CMS Energy Corp. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. The filing presents unaudited, combined information for CMS Energy and its wholly owned regulated utility, Consumers Energy; NorthStar Clean Energy is also part of CMS Energy’s consolidated results. Amounts below are in U.S. dollars unless noted.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| CMS Energy revenue | $1.673B | $2.024B | $5.512B | $6.318B |
| CMS Energy operating income | $271M | $258M | $829M | $953M |
| CMS Energy net income available to common | $174M | $163M | $571M | $659M |
| Diluted EPS | $0.60 | $0.56 | $1.96 | $2.27 |
| Consumers net income available to common | $178M | $189M | $576M | $744M |
CMS Energy’s nine-month operating margin was approximately 15.0%, versus 15.1% a year earlier; its net income available to common was approximately 10.4% of revenue in both periods. Q3 operating income and common earnings increased despite lower revenue. Nine-month common earnings fell $88M, primarily reflecting lower electric and gas sales, storm restoration costs, higher interest and depreciation, and voluntary separation expenses. Rate increases and a $101M nine-month pre-tax gain from debt extinguishment partly offset these pressures. Electric deliveries declined to 27.5 billion kWh from 28.5 billion; gas deliveries fell to 198 bcf from 222 bcf. Management attributed lower sales mainly to unfavorable weather.
CMS Energy generated $1.904B of operating cash flow in the first nine months, compared with $667M in 2022. The improvement was largely due to favorable working-capital movements, including collections and lower gas purchase costs, and should not be assumed to represent a comparable recurring earnings increase. Capital expenditures were $1.799B and the Covert facility acquisition used $812M; investing cash outflow totaled $2.737B. Financing cash inflow was $835M.
At September 30, CMS Energy reported $184M of cash and restricted cash, including $27M restricted. Long-term debt was $15.157B, including its current portion, and notes payable were $247M. Available revolving credit was $530M at CMS Energy and $1.3B at Consumers; Consumers also had $247M of commercial paper outstanding. Both companies reported compliance with their credit-facility financial covenants. Management said liquidity should be sufficient for current and future commitments.
Changes, strategy and outlook
- Consumers completed its May 2023 purchase of the 1,200-MW Covert natural-gas generating facility for approximately $812M, including a post-closing adjustment. Its cash purchase contributed to higher investing outflows.
- Consumers’ August 2023 gas-rate settlement authorized a $95M annual increase effective October 1, 2023, at a 9.9% authorized return on equity. Its pending electric-rate request was revised to $169M, including a $9M surcharge; the MPSC decision remained pending at quarter-end.
- Consumers’ approved Clean Energy Plan calls for ending coal generation in 2025, expanding renewable resources, and net-zero electric-business carbon emissions by 2040. It expects weather-normalized electric and gas deliveries to remain relatively stable over the next five years, reflecting efficiency programs offset by modest demand growth.
- Consumers’ five-year capital plan totals $15.5B through 2027, excluding additional spending proposed in its September Reliability Roadmap. That proposal calls for $7B of distribution capital investment and $1.7B of maintenance and operating spending over five years; future rate recovery will be sought. Management expects annual rate-base growth above 7%.
- Consumers expects to issue securitization bonds in Q4 2023 for recovery of the retired D.E. Karn coal units’ remaining book value; the recorded regulatory asset was $655M at September 30. Consumers also received authorization to defer J.H. Campbell retention costs, with retirement planned for 2025.
- Management cited a $100M U.S. Department of Energy grant selected to support electric-distribution reliability investments. The filing also describes ongoing investment-grade financing access as dependent on market conditions and says reduced capital spending could be a contingency if market access were restricted.
Risks, contingencies and unusual items
- Weather and storms affected both demand and costs. Consumers recorded higher service-restoration costs, while its distribution system is subject to a state-commission-ordered third-party audit; a progress report was expected by year-end 2023 and the final report in 2024.
- In July 2023, the MPSC opened an investigation into Consumers’ meters, estimated billing and service installations. In October, after quarter-end, it issued a show-cause order regarding billing and service-quality rules. Consumers could face penalties and increased scrutiny; it could not predict the outcome.
- Consumers’ litigation includes disputes over defective Ludington overhaul work and Wolverine Power’s claim for approximately $37M related to the planned J.H. Campbell 3 retirement. The company says the claims lack merit, but an adverse outcome could materially affect results, financial condition or liquidity.
- Environmental and regulatory developments could add costs or affect operations, including proposed greenhouse-gas rules, emissions and pipeline requirements, water permits and remediation obligations. Cost recovery through customer rates is expected in many cases but is not assured.
- CMS Energy recorded a $33M pre-tax charge for a 2023 voluntary separation program accepted by more than 400 employees. The debt-extinguishment gain ($101M pre-tax for nine months) was an unusual earnings benefit.
- CMS Energy disclosed a $44M recorded Bay Harbor environmental liability. Consumers recorded $63M for former manufactured-gas-plant remediation; estimates and ultimate costs may change. The filing also reports indemnity guarantees and other ordinary-course claims.
Investor verification priorities
- Track the pending electric-rate case, implementation of the approved gas increase, and the timing and customer-rate treatment of planned capital investment.
- Assess whether the strong operating cash flow persists after the favorable working-capital effects, and monitor capital spending, debt issuance, interest expense and liquidity.
- Confirm the timing, financing cost and recovery effects of D.E. Karn securitization, and progress on Consumers’ coal retirements, Covert operations and replacement generation.
- Follow outcomes of the MPSC meter inquiry and distribution audit, and the Ludington and J.H. Campbell litigation, including any quantified exposure or regulatory consequences.
- Monitor actual storm restoration costs, weather-normalized sales, environmental compliance costs and whether recovery in rates is approved.