Q4 2023 Earnings Summary
- CMS Energy has announced a new 5-year, $17 billion utility customer investment plan, supporting approximately 7.5% rate base growth through 2028, with significant investments in renewable generation, grid modernization, and reliability improvements.
- The company expects a constructive outcome in its electric rate case, with positive indicators and support from key stakeholders, which could enhance future earnings growth.
- Increased load growth opportunities due to manufacturing and data center expansion in Michigan, supported by favorable policies like the Chips Act and the Inflation Reduction Act, with a robust pipeline not yet fully reflected in their plan, suggesting potential upside to earnings.
- CMS Energy's FFO-to-debt ratio remains under 15%, and management does not foresee improving it to the 17% required for a credit rating upgrade by Moody's in the near term or within their 5-year plan, indicating potential limitations in financial flexibility.
- There is an ongoing storm review process and audit, with results expected in September. The company anticipates incorporating the findings into future rate cases, which could potentially lead to increased regulatory scrutiny or required investments, impacting financial performance.
- CMS Energy's growth projections rely on elevated energy and capacity prices in the years beyond 2026, particularly from their Dearborn Industrial Generation (DIG) facility. If these prices do not remain elevated, the company's growth may not meet expectations.
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Increased CapEx and Rate Base Growth
Q: What's driving the uplift in CapEx and rate base growth to a firm 7.5% CAGR?
A: CMS Energy is increasing its capital expenditure plan by $1.5 billion, primarily driven by incremental investments in electric reliability and clean energy projects. About half of the uplift is due to reliability-related investments, with the rest attributed to increased renewable investments approved in their '22 Integrated Resource Plan (IRP). This higher CapEx plan supports a rate base growth of 7.5% CAGR over the next five years. -
Equity Needs Amid Higher CapEx
Q: Will higher CapEx plans require additional equity beyond the $350 million per year after 2025?
A: Despite the increased CapEx, CMS Energy doesn't anticipate needing equity beyond the planned $350 million annually starting in 2025. This is due to strong cash flow generation, the ability to monetize over $0.5 billion in tax credits from the Inflation Reduction Act (IRA), and improved equity credit treatment from Moody's recent decision. These factors help offset the equity needs from higher CapEx. -
Moody's Increased Equity Credit
Q: How does Moody's change in equity credit for subordinated notes impact CMS's credit metrics?
A: Moody's increased the equity credit for junior subordinated notes from 25% to 50%, aligning with S&P. This change improves CMS Energy's FFO-to-debt ratio by about 50 to 60 basis points, enhancing their credit metrics and providing more balance sheet flexibility amidst increased capital investments. -
Dividend Growth Rate
Q: Is CMS Energy slowing its dividend growth rate to support capital investments?
A: CMS Energy plans to grow dividends at the lower end of its 6% to 8% earnings growth target. This disciplined dividend policy aims to reduce the payout ratio to the low 60% range, providing internal equity to efficiently fund the company's growing capital investment program. -
Load Growth Expectations
Q: What are CMS's expectations for load growth and contributing factors?
A: CMS Energy anticipates over 0.5% load growth over the next five years, a positive shift from previous flat or declining forecasts. This is driven by increased manufacturing activity, including investments in semiconductors, batteries, and data centers. Notably, only two large projects (Gotion and Ford) are included in the current plan, suggesting potential upside from a robust pipeline. -
Progress on Electric Rate Case
Q: How is the electric rate case progressing, and what's the outlook?
A: CMS Energy reports that the electric rate case is progressing constructively, with positive indicators on reliability investments and support for mechanisms like the infrastructure recovery mechanism and undergrounding pilot. They expect a final order on or before March 1, anticipating a constructive outcome. -
Renewable Energy Plan and Legislation Impact
Q: How will new energy legislation and the Renewable Energy Plan affect future CapEx and rate base?
A: CMS Energy will file its Renewable Energy Plan in the second half of 2024, aiming to achieve 50% renewables by 2030 and 60% by 2035. While the current five-year plan doesn't include capital investments from new legislation, future plans are expected to incorporate these, potentially increasing CapEx and rate base further in subsequent periods. -
Cost Savings Impact on Earnings
Q: How are cost savings contributing to earnings growth in 2024?
A: CMS Energy anticipates $0.16 per share in cost savings in 2024, driven by approximately $60 million in CE Way-related savings and the reversal of higher storm restoration costs from 2023. These savings offset inflationary pressures and contribute to the company's earnings growth. -
Palisades Nuclear Plant Revival
Q: Does the revival of the Palisades nuclear plant affect CMS Energy's resource planning?
A: The Palisades plant revival does not impact CMS Energy's resource planning. The company is not involved in the project, and existing power purchase agreements are already in place with other entities. CMS Energy remains focused on its own clean energy initiatives. -
Storm Review Process Update
Q: What's the status of the storm review process and its implications?
A: The storm review process is underway, with an audit expected to be completed by September. CMS Energy is focused on improving reliability, as reflected in their increased capital investment plan and reliability roadmap. The outcomes of the review will be incorporated into future rate cases.