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    CMS Energy Corp (CMS)

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    Business Description

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    Q2 2024 Summary

    Initial Price$60.39April 1, 2024
    Final Price$58.80July 1, 2024
    Price Change$-1.59
    % Change-2.63%

    What went well

    • CMS Energy is experiencing strong growth opportunities in the data center and manufacturing sectors, with a recent signing of a 230 MW data center customer and continued strong interest from both hyperscalers and mid-scale data centers, leading to increased sales and economic development.
    • NorthStar is outperforming expectations, with DIG earnings up by $0.05 per share year-over-year, benefiting from improved operational performance and new solar projects, contributing positively to CMS's financial results. ,
    • CMS is effectively managing costs, executing on cost performance initiatives and leveraging cost management over the course of the year, enhancing financial performance despite challenges such as weather impacts. ,

    What went wrong

    • Weather-normalized Commercial and Industrial electric sales volumes decreased in Q2 2024, with Commercial down 1% and Industrial down 2% compared to Q2 2023, indicating potential weakness in demand.
    • The upcoming implementation of performance-based ratemaking could introduce financial risks, with potential penalties of up to $10 million annually if performance metrics are not met.
    • Heavy storm activity in the first half of 2024 led to increased operational challenges and costs, resulting in a negative impact of $0.03 per share due to storm restoration expenses, indicating vulnerability to weather-related disruptions.

    Q&A Summary

    1. Increased Demand and CapEx
      Q: Are you seeing higher demand and planning for increased CapEx?
      A: Yes, we are experiencing strong economic growth in the state, leading to higher demand than projected in our 2021 Integrated Resource Plan (IRP). This increased demand will be reflected in our Renewable Energy Plan filing in November. We anticipate additional capital investment opportunities between 2026 and 2028, providing upside potential in terms of capital growth.

    2. Financing Strategy
      Q: What are your plans regarding financing and potential debt or equity issuance?
      A: We plan to issue about $675 million in the second half of the year at the utility, slightly increased from the initial $500 million due to rate case outcomes with modestly lower equity levels. We're considering pulling forward some parent debt financing needs, such as senior notes or hybrids, to take advantage of favorable market conditions. However, we do not plan to issue equity in 2024, and our equity needs starting next year remain up to $350 million.

    3. Performance-Based Ratemaking
      Q: Can you provide an update on performance-based ratemaking legislation and its impact?
      A: The dialogue on performance-based ratemaking has been constructive. We've narrowed down to four benchmarkable metrics, and while details are being finalized, we expect implementation over the next one to two years. The mechanism is intended to be symmetric, offering both upside and downside of approximately $10 million each, which is manageable in the context of the year.

    4. Sales Trends and Outlook
      Q: How are underlying sales trends and what is the near-term outlook?
      A: Despite a slight pullback in Q2 weather-normalized sales—residential up 0.1%, commercial down 1%, industrial down 2%—year-to-date trends are positive. Residential sales are up about 1%, commercial up over 1%, and industrial down about 1%, with all-in sales up over 0.5%. Accounting for our 2% annual energy waste reduction, underlying economic conditions remain strong across all customer classes.

    5. Data Center Load Growth
      Q: How is data center growth impacting your operations and is legislation affecting it?
      A: Data center projects are progressing regardless of state legislation on sales and use tax incentives. We've signed a 230-megawatt data center set to come online in 2025-2026. The primary focus for data centers is the speed of infrastructure deployment rather than tax legislation, and we're accommodating their needs within a two to three-year cycle.

    6. Outperformance Drivers
      Q: What is driving your current level of outperformance?
      A: Outperformance is driven by rate relief net of investments, cost performance initiatives, and strong performance at our non-utility business, NorthStar. NorthStar has contributed an additional $0.05 year-over-year due to strong operations at DIG and benefits from solar projects. We continue to execute cost management initiatives through the CE Way, yielding annual savings greater than $50 million.

    7. Electric Rate Case and Settlement
      Q: What are your thoughts on the electric rate case settlement and potential rate design issues?
      A: While we always look for settlement opportunities, electric cases are more complex with over 20 intervenors. Our case focuses on electric reliability investments, such as system hardening and tree trimming, aligning with customer and regulator expectations. Regarding rate design, data centers currently use an industrial rate, and we're exploring a specific data center rate to better balance capacity and energy costs.

    8. Palisades Nuclear Plant Impact
      Q: How does the potential return of the Palisades plant affect you?
      A: The Palisades plant is making progress towards reopening, with an additional $150 million allocated by the state. A Power Purchase Agreement for its output has already been signed with co-ops in Michigan and Indiana, so it's already spoken for. We do not anticipate any adverse impact on CMS Energy as a result of Palisades returning.

    9. Storm Restoration and Reliability
      Q: How are you performing in terms of storm restoration and reliability improvements?
      A: We've made significant improvements, reducing the size of outages and increasing the percentage of customers restored within 24 hours from 90% last year to 95% this year. Investments in tree trimming have led to more than 60% reduction in outages where trees are trimmed. Financially, we've avoided over $40 million in costs through efficient storm restoration efforts.

    10. DIG Recontracting and Power Prices
      Q: What's the outlook for DIG recontracting given power price trends?
      A: The energy and capacity markets continue to present ripe opportunities. We are securing favorable bilateral contracts for capacity prices well above our plan, which strengthens and extends our financial performance.

    Key Metrics

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    Executive Team

    NamePositionStart DateShort Bio
    Garrick J. RochowPresident and CEODecember 2020Garrick J. Rochow has been serving as the President and Chief Executive Officer of CMS Energy and Consumers Energy since December 2020. He has over 20 years of experience in the utility industry, including 19 years with CMS, and has held various leadership positions within the company .
    Rejji P. HayesExecutive Vice President and CFOOctober 20, 2023Rejji P. Hayes serves as the Executive Vice President and Chief Financial Officer of CMS Energy Corporation. He has been in this role since at least October 20, 2023 .
    Brandon J. HofmeisterSenior Vice President, Sustainability and External AffairsN/AThe documents do not provide specific details about the start date or a comprehensive biography for Brandon J. Hofmeister, who serves as Senior Vice President, Sustainability and External Affairs at CMS. However, it is noted that he held the position of Senior Vice President at CMS and Consumers in 2023 .
    Shaun M. JohnsonSenior Vice President and General CounselN/AThe documents do not provide specific details on the start date for Shaun M. Johnson as Senior Vice President and General Counsel at CMS. However, he is listed as one of the named executive officers (NEOs) for CMS as of December 31, 2023 .
    LeeRoy Wells Jr.Senior Vice President, OperationsN/AThe documents do not provide specific details on the start date or a comprehensive biography for LeeRoy Wells Jr., who serves as the Senior Vice President, Operations at CMS. However, it is noted that he is one of the named executive officers (NEOs) as of December 31, 2023 .

    Questions to Ask Management

    1. CMS increased its planned utility debt issuance for 2024 from $500 million to $675 million to rebalance the rate-making capital structure due to recent rate case outcomes ** **. Given the potential impact of increased debt on the company's balance sheet and credit ratings, how does management plan to manage debt levels while ensuring financial stability?

    2. With an upcoming equity need of up to $350 million starting next year, and discussions about potentially pulling ahead some parent debt financing needs from 2025 to 2024 if market conditions are favorable ** **, could you elaborate on the company's capital raising strategy and its impact on shareholder value?

    3. You have a $17 billion 5-year capital plan focused on transitioning to renewables and clean energy while maintaining customer affordability ** **. Considering this significant investment, what specific measures are you implementing to prevent rate hikes that could burden customers?

    4. In the electric rate case filing, you mentioned that electric cases are more complex than gas cases, with over 20 intervenors compared to less than 10 in gas cases . What challenges do you anticipate in achieving a constructive outcome, and how might increased complexity and intervenor participation affect the timeline and results of the rate case?

    5. Regarding servicing data centers, data centers are currently on industrial rates rather than economic development rates, and there is ongoing exploration of a specific data center rate ** **. How do you plan to attract and retain large data center customers while ensuring that rate design changes do not negatively impact the company's revenue stability?

    Past Guidance

    Q2 2024 Earnings Call

    • Issued Period: Q2 2024
    • Guided Period: FY 2024
    • Guidance:
      • Adjusted Earnings Per Share (EPS): Full-year guidance of $3.29 to $3.35 per share, with confidence toward the high end of this range .
      • Long-term Adjusted EPS Growth: Guidance toward the high end of the range of 6% to 8%, implying 7% up to 8% .

    Q1 2024 Earnings Call

    • Issued Period: Q1 2024
    • Guided Period: FY 2024
    • Guidance:
      • Full Year EPS Guidance: Reaffirmed at $3.29 to $3.35 per share, with confidence toward the high end .
      • Long-term Adjusted EPS Growth: High end of the range of 6% to 8%, implying 7% up to 8% .
      • Weather Impact: Plan for normal weather, equating to $0.22 per share of positive variance for the remaining 9 months .
      • Regulatory Perspective: Assuming $0.18 per share of positive variance from a constructive electric rate order .
      • Cost Performance: Anticipate lower O&M expenses, driving $0.09 per share of positive variance for the remaining 9 months .

    Q4 2023 Earnings Call

    • Issued Period: Q4 2023
    • Guided Period: FY 2024
    • Guidance:
      • 2024 Adjusted EPS Guidance: Raised to $3.29 to $3.35 per share, with confidence toward the high end .
      • Dividend: Increase to $2.06 per share for 2024, targeting a payout ratio of about 60% .
      • Long-term EPS Growth: High end of the range of 6% to 8%, implying up to 8% .
      • Utility Investment Plan: New 5-year, $17 billion utility customer investment plan, supporting approximately 7.5% rate base growth through 2028 .
      • Equity Needs: Resume ATM equity issuance program up to $350 million per year from 2025 through 2028 .
      • Debt Issuances: Limited to utility debt issuances for 2024, with no planned long-term financings at the parent company .

    Q3 2024 Earnings Call

    • Issued Period: Q3 2024
    • Guided Period: N/A
    • Guidance: The documents do not contain information about the Q3 2024 earnings call for CMS, so specific guidance metrics are unavailable.