CMS ENERGY CORP(CMSA)Q2 2025 法說會逐字稿

Good morning, everyone, and welcome to the CMS Energy 2025 Second 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. Just a reminder that there will be a rebroadcast of this conference call today beginning at 12:00 p.m. Eastern Time running through August 7. 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. Jason Shore, Treasurer and Vice President of Investor Relations.

Thank you, 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. And now I'll turn the call over to Garrick.

Thank you, Jason, and thank you, everyone, for joining us today. Our investment thesis is robust and solid, continuing our track record of industry-leading results. You know this, and you have seen the results it delivers. As I've said before, Michigan is open for business. Today, I'm pleased to announce we have reached an agreement with a new data center, which is expected to add up to 1 gigawatt of load. This load is incremental to our plan and part of the 9-gigawatt pipeline that we have been working to locate in our service area. We expect this load early ramp to start to show up in the latter portion of the 5-year plan. We continue to see positive momentum with data centers within the 9-gigawatt pipeline and expect additional progress once we finalize the data center tariff. In addition to low growth from data centers, Michigan is on the move. Grand Rapids, the heart of our electric service territory, was recently ranked the number 1 city on the rise in the U.S. by LinkedIn, highlighting their diverse industries from tech, insurance, manufacturing, and health care.

This area is growing nicely, bringing jobs and people to the state. Once again, CNBC ranked Michigan in the top 10 best states for doing business, and we are seeing it. As I shared in Q1, we continue to see strong housing starts, alterations, as well as upgrades and relocations, all signs of positive growth among residential and commercial customers. All of this drives our long-term annual sales growth estimates of 2% to 3%. Remember, this is before this new data center is fully online. We're excited about and committed to Michigan's future prosperity, and we are prepared and ready to serve its growing energy needs. On this next slide, I want to connect a few dots, which highlight the investment opportunities we see above and beyond our 5-year plan. Specifically, I want to share some early insight into our upcoming integrated resource plan filing. A long runway of customer investments is great but isn't sustainable if your customers cannot afford them.

So I like starting with customer affordability. What we know to be true is that growing demand, like I shared on the previous slide, enables longer-term cost savings for our customers. As our load grows, we can expect to spread fixed costs over a larger customer base, a win for all. Our strong focus on these cost-saving opportunities keeps bills affordable, both gas and electric, and allows us to make needed customer investments. Many customer investment opportunities greater than $25 billion above and beyond our 5-year plan exist. We've talked previously about the investments needed in our electric grid, which drive resiliency and reliability for our customers through our electric reliability roadmap. In addition, we have important investments clearly articulated in our renewable energy plan, or REP, to meet Michigan's clean energy law. Today, I want to highlight our Integrated Resource Plan, or IRP, which we will file in mid-2026.

We are still preparing for this filing but getting a clearer picture of what will be required for the future. As I mentioned, we are building renewables required by the law and included in the REP, which provides energy but limited capacity. Our IRP will primarily address capacity. When we model the 2% to 3% sales growth that we are realizing, the need to replace plants, existing capacity that will retire over the next 5 to 7 years, and the need to replace a large PPA that will expire in 2030, the model points to additional storage and gas capacity. We anticipate needing to build more storage than the amount required by the 2023 energy law. We currently view this as a mix of owned and PPAs with the financial compensation mechanism. Of course, we'll take advantage of supportive tax credits for storage. We also anticipate new gas capacity at multiple locations, and we are well into the planning and preparations to realize this need.

Our first cut looks like an additional $5 billion of opportunity outside the 5-year plan, but understand that this is an early number and could be higher. We'll continue to keep you updated as we prepare prior to filing this important IRP. As I've shared before, CMS has a long history of working effectively with all administrations, and I continue to be proud of our agility as the federal environment continues to evolve. Let's start with the One Big Beautiful Bill Act and how it impacts the utility. As we understand the provisions today, our renewable projects within the 5-year financial plan are well positioned to meet timelines and requirements to receive full production and investment tax credits, as well as transferability through 2029. These derisk $4.5 billion of capital for the renewable portion of the 5-year plan at the utility. It ensures full transferability of the tax credits, which Rejji will summarize in a moment.

This puts us well on track for the 2030 renewable requirement in Michigan's energy law in a way that maintains affordability for our customers. To the degree we see affordability concerns post-2029, we have options within the law to mitigate costs, including out-of-state PPAs where capacity factors may be higher or an extension to the compliance period. At a minimum, we're seeing cost savings on self-build projects through good lean engineering in the CE Way to take costs out for our customers. Let me address North Star. This business makes up approximately 5% of the earnings mix, with the majority of growth at Dearborn Industrial Generation, or DIG, with energy and capacity sales. The renewables portion of the business is very small, where we typically complete 1 to 2 solar projects a year with utility-like returns or better. At North Star, our renewable projects are safe harbor through 2027, with some options in 2028.

Many of these projects are already contracted with offtakers, materials secured, and a solid plan to execute, including strong contractual language. As we move forward, we'll continue to evaluate the need for capital across the business as we always do while being mindful of the return on those investments. In light of the passage of the One Big Beautiful Bill and subsequent executive order, we're using a sharp pencil in the 5-year planning process, which is well underway. This includes growing value at DIG and recontracting both energy and capacity as both markets continue to be strong, as well as the ability and willingness to shift capital to utility investments that benefit our customers. Shifting to the Federal Power Act 90-day emergency order, in May, we were ordered by the Department of Energy to continue to operate our J.H. Campbell coal facility. We are complying with that order and dispatching into MISO.

We are also currently reviewing our maintenance and investment plans for the facility should we see a push for longer-term use. Keep in mind, the DOE's order provides for cost recovery, and we have filed a request with FERC for recovery from all MISO North and Central customers served and benefiting from the supply resource. We expect a positive outcome from this proceeding that will be good for all stakeholders. Finally, our minimal exposure to the auto industry, diverse supply chain, and continued focus on moving to U.S.-based suppliers further limits potential tariff impacts. Much of the exposure is related to capital equipment, so any impact would be spread over the life of the asset, with minimal impact on earnings and customer rates. To date, we've only experienced about $250,000 in increases. Again, I appreciate the team's efforts on multiple fronts to continue positioning CMS Energy for success in this dynamic federal environment.

I want to take a moment to highlight Michigan's constructive regulatory environment. Last month, the commission approved the first-ever storm deferral at the utility, a new precedent for Michigan. It speaks to our performance during the March and April ice storms and the constructive nature of this commission. While this is a unique aspect of the utility sector, it was noted as a best practice by Liberty Consulting in the third-party distribution audit and was approved in a timely fashion. This is a great step to strengthen an already strong regulatory environment in the state. We continue to be supportive of the Liberty audit of our distribution system commissioned by the MPSC, and the results point directly to the important investments needed to improve reliability for our customers, bolstering the game plan we laid out in our reliability roadmap. We will continue to weave the audit findings into future rate cases.

Jumping to the rate cases: on the electric side, our current rate case filing is larger than what you've seen from us in the past, requiring a $460 million revenue increase, which aligns well to significantly improve reliability for our customers through additional capital investments and O&M, including vegetation management. If we were to achieve 100% of the rate case, our residential electric bills will continue to be below the national average. In our gas case, we received very constructive recommendations from the staff supporting about 80% of our revised ask and about 95% of our capital. While we're always open to settlement, we're confident in the quality of our case and comfortable going the distance to a fully adjudicated order. We expect an order in our renewable energy plan by mid-September. Our REP will further define our renewable investments while feeding into our integrated resource plan that we'll file in mid-2026.

We are making important investments for our customers in the future of our growing state, and we continue to see constructive outcomes time and time again. Finally, I'd like to take a moment to welcome our new Commissioner, Shaquila Myers, who was appointed earlier this month by the Governor. Commissioner Myers has an impressive background. She was a member of the Governor's senior leadership team and previously led Speaker of the House, Joe Tate's office, as his Chief of Staff. She understands the importance of economic development to bring good paying jobs to Michigan and played an instrumental role in the development of the 2023 energy law. We look forward to working with Commissioner Myers and the rest of the commission and staff as we have in the past to reach constructive regulatory outcomes. Now on to the financials for the quarter. We are in a strong position heading into the second half of the year.

For the first half, we reported adjusted earnings per share of $1.73, well ahead of our budget and where we had planned to be according to our full-year guidance. The team has delivered strong performance, particularly in Q2 on all fronts: regulatory, operations, and financial. Therefore, we remain confident in this year's guidance and long-term outlook, reaffirming all our financial objectives. Our full-year guidance remains at $3.54 to $3.60 per share, with continued confidence toward the high end. Longer term, we continue to guide toward the high end of our adjusted EPS growth range of 6% to 8%. With that, I'll hand the call over to Rejji.

Thank you, Garrick, and good morning, everyone. On Slide 9, you'll see our standard waterfall chart, illustrating the key drivers impacting our financial performance for the first 6 months of 2025 and our year-to-go expectations. For clarification purposes, all variance analyses herein are in comparison to 2024, both on a year-to-date and year-to-o basis. In summary, through the first half of 2025, we delivered adjusted net income of $518 million or $1.73 per share, which compares favorably to the same period in 2024, largely due to the absence of unfavorable weather from the prior year and continued constructive regulatory outcomes. To elaborate on the top line impact of weather, favorable weather in the second quarter, largely in June, coupled with a relatively normal winter in Q1, provided an aggregate benefit of $0.32 per share of positive variance. The weather outlook in our service territory remains quite good for the balance of the summer.

Rate relief net of investment-related expenses resulted in $0.09 per share of positive variance due to constructive outcomes achieved in our electric rate order earlier in the year and our gas rate case settlement in the second half of 2024. Moving on to cost trends, you'll notice in the third bar on the left-hand side of the chart, $0.04 per share of negative variance versus the comparable period in 2024 due in large part to increased vegetation management in accordance with our electric reliability roadmap. What's less visible in that bar on the chart, but still quite meaningful, is the favorable impact of the service restoration expense deferral granted by the commission in June, enabling us to establish a regulatory asset on the balance sheet for the substantial costs incurred during the March and April storm. This timely and supportive action by the commission is a testament to the historic nature of the storm and our strong restoration efforts.

Rounding out the first 6 months of the year, you'll note a negative variance of $0.27 per share, highlighted in the catch-all bucket in the middle of the chart. The primary drivers of the negative variance were related to the planned outage of our Dearborn industrial facility, which I'm pleased to report is fully operational and expected to deliver normalized earnings for the remainder of the year. We anticipate back-end weighted tax benefits from select renewable projects at North Star. Other notable drivers in this category include the impact of current financing activities thus far in 2025 and slightly lower electric and gas non-water sales volumes. Looking ahead, we plan for normal weather, which equates to $0.11 per share, a positive variance for the remainder of the year, given the absence of the mild temperatures experienced in the fourth quarter of 2024. From a regulatory perspective, we're assuming $0.18 per share of positive variance, largely driven by the aforementioned electric rate order received from the commission earlier this year and the expectation of a constructive outcome in our pending gas rate case.

Closing out the glide path for the remainder of the year, as noted during our Q1 call, we anticipate lower O&M expense at the utility driven by the usual cost performance fueled by the CE Way, which we're estimating at $0.01 per share of positive variance. Lastly, an estimated range of $0.14 to $0.20 per share of negative variance consists largely of the absence of select one-time countermeasures from 2024 and the usual conservative assumptions around weather-normalized sales and parent financings among other items. Given our strong year-to-date performance, particularly in Q2, we remain confident in our ability to deliver on our full-year financial objectives to the benefit of all stakeholders. Moving on to credit quality, it is worth noting that Moody's reaffirmed our credit ratings in May, as noted at the bottom of the table on Slide 10, and we are currently working through the review process with S&P. Longer term, we'll continue to target solid investment-grade credit ratings and will manage our key credit metrics accordingly as we balance the needs of the business.

Slide 11 offers an update to our funding needs in 2025 at the utility and at the parent. With two quarters under our belt in 2025, I'm pleased to report that we have completed the vast majority of our financing plan for the year. As you'd expect, we're busy evaluating alternatives for our remaining funding needs at the parent. We've executed 40 equity contracts of approximately $350 million, derisking roughly 70% of our planned equity needs for the year. We continue to see strong appetite in the bilateral market for tax credit transfers and are on track to complete our planned monetizations for the year. 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 enabled us to deliver on our operational and financial objectives, irrespective of the circumstances to the benefit of our customers and investors. With that, I'll hand it back to Garrick for his final remarks before the Q&A session.

Thanks, Rejji. We've had a great quarter, and we are well positioned to deliver on the full year. What I'm even more excited about is how this team continues to deliver great outcomes for our customers and investors. The data center agreement is a big win and reflects progress in our growth as well as the opportunity to invest in new renewable and thermal resources. It is an exciting time in this industry, and CMS Energy is well positioned. With that, please open the lines for Q&A.

Our first question is from Julien Dumoulin-Smith at Jefferies.

Julien, I look forward to the next video.

You better believe it. We've got to wear another rally. With that said, I wanted to speak about the gigawatt that you announced this morning. I would love to get a bit more detail here. How do you think about the ramp in the load? You mentioned it's towards the end of your outlook. Can you elaborate a little more specifically? Also, can you provide more insight into how this fits into your resource mix? I understand that this is somewhat dynamic, but can you at least give us a preliminary idea of how you're thinking about it? When you say it's ramping up in the second half of the plan, when will you reach that gigawatt? Is it just a hundred megawatts in the latter part of the plan? Please give us more information if you can, and I appreciate it.

We're excited about the opportunity here. The team has done a nice job of converting part of this 9 gigawatt pipeline. We have an agreement in place, and the counterparty has invested a significant amount of capital into this agreement to secure materials and equipment and finalize design work. From a ramp perspective, those conversations continue with the counterparty. Specifically, it's in '29 or '30. We're also looking at that ramp rate, which is still being determined in discussions with the counterparty. So that gives you a flavor of that. Regarding the resource mix, I love the fact that the ramp is in 2029 or 2030 into the next decade, giving us a ton of flexibility from a resource perspective. Remember, I'm a little long from a capacity perspective. It's a good starting point as I'm still building capacity today, even though I’m long, thanks to the renewable energy law. I'm building renewables; they have limited capacity, but I'm also building storage. That’s already underway, along with several PPAs on storage. I hope it’s clear we’re well into the preparation phases for gas capacity build-outs. That’s the mix of the supply resources that will serve this customer.

If I could follow up quickly, that 9 gigawatt number on the pipeline side, how are you seeing that evolve? I think it's flat quarter-over-quarter. In this modern day and age, I'm curious about how you're seeing it evolve. Would it be materializing on the tail end of the period or beyond that point, given what you're seeing on ramp rates for other customer contracts?

That 9 gigawatt pipeline continues to fill. It's conservative. If you look at some of our other public documents, you would see a larger pipeline. We feel confident in the 9 gigawatts, and I've described it as a gradient. There are some customers within that pipeline where we are still exchanging terms and conditions. One of the next stage gates specifically is this data center tariff. I expect that additional customers could convert once we have that data center tariff in place. We’re continuing to see good progress with that pipeline. I'll also mention we've been focusing a lot on data centers, but there's a robust manufacturing base involved as well, and there are over 200 non-data center customers that are part of this overall large growth potential. So again, things in Michigan look strong and promising for the future.

Our next question is from Nicholas Campanella from Barclays.

I wanted to pick up where you left off and clarify how the 1 gigawatt of new data center customers interacts with the $5 billion of CapEx upside in the IRP. Is there a tipping point where if you do another gigawatt, you'd go back and revise that $5 billion number? Just where is the point in which you look at a higher than 2% to 3% long-term sales outlook?

Yes. Let me broaden your question a bit. We’ll have another capital update in the Q4 call, and there are several things I see. We'll update the grid numbers. The reliability and resiliency piece and the economic projects will fall into that as well. So you'll see that grow, and we'll have the REP approved by that time. The renewables segment will be a big piece of that 5-year plan. The relationship between the Big Beautiful Bill and the accelerating projects may result in more developers pulling projects forward, providing the opportunity for transfer arrangements and possibly some PPAs with the financial compensation mechanism. So that might grow, particularly in the near term for the utility. We're looking at some dollars for this IRP, and we need to balance that as we will file an IRP in 2026, taking about 10 months for a rate case approval, putting it in 2027. We’ll need to run some things in parallel because we need to build out the future capacity. So you’ll see elements of that throughout the plan. The $5 billion figure is based on the 2% to 3% sales growth we are realizing, retiring some plants, and replacing a large PPA. If we add this gigawatt, we would need to adjust that number up, and we will detail that during the Q4 call, weaving it into our future capital plans.

Excellent, that's very clear. How do you feel about the gas case at this point and the potential to settle that? We've seen more litigated outcomes on the electric side, but I wanted to take your temperature on the gas.

We're in a great place right now. When I say great place, 80% of the revised task and 95% of our capital are approved. That’s a great case from a quality perspective. We're continuing to be open to settlement. We expect to have a PFD by August. We're in a good position overall, and I’m comfortable going to a fully adjudicated order.

I appreciate the financing update, Rejji. It seems like you're executing on 2025 as planned. How are you thinking about 2026, with the opportunity to perhaps derisk the equity in that year? Would you be open to that?

I appreciate the question, Nick. The quick answer is that as we look at the second half funding needs for 2025, we will account for our funding needs in the front half of 2026. If there are opportunities to pull ahead some of those financing needs this year, we may look to do that. We'll keep all options on the table, as you'd expect. The funding environment remains quite good, so we're going to maintain as much flexibility as possible.

At this time, there are no further questions in the queue. I'll hand back to Mr. Garrick Rochow for any closing remarks.

Thanks for joining us today. I look forward to seeing you on the road. Take care and stay safe.

This concludes today's CMS Energy Q2 2025 call. Thank you all very much for joining.