Q2 2023 CMS Energy Corporation Earnings Call

Ladies and gentlemen, please standby your conference call will begin momentarily.

<unk> is the pace of your patience is appreciated my apologies. Please do not disconnect your lines.

Yes.

[music].

Good morning, everyone. Thank you for standing by.

Welcome to the CMS Energy 2023 second quarter results conference call and news earnings release.

The earnings news release was issued earlier today and the presentation used in this webcast are available on CMS Energy's website in the Investor Relations section.

Today's call is being recorded.

After the presentation, we will conduct a question and answer session and instructions will be provided at that time on how to queue up.

If at any time during the conference you need to reach an operator, Please press star zero.

As a reminder, there will be a rebroadcast of this conference call today, beginning at 12 P. M. Eastern time running through August 3rd.

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 conference over to Shri Mata Party Treasurer, and Vice President of Finance and Investor Relations. Please go ahead Sir.

Thank you Michele good morning, everyone and thank you for joining US today, we apologize for the delay and we are experiencing.

Technical difficulties, if you have any questions and we are unable to participate on the call. Please feel free to meet our credit is not about a call. After this.

This earnings call.

With me are Eric <unk>, President and Chief Executive Officer, Rajiv <unk> Executive Vice President and Chief Financial Officer. This presentation contains forward looking statements 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. The most directly comparable GAAP measures include independent imports now.

Now I'll turn the call over to Gary.

Thank you Sri and thank you everyone for joining us today.

CMS energy.

We deliver we say it.

And we back it up.

But what makes it work for all stakeholders is this investment thesis that we start with nearly every earnings call.

I've reiterated the key points of this thesis on many occasions today I want to draw attention to three key components.

First we continue to make industry, leading progress on the transformation to clean energy. This is required to position the business for the future and I will share more evidenced of our good work this quarter with the exit of our coal units at our current facility and the acquisition of the Colbert generating plant.

Next.

Michigan continues to be a solid place for investment.

Our energy legislation is one of the best in the country.

We operate net top tier regulatory environment, providing important certainty for critical customer investments.

And there continues to be evidence to support it.

I will share the details on our fourth.

Fourth consecutive settlement and a recent gas rate case.

Finally, you'll hear from me on the strong progress we've made in cost management, the CE way and other countermeasures to offset the unplanned headwinds experienced early in the year I.

I am pleased with the progress and remain confident in our plan to deliver 2023 and beyond.

Our investment thesis is simple.

Worked for more than 20 years, regardless of conditions.

Over the operational and financial results across the Triple bottom line for all our stakeholders.

At CMS energy, we like to say leaders lead and.

And we are leading the clean energy transformation, we've set industry, leading ambitious net zero targets for both our gas and electric systems and we continue to get it done our actions today serve as proof points that we can and we will achieve our targets.

In June we retired our karn units, one and two were moving 515 megawatts of coal generation for Michigan.

Reducing our carbon profile.

I'd like to take a moment to recognize the service of the individuals at card who dedicated their careers to providing energy for our customers.

I had the opportunity to be there in the final days the facilities operations and I'm proud to share the pride.

Our coworkers have for their work.

I'm also proud of the work we have done to provide a just transition either to retirement or a new place within our company to those who served at this facility.

As we transition out of coal it is imperative that we maintain reliability for our customers and our state.

So in June we assumed ownership and operations of the Colbert generating plant.

This existing one two gigawatt facility maintained important low cost reliable electric supply in Michigan and further bolsters the MISO footprint.

I am proud to share our industry, leading commitments are being noticed and we are now included in the MSCI ESG leaders index.

Only vertically integrated utility to be included in this index.

These are proof points evidenced in our leadership of this important transformation across the industry and will help us attract incremental capital to CMS energy to bolster our customer investments.

Adding to the good work of the quarter.

Signed more contracts in our voluntary green pricing program, which has now grown to 341 megawatts of owned generation.

And I see further growth on the near Horizon.

We received approval for nearly $11 million in grants for RMG facilities to support farms, we partner with as we Decarbonize our gas system.

And we expect our 201 megawatt Heartland wind farm, which qualifies for 10, 7% Roe.

Will be operational later this year.

While these are just a few highlights demonstrate what we do at CMS energy.

We set big goals, we get after it every day we deliver.

Leading the clean energy transformation.

Turning to slide five I want to take a moment to talk about the constructive regulatory environment in Michigan.

Recently, the governor reappointed tier scripts to full term ending in 2029 points.

Appointed Alexandra Purion to fill the remainder of Commissioner Tremaine Phillips term, which ends in 2025.

Element of Commissioner Carryon in continuity in leadership through the reappointment of tier scripts further reflect the constructive and stable nature of the Michigan regulatory environment.

Which remains one of the best jurisdictions in the country.

We've connected with Commissioner Carryon and she has a strong background in de carbonization in transportation electrification and is well suited for the role.

We look forward to working with her and this commission.

As for the regulatory calendar, our gas rate case settlement is one more in the streak settlements and our second gas settlement in just over a year I.

I am pleased with the outcome and the team's work.

This is a clear demonstration of the constructive regulatory environment in Michigan and speaks to our ability to work with multiple parties to provide the best outcome for our customers and our investors.

We expect rates to go into effect October one.

Of the new test year.

And our electric rate case, we are waiting steps position by the end of August and a final order by March of next year.

Within our filing we are requesting approval for a small underground pilot roughly 10 miles implant underground over 400 miles annually.

This is an area, where we have a lot of opportunity to strengthen our system and improve reliability and resiliency, while aligning with our Midwest peers.

Solid energy legislation.

<unk> regulatory construct.

And the evidence to support it.

The top tier regulatory jurisdiction.

Moving on to the financials for the second quarter, we reported adjusted earnings per share of <unk> 75.

Had a strong quarter driven by operational and financial performance and we continue to build contingency through the CE way as we deliver on our year end financial objectives today.

Today, we are reaffirming all our financial objectives, including our full year guidance of $3 <unk> to $3 12 per share with continued confidence towards the high end.

We're also reaffirming our long term adjusted earnings per share growth of 6% to 8% per year with continued confidence towards the high end and remain committed to annual dividend per share growth of 6% to 8%.

As I stated in our Q1 call.

This is not our first rodeo the team has done a remarkable job of mitigating the gap left from a warm winter large ice storm through the CE way operational cost measures finance and other countermeasures, we have made great progress year to date.

Year after year, we deliver in this year will be no different.

This is not about winning one game or one season, it's about winning multiple seasons, winning program continuing our long track record of consistent growth and compounding off of actuals.

Our investors a high quality of earnings do any year.

After year.

Now I'll hand, the call over to Reggie to provide some additional details and insights.

Thank you Garrett and good morning, everyone.

We had a strong second quarter delivering adjusted earnings of 75 per share driven by numerous cost reduction initiatives foreshadowed on our Q1 call, which I will elaborate on shortly.

Our financial performance over the past few months has materially offset the weather driven challenges we faced in the first quarter as such as Gary noted, we are reaffirming our guidance for the year and on a year to date basis. We are on track with adjusted EPS of $1 45 per share given the back end weighted nature of our plan this year.

As you can see on the waterfall chart on slide seven whether it's been a significant headwind to our financial performance in the first half of this year driving 37 per share of negative variance versus the comparable period in 2022.

Great relief net of investment related expenses has resulted in <unk> per share positive variance versus the first half of 2022.

Driven by last year's constructive electric and gas rate case settlements from.

From a cost perspective, our financial performance in the first half of the year has been significantly impacted by higher operating and maintenance or O&M expenses to the tune of.

<unk> 15 per share versus the comparable period in 2022 attributable to storm restoration costs in the first quarter. However, it is worth noting that our operational O&M expenses, which represent the majority of our O&M expense and primarily exclude costs associated with our energy waste reduction programs and employee benefits had trended.

<unk> during the second quarter and were down roughly 10% versus the second quarter of 2022.

So we're seeing the fruits of the numerous operational cost reduction initiatives, we put in place earlier in the year.

Such as reducing our use of consult of consultants and contractors limiting hiring accelerating longer term cost reduction initiatives and eliminating other discretionary spending and of course, leveraging the CE way our lean operating system, we anticipate that our strong cost performance will continue as we move through the second half of the year.

Year.

Rounding out the first six months of the year Youll note. The <unk> 18 per share positive variance versus the first half of 2022 highlighted in the catchall bucket in the middle of the chart. The primary source of upside here was it related to financing efficiencies and shortly capitalize on attractive conditions in the convertible bond market by pricing and 800 million.

Issuance and using the majority of the proceeds to pre fund future parent company financing needs usually pre funding like this are subject to negative carry however, given the current inverted yield curve we.

We have managed to reinvest the proceeds that deposit rates favorable to the underlying funding costs. Lastly, we use the balance of the proceeds from the convert offering to tender a portion of select bonds, well par, which has de levered our balance sheet. All in this opportunistic financing transaction was earnings accretive and is further.

Strengthened our liquidity position.

Looking ahead as always we plan for normal weather, which equates to <unk> <unk> per share of negative variance versus the comparable period in 2022 due to the absence of strong sales of the electric utility driven by last year's warm summer.

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 <unk> <unk> per share versus the first half of 2022.

Our estimates reflect the terms of our recently filed gas rate case settlement agreement, which is subject to commission approval and the residual benefits of our 2022 electric rate case settlement.

Closing out the glide path for the remainder of the year as noted during our Q1 call. We anticipate lower overall O&M expense at the utility driven by the ongoing benefits of the aforementioned cost reduction initiatives.

Some expected favorable year over year variance related to service restoration costs and the usual cost performance fueled by the CE way, which collectively equates to 26 26 per share of positive variance versus the comparable period in 2022.

Lastly, as we discussed during our first quarter call, we're assuming modest growth at North star and the benefits associated with the roughly <unk> 12 per share of pull ahead exercise in the fourth quarter of 2022 as per our original guidance. All in we estimate these items will drive 17.

To <unk> 23 per share positive variance versus the comparable period in 2022.

In summary, we've made great progress to offset the challenging weather experienced in the first quarter, but needless to say, we will continue to plan conservatively and execute as we always do.

Moving on to the balance sheet on slide eight we highlight our recently reaffirmed credit ratings from Moody's as you know we continue to target mid teens <unk> to debt over our planning period as always we remain focused on maintaining a strong financial position, which coupled with the support of regulatory construct and predictable operating cash flow growth supports our <unk>.

Solid investment grade ratings to the benefit of customers and investors.

Moving on to the financing plan slide nine offers more specificity on the balance of our planned funding needs in 2023, which are limited to debt issuances at the utility. This includes both first mortgage bond financings and our securitization financing to address the recovery of the unappreciated rate base at the recently retired carne coal facility.

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As for the parent company given the timing of the convertible bond issuance, we have been able to delay the settlement of the equity forwards that price last year. So the roughly $440 million of forward equity contracts will be settled commensurate with the needs of the business overtime.

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 yearend 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 <unk>.

Investors and this year is no different and with that I'll hand, it back to Gary for his final remarks before the Q&A session.

Thank you Rajeev.

Our track record spanning two decades and consistently delivers industry leading results any conditions.

This is what we do.

We deliver for all stakeholders year in year out.

And this year will be no different.

With that Michelle please open the lines for Q&A.

Thank you very much garik.

Ladies and gentlemen, we will now begin the electronic question and answer session.

If you would like to ask a question.

Press Star followed by the number one on your telephone keypad.

If your question has been answered and you would like to withdraw from the queue. Please press star followed by the number too.

And if you are using a speaker phone please lift the handset before pressing any keys.

We will take questions in the order. They are received and we will take as many questions as time permits.

One moment. Please for your first question.

Your first question will come from Jeremy tonic of J P. Morgan.

Please go ahead.

Hi, good morning.

Hey, good morning, Jeremy.

Good good thanks.

Maybe just wanted to start off with the underground pilot if I could and just wondering if you could expand a bit more I guess on what would define success, there or I guess future outlook for how quickly.

That could fold into the plan and larger size over time.

So I've got an interesting story and as Jeremy I was out with our crews here about two weeks ago, and we had been underground in a replacement underground.

Subdivision area, so remember in Michigan.

<unk>, our underground a lot of people requests or service underground and so we know how to do this work and in fact, we have a large gas business that does a lot of underground. So we're sharing practices back and forth and so again right.

Right now we are starting out with a pilot and that's just a nice way to step into this with the public service Commission to show them, our capabilities of being able to deliver that at a low cost for our customers again as I've shared in past past called cost per undergoing in Michigan given the.

The soil given.

Where we intend to put the underground.

It is really conducive that's really at that almost at parity with above ground construction. So it makes it really affordable for our customers and so we intend to use that practice, it's recognized <unk> as a best practice, not everywhere, but strategically or selectively across our system and so it starts with 10 miles got six counties identified projects, starting up and one of the norm.

The Grand Rapids area here about two weeks the public service Commission will beyond that that site as well to watch that observe that.

We intend to grow that is about 400 miles annually as I've shared in the past.

15% to 15% of our system is underground other Midwest peers around 35% to 40%. So again, it's the best practice and we see it as way to improve reliability and resiliency for the future.

Got it that's helpful. Thank you for that and storms, it's been topical in Michigan obviously.

Recent time here and just wondering if you could provide a bit more color I guess on.

Your your efforts hardening efforts and where you stand where you want to be.

To improve resiliency, there and just kind of how you feel local stakeholders are.

Aligned against those against this outlook in the state.

As I shared in the Q1 call our focus on clearly on reliability and resiliency coming off the large ice storm we are making.

Lot of investments considerable investments across the electric system and we've seen good. So good performance here over the course of the summer even just last night, we had 65 mile winds come through in the system performed well with about 20000 customers out. This morning were quickly restore them and so the investments we are making.

Its a large system, but the investments we're making are certainly showing benefit. So we've got a great plan. We're filing that plan here in September with a five year with our five year infrastructure plan.

This audit that's underway that will start here in September will be another point of alignment.

Are the right investments across the electric system to improve reliability and resiliency.

Things are going well and our system is performing well and so I feel good about our performance. This summer and we will continue to be.

We focused on it.

Got it that's helpful I'll leave it there thanks.

Thanks, Jeremy.

Your next question comes from Julien Dumoulin Smith at Bank of America. Please go ahead.

Hi, Good morning. This is Heidi Hogan for Julien. Thank you for taking my question.

Hi, Hi, good morning, Hi, Hi.

First question, noting your plans to file another <unk> in the next year or two.

See any read throughs for your next RFP related the latest peer Irt's settlement approved by the Michigan.

Yes.

Either from the call retirement renewables investments there or otherwise.

Well first I want to congratulate that peer utility that had an ERP settled this week. So congratulations to the DTE team a lot goes into those arpus and if you take one thing away from that.

AARP that just speaks to the constructive environment here in Michigan for settlements for US a settlement and IRB for DTE.

That's really good.

So we will obviously look at their IOP.

Look at what we want to take into our next IOP. The other things that we'll consider the inflation reduction Act has certainly changed ptc's <unk> in shaping the industry.

Investment.

Infrastructure and jobs Act has also shaped some things in our industry and so all of that will go into our next AARP and in some of our thinking.

The IRB process takes about 12 to 18 months to build really a thoughtful and thorough.

Plan that would submit to the commission I anticipate we'll start that process in 2020 for building out that so you can.

Played out that means we file maybe late 2025 2026 timeframe.

And so there is still some work to define that and tie that down but that's our early indications of how we think about our next IOP.

Great. Thank you and then.

Second question from me.

Can you comment on the latest.

Yes, the investigation into the natural gas meters.

New service delays.

How are you planning to address this issue then.

Are there any potential capital opportunities that may result from that.

Obligation. Thank you.

Thank you for your question.

Question.

It probably goes without saying this but I'll say it anyways, we take every and PSC inquiry seriously and from a customer perspective and bills, we've got to get that right but.

But maybe a little background here Heidi.

Our meters communicate wirelessly, that's our smart grid is all wireless.

And obviously there is a wireless carrier that communicates that signal back to our home office is here.

And.

As you might imagine those wireless carriers are moving from <unk> to <unk>, So theyre shutting down some of the <unk> systems move into <unk>.

And they made us aware of that and we're working with our meter vendor.

To upgrade those meters. So they had the right communication components to operate at <unk> and <unk> technology that process was underway. However, the meter vendor ran into supply chain problems in part due to the pandemic, where they couldnt get the components for the meter that.

That delayed our our deployment of these meters and so when we walked in in January of 2023.

We had about 190000 meters that were no longer communicated today, that's around 33000, and we continue to work with our meter vendor to close that and we expect that to be close by August .

As you imagine when those meters are communicating it creates the potential for estimated reads our meter vendor.

Was supposed to go out and read meters for us to close that gap. They did not meet our expectations around that and we had to step in and close that gap, which we've done.

And our reads are being completed and any consecutive estimates are now within historical parameters and so from a media perspective from a consecutive estimate perspective, those are resolved or will be resolved in August we.

We will report to the commission on August 4th.

And so we will do that from a materiality perspective.

We factored that in both the meeting the reading of the meters and any penalties. We may see from the public Service Commission and they are incorporated within our guidance that we've offered I do not see a capital opportunity here.

But rest assured.

From a customer perspective and NPS Pete.

In PSC perspective, we're running this to ground and were doing a root cause on it and make sure that it will not happen again for our customers.

Thanks for your question Heidi.

Thank you.

Your next question comes from Michael Sullivan at Wolfe Research. Please go ahead.

Okay.

Hey, Rob Good morning can you hear me okay.

We get more Mike, yes, Okay, Great Hey, Garik.

Maybe this one for Roger just wanted to ask on the.

The delay in the draw on the.

Forward equity and just how we should think about.

Timing, there whether that ends up getting need at all I think my recollection is.

Outside of that you had no other needs.

Till 2025, but.

Yes, maybe just a little more color on what the equity picture looks like going forward now that you've done the convert.

Yes, Mike. Thanks for the question, Yes, we will still plan to settle the equity it'll likely be I'll say the back half of this year and deep into the second half so call. It late Q3 or in Q4, but we do still plan to settle the equity over the course of this year.

Okay, great and just in terms of the.

The land equity does that kind of move you at all up or down within.

Within your mid teens target.

No. The convert transaction was for all intents and purposes. When you take into account all of the puts and takes as effectively credit neutral maybe modestly accretive and then the delay of the equity settle again, it's still going to take place over the course of this year. So again, all credit neutral and so we will still be right in that mid teens area.

Well in alignment with the expectations of the <unk>.

Rating agencies, so we can maintain our investment grade ratings.

Okay, great. Thank you very much.

Thank you.

Yeah.

There are no further questions from the phone line. So I will turn the conference back to Garik Rochelle for any closing remarks.

Thanks, Michelle I'd like to thank you for joining US today, we'll see on the road soon take care.

Thanks.

Okay.

Ladies and gentlemen, this does conclude your conference call for this morning, we would like to thank you all for participating.

Ask you to please disconnect your lines.

Thanks.

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