3 2021 versus 22.6% in Q3 2020, and 17.8% for the first nine months of 2021 versus 19.7% in the comparable 2020 period. Nine-month common earnings included $82 million from discontinued operations, compared with $34 million in 2020. For continuing operations, nine-month income was $614 million versus $556 million.

Q3 earnings declined despite higher revenue; management cited higher service-restoration, operating, and depreciation costs, partly offset by rate increases and higher electric sales. For the first nine months, earnings rose on electric and gas rate increases, higher electric sales, and discontinued-operations earnings, partly offset by higher operating and capital-related costs.

Cash from operating activities was $1.483 billion for CMS Energy for the first nine months, versus $1.144 billion in 2020; capital expenditures were $1.442 billion, versus $1.693 billion. The cash-flow improvement included $531 million of lower pension contributions, partly offset by working-capital effects and lower cash from discontinued operations. CMS Energy reported $236 million of cash and cash equivalents including restricted cash and cash held by EnerBank classified as held for sale; Consumers reported $55 million, including restricted cash.

At September 30, CMS Energy had $12.027 billion of long-term debt and $585 million of current debt, lease, and other financing obligations on its balance sheet. Consumers had $8.028 billion of long-term debt and $377 million of current debt, lease, and other financing obligations. CMS Energy had $532 million available under its revolving facility; Consumers had approximately $1.1 billion available under its facilities. Consumers had no commercial paper outstanding. Both companies reported compliance with credit covenants.

Consumers’ nine-month operating revenue was $5.074 billion versus $4.524 billion; operating income was $951 million versus $913 million; and net income available to its common stockholder was $711 million versus $624 million. Consumers generated $1.583 billion of operating cash and used $1.433 billion for capital expenditures in the first nine months.

Material changes and notable developments

• CMS Energy issued $224 million of Series C preferred stock in July, with a 4.2% annual dividend rate.
• Consumers issued $300 million of first-mortgage bonds at 2.65%, maturing in 2052.
• EnerBank’s merger generated approximately $1.0 billion of proceeds; CMS Energy expected a pre-tax gain of approximately $660 million in Q4 2021, subject to post-closing adjustments. Proceeds are intended for core energy-business initiatives.
• CMS Energy declared common dividends of $1.305 per share for the first nine months of 2021, compared with $1.2225 in 2020.

Outlook, risks and contingencies

Consumers expects weather-normalized electric and gas deliveries to remain stable over the next five years relative to 2020. It expects $25 billion of capital investment over ten years and annual rate-base growth of 6% to 8%. Its filed 2021 integrated resource plan, still subject to regulatory approval, proposes ending coal generation by 2025, acquiring natural-gas generating units, and adding nearly 8,000 MW of solar capacity by 2040. Consumers’ stated goals include net-zero carbon emissions from its electric business by 2040 and net-zero methane emissions from its gas delivery system by 2030.

Consumers reduced its pending electric-rate-increase request from $225 million to $201 million annually. In October 2021, an administrative law judge proposed disallowing certain capital-cost recovery in that rate case; Consumers had incurred $39 million of the affected expenditures at quarter-end. The MPSC’s final decision was expected in December 2021. The 2021 resource plan, proposed generation acquisitions, rate recovery for retiring plants, construction and supply-chain execution, environmental requirements, severe weather, commodity prices, and regulatory and litigation outcomes are material uncertainties. The filing also identifies potential remediation costs and unresolved proceedings, including a recorded $44 million Bay Harbor environmental liability and $57 million for Consumers’ former manufactured-gas-plant sites.

Important facts for investors to verify

• Whether the MPSC approves Consumers’ rate request and how it resolves the proposed capital-cost disallowance.
• Final EnerBank sale proceeds and gain after post-closing adjustments, and how proceeds are deployed.
• Regulatory approvals, purchase terms, and execution risks for the 2021 resource plan and planned generation acquisitions.
• Whether service-restoration costs, environmental remediation, and other operating-cost pressures persist or are recoverable in rates.
• Liquidity and funding needs relative to the multiyear capital plan, including debt maturities and access to capital markets.