Q1 2023 CMS Energy Corporation Earnings Call

Speaker 1: The number of heating degree days in our service territory during the quarter were approximately 18% below normal weather patterns.

Speaker 1: The typically warm weather coupled with the strong comp in the first quarter 2022 resulted in 27 cents per share of negative variance versus the comparable period in 2022 as noted on slide.

Speaker 1: Rate relief net of investment related expenses resulted in 3 cents per share of negative variance as last year's constructive electric and gas rate case settlements were offset primarily by the roll off of tax benefits realized in the first quarter 2022 associated with a prior gas rate case settlement as expected.

Speaker 1: From a cost perspective, as mentioned, our financial performance in the 1st quarter was significantly impacted by higher operating and maintenance expenses. A triple storm restoration cost, which resulted in 20 cents per share of negative variance versus the 1st quarter. Of 2022.

Speaker 1: It is worth noting, however, that given the elevated storm costs we've seen over the last few years, we have incorporated fairly conservative assumptions for this cost category in our full year forecast.

Speaker 1: Looking ahead, as always, we plan for normal weather, which equates to 14 cents per share of negative variance versus a comparable period in 2022, due to the absence of strong sales at the electric utility driven by last year's warm summer.

Speaker 1: We anticipate that the estimated negative variance attributable to weather will be more than offset by rate relief, net of investment related costs, which we have quantified at 17 cents per share versus a comparable period in 2022. Our underlying assumptions for rate relief are largely driven by last year's successful gas and electric rate case settlements.

Speaker 1: And we have assumed a constructive outcome in our pending gas rate case.

Speaker 1: Closing out the glide path for the remainder of the year, as noted during our Q4 call, we anticipate lower overall O&M expense of the utility driven by the usual cost performance fueled by the CE way.

Speaker 1: We have implemented our planned productivity for the year by limiting hiring, reducing our use of consultants and contractors, accelerating longer term IT cost reduction initiatives, and eliminating other discretionary spending among other activities. These cost performance measures will support the 28 cents per share of positive variance versus accompanying the cost of the company's performance.

Speaker 1: Star and the benefits associated with the roughly 12 cents per share of pull has achieved in the fourth quarter 2022 as per our original guidance.

Speaker 1: And to offer further risk mitigation of the financial headwinds encountered in the first quarter and provide additional contingency should we need it. We have supplemented these opportunities with anticipated cost savings at the parent. Largely in the form of opportunistic financings and tax planning. Which an aggregate estimate will drive 36 to 42 cents per share of positive variance versus a comparable period.

Speaker 1: in 2022.

Speaker 1: Before moving on, I'll just note that though our track record of delivering on our financial objectives over the last two weeks, two decades, speaks for itself, we remain perpetually paranoid in our financial planning process. More bluntly, we always do the worrying so you don't have to.

Speaker 1: And to that end, I'm pleased to report that we've already begun to see the benefits of the numerous countermeasures implemented in the first quarter. As such, I'm highly confident that we'll realize the balance of expected savings over the course of the year.

Speaker 1: Moving on to the financial plan slide 8 offers more specificity on the balance of our plan funding needs in 2023. Which are largely limited to debt issuance at the utility. A good portion of which has already been priced and or funded over the past several months. As we have noted in the past, the parents contribution to the funding needs of the covert acquisition is in place.

Speaker 1: year, we will continue to evaluate opportunistic financings to de-risk our future funding needs if market conditions are accommodative.

Speaker 1: Our approach to our financing plan is similar to how we run the rest of 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 our customers and investors.

Speaker 1: and this year is no different. And with that, I'll hand it back to Gerrit for his final remarks for the Q&A session.

Speaker 1: is no different. And with that, I'll hand it back to Garak for his final remarks for the Q&A session. Thank you, Reggie.

Speaker 2: As you look at slide nine, I'll remind you again, our track record spans two decades of consistent

Speaker 2: recessions, severe weather and storm activity, or a pandemic. We're here for the long haul. We have powered Michigan's progress for nearly a century and a half.

Speaker 2: And as we look ahead, we see great opportunities to support the state's growth through critical infrastructure as we help power Michigan through the next century.

Speaker 3: Thank you very much, Garrick.

Speaker 3: The question and answer session will be conducted electronically. If you would like to ask a question please do so by pressing the star key followed by the digit 1 on your touch Ahhhahaha no

Speaker 3: If you're using a speaker function, please make sure you pick up your headset.

Speaker 3: If you do find that your question has been answered, you may remove yourself by pressing the star key followed by the digit 2 on your touch tone phone. We'll pause for just a second.

Speaker 3: Our first question today comes from the line of Jeremy Tille from JP Morgan. Please go ahead Jeremy, your line is now open.

Speaker 4: Hi, good morning.

Speaker 5: Hey, good morning, Jeremy. How are you? Good, thank you. Just wanted to come back to the key focus, I think, in the market at this point, just with adverse weather and storm headwinds in the first quarter. Great to see that you're still targeting high into the guide there. And just wondering, as you think about contingency flex...

Speaker 2: and our ability to deliver. That's the first point, Jeremy. And we know there's a lot of year remaining. And so, really in all our efforts, we look to build contingency out throughout the year. And so, maybe if I just take a step back, because I know this is a popular question today, we can just talk about our playbook.

Speaker 2: Reggie alluded to it, but let me offer a little more specifics. And I'd break it into really five areas. The first one is we plan conservatively. And you know this, Jeremy, we've done this year after year after year. That's what leads to our consistency, one of the reasons we have consistent financial performance.

Speaker 2: And also we talked about this in Q4. What we did in 2022 to de-risk the year and then just adding Reggie's points, we budget for storms and we budget conservatively for storms because we know they occur throughout the year. And so in many cases, this is just a weather story. So the first piece is just we plan conservatively. The second piece...

Speaker 2: of the plan is the CE way. And you, this is another strong suit for us, and I'll remind everybody, it's industrial engineering, and it's a lean operating system. It's science, it's proven throughout the years for many different companies. And I see a great opportunity that we continue to deliver on year after year. Scheduling optimization is one example.

Speaker 2: is what you would expect. We release some consultants, our contractors are flexible, so we dial that down a bit, we pinch back on overtime, and then we hold on hiring. And so those things help as well. The fourth area is really discretionary spending. It's limiting conferences and travel and some of the training.

Speaker 2: And you think that's small, but it's actually big when you apply it across the entire company. And then the fifth piece, and Reggie hit on it, was good tax planning and, you know, just opportunistic financing. And so that's the recipe. And as I said, this isn't our first rodeo. If you go back to the pandemic, we had to find $100 million. Fifty percent of it came through the...

Speaker 2: through the CE way, 50% through other actions, very similar to what we're doing right now. And so we're gonna chin this bar and we're gonna add some contingency throughout the year. So I feel very confident in our ability to deliver and to weather whatever mother nature throws at us throughout the year.

Speaker 5: Got it. That's very helpful. Thank you for that. It may be pivoting

Speaker 5: Got it. That's very helpful. Thank you for that. And maybe pivoting. Thanks.

Speaker 5: Maybe pivoting to the gas case is just wondering if you could talk a little bit more about that. I know the gas case. Maybe it doesn't come as much focus as electric generally speaking. But what are the key focus points across stakeholders in the gas case at this point? Just trying to get a sense for your thoughts on chances for settlement without getting too far ahead.

Speaker 2: staff and AG positions and so that bodes well for an ROE and some of the financial metrics.

Speaker 2: The other important piece is we build that, remember we built that case over Q3 and Q4 last year. And so gas prices were rising. We also saw some expense from pension and OPEB perspective. But when you fast forward to today, those have changed. And so gas prices are lower. We snapped the line at the end of the year on pension and OPEB expense. And so.

Speaker 2: We got a $212 million ask, but that effectively pulls that down because the fact pattern is different than what we saw when we built the case.

Speaker 2: And then the big piece is this that, you know, people are talking about here is the sales forecast.

Speaker 2: And there's about a 10, $12 million difference there. So let me walk through that. We have used this method since 2010 to project sales. It's a 15 year regression type model. We haven't changed it yet.

Speaker 2: It's tried and true and it's accurate and here's the important point Back in 2010 the Commission ordered us Let me repeat the Commission ordered us to use this method and that was in case you won five nine eight six And so we're doing exactly what the Commission told us to do. So we feel like really good about where we're positioned there

Speaker 2: And so there's other cats and dogs, but bottom line, take this away. It's a good constructive starting point.

Speaker 2: The other thing you asked about settlement, we'll always look for the opportunity for settlement. But again, we sit in a very constructive jurisdiction, so I'm very comfortable taking it to the end and getting a full order from the commission.

Got it, that's helpful, thank you. Thank you. The next question today comes from the line of Shah Perez from Guggenheim Partners. Please go ahead, your line is now open.

Good morning, Char. You with us, Char?

Good morning, Char. You with us, Char? Please do ensure you are unmuted locally.

We will move on to our next question.

Our next question today comes from the line of Julian DeMillean-Smith from Bank of America. Please go ahead, your line is now open. Hey, good morning team. Hopefully I can try to work here.

You guys can hear me? Excellent, thank you guys very much. Let me follow up on the first question here just around the the uptick in usage Non utility tax and other you guys allow that rated on it so not only have you pressed some of those levers to see the quarter over quarter change in 23 and

the range, you're talking about 36 to 42 cents of positive offsets there now. But in addition to that, you've got further levers to go to the extent to which that they might materialize. I just wanna make sure I understand the comment from earlier.

Yeah, good morning, Julian. This is Reggie. Yeah, you've got it exactly right. And, um, Derek, I think offered a wonderful dissertation on how we approach cost reduction opportunities. The only thing I would add to his his comments is that when it comes to cost reduction, we don't discriminate. We look across the entire cost structure when you exclude depreciation, it's about 7Billion dollars annually and about a billion of that is a common.

profile of our bonds and see if there are opportunities to take out bonds prematurely. So we'll look at those and then again on the tax planning side we're always looking for opportunities to reduce costs whether that's for state tax, property tax or otherwise. And so that's what's incorporated into that last item and again that's all I would add to Garak's good comments on how we approach cost reduction. Excellent, fair enough. And then just following up on some of the conversation.

related and then also maybe you could talk about ring fencing in the context of veg management efforts.

Philosophies are aligned with the governor's policies I should say around healthy climate, So theres that nice continuity, there and they have a corn with two and so we will still carry on and I'm sure they'll find a suitable replacement for commissioner Phillips when the time is right with respect to your question around the cost opportunities. Let me just be very clear I'll try to get at the numbers you specified.

As best I can and if I Miss anything please feel free to follow up on the question, but if you think about our guidance at the beginning of the year on our Q4 call. We effectively said as always we plan for normal weather and we assumed a level of cost productivity in our plant and so we were showing about four cents per share.

A positive variance related to cost savings.

We had some estimated opportunities as a result of the warm weather, we put to work in 2022.

In Q4, specifically with the voluntary refund mechanism and some of the poll heads and opportunities we exercised in the context of the electric rate case settlement, so that equated to about 19% to 25.

Of opportunity of positive variance in the original guidance and so as you fast forward to Q1 and you look at the waterfall, we're showing today, what's really changed is that we've now seen 21 cents or just over $80 million pre tax in the form of weather hurt and Thats were offsetting solving for in the form of cost productivity as well as in that sort of catch up.

Bucket.

Round.

Parent related opportunities and so we're effectively saying is that there's $80 million of offsets that we need to go identify and when we look at our track record and we're not trying to be a modest around that we feel very good about our ability to achieve that and so when you think about 2020 during the pandemic.

Took out $100 million and when you think about sustainability sustainable savings versus one timer is about 50% of that in 2020 was in the form of the CE way and that's what will flow through rates.

That's what customers will benefit from there are one timers, that's sometimes we do have to resurrect some of those old plays and so those are sort of opportunities that probably don't get incorporated into rates because you need to execute on those in subsequent years, but.

On the call so whether it's hiring freezes, whether it's external hiring type decisions around contractors and consultants, we will take all of those opportunities as part of this portfolio is savings to offset that call. It 80 plus million of weather. So that's how we think about it that's how we will go get it and again a good portion should be passed on.

So.

I'm with you on the on the 80 million of cost cuts and then there's like an incremental 50.

And adjudicated process, because it's not at the Opco level. Some of those will directly go to shareholders and so I think that's also very clear to the commission and other stakeholders in the context of a rate case.

Absolutely.

Yeah.