CMS Energy Corporation (NYSE:CMS) Q4 2022 Earnings Call Transcript

CMS Energy Corporation (NYSE:CMS) Q4 2022 Earnings Call Transcript February 2, 2023

Operator: Good morning, everyone, and welcome to the CMS Energy 2022 Year End Results Call. The earnings news release issued earlier today and the presentation used in this webcast are available on CMS Energy’s website in the Investor Relations section. This call is being recorded. After the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time. Just a reminder, there’ll be a rebroadcast of this conference call today beginning at 12 PM Eastern Time running through February 9th. This presentation is also being webcast and is available on CMS Energy’s website in the Investor Relations section. At this time, I would like to turn the call over to Mr. Sri Maddipati, Treasurer and Vice President of Investor Relations and Finance.

Sri Maddipati: Thank you, Adam. Good morning, everyone, and thank you for joining us today. With me are, Garrick Rochow, President and Chief Executive Officer; and Rejji Hayes, Executive Vice President and Chief Financial Officer. This presentation contains forward-looking statements, which are subject to risks and uncertainties. Please refer to our SEC filings for more information regarding the risks and other factors that could cause our actual results to differ materially. This presentation also includes non-GAAP measures. Reconciliations of these measures to the most directly comparable GAAP measures are included in the appendix and posted on our website. Now, I’ll turn the call over to Garrick.

Garrick Rochow: Thank you, Sri, and thank you everyone for joining us today. 2022, an outstanding year at CMS Energy, both operationally and financially. And even more than that, 2022 marks the 20th year CMS Energy has consistently delivered industry-leading financial performance. Many of you have been on this journey with us. And I appreciate you and I thank you. You see us put our words into action. Our performance is supported by our simple investment thesis, which delivers for our customers and investors. We continue to lead the clean energy transformation. Our net zero commitments backed up by the solid plans in approved Integrated Resource Plan, IRP, provide certainty for investments in clean energy and highlight the supportive regulatory construct in Michigan.

Across the company, we are disciplined about taking cost out and working every day to get better. We use the CE Way from corporate functions to the frontline to achieve our operational and financial objectives. This focus keeps customer bills affordable. On the regulatory front, it’s been an incredible year. We sold not one, not two, but three major cases highlighting the top-tier regulatory backdrop in Michigan. All of this leads to a premium total shareholder return you’ve come to expect from CMS Energy. I want to take a few minutes to share some of the big wins we had over the year. First, our commitment to people, our co-workers, who show up every day with the heart of service, and our customers who count on us to be there in any weather with safe, reliable, affordable and clean energy.

In 2022, we were recognized nationwide as the Best Employer for Women in the Utility Sector, a Top Employer for Diversity and one of the Best Large Employers by Forbes, this team of co-workers, who continue to deliver results, utilizing the CE Way. In 2022, our co-workers commitment to being best-in-class in the operation of our generating assets saved our customers roughly $560 million. This is more than double what we delivered in 2021 mean our team continues to drive more value by running our own generation, more efficiently than the market. Just to make this real, in December, during the storm Elliott, when others were short power, this team and these generation assets were exporting energy out of Michigan into MISO. And I’m also pleased with the growth in economic development we’ve seen and helped lead in the state.

As I shared in the Q3 call semiconductors, polysilicon and battery manufacturing, up all calling Michigan Home, 230 MW of new and expanding load with over $8 billion of investment in Michigan. A recent Department of Energy study ranks Michigan as a Top 3 state for planned battery plant capacity further differentiating our state and service territory. Our commitment across the state have delivered more load growth, more jobs and more investment, all of which create an environment. And our state looks strong well into the future. We remain focused on getting ready for that future with our IRP, which delivers even more savings to our customers with roughly $600 million in savings over our prior plan and reduces our carbon footprint by over 60% as we exit coal in 2025 amid 8 gigawatts of store and 550 megawatts of battery through 2040.

We continued our long track record of managing costs and keeping prices affordable through the CE Way, and delivering $58 million of savings in 2022. This level of discipline to continuously improve has been a contributor to the successful regulatory outcomes in our settled electric and gas rate cases, which is highlighted by the $47 million of regulatory mechanisms to support infrastructure investments and assist customers. This year both our customers and investors will benefit from our $22 million voluntary refund mechanism, a $15 million bill credit and $10 million of customer assistance. These regulatory mechanisms de-risk 2023, while providing needed customer benefit. It’s this strong execution in these results that you and we expect and meet our commitment to the triple bottom-line positioning our business for sustainable long-term growth.

2022 marks another year of premium growth. The team continued to deliver regardless of conditions. In 2022, we delivered adjusted earnings per share of $2.89 at the high-end of our guidance range. I’m also pleased to share that we are raising our 2023 adjusted full-year EPS guidance to $3.06 to $3.12 from $3.05 to $3.11 per share, compounding off of 2022 actuals like you would expect from a premium name like CMS Energy. We continue to expect to be toward the high-end of this range, which points to the midpoint or higher signaling are confident as we start the year in a strong position. Furthermore, the CMS Energy Board of Directors recently approved a dividend increase to $1.95 per share for 2023. Longer-term, we continue to have confidence toward the high-end of our adjusted EPS growth range of 6% to 8%, and we continue to see long-term dividend growth of 6% to 8% with a targeted payout ratio of about 60% over time.

And finally, I’m pleased to share we have refreshed our five-year utility customer investment plan, increasing our prior plan by $1.2 billion to $15.5 billion through 2027. I have confidence in our plan for 2023 and beyond given our longstanding ability to manage the work and consistently deliver industry-leading growth. It’s no coincidence that I started my prepared remarks with our investment thesis. We live by it and it works. On Slide 6, we’ve highlighted our new five-year $15.5 billion utility customer investment plan. This translates to greater than 7% annual rate base growth in support safety and reliability investments in our electric and gas systems and paves the way to a clean-energy future when net zero carbon, methane and greenhouse gas emissions.

You will note that about 40% of our customer investments support renewable generation, grid modernization and maintenance service replacements on our gas system, which are critical as we lead the clean energy transformation. Bottom line, we have a long and robust capital runway. Beyond our core investments, we have growth drivers outside of traditional rate base. This includes adders built into legislation where incentives on our energy efficiency and demand response programs and the financial compensation mechanism, FCM we earn on PPAs. We also expect incremental earnings provided by our non-utility business NorthStar Clean Energy as they see continued growth in their contracted renewables, as well as better pricing from capacity and energy sold at our DIG facility.

We continue to earn a 10.7% ROE on renewables to meet our renewable portfolio standard and are in the process of completing Heartland Wind Project in 2023. These regulatory incentives are a core part of Michigan’s energy law which with our strong regulatory construct continues to support needed customer investments. In addition, the Energy Law provides certainty of recovery before looking 10-month rate cases in regular fuel tracking mechanisms and allow us to help smooth the impact of commodity prices for our customers. I used the word incredible to describe this earlier. We delivered across the board the settlements in IRP and our gas and electric rate cases providing more certainty for 2023 customer investments. This wasn’t by accident. We have a supportive law, strong regulatory construct and our improved regulatory approach enables us to work with multiple parties on complex cases and provide the best outcome for our customers and investors.

And we plan to continue the strong performance in the next rate case cycle. We filed our gas case in December and we file our next electric rate case later this year with those outcomes providing further certainty for 2024 customer investments. We know a robust customer investment plan in strong regulatory construct loan do not support sustainable growth. Our customers count on us to keep their bills affordable. Inflation has been top of mind for many throughout 2022 and remains so as we enter 2023. First, I’ll remind everyone that CMS Energy is well positioned as it relates to the key sources of inflation including labor, materials and commodities. In addition, we delivered roughly $150 million in CE Way savings over the last three years and estimate over $200 million in large, episodic savings as PPAs expire and as we exit coal generation.

We’re also seeing significant new and expanding commercial and industrial load in our service territory. There is a broad spectrum of growth. Some customers have opened new facilities this year and some are in early construction. These new sales opportunities, both in the short and long-term, allow us to spread our costs across a growing customer base, ultimately reducing rates for all of our customers. It should be no surprised why I’m pleased with 2022, and confident in the 2023 outlook. This proven approach continues to deliver. Now I’ll pass the call over to Rejji, who will offer additional detail.

Rejji Hayes: Thank you, Garrick, and good morning, everyone. As Garrick highlighted, we delivered strong financial performance in 2022 with adjusted net income of $838 million, which translates to $2.89 per share at the high end of our guidance range. The key drivers of our full year 2022 financial performance were higher sales, driven by favorable weather and solid commercial and industrial load. The latter of which is indicative of the attractive economic conditions in our service territory and rate relief net of investments. These positive drivers were partially offset by higher expenses attributable to discrete customer initiatives, which reduce bills, support our most vulnerable customers and improve the safety and reliability of our gas and electric systems.

Our strong performance in 2022 provided significant financial flexibility at year end, which, as Garrick highlighted, enabled us to de-risk our 2023 financial plan to the benefit of customers and investors, which I’ll cover in more detail later. To elaborate on the strength of our financial performance in 2022, on Slide 10, you’ll note that we met or exceeded the vast majority of our key financial objectives for the year. From an EPS perspective, our consistent performance above plan over the course of 2022, enabled us to raise and narrow our 2022 adjusted EPS guidance on our third quarter call. From a financing perspective, we successfully settled $55 million of equity forward contracts as planned and more notably opportunistically priced approximately $440 million of equity forward contracts at a weighted-average price of over $68 per share.

Photo by American Public Power Association on Unsplash

To address the parent company’s financing need for the pending acquisition of the Covert natural gas generation facility in support of our IRP. The only financial target missed in 2022 was related to our customer investment plan at the utility, which was budgeted for $2.6 billion. We ended the year just shy of that at $2.5 billion, primarily due to the timing of a wind project in support of Michigan’s renewable portfolio standard, which was largely pushed into 2023, and is now under construction. Moving to our 2023 EPS guidance on Slide 11, as Garrick noted. We are raising our 2023 adjusted earnings guidance to $3.06 to $3.12 per share from $3.05 to $3.11 per share with continued confidence toward the high end of the range. As you can see in the segment details, our EPS growth will primarily be driven by the utility as it has for the past several years and we also assume modest growth for non-utility business NorthStar Clean Energy.

Finally, we plan for limited activity at the plant given the lack of financing needs in 2023, beyond the settlement of the aforementioned equity forward contracts for the Covert acquisition, while maintaining the usual conservative assumptions throughout the business. To elaborate on the glide path to achieve our 2023 adjusted EPS guidance range, as you’ll note on the waterfall chart on Slide 12, we’ll plan for normal weather, which in this case, amounts to $0.20 per share of negative year-over-year variance, given the absence of the favorable weather we saw in 2022. Additionally, we anticipate $0.14 of EPS pickup attributable to the rate – attributable to rate relief, largely driven by our recent electric and gas rate orders and the expectation of a constructive outcome in our pending gas rate case later this year.

As always, our rate relief, figures are stated net of investment-related costs such as depreciation, property taxes and utility interest expense. As we turn to our cost structure in 2023, you’ll note $0.04 per share of positive variance attributable to continued productivity, driven by the CE Way and other cost reduction initiatives underway. Lastly, in the penultimate bar on the right hand side, we’re assuming the usual conservative estimates around weather-normalized sales and non-utility performance coupled with the benefits of the significant reinvestment activity deployed in the fourth quarter of 2022 through a regulatory filings and traditional operational pull ahead. These assumptions equates to $0.19 to $0.25 of positive variance versus 2022.

As always, we’ll adapt to changing conditions throughout the year to mitigate risks and deliver our operational and financial objectives to the benefit of customers and investors. On Slide 13, we have a summary of our near and long-term financial objectives. To avoid being repetitive, I’ll limit my remarks to the metrics we have not yet covered. From a balance sheet perspective, we continue to target solid investment grade credit ratings and we’ll continue to manage our key credit metrics accordingly. To that end, we’ll look to settle the equity forward contracts for the Covert financing in the second quarter of 2023 and have no additional planned equity financing need until 2025. In the outer years of our plan, we intend to resume our At The Market or ATM equity issuance program in the amount of up to $350 million per year in 2025 through 2027, given the substantial increase in our five-year utility customer investment plan.

And as such, you can expect us to file a – perspective supplement to reflect this revision to our ATM program later this year. Slide 14 offers more specificity on the balance of our funding needs in 2023, which are limited to debt issuances at the utility, a good portion of which has been priced and or refunded over the past several weeks as noted on the page. In fact, the $825 million of utility bond financings address to date include the $400 million tranche of debt financing required to fund the acquisition of Covert in the second quarter. So we have fully de-risked our financing needs for that critical component of our IRP well in advance with attractive terms to the benefit of customers and investors, which I’ll cover in more detail later.

To elaborate on the strength of our financial performance in 2022 on Slide 10, you’ll note that we met or exceeded the vast majority of our key financial objectives for the year. From an EPS perspective, our consistent performance above plan over the course of 2022, enable us to raise and narrow our 2022 adjusted EPS guidance on our third quarter call. From a financing perspective, we successfully settled $55 million of equity forward contracts as planned and more notably, opportunistically priced approximately $440 million of equity forward contracts at a weighted average price of over $6 to $8 per share to address the parent company’s financing needs for the pending acquisition of the covert natural gas generation facility in support of our IRP.

The only financial target missed in 2022 was related to our customer investment plan at the utility which was budgeted for $2.6 billion. We ended the year just shy of that at $2.5 billion, primarily due to the timing of a wind project in support of Michigan’s renewable portfolio standard, which was largely pushed into 2023 and is now under construction. Moving to our 2023 EPS guidance on Slide 11. As Garrick noted, we are raising our 2023 adjusted earnings guidance to $3.06 to $3.12 per share from $3.05 to $3.11 per share with continued confidence toward the high end of the range. As you can see in the segment details, our EPS growth will primarily be driven by the utility as it has for the past several years, and we also assume modest growth for our nonutility business, North Star Clean Energy.

Finally, we plan for limited activity at the parent given the lack of financing needs in 2023 beyond the settlement of the aforementioned equity forward contract for the Covert acquisition, while maintaining the usual conservative assumptions throughout the business. To elaborate on the glide path to achieve our 2023 adjusted EPS guidance range, as you’ll note on the waterfall chart on Slide 12, we’ll plan for normal weather, which in this case amounts to $0.20 per share of negative year-over-year variance, given the absence of the favorable weather we saw in 2022. Additionally, we anticipate $0.14 of EPS pickup attributable to rate relief, largely driven by our recent electric and gas rate orders and the expectation of a constructive outcome in our pending gas rate case later this year.

As always, our rate relief figures are stated net investment-related costs such as depreciation, property taxes and utility interest expense. As we turn to our cost structure in 2023, you’ll note $0.04 per share of positive variance attributable to continued productivity driven by the CE Way and other cost reduction initiatives underway. Lastly, the ultimate bar on the right-hand side were stemming the usual conservative estimates around weather-normalized sales and nonutility performance, coupled with the benefits of the significant reinvestment activity deployed in the fourth quarter of 2022 through our regulatory filings and traditional operational pull ahead. These assumptions equate to $0.19 to $0.25 of positive variance versus 2022. As always, we’ll adapt to changing conditions throughout the year to mitigate risks and deliver our operational and financial objectives to the benefit of customers and investors.

On Slide 13, we have a summary of our near- and long-term financial objectives. To avoid being repetitive, I’ll limit the metrics we have not yet covered. From a balance sheet perspective, we continue to target solid investment-grade credit ratings, and we’ll continue to manage our key credit metrics accordingly. To that end, we’ll look to settle the equity forward contracts for the Covert financing in the second quarter of 2023 and have no additional planned equity financing needs until 2025. In the outer years of our plan, we intend to resume our at-the-market, or ATM, equity issuance program in the amount of up to $350 million per year in 2025 through 2027 and given the substantial increase in our 5-year utility customer investment plan.

And as such, you can expect us to file a prospectus supplement to reflect this revision to our ATM program later this year. Slide 14 offers more specificity on the balance of our funding needs in 2023, which are limited to debt issuances at the utility a good portion of which has been priced and/or funded over the past several weeks as noted on the page. In fact, the $825 million of utility bond financings addressed to date include the $400 million tranche of debt financing required to fund the acquisition of Covert in the second quarter. So we have fully derisked our financing needs for that critical component of our IRP well in advance with attractive terms to the benefit of customers and investors. And as a reminder, the acquisition of the Covert natural gas facility will enable us to exit coal generation in 2025 and which makes us one of the first vertically integrated utilities in the country to do so.

To conclude my remarks on Slide 15, we’ve refreshed our sensitivity analysis on key variables for your modeling assumptions. As you’ll note, with reasonable planning assumptions and our track record of risk mitigation, the probability of large variances from our plan is minimized. Our model has served and will continue to serve all stakeholders well. Our customers receive safe, reliable and clean energy at affordable prices. Our diverse workforce remains engaged, well-trained and in our purpose-driven organization, and our investors benefit from consistent industry-leading financial performance. And with that, I’ll hand it back to Garrick for his final remarks before the Q&A session.

Garrick Rochow: Thank you, Rejji. Our simple investment thesis is how we run our business and has withstood the test of time. It delivers in a very balanced way for all our stakeholders and enables us to consistently deliver our financial objectives. 2022 was an outstanding year, marking our 20th year of industry-leading financial performance. I’m confident in our refresh $15.5 billion utility customer investment plan, the ability to execute on it and in our regulatory construct to support it as well as our solid track record of managing costs we keep customer bills affordable. Finally, we deliver regardless of conditions, not by luck, or accident, but by a great team who runs a proven model, who sees discipline in the work. This is what led to an outstanding 2022 and provides for a strong outlook in 2023 and beyond. With that, Adam, please open the lines for Q&A.

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Q&A Session

Operator: Our first question comes from Shahriar Pourreza from Guggenheim Partners. Shahriar, your line is open. Please go ahead.

Shahriar Pourreza: Thanks. Good morning, guys. Good morning. So just Garrick, couple of quick questions here. The CapEx update now includes Covert. Can you maybe comment on the impacts of IRA in the plan you presented today? The Clean Energy segment went from 2.8 to 3.1. So it was kind of a fairly modest increase. Were there sort of any assumption changes around tax equity utilization? Or do you anticipate another IRP update would be needed for more fundamental changes to the Clean Energy outlook? Thanks.

Garrick Rochow: Thanks Sharh. The $15.5 billion plan, as you indicated, includes Covert and a nice tranche of renewables. And I’ll also point out from a VGP perspective, that’s that large customer renewable program. It includes the first tranche of that as well. And so happy to dive in a little bit deeper here. But remember this, that Covert and our renewables build is spelled out in our integrated resource plan. So that’s the nature of this 5-year plan, both from a renewable and the development of renewals, the Covert acquisition as well as storage and storage deployment. So that’s set. And that IRP really serves as the prudency review and then we go through the regulatory cases to recover on those. And so that plan reflects that.

Now your specific question on the IRA, that’s additional benefit for our customers. as we’ve shared, that production tax credit offers savings directly on the execution of that plan. By 2026, that’s about $60 million a year of savings for our customers. And so that IRP when we originally filed it was around $600 million or settlement, I should say, was around $600 million of savings for our customers. That only grows as a result of the production tax credit and the IRA. And so that’s the nature of how we’re applying that. I would remind you as well, based on AMT, we don’t anticipate being subject to AMT for really the remainder of the decade, the way that’s framing up. And so I don’t know, Rejji, do you want to add any additional comment to Shar’s question?

Rejji Hayes: No, I think you laid it out pretty well, Garrick. The only thing I would add, you did ask about tax equity at the utility, we’re not assuming a tax equity for financing for any of these projects.

Shahriar Pourreza: Got it. Okay. Perfect. And then just lastly, just a question on your updated guidance and sort of the embedded assumptions. You’re showing $0.04 of cost savings as a driver for ’23, but also highlighted roughly $30 million or about $0.10 of cost savings related to Kam 1 and 2 Covert retirements. What level, I guess, of cost inflation is embedded in the $0.04? Is there a headwind on labor materials? And then more importantly, how are you sort of thinking about that O&M flex beyond that $0.04? Is it closer to the $58 million you achieved in ’22?

Rejji Hayes: Yes, sure. I’ll cover most of this, and if Garrick wants to add certainly can. To answer your last question first. We’re assuming around $45 million to $50 million of cost reductions attributable to the CE Way. So that’s what we have embedded in the plan. And we’ve been pleased to observe over the last several years now that we’re at a run rate now of about $45 million, $50 million, which we hit really the pandemic, sometimes necessity is the mother of invention. And so prior to the pandemic, the run rate was about $10 million of O&M reduction. And then we had a really nice inflection point during the pandemic of about $40 million to $45 million of CE Way-driven savings, and that’s — we’ve held on to that some time.