CMS Energy Corporation (NYSE:CMS) Q4 2022 Earnings Call Transcript February 2, 2023
Operator: Good morning to everyone! Welcome to the CMS Energy 2022 year end results call. You can access the investor relations section on CMS Energy’s site to view the earnings release from CMS Energy earlier today as well as the presentation used in this webcast. The call is being recorded. Following the presentation, we will hold a question-and answer session. At that point, we will provide instructions. As a reminder, the conference call will be replayed today at 12:00 PM Eastern Time. It will run through February 9th. This presentation is also available online at CMS Energy’s Investor Relations section. At this point, I’d like to hand the call to Mr. Sri Maddipati (Treasurer and Vice President for Investor Relations and Finance).
Sri Maddipati: Adam, we are grateful. Good morning to all and thank-you for joining us today. Garrick Rochow is the President and Chief Executive Officer. Rejji Hayes is the Executive Vice President, Chief Financial Officer. Forward-looking statements in this presentation are subject to uncertainties and risks. For more information on the risks and other factors that could affect our actual results, please refer to our SEC filings. This presentation also includes non GAAP measures. The appendix contains reconciliations between these measures and the most directly comparable GAAP measure. These are posted on our site. Garrick will now take the call.
Garrick Rochow: Sri, we are grateful for your presence and all of you who joined us today. 2022 was a great year for CMS Energy both financially and operationally. Even more, CMS Energy’s 20th anniversary of consistently delivering industry-leading financial performance marks its 20th year. Many of our customers have been with us throughout this journey. I am grateful for you and I thank. We put our words into practice. Our simple investment thesis supports our performance, which delivers for both our customers and our investors. We remain at the forefront of clean energy transformation. We are proud of the support regulatory structure in Michigan and our net zero commitments, which are backed up with solid plans in the approved Integrated Resource Plan, IRP.
We are all disciplined in reducing costs and striving to improve every day. To achieve our operational and financial goals, we use the CE Way to connect corporate functions with frontline staff. This helps to keep customer bills affordable. It’s been a remarkable year on the regulatory front. Not one, not two but three cases were sold, highlighting Michigan’s top-tier regulatory background. This all leads to the premium total shareholder return that CMS Energy is known for. Let me share with you some of our biggest wins over the past year. Our commitment to people. This includes our coworkers who show up everyday with the heart of service and our customers who rely on us to provide safe, reliable and affordable energy.
We were named the Best Employer of Women in the Utility Sector in 2022. Forbes also recognized us as a Top Employer of Diversity and Best Large Employer. This team of coworkers continues to deliver results by following the CE Way. Our customers saved $560 million by our coworkers’ commitment to operating our generation assets best-in class in 2022. This is nearly twice the amount we delivered in 2021. Our team continues to create more value by operating our own generation more efficiently that the market. This is a true story. In December, during the storm Elliott and when other power was cut off, this team and these generation assets exported energy from Michigan to MISO. Also, I am pleased with the state’s economic growth and the leadership it has shown.
As I shared during the Q3 Call semiconductors, battery manufacturing, and polysilicon were up all calling Michigan home, there are 230MW of new and growing load, with more than $8B in Michigan investment. A Department of Energy report ranks Michigan in the Top 3 for planned battery plant capacities, further distinguishing our state from other states. All across the state, our commitment has resulted in more load growth, higher employment, and greater investment. This creates a favorable environment. The state remains strong into the future. With our IRP, we are still focused on preparing for the future. It delivers more savings to customers with approximately $600 million over our previous plan and reduces carbon footprint by more than 60%. We will be exiting coal in 2025 with 8 gigawatts store and 550 megawatts battery through 2040.
We maintained our track record of managing costs to keep prices affordable and continued to deliver $58 millions of savings through the CE Way in 2022. This discipline to constantly improve has contributed to the success of our settled electric rate and gas rate cases. It is evident in the $47 million worth of regulatory mechanisms to assist infrastructure investments and customers. Both our customers as well as investors will reap the benefits of our $22million voluntary refund mechanism, which includes a $15 Million bill credit and $10,000,000 customer assistance. These regulatory tools reduce the risk of 2023 while providing customer benefit. We expect this strong execution of these results, and it is our responsibility to meet our triple bottom-line positioning for our business’ sustainable long-term growth.
2022 will mark another year for premium growth. The team delivered regardless of the conditions. Our 2022 adjusted earnings per shares were $2.89, which was at the high end of our guidance range. I am also happy to announce that our 2023 adjusted full year EPS guidance has been increased to $3.06 to 3.12 from $3.05 and $3.11 per shares. This compounded off 2022 actuals, as you would expect from a premium company like CMS Energy. We expect to continue to be at the high-end, which indicates that we are confident as the year begins in a strong place. The CMS Energy Board of Directors approved a $1.95 per-share dividend hike for 2023. Long-term, we remain confident towards the high-end end of our adjusted growth range of 6 to 8 percent and long-term dividend yields of 6% – 8%. We also continue to target a payout ratio of approximately 60%.
Finally, I am happy to share that our utility customer five-year investment plan has been renewed. It will increase our existing plan by $1.2Billion to $15.5Billion through 2027. Given our proven ability to manage work and deliver consistent industry-leading growth, I am confident in our plan for 2023. It’s not a coincidence that I began my prepared remarks by referring to our investment thesis. It works because we live it. Slide 6 features our $15.5 billion five-year investment plan for utility customers. This represents a greater than 7% annual rate growth in support safety, reliability and investments in our electric or gas systems. It paves the road to a clean-energy future that net zero carbon, methane, and greenhouse gas emissions.
Notice that 40% of our customer investments go towards renewable generation, grid modernization, maintenance service replacements for our gas system, and other important areas as we lead clean energy transformation. Our capital runway is long and solid. We also have growth drivers beyond the traditional rate base. These include adders that are built into legislation to provide incentives for our energy efficiency and demand management programs, as well as the financial compensation mechanism, FCM earned on PPAs. Our non-utility company NorthStar Clean Energy will also provide incremental earnings as they continue to grow their contracted renewables and enjoy better pricing for the energy they sell at our DIG facility.
We are achieving a 10.7% ROE in renewables, which is necessary to meet our renewable portfolio standards. In addition, we are currently working to complete the Heartland Wind Project by 2023. These regulatory incentives are an integral part of Michigan’s energy law. They, along with the strong regulatory structure, continue to support customer investments. The Energy Law also provides certainty for recovery before we look at 10-month rate cases in regular oil tracking mechanisms. This allows us to smoothen the impact of commodity price fluctuations on our customers. To describe it, I used the term incredible earlier. We made all settlements in IRP, our gas rate and electric rate cases. This provided more certainty for customers’ 2023 investments. This was not an accident. We have a solid law and strong regulatory structure. Our enhanced regulatory approach enables our clients and investors to collaborate with multiple parties on complex cases.
We intend to keep up the excellent performance in the next rate cases cycle. We filed our December gas case and will file our next electric rate case later in the year. These outcomes will provide further certainty for customer investments in 2024. We are aware that strong customer investments and a strong regulatory structure loan will not lead to sustainable growth. We are committed to keeping our customers’ bills affordable. Inflation was a major concern throughout 2022 and will be as long as 2023. First, let me remind you that CMS Energy is well-positioned in relation to key inflation sources, including labor, commodities, and materials. We also delivered approximately $150 million in CE Way savings in the last three year and expect over $200 million in large, periodic savings as PPAs expire or as we exit coal-generation.
In our service area, we are also experiencing significant growth in industrial and commercial load. There are many avenues for growth. Some customers have already opened new facilities, while others are still in the early stages of construction. This new opportunity to sell, both short- and long-term allows us to spread costs among a larger customer base, thereby lowering rates for all our customers. It shouldn’t surprise me that I’m happy with 2022 and confident about 2023. This proven strategy continues to prove its worth. Now, I’ll pass this call on to Rejji. He will provide additional details.
Rejji Hayes: Good morning to everyone and thank you Garrick. Garrick pointed out that we had a strong financial performance in 2022, with an adjusted net income of $838million, which translated to $2.89 per shares at the top end of our guidance range. Favorable weather and solid industrial and commercial load were the key drivers of our financial performance for full year 2022. The attractive economic conditions within our service territory and rate relief without investments are the key drivers of this latter figure. These positive drivers were partially offset partly by higher expenses due discrete customer initiatives. These initiatives lower bills, support our most vulnerable clients, and improve safety and reliability in our gas and electricity systems.
Garrick noted that the strong performance of 2022 allowed for significant financial flexibility at year-end, which enabled us, as Garrick mentioned, to de-risk our 2023 financial plans to the benefit both customers and investors. Slide 10 explains the strength of our financial performance. It will be clear that we exceeded or met the majority of our financial objectives for the year. An EPS perspective, our consistent performance beyond plan throughout 2022 enabled us to raise our 2022 adjustedEPS guidance for our third quarter call. We were able to settle $55 million worth of equity forward contracts on time. More importantly, we were able to price approximately $440 million equity forward contracts at an average weighted-average of more than $68 per share.
Photo by American Public Power Association, Unsplash
To meet the parent company’s financing needs for the acquisition of Covert natural gas generator facility to support our IRP. The financial target that was not met in 2022 was the customer investment plan of the utility. This was budgeted at $2.6 billion. We finished the year at $2.5billion, just shy of the target. This was due to the timing for a wind project to support Michigan’s Renewable Portfolio Standard, which was largely pushed into 2020 and is currently under construction. Slide 11 shows our 2023 adjusted earnings guidance. Garrick also noted this. We have increased our 2023 adjusted earnings guidance by $3.06 – $3.12 per Share from $3.05 – $3.11 per Share with continued confidence towards the upper end of the range. You can see that our EPS growth will be driven primarily by the utility, as it has done for several years. We also expect modest growth for NorthStar Clean Energy, a non-utility company.
In order to avoid financing problems in 2023 beyond the settlement of equity forward contracts for Covert, we expect the plant to be quiet. We also plan to keep the business’s usual conservative assumptions. We will use the slide 12 waterfall chart to explain the plan to reach our adjusted 2023 EPS guidance range. In this case, $0.20 per share of negative annual variance is required. This is due to the lack of favorable weather in 2022. In addition, $0.14 of the EPS increase will be attributable rate relief. This is mainly driven by the recent electric and gas rate order and the expectation of a constructive outcome to our pending gas rate case later in this year.
Rate relief, figures are shown net of investment-related costs like depreciation, property tax, and utility expense. You’ll notice $0.04 per share positive variance due to productivity. This is due to the CE Way and other cost-reduction initiatives. In the last bar, on the right, we assume the usual conservative estimates about weather-normalized and non-utility sales, as well as the benefits of significant reinvestment activity that was implemented in the fourth quarter 2022 via regulatory filings and traditional operational pull forward. These assumptions result in $0.19 to $0.25 positive variance compared to 2022.
We will continue to adjust to changing circumstances throughout the year, to mitigate risks and to deliver our operational and financial goals to the benefit both customers and investors. Slide 13 contains a summary of both our long-term and near-term financial goals. To avoid repetition, I will limit my comments to those metrics that we haven’t yet covered. We will continue to aim for solid investment-grade credit ratings, and we will continue to monitor our key credit metrics. We will settle the Equity Forward Contracts for Covert Financing in the second quarter 2023. We have no planned equity financing needs until 2025. We plan to continue our At The Market equity issuance program (or ATM equity issuance) in the remaining years of our plan. This is due to the significant increase in utility customer investments over the five-year period.
As such, we will be filing a – Perspective Supplement to reflect the revision to our ATM program in the latter part of this year. Slide 14 gives more details on the balance of our funding requirements for 2023. This is limited to debt issues at the utility. Slide 14 also notes that a large portion of the page’s data has been priced and refunded in the past few weeks. Actually, the $450 million tranche of debt financing that Covert will require to be funded in the second quarter is part of the $825m of utility bond financings. We have therefore fully de-risked the financing requirements for this critical component of our IRP. This was done with attractive terms that are beneficial to customers and investors.
Slide 10 provides more details on our financial performance in 2022. It will be clear that we have met or exceeded all of our key financial targets for the year. From an EPS perspective our consistent performance above the plan throughout 2022 allowed us to raise and decrease our 2022 adjustedEPS guidance on our third quarter conference call. We were able to settle $55 million in equity forward contracts according to plan. More importantly, we opportunistically valued approximately $440,000,000 of equity forward contract at an average weighted price of $6 to $8 per share. This was to meet the parent company’s financing requirements for the acquisition of the secret natural gas generator facility to support our IRP.
The $2.6 billion customer investment plan that we had planned for the utility was our only financial goal in 2022. We finished the year at $2.5 billion. This was due to the timing for a wind farm in support of Michigan’s renewable portfolio standard. It was largely delayed into 2023, and is currently under construction. Slide 11 contains our 2023 adjusted earnings guidance. Garrick mentioned that we have increased our 2023 adjusted earnings forecast to $3.06 – $3.12 per share, from $3.05 – $3.11 per share. We remain confident at the high end. You can see that our EPS growth will be driven primarily by the utility, as it has done for several years. We also expect modest growth for North Star Clean Energy, our non-utility business.
We expect to see limited activity at the parent due to the lack of financing in 2023 beyond the settlement for the equity forward contract for Covert acquisition. However, we will continue to maintain the same conservative assumptions throughout the business. For the 2023 adjusted EPS guidance range (shown in Slide 12), we will plan for normal weather. That is, $0.20 per share negative year-over–year variance. It is due to the fact that 2022 was not a favorable year. In addition, $0.14 of our expected EPS increase will be attributable rate relief. This is mainly due to our recent electric and gasoline rate orders and the expectation that a positive outcome in the pending gas rate case this year.
Our rate relief figures include net investment-related costs like depreciation and property taxes, as well as utility interest expense. You’ll notice $0.04 per share positive variance in our cost structure for 2023 due to the CE Way and other cost-reduction initiatives. The final bar was set at the right-hand end by incorporating the conservative estimates of weather-normalized sales performance and nonutility performance along with the benefits from significant reinvestment activity that was implemented in the fourth quarter 2022 via our regulatory filings. These assumptions translate to $0.19- $0.25 of positive variance relative to 2022. We’ll continue to adapt to changes throughout the year in order to minimize risks and achieve our financial and operational objectives for the benefit of investors and customers.
Slide 13 contains a summary of our long-term and near-term financial goals. To avoid repetition, I’ll limit what metrics I haven’t yet covered. We will continue to aim for solid investment-grade credit ratings and manage our key credit metrics accordingly. We will settle the Equity Forward Contracts for Covert Financing in the second quarter 2023. We have no planned equity financing needs beyond 2025. Given the significant increase in our utility customer investment plan over 5 years, we plan to resume our ATM equity issuance program (at-the-market) in the last two years of our plan.
As such, we will be filing a prospectus supplement in order to reflect the revisions to our ATM program. This supplement will be filed later in the year. Slide 14 provides more detail on our remaining funding requirements in 2023. These are limited to debt issuances by the utility, a large portion of which have been priced and/or paid over the past few weeks as noted on this page. The $400 million tranche of debt financing needed to finance Covert’s acquisition in the second quarter of the second quarter of 2018 is included in the $825 million worth of utility bond financings. We have therefore fully deregulated our financing requirements for this critical component of our IRP in advance, with attractive terms for customers and investors. As a reminder, we will be able to exit coal generation by 2025 through the acquisition of Covert natural gas facilities. This makes us one the first vertically integrated utilities to do so.
Slide 15 concludes my remarks. I have refreshed the sensitivity analysis for key variables that you use in your modeling assumptions. You’ll see that our track record of risk mitigation and reasonable planning assumptions reduce the chance of large deviations from our plan. All stakeholders have been well served by our model, and we will continue to do so. Customers receive reliable, safe and clean energy at reasonable prices. Our diverse workforce continues to be engaged and well-trained in our purpose-driven company. And our investors enjoy consistent industry-leading financial performance. And with that, I’ll hand it back to Garrick for his final remarks before the Q&A session.
Garrick Rochow: Thank you, Rejji. Our investment thesis, which is our simple way of running the business, has stood the test. It is balanced for all stakeholders and allows us to achieve our financial goals consistently. 2022 was a great year. It marked our 20th consecutive year of financial excellence in the industry. I believe in our $15.5B utility customer refresh investment plan, its ability to be executed on it, and in the regulatory framework to support it. With our track record of cost management and affordability, we can keep customer bills within budget. We deliver no matter what the conditions. This is not luck or chance. It’s because of a great team that has a proven model and who puts discipline into their work. This was what made 2022 an exceptional year and gives us a great outlook for 2023. With that, Adam, please open the lines for Q&A.
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