CMS Energy Corporation (NYSE:CMS) Q3 2023 Earnings Call Transcript

CMS Energy Corporation (NYSE:CMS) Q3 2023 Earnings Call Transcript October 26, 2023

CMS Energy Corporation misses on earnings expectations. Reported EPS is $0.61 EPS, expectations were $0.78.

Operator: Good morning, everyone and welcome to the CMS Energy 2023 Third Quarter 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, 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 November 2. 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.

Sri Maddipati: Thank you, Harry. 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. Now I'll turn the call over to Garrick.

An aerial view of an energy refinery, with massive tanks and piping defining the landscape.

Garrick Rochow: Thank you, Sri and thank you everyone for joining us today. What sets us apart in this industry is clear and it's been proven for over two decades are simple cleaner and leaner investment thesis. We've talked about this in many calls in many investor meetings and it works a long and robust capital runway, a best-in-class ability to take cost out of the business, to create headroom for needed investments and keep bills affordable for customers. Couple that with a constructive top-tier regulatory environment and that is our recipe for premium total shareholder return. Today I want to highlight one part of our investment thesis, infrastructure renewal. It starts with our five-year $15.5 billion capital plan which supports a long runway for important customer investments.

This allows us to do what is most important for our customers deliver safe, reliable, affordable energy and lead the industry in the clean energy transformation. We are one of the first vertically integrated utilities to switch from coal to clean by 2025 leading the industry with net zero carbon by 2040 aligned with customers, policymakers and our strategic plan positioning us for the future. In our gas business, we are on pace to net zero methane by 2030 and with a 20% reduction in Scope 3 emissions one of the few in the industry making the gas system safer and cleaner. And in our electric distribution system, we are hardening the grid to make it more reliable today while preparing for the resiliency that will be required for EVs, connected devices and to mitigate impact of climate change.

Our electric distribution system is vast covering much of the lower Peninsula of Michigan, but it's aging. We are seeing more frequent and severe weather which proves the future or require something different because our customers count on us for reliable service. Last month we filed our electric reliability road map with the Michigan Public Service Commission, which outlined our plan to improve reliability and prepare the system for greater resiliency. Over the last 20 years, we've seen an increase in both the frequency of storms and higher wind speed with some of the most extreme wins within the last four years. We're clearly seeing the effects of climate change. Given this in the increasing dependency on the electric distribution system, we have set forward a plan that bolsters the system now and builds for the future.

We worked with the leading industry research institute EPRI benchmarking companies as well as advancing technology to build a robust and comprehensive plan. This five-year electric reliability road map calls for $7 billion of capital investment to harden the system, expand undergrounding, update infrastructure, increase capacity and advanced automation. To give you a small snapshot, our plan includes roughly 1,000 miles of system undergrounding in the near-term and longer term significantly more undergrounding to ensure our system is prepared to withstand severe weather. Originally our design standard was for 40-mile per hour wind. With the wind speeds we are seeing today, our new standard is for 80-mile per hour wind and 0.5 inch of ice loading.

This plan also includes further automation in machine modeling adding technology to more precisely locate and isolate damage, reroute power and better predict problem areas keeping more customers online in responding to outages faster. We put our stake in the ground. We've identified the steps to improve reliability a step change and build an electric grid that can better withstand extreme weather and better serve our customers in the future. With commission support this plan will reduce the frequency and duration of outages while moving us into second quartile for reliability coupled with additional customer investments the longer-term vision delivers a grid or no outage will affect more than 100,000 customers and no customer will be without power for more than 24 hours.

We expect these investments to be part of our upcoming electric rate case filings and will be implemented upon commission approval. And let me be clear, we are already making progress. We've doubled our investment in vegetation management over the last three years shortening our trim cycles. We've seen greater than 60% benefit where we've done the work. We've increased the amount of customer investments and upgrades using in hardening installing nearly 15,000 used devices in the last two years more than we've ever done reducing the number of customers impacted for interruption. We've increased our maintenance inspection frequency mining potential failures before they occur. And just last week we were notified that of the nearly 300 companies who applied for grants on the Department of Energy, we were one of seven companies who were awarded $100 million for specializing and improving circuit in disadvantaged communities.

This is great for our company and our customers. First it accelerates investment, which were already part of our $7 billion electric reliability road map; second this strikes the important balance of reliability improvement and affordability; and finally because these are matching grant that provides greater line of sight and certainty recovery of these needed customer investments. We take our commitment to serve seriously what our customers deserve. We wake up every day to deliver. That's why we constructed our electric reliability road map. On Slide 5 I want to take a moment to provide an update on our regulatory calendar. In September, we revised our position in our electric rate case to $169 million and maintained our position for a 10.25% ROE and a 51.5% equity ratio.

We're requesting approval of a 10-mile undergrounding pilot with plans to underground over 400 miles annually beginning in 2027, which aligns with our electric reliability road map, a small but important step in building out a program that can be supported by the Michigan Public Service Commission and will deliver significant improvement for our customers. We also requested a recovery mechanism for investments in our electric distribution system to improve reliability. Similar to the mechanism we've utilized in our gas business, which creates greater clarity on the investment end customer benefit while improving certainty of recovery. We expect the final order by March of next year. We also recently received approval from the Michigan Public Service Commission on our gas rate case settlement providing continued value for our customers and investors.

These rates became effective October 1. We plan to follow our next gas rate case in December of this year. This case brings a continued focus on a safe, reliable, affordable and clean natural gas system will support needed customer investment. As we've shared in previous calls and in investor meetings, we continue to see the Michigan regulatory jurisdiction as constructive in providing a good balance for all stakeholders leading up to its ranking as top tier. Moving on to the financials. For the third quarter, we reported adjusted earnings per share of $0.61 and $2.06 per share year-to-date. Rejji will provide additional details but despite a significant storm in the third quarter, we remain on track to deliver on our full year guidance of $3.06 to $3.12 per share and expect to deliver toward the high end.

Given that confidence, we are initiating our full year guidance for 2024 at $3.27 to $3.33 per share reflecting 6% to 8% growth off the midpoint of this year's range and we are well positioned just like 2023 to be toward the high end of that range. It is also important to remember that we always rebased guidance off our actuals on the Q4 call impounding our growth. This brings you a higher quality of earnings and differentiates us from others in the sector. We're also reaffirming our long-term adjusted earnings growth of 6% to 8% per year with continued confidence toward the high end and remain committed to dividend per share growth of 6% to 8%. Like we've done in previous years we'll provide you with an update on our 2024 guidance based off of actuals, as well as a refresh of our 5-year capital plan on the Q4 call.

We continue to be confident in our ability to deliver the year and in our longer-term outlook providing exceptional value for all stakeholders. With that I'll hand it over to Rejji to offer some additional details.

Rejji Hayes: Thank you, Garrick and good morning, everyone. As Garrick noted, we had a solid third quarter, delivering adjusted earnings of $0.61 per share, driven by numerous cost reduction initiatives which have largely offset the headwinds that we have faced throughout the year most recently in the form of a severe storm that hit our electric service territory in August. To put the weather we have experienced in 2023 into perspective, we are approaching a record level of storm activity this year, which further supports the needed investments in our electric system that Garrick highlighted, and we have seen heating and cooling degree days of 11% and 24% below historical levels respectively on a year-to-date basis. That said, we do not make excuses and have implemented numerous countermeasures throughout the year to mitigate these risks and are well positioned to deliver on our financial objectives this year, the benefit of customers and investors.

As such, we are reaffirming our guidance for the year and on a year-to-date basis, we're on track with adjusted EPS of $2.06 per share given our progress in the aforementioned countermeasures which I'll elaborate on shortly. In the waterfall chart on Slide 7, for clarification purposes all of the variance analysis therein are measured relative to the comparable periods in 2022. The actuals are quantified on a year-to-date basis and the prospective period reflects the final three months of the year. Starting with actuals with respect to weather. The previously noted unfavorable weather experience in 2023 has driven $0.49 per share of negative go. Rate relief, net of investment-related expenses has resulted in $0.20 per share of positive variance, driven by last year's constructive electric and gas rate case settlements.

From a cost perspective, our financial performance through the third quarter has been significantly impacted by higher operating and maintenance or O&M expenses to the tune of $0.21 per share of negative variance due to higher service restoration expenses attributable to storms. However, it is worth noting that our operational O&M expenses exclusive of service restoration expense are down roughly 10% versus the third quarter of 2022, which highlights the significant cost performance we've realized across the business. To that end and as previously noted, we implemented numerous cost reduction initiatives early in the year, such as reducing our use of consultants and contractors, limiting hiring, accelerating longer-term IT projects and eliminating other discretionary spending.

We have also supplemented these efforts with a voluntary separation program or VSP that reduced our salaried workforce by roughly 10%. And more importantly, as we leverage the CE Way our lean operating system, we will continue to eliminate waste and increase productivity going forward. Rounding out the first nine months of the year, you'll note that $0.27 per share of positive variance highlighted the catch-all bucket in the middle of the chart. We've seen this bar increase throughout the year, as a result of our continued success in realizing cost savings through financing efficiencies, liability management, strong tax planning and favorable non-weather sales in our electric business during the summer. As we look ahead to the fourth quarter, as always we plan for normal weather, which we expect will have a neutral impact on our financial performance versus the fourth quarter of 2022.

And we expect a similar financial impact for rate relief net of investment-related costs as the benefits of our recent gas rate case settlement and our 2022 electric rate case settlement are largely offset by the absence tax benefits associated with the prior gas rate case settlement. From a cost perspective as noted during our Q2 call, we anticipate lower overall O&M expense at the utility, driven by the ongoing benefit cost reduction initiatives, which equates to $0.17 per share of targeted variance. It is also worth noting that the Q4 2022 comp for this bucket is notably soft given the higher-than-average O&M expenses incurred during that period. Closing out the glide path for the remainder of the year, you'll note in the penultimate that yellow bar on the right that we're anticipating $0.23 to $0.29 per share a positive variance.

As we've discussed previously, the key drivers here are the absence of significant discretionary actions taken in the fourth quarter of 2022 related to last year's electric rate case settlement and the filing of our voluntary refund mechanism which collectively equate to $0.12 per share. The remaining notable items that we anticipate in this bucket are from North Star our non-utility business achieving its full year guidance and favorable non-weather sales at the utility, which have trended well over the past few quarters. All in, we remain confident in our ability to meet our EPS guidance for the year. And as always we'll take none of this positive momentum for granted and will approach these last two months of the year with the usual degree of paranoia by maintaining our cost discipline and flex additional opportunities as needed to deliver the consistent financial results you have come to expect.

Moving on to the balance sheet. On Slide 8, we highlight our recently reaffirmed credit ratings from S&P in August. As you know, we continue to target mid-teens FFO to debt on a consolidated basis over our planning period to preserve our solid investment-grade credit ratings. Our financing strategy and strong balance sheet position us well given the market volatility we've seen recently. At the utility, our annual rate case cadence and the use of forward-looking test years allow us to incorporate higher interest rates into our filings and recover the associated costs with minimal lag. At the parent where funding costs are non-recoverable, we have limited refinancing risk in the near term with $250 million due in 2024 and 2025 and $300 million coming due in 2026.

And as noted during our second quarter call, the 2024 maturity has already been prefunded with proceeds from our convertible debt issuance in May. It is also worth noting that 100% of the debt of the parent companies fixed is over 40% is hybrid in nature thus receiving equity credit from the rating agencies. In addition to strong liability management, we have continued to plan conservatively. And debt funding costs have increased in the current environment they remain consistent with the assumptions embedded in our long-term financial plan. As always, we remain focused on maintaining a strong financial position which coupled with a supportive regulatory construct and predictable operating cash flow generation supports our solid investment-grade ratings for the benefit of our customers and investors.

Moving on to the financing plan. Slide 9 offers more specificity on the balance of our planned funding needs in 2023. In short, I'm pleased to report that our financing plan for the year is largely completed. In fact at the utility, we've completed all of our planned first mortgage bond issuances for the year at a weighted average coupon of approximately 4.8%, which is below our planned estimate. The only remaining opco financing is a securitization funding to address the recovery of the undepreciated rate base in our recently retired coal facilities. As for the parent company given the timing of the aforementioned convertible bond issuance, we've been able to delay the settlement of the equity forwards at price last year. So the roughly $440 million of forward equity contracts will be settled in the fourth quarter.

As I've said before, our approach to our financing plan is similar to how we run the business. We plan conservatively and capitalize on opportunities as they arise. This approach has been tried and true year in and year out and has enabled us to deliver on our operational and financial objectives irrespective of the circumstances to the benefit of customers and investments. And with that, I'll hand it back to Garrick for his final remarks and for the Q&A session.

Garrick Rochow: Thank you Rejji. You hear us say it every year. We deliver. Our track record spans two decades of consistently delivering industry-leading results in all conditions for all stakeholders. This year be no different. With that, Harry, please open the lines for Q&A.

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