CMS Energy Corporation (NYSE:CMS) Q4 2023 Earnings Call Transcript

CMS Energy Corporation (NYSE:CMS) Q4 2023 Earnings Call Transcript February 1, 2024

CMS Energy Corporation beats earnings expectations. Reported EPS is $1.05, expectations were $1.04. CMS Energy Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, everyone. And welcome to the CMS Energy 2023 Year-End Results. 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, and instructions will be provided at that time. [Operator Instructions]. Just a reminder, there will be a rebroadcast of this conference call today beginning at 12:00 P.M. Eastern Time running through February 8. 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 Finance and Investor Relations.

Srikanth Maddipati: Thank you, Emily. 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 measure are included in the appendix and posted on our website. As some of you may know, this will be my last earnings call, as I’ve transitioned to a new role in the company, responsible for electric supply and the implementation of the New Energy Law.

While I’m excited for my new role and responsibilities, I will miss working with all of you in the investment community so closely. I want to thank you for the support you’ve all given me in this company. Jason Shore, a 25-year veteran at CMS, has been named Treasurer and VP of Investor Relations. As I hand over the baton, I’m confident in Jason and our very experienced [indiscernible]. And now, I’ll turn the call over to Garrick.

Garrick Rochow : Thank you, Sri. And thank you, everyone, for joining us today. Before I get started, I want to thank Sri for his leadership in the finance area, and I look forward to his continued growth and impact as he takes on this important role in electric supply, where he’ll lead critical filings like our renewable energy plan and integrated resource plan, which I will discuss later in this call. We have a deep bench of talent at CMS Energy. And it is critically important that we develop our leaders in key areas of the business, continuing to strengthen the bench, build dexterity, and provide challenging growth opportunities. I know both Sri And Jason will make a big impact in their new roles. I’ve shared before on these calls, this isn’t our first rodeo.

The CMS team delivers now 21 years of exceptional performance. I am proud to share with you the highlights of the year. And I am proud of this team. You will see in the numbers and our operational highlight, 2023 was an incredible year. We met and faced challenges that tested our team and we rose to the occasion. First, let’s talk about the weather. The 2022/2023 winter was in that top 10 warmest on record. And then there was summer. When much of the world saw temperature warmer temperatures, our summer, influenced by El Nino conditions, was cooler than normal. And then, December 2023, the second warmest December on record. Add to that, record storm activity within our service territory. To say the least, it was a challenging year. Despite severe storms and unfavorable weather, we delivered and offset nearly $300 million of weather-related financial headwinds, serving our customers with heat and light and keeping our financial commitments for our investors.

This world class team comes together and we do what we say we will do year in and year out. No excuses, just results. As I said earlier, I’m proud of the team at CMS Energy. There are a number of great things we delivered in the year, even more than are represented on slide 4. In the interest of time, I want to hit on just a few. I want to highlight the Freedom Award from the Secretary of Defense, and why this is so special. This is the highest recognition a company can receive for supporting their employees who serve in the Guard and Reserve. The nomination was submitted by one of our employees and demonstrates the commitment of our entire company. This is an important part of our culture, to support and care for our people. And to honor our coworkers who serve our customers and our country.

We continue our focus on leading the clean energy transformation. In 2023. we retire over 500 megawatts of coal, further reducing our carbon footprint. Alongside these retirements, we ensured resource adequacy with the acquisition of the 1.2 gigawatt Covert natural gas generating station and brought online our 201 megawatt Heartland wind farm. This thoughtful transition ensures customer reliability as we move our portfolio from coal to clean. I also want to give a shout out to our small, but important NorthStar Clean Energy team. They performed well in 2023, exceeding our expectations for the year, completing the Newport solar project and demonstrating strong operational performance at Dearborn industrial generation, DIG. Another solid year of execution at CMS Energy across the triple bottom line, delivering industry leading, sustainable premium growth.

In 2023, Michigan also passed new energy legislation, starting the course for cleaner energy in Michigan, while maintaining resource adequacy, customer affordability and strengthening our financial plan. This legislation speaks to the constructive Financial Plan. This legislation speaks to the constructive nature of Michigan, provides more incentives to grow our clean energy portfolio, furthering investment opportunities with increased certainty of recovery. Now, it’s still early days. We’re evaluating all aspects of the new law, including the strategic advantage of owning versus contract and supply, the increased incentive on PPAs and what makes the most sense for us and for our customers. The law provides a lot of flexibility and options, which is important.

You’ll see this play out in a couple of upcoming filings. I want to draw your attention to the Renewable Energy Plan. This is not a new filing, but becomes a more important input in the Integrated Resource Plan. The Renewable Energy Plan will detail our plan to meet the 60% renewable portfolio standard by 2035. As you might imagine, this work is underway. We plan to file in the second half of the year. Following our renewable energy plan filing, our next 20-year Integrated Resource Plan is due in 2027. Together, the Renewable Energy Plan and Integrated Resource Plan will align our supply resources to deliver cost competitive, cleaner, and reliable energy as we target net zero. They also provide important transparency and certainty as we advance the business forward with investments in renewables and clean energy.

Michigan Energy Law continues to support its strong regulatory environment and needed customer investments. While the recent legislation provides opportunities to file our updated Renewable Energy Plan, the regulatory calendar is fairly routine in 2024. Our electric rate case continues toward a constructive outcome. We’ve seen positive indicators with key stakeholder support for recovery of customer investments and important investment mechanisms, such as the IRM and our undergrounding pilot. We expect an order from the Commission on or before March 1. We filed our gas rate case in mid-December, with an ask of $136 million with a 10.25% ROE and in a 51.5% equity ratio. The request lines with needed investments outlined in our 10-year natural gas delivery plan.

We expect an order for the end of the year. On slide 7, we’ve highlighted our new five-year, $17 billion utility customer investment plan, which supports approximately 7.5% rate base growth through 2028. You will note that about 40% of our customer investment opportunities support renewable generation, grid modernization and maintenance service replacements on our gases, which are critical as we lead the clean energy transformation. The plan also includes an increased investment in the electric distribution system to improve reliability and resiliency for our customers. We also have growth drivers outside of traditional rate base. These include adders built into legislation for incentives on energy efficiency programs and the financial compensation mechanism we earn on PPA that I mentioned earlier.

We also expect incremental earnings provided by our non-utility business, NorthStar Clean Energy, as they see attractive pricing from capacity and energy sold at DIG. It’s important to note we have a long and robust runway of additional investment opportunities both within and beyond the five-year window. As an example, we’ve incorporated a little less than half of the incremental $3 billion of customer investments associated with our electric reliability roadmap. We’ve also not yet included the customer investments associated with the new energy law. These will be included in our renewable energy plan filing and will provide more opportunities for investment. I feel good about our five-year utility investment plan. It is focused on our customers.

It positions the business for continued success and delivers for all stakeholders. With that, I’ll conclude with the 2023 results and long term outlook before passing it over to Rejji, who will cover the financials in more detail. 2023, no excuses, not weather, not storms, just results. We delivered adjusted earnings per share of $3.11 or the high end of our guidance range. I’m also pleased to share that we are raising our 2024 adjusted full-year EPS guidance $0.02 to $3.29 to $3.35 from $3.27 to $3.33 per share, compounding off of 2023 actual result. Let me repeat, compounding off of actuals. That is a differentiator in this sector. We continue to expect to be toward the high end of our 2024 guidance range, which points to our confidence as we start the year.

Furthermore, the CMS Energy Board of Directors recently approved a dividend increase to $2.06 per share for 2024. Longer term, we continue to guide for the high end of our adjusted EPS growth range of 6% to 8%, which implies and includes 7%, up to 8%. Our dividend policy remains unchanged. We continue to grow the dividend. You’ll see that we are targeting a dividend payout ratio of about 60% over time. Finally, we remain confident in our plan for 2024 and beyond, given our longstanding inability to manage the work and consistently deliver industry-leading growth. With that, I’ll hand the call over to Rejji.

Rejji Hayes : Thank you, Garrick. And good morning, everyone. As Garrick highlighted, we delivered strong financial performance in 2023, with adjusted net income of $907 million, which translates to $3.11 per share, toward the high end of our guidance range. The key drivers of our 2023 financial performance included strong cost performance throughout the organization, fueled by CE Way, a solid beat at NorthStar and a variety of non-operational countermeasures, such as liability management and tax planning, which more than offset the significant weather-related headwinds experienced throughout the year. And to further underscore the magnitude of cost performance delivered by our workforce, our fourth quarter operating and maintenance, or O&M, expense, exclusive of service restoration and vegetation management, was approximately 25% below the comparable period in 2022 and over 20% below our five year average for this cost category, a truly impressive achievement.

All in, we managed to offset nearly $300 million of weather-related financial headwinds, without compromising our operational commitments to our customers and the communities we serve. At CMS, we’ve had plenty of years of adversity, followed by impressive operational and financial beat, but I can’t recall one quite like 2023, a year in which our workforce personified grit and displayed that perennial will to deliver for all stakeholders. To elaborate on the strength of our financial performance in 2023, on slide 10, you’ll note that we’ve met or exceeded the vast majority of our key financial objectives for the year. From a financing perspective, we successfully settled $178 million of equity forward contracts in November and settled the remaining roughly $265 million in forwards in January.

As a reminder, these forwards are pricing levels favorable to our planning assumption. The only financial target missed in 2023 was related to our customer investment plan at the utility, which was budgeted for $3.7 billion. We ended the year below that, at $3.3 billion, primarily due to siting and permitting delays at select solar projects. As mentioned in the past, we fully intend to build out all of the solar projects approved in IRP and voluntary green pricing [indiscernible]. And with the Michigan Renewable Energy siting reform bill passed last fall, we should see better progress here going forward. Moving to our 2024 EPS guidance on slide 11. We are raising our 2024 adjusted earnings guidance range to $3.29 to $3.35 per share from $3.27 to $3.33 per share, as Garrick noted, 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, providing $3.74 to $3.80 of adjusted earnings, the details of which I’ll cover on the next slide. At NorthStar, we’re assuming EPS contribution of $0.16 to $0.18, which reflects strong underlying performance, primarily DIG, and ongoing contributions from our renewables business. Lastly, our financing assumptions remain conservative at the parent segment and our 2024 guidance range assumes the absence of liability management transactions. As always, we’ll remain opportunistic in this regard, and we’ll look to capitalize on attractive market conditions, should they arise. To elaborate on the glide path to achieve our 2024 adjusted EPS guidance range, you’ll see the usual waterfall chart on slide 12.

For clarification purposes, all of the variance analyses herein are measured on a full-year basis and are relative to 2023. From left to right, we’ll plan for normal weather which in this case amounts to $0.43 per share of positive year-over-year variance, given the absence of the atypically mild temperatures experienced throughout 2023. Additionally, we anticipate $0.23 of EPS pickup, attributable rate relief, really driven by the residual benefits of last year’s constructive gas rate case settlement and assumed supportive outcomes on our pending electric and gas rate cases. As always, our rate relief figures are stated net of investment-related costs, which is depreciation, property taxes and utility interest expense. As we turn to our cost structure in 2024, you’ll note $0.16 per share of positive variance due to continued productivity, driven by the CE Way, the ongoing benefits of cost reduction measures implemented in 2023, which was our voluntary separation plan which reduced our salaried workforce by roughly 10%, and initiatives already underway.

It is also worth noting that our cost assumptions exclude the impact of the catastrophic ice storm we experienced in the first quarter of 2023. Lastly, in the penultimate bar, on the right hand side, you’ll notice significant negative variance, which largely consists of the reversal of select one-time cost reduction measures. These are partially offset by the ongoing benefits of our well executed financing plan in 2023, and we’re assuming the usual conservative assumptions around whether normalized sales, taxes and non-utility performance, among other items. In aggregate, these assumptions equate to $0.58 to $0.64 per square of negative variance. 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 focus my remarks on those 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, as we balance the needs of the business. As previously mentioned, we have already settled the remaining equity forwards and have no additional equity needs in 2024. Longer term, we intend to resume our at the market or ATM equity issuance program in the amount of up to $350 million per year beginning in 2025 and extending through 2028, which is essentially the same assumption in our previous five year plan, but for the extension of an additional year.

We’re able to maintain our pre-existing equity needs despite an increase in utility capital plan, given the expectation of strong operating cash flow generation and the ability to monetize tax credits, courtesy of Inflation Reduction Act. It is also worth noting that this morning’s decision by Moody’s to increase the equity credit ascribed to junior subordinated notes, which represents about 40% of our debt at the parent company, is not embedded in our plan, thus providing further cushion in these metrics. Slide 14 offers more specificity on the balance of our funding needs in 2024, which are limited to debt issuances at the utility, over half of which has been opportunistically issued as noted on the page. And the coupon rate on this newly issued debt is favorable to plan, thus providing a helpful tailwind as we start the year.

Over the coming year, we have no planned long term financings at the parent and already redeemed at full maturity in January at par. Longer term, we have relatively modest near term maturities at the parent, with $250 million due in 2025 and $300 million due in 2026. 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 and battle tested workforce remains committed to our purpose-driven organization, and our investors benefit from consistent industry-leading financial performance.

Before I hand it back to Garrick, I would be remiss if I didn’t take a moment to echo Garrick’s praise of Sri, whom I’ve worked closely with over the past seven years. Sri’s contributions to the finance team and the company have been immeasurable since he joined CMS. So thank you, Sri. You’re leaving it better than you found it, and I look forward to working with you and Jason in your new roles. And with that, I’ll pass it on to Garrick for his final remarks before the Q&A session.

Garrick Rochow : Thank you, Rejji. You all know this last slide very well by now. Over two decades, regardless of conditions, no excuses, just results. Given the challenges of 2023, I’m extremely proud of the team’s effort. Our simple investment thesis is how we run our business. It has withstood the test of time, and provides us confidence for a strong outlook in 2024 and beyond. With that, Emily, please open the lines for Q&A.

See also 13 Best Consumer Staples Dividend Stocks To Buy Now and Wall Street Analysts Just Trimmed Price Targets for These 10 Stocks.

Q&A Session

Operator: [Operator Instructions]. First question comes from the line of Nick Campanella with Barclays.

Nicholas Campanella: Sri, great work with you all these years. Best of luck in the new role. Just to get started, could you maybe just help us understand the DIG uplift and kind of context of the current 6% to 8% CAGR? You have some open capacity there. The current run rates are clearly higher. Just what’s the timeline to lock that in? And how should we kind of think about the uplift to the 6% to 8% or perhaps just adding higher visibility in extending the 6% to 8% for even longer?

Garrick Rochow: Those traditional, what I call, outside of base growth, so those growth drivers outside of traditional rate base – energy efficiency, financial compensation mechanism and DIG – those are powerful in the plan. And you asked specifically about Dearborn Industrial Generation. We are seeing both energy and capacity of prices elevated, particularly in the out years of the plan. We have available capacity beyond 2026 out through the plan. We’re layering in contracts, really as we speak, which with attractive numbers and which gives us confidence in our plan, particularly in the out-years through DIG.

Nicholas Campanella: On the REP plan, I guess if you file second half of 2024, can you just help us understand regulatory process? When would there be a decision there? Or what does that kind of look like? And then how does that kind of flow through to your CapEx plan? Would it be like this time next year we kind of get an update on how that flows through?

Garrick Rochow: First of all, this is not a new filing. It is a more important filing. It is a bigger filing. As you might imagine, if you’re going to achieve 60% renewable by 2035 or 50% by 2030, it has to grow from a size perspective. So it takes on increased importance. It’s also important to remember it’s based on energy versus the Integrated Resource Plan, which is based on capacity. So that work is underway. And it’s really a spectrum. To meet that standard, do you do all PPAs? That’s one bookend. Or do you do all ownership? I view it somewhere in the middle. But what’s the strength of this energy law is there’s a lot of flexibility to be able to start that path to those clean energy ambitions. We’ve got to think about what the customer impact is.

We’re still required as a load serving entity to meet resource capacity constraints in the IRP. So that’s a consideration. We’ve got to look at the balance sheet. And here’s a really capital light option where we can get an FCM at 9%. That’s a really attractive part of this energy law. So there’s a lot of dynamics that have to play out in there. That work is underway right now. We will file that Renewable Energy Plan in the second half of the year. We have until 2025 to get it done, but we want to pull that forward into 2024, given the work that has to be done and these milestones that are out there. So we’ll file that. The commission has and staff has 10 months to get to a final order. And then that information there will certainly aid our capital plan and the upside from an FCM mechanism, but also flows into our Integrated Resource Plan.

And that Integrated Resource Plan should become less complex because of this Renewable Energy Plan work. Ultimately, that then flows into rate cases as we move forward over time on the annual frequency. So, I know Rejji has some more comments on this as well. So, I’ll pass it to Rejji.

Rejji Hayes: All I would add to Garrick’s good comments is, as you think about that trajectory and sequencing the Garrick laid out, it’s important to note that the plan that we laid out today, that takes you from 2024 to 2028 does not incorporate any capital investment opportunities associated with the new legislation. And so, as we file the REP in the second half of this year and then get feedback presumably in the second half of 2025, we won’t start incorporating capital opportunities, most likely for a couple of vintages of five year plans. Now, we have started to layer in the energy waste reduction or energy efficiency opportunities, as well as modest portion of the FCM opportunities. But I think in subsequent five year plans, you’ll start to see more FCM-related opportunities and certainly more capital opportunities, but it’s going to take a couple of vintages before we have real clarity on that. Is that helpful?

Operator: The next question comes from Jeremy Tonet with J.P. Morgan.

Jeremy Tonet: Just wanted to touch base, I guess, a little bit more on the Moody’s change this morning. If you could just walk us through that a bit and quantify how much equity credit that is, just trying to get a sense for what that means.

Rejji Hayes: Jeremy, this is Rejji. So, Moody’s this morning increased the equity credit that they ascribe to junior subordinated notes, which are more informally referred to as hybrids. It was previously a 25% equity credit. And they’re essentially now at parity with S&P at 50%. The reason why that’s impactful for us is that we’ve issued those securities quite a bit over the last five to six years, and so currently represents about 40% of our debt portfolio at the holdco. And so, by them, increasing the equity credit ascribed to this, it really increases, I’d say, the FFO to debt metrics at Moody’s by that 50 to 60 basis points. So fairly accretive from a credit perspective to plan.

Jeremy Tonet: As we approach finalizing the electric rate case, just wondering if you could provide any more incremental thoughts, I guess, on how you feel about how things are progressing there. Just any color will be appreciated.

Garrick Rochow: Jeremy, things are progressing nicely. I feel good about a constructive outcome. Staff had a great starting spot on what I think can be a constructive outcome and feel confident that we can get there. There’s a lot of positive indicators. Support for the important work on reliability. I would say there’s a great alignment between staff and, frankly, the commissioners on where we want to go, improve reliability in the state. That’s a big part of this electric rate case. And also, positive indicators on the mechanisms that we’ve talked about in the past, this infrastructure recovery mechanism. We think that’s really important from a go forward reliability perspective. It also lines up with [indiscernible] have shared about ring fencing and providing opportunity to capital to see the insight of where those investments are and how they make a difference.

And then, finally, our undergrounding pilot. That’s seeing support as well. That’s an important first step in this resiliency play and our larger ambitions that are evident in our reliability roadmap. So, again, I feel really good about where the case is headed. And we expect the final order on or before March 1.

Operator: Our next question comes from Shahriar Pourreza with Guggenheim Partners.

Shahriar Pourreza: Just a real quick cleanup question on the CapEx and rate base. Is part of the rate base CAGR increase to that firm 7.5% and the higher CapEx run rate, is that driven by some of the spending and solar delays in 2023, so slightly off, maybe a lower base and timing differences? Or is it driven by new CapEx, the tail end of the plan, or maybe a combination of both, especially since you guys don’t really include a lot of CapEx until we get through the approval process right.