CMS Energy Corporation (CMS) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the CMS Energy 2026 Third 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. [Operator Instructions] Just a reminder that there will be a rebroadcast of this conference call today beginning at 12:00 p.m. Eastern Time running through November 3. 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, Piercy. Good morning, everyone, and thank you for joining us today. With me are Garrick Rochow, President and Chief Executive Officer; and Sri Maddipati, 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. I always start with our investment thesis because it is a durable and proven model that has delivered for more than 20 years of consistent industry-leading performance for all stakeholders. For our customers, it enables important investments in safe, reliable and clean energy across our electric and gas systems while maintaining affordable bills. For our investors, it delivers a premium total shareholder return, made up of 6% to 8% adjusted EPS growth toward the high end, which reflects 7% or better compounded annually impaired with an approximately 3% dividend yield. And as shared on our Q2 earnings call, with the restructuring of NorthStar Clean Energy, our model is further simplify as we exit nonutilities renewable development and deliver approximately 100% regulated utility earnings growth after 2027. Let's start with NorthStar. As of today, we have more than 35% of the assets at signed agreements or closed. There continues to be strong interest across the remaining assets with the majority of these assets in exclusivity with buyers. In summary, good progress. We are on track to complete the restructuring by year-end. As a reminder, as part of this restructuring, we retain Dearborn Industrial Generation or DIG, several small gas peakers and 4 commercial solar projects. all of which generate strong cash flows and support our long-term growth strategy. This restructuring strengthens our balance sheet and allows us to produce over $500 million of funding within our current 5-year plan for use at the utility, supporting important and needed customer investments in our systems. Simply put, nearly 100% regulated utility earnings growth after 2027, reduced parent funding requirements, improved earnings quality. This restructuring strengthens our business model and positions the company to make the long-term utility investments our customers' need. Speaking of customer-focused utility investments, in September, we filed our long-term Integrated Resource Plan, or IRP, outline how we will meet Michigan's clean energy targets while ensuring reliable electric service through 2040. The IRP details in all of the above resource strategy that combines natural gas, solar, wind, pump storage and battery storage to deliver reliable, affordable and cleaner energy for Michigan customers. We foreshadowed a portion of these customer investment opportunities in previous earnings calls. But as noted on the slide, the plan includes 15.8 gigawatts of clean energy resources an increase of our already approved renewable energy plan of 10.8 gigawatts, 4.1 gigawatts of battery, an increase over our previous plan of 850 megawatts. In 1.4 gigawatts of new simple cycle gas generation to replace the aging oil and gas-fired peakers at our current 3 and 4 plants and to ensure reliability of the electric grid. The plan further reflects energy waste reduction and virtual plant options that help customers save money while providing additional earning opportunities. In summary, our IRP provides significant capital investment opportunity of roughly $27 billion in new clean energy resources, battery storage and gas generation. Another important aspect of the plan is the ability to earn power purchase agreements. Frankly, it's a differentiator in our sector. The IRP assumes a financial compensation mechanism or of approximately $125 million beginning in 2031, growing to approximately $195 million by 2040, assuming a 50-50 ownership split. On the right side of the slide, we've offered visibility into how the value of the FCM has progressed over the last few financial plans and the path to achieve those earnings. The ability to earn in a capital-light way has grown as we have signed more PPAs for renewables, batteries and clean energy. Of note, the filed IRP includes a recently signed large clean energy PPA of 680 megawatts. This PPA derisks new renewable development supports Michigan's clean energy targets delivers the energy and capacity our customers need while ensuring the continued strength of our balance sheet. I look forward to sharing more details at the EEI conference in November. I'm also pleased to share we continue to deliver on the approximately 900 megawatts of growth that supports the 2% to 3% annual loan growth we've highlighted within our 5-year plan period. As noted on the slide, we've added approximately 745 megawatts of new contracts in our service territory, and we've energized more than half of that load or approximately 450 megawatts. Essentially, we are adding the equivalent of a large data center through primarily the manufacturing in semiconductor industries, and it comes with more jobs and other tertiary benefits, such as supply chain, housing starts and potentially higher margin commercial and residential growth. And keep in mind, this does not include the large load agreement, a large data center signed earlier this year. That project continues to progress through zoning in multiple locations, and I expect further movement after the elections. I continue to be proud with what the CMS Energy team has delivered and know that the benefit of growth flows to our customers as we spread fixed costs across a larger customer base driving affordability and while these opportunities create jobs and strengthen our communities and our state. As we turn to the regulatory calendar, I'll highlight the constructive order from the commission in our gas rate case, approving $139 million or approximately 60% of our final ask, a 9.8% ROE and 50% equity ratio. The commission order delivers another proof point of the constructive regulatory environment in Michigan and supports the important and needed investments in our gas distribution system. In October, we filed our revised or updated electric rate case requesting a $443 million revenue increase a 10.25% ROE and a 51.75% equity ratio. Staff also filed their position in October recommending $265 million revenue increase or 60% of our revised ask, a 9.85% ROE and 50% equity ratio. Additionally, staff supported our storm deferral recovery for the 2025 storms within the electric rate case and the commission approved the deferral of 2026 Q1 storms in August, furthering our confidence in recovery and evidence of a constructive regulatory environment in Michigan. If I pull up from the details and reflect on the entire electric rate case, SaaS position is constructive, a good starting point, and there are opportunities we'll pursue in the rebuttal process to ensure we support the important and needed investments to improve reliability and that the record further reflects our reasonable sales forecast for both residential and commercial growth. We expect the PFD position in late January in a final order by early April of next year. Now on to the financials. Year-to-date, we reported adjusted earnings per share of $2.95. We are reaffirming our full year 2026 guidance of $3.83 to $3.90 per share with continued confidence toward the high end. Our financial performance has positioned us to reinvest in the business, derisking future years in further enhancing service for our customers. We are also reaffirming our 2027 guidance of $4.08 to $4.17 per share, which incorporates the NorthStar restructuring. Longer term, we continue to guide toward the high end of our adjusted EPS growth range of 6% to 8%. Finally, as we've done in previous years, will provide an update on our year-end call regarding the roll forward of our 5-year utility capital plan and broader financial plan. With that, I'll hand the call over to Sri.

Thank you, Garrick, and good morning, everyone. I'm excited to be with you all this morning and to provide an update on our business. Today, my remarks will largely focus on continued execution through 2026 and our reinvestment of favorable performance, which will benefit customers, strengthen next year and future long-term growth as well as an update on our financing activities and how we'll continue to leverage the benefits of restructuring NorthStar into our annual planning process. Given the progress Garrick highlighted in our IRP, we see plenty of opportunities between rate base and FCM on PPAs in our supply business. In addition, there is a robust capital backlog in both our electric and gas distribution businesses. We'll provide an update of our capital plan in Q4 for our normal practice. Starting on Slide 9, we have the standard waterfall chart, which illustrates the key drivers of our financial performance through the first 9 months of 2026 and our year-to-go assumptions for meeting our full year guidance range. where we plan to deliver toward the high end. Year-to-date, the company delivered adjusted net income of $915 million or $2.95 per share, which will note excludes the restructuring activities at NorthStar and is $0.29 favorable to last year. We're trending ahead of last year and are well positioned relative to plan, reflecting strong execution at the utility, including constructive regulatory outcomes as well as completion of the Michigan solar projects we are retaining at NorthStar. Favorable weather in the quarter and benefits from the storm referral give us greater flexibility as we manage the remainder of the year, including weather and storm risk, while continuing to reinvest in the business to benefit customers and strength in 2027 and beyond. Compared to last year, you can see that weather results in a $0.05 unfavorable variance. However, from a planning perspective, we assume normal weather. So relative to plan, we have benefited $0.08 year-to-date, primarily driven by Q3 cooling degree days. New rates net of investment costs resulted in a positive variance of $0.34 with the benefits of last year's gas rate order, new electric rates from earlier this year and continued investments in renewable projects at the utility. We were pleased with the commission's approval of the storm referral in Q3, offsetting the full year impact of the ice storm earlier in the year. Year-to-date, O&M is unfavorable $0.16 primarily due to additional storm activity as well as a portion of the reinvestments we have already made across the business, including electric reliability, gas operations, customer service and digital investments that will enhance future productivity. The $0.16 of favorable variance in parent and other has been primarily driven by NorthStar performance with much of that being reinvested back into the business, which I'll touch on in a moment. Looking at the remainder of the year, we are well positioned to meet our financial objectives in 2026, as Garrick noted. Our assumptions already reflect an unrivaled variance of $0.09 for normal weather. With our 2026 regulatory outcomes complete, we're confident in the positive variance of $0.08 in the fourth quarter for rates net of investments. From an O&M perspective, we expect to net $0.10 of favorable variance given our conservative planning assumptions for storm activity. This already accounts for $0.10 of reinvestments to improve safety, reliability and enhance future productivity, as previously noted. As always, will remain flexible throughout the quarter and look to take advantage of additional opportunities to reinvest for customer benefits that will strengthen future years. Closing out the glide path for the remainder of the year in the bar on the right-hand side, you'll note $0.09 to $0.16 of negative variance, which incorporates the flexibility we have for the rest of the year for contingency or to reinvest back into the business. We remain well positioned to deliver toward the high end of our guidance range while maintaining the flexibility to manage the remainder of the year and continue investing for the long term. Moving to Slide 10. You'll note that our planned financing for the year is nearly complete, given the 900 million utility first mortgage bonds we raised in the third quarter, all within our planning assumptions. From an equity perspective, at the parent, we've completed $495 million at attractive prices relative to plan. For the remaining equity, we'll continue to match the pricing and issuance relative to our needs given the NorthStar restructuring where I'd be disappointed if we're not above the $500 million funding benefit Garrick noted. We're already optimizing those benefits this year, and we incorporate it into our 5-year planning cycle. From a debt maturity perspective, we have approximately $625 million maturing at the parent next year. Keep in mind, our conservative approach already incorporates interest rates consistent with where the market is today. So we'd look to potentially derisk next year by pulling some of that refinancing forward. Also, I'll remind you that nearly all our debt is fixed rate. I'm confident in the strategy we are executing to deliver on our objectives this year and strengthen the plan going forward, and I look forward to sharing more in the future. Now I'll turn the call back to Garrick before we take your questions.

Thanks, Sri. At CMS Energy, we deliver every year for 23 years, consistent industry-leading performance regardless of circumstances, you can count on CMS Energy to deliver for all of its stakeholders. With that, Piercy, please open the lines for Q&A.

[Operator Instructions] Your first question comes from Shar Pourreza with Wells Fargo.

This is Marcello on for Shar. Then DSC has had some commentary recently on the FCM specifically as it relates to contracts, you're legally obligated to enter. But just more broadly, how should we be thinking about durability of the FCM and energy policy Michigan postelection?

The short answer is we don't see the FCM going away, but let me talk a little more about that. And I'm glad you brought up the FCM because we've been very deliberate including in our slide deck, right? It's on the right-hand side of -- I don't remember the slide number, I think Slide 5 there. But I think it's one of the things that's most underestimated by our investors, the ability to grow FCM over time, and we're showing that in that graph. The ability to grow up to 2031 and beyond to $125 million and then even to 2040 to $190 million. And Marcella, you won't know this about me, my mom was a math teacher. And she would always say to me, like, show your work, like you drilled that into me in junior high. And that's what we're doing right here in the context of this FCM. You can see in that slide, in Slide 5 that it's highlighted, right? There's goes from darker blue to light blue. That's the show of the progress we've made. In 2031, over 70% of of those contracts are already signed or online. And so that creates the visibility and clarity and for me, confidence of our ability to deliver on that. And so I just want to highlight that in context of this because, again, I think it's a differentiator in our story. I want to make sure I bring attention to that. In terms of the MPSC, the commission in their words, in their letter of the governor, recognize the value of the FCM and particularly third-party solutions that come at a lower cost. And so this is about a discussion around the higher FCM. This is about refinement, particularly around PPA contracts and assets that are fully depreciated. And so I really view this as a refinement of the FCM, not eliminated in the context of affordability. And that's why I came out strongly and said, "We don't see the FCM going away. In fact, it's one thing that we want to highlight during this call, just the potential upside there."

Yes. And the only thing I'd note to Garrick's comments were -- the depreciated assets largely talk about river hydros. We didn't include that into our projection of the FCM. In fact, we asked to use those proceeds to derisk future safety at those funds. So the FCM that we have here contemplated is within the law and really isn't reflective of the contracts, the commission highlights.

Super helpful. And then just because it's pretty topical right now, given the latest gubernatorial debate posturing and kind of a high relative number of moratoriums in Michigan. How should we be thinking about the data center opportunity window relative to manufacturing and other opportunities, but just how should we be thinking?

The short answer is strong. I still -- I mean, across both candidates and our current governor, but let me offer some more context around this. Politics, Sri says this, I love him when he says this, "politics do not equal policy. And some of the spend that you see leading up to election does not equal a reality. And what we know, and we showed in that slide, it's the last slide in my prepared remarks, that regardless CEO, CFO, governor, legislature, MPSC and weather, we deliver. And it's based on the principle, we work with everyone. And that's easy to say, harder to do, but that's what we do. We do it year after year by finding common ground. There's common ground on affordability and there's common ground on data centers. right? And we see this with both candidates that are running, are supportive of those investments in Michigan and the jobs that come with it and the property tax value. No one said no data centers. In fact, they've talked about responsible data centers for that as well. In fact, our electric tariff for data centers or large load agreement, does just that. It's responsible and again, who pays and so our residential customers are not burdened with the data center. And so we need to do more of that in terms of water and wastewater and noise and land as a state. That's the important work that to be done. And I bet the data centers will continue to move forward after the elections here. But again, just back to my beginning remarks, I see a strong environment for data center growth across Michigan.

Your next question comes from Jeremy Tonet with JPMorgan.

Good morning, Jeremy. I look forward to seeing you soon in EEI.

Yes, see you soon. Looking forward to it. I was just wondering if you could provide maybe a little bit more color on large load expectations there in the cadence. You see coming forward. There was the funnel in prior slides. And so just looking to see how you think about that at this point? How far different initiatives are advanced? And I'll leave it there for now.

Well, to be super clear, we heard that feedback this morning. We didn't include the slide. Look, we -- like we could provide the slide. That's not -- it's a little bit like watching Michigan play football. You can spend a lot of time looking at the plays, but you've got to get it across the end zone. You got to get across the goal line. And so we provide in this deck really along the lines of economic development. We're showing our work, again, going back to my mom, show your work, 745 megawatts. It's been signed. 450 is already energized. A lot of that's in the manufacturing space. You've heard me talk before about the benefits and value of that. So we're showing that. We're showing that important work and what that means for the day, what that means for jobs, what that means for -- and confirming our sales growth that's in our financial plan of 2% to 3%. Now we can talk data centers, and we're happy to talk data centers. Multiple data centers continue in the state. That's the pipeline. We signed one in Q2. We shared that in the Q2 earnings call. That's continued to progress in multiple locations across the state. From a zoning perspective, one of the areas where they're located, they just released their draft zoning ordinates. And so the company is in fact, reviewing that right now and providing feedback. So I see that as, again, as a positive step. And another data center, actually, a couple of data centers are acquiring more land within the state. So again, we continue to see positive progress along those lines, and I see more progress after we get through the elections here shortly.

Got it. That's helpful. And then I just want to pick up again, in the past, you talked about 1 gigawatt could drive $2 billion to $5 billion in CapEx and just wondering if we should still think about that relationship and specifically as it relates to IRP and the $27 billion of long-term CapEx, how you think this could enter the plan over time, forward thoughts there?

Yes. Jeremy, I think that's still a good way to look at it, $2 billion to $5 billion, and that really just bifurcated between just the capacity needed and then the clean energy that's needed over time. As it relates to the IRP, we'll incorporate that into our annual process. Keep in mind, our current plan doesn't recontemplate having a data center in it. So our future plans will incorporate the IRP capital, which largely isn't data center-related nor is the FCM. So we'll incorporate that as we roll forward

Your next question comes from Richard Sunderland with Truist Securities.

Thanks for the time today. Turning back to NorthStar, the 35% of assets that signed agreement were closed and kind of that buyer interest for the remainder. Could you speak a little to that versus expectations last quarter into the process maybe just progress overall and where it's trending versus sort of your internal modelling?

I think Sri and I will tag team this one, but I'm very pleased with the progress from where we stand and the 35% of the assets that are either a purchase sale agreement or closed. And so that's trending well. And then in the context of exclusivity with the buyers, that's well underway. So we're not just at the beginning of that. And so closing in on purchase and sales agreement. And that's why we're, again, offer the commentary that restructuring will be complete by year-end, and we're on target from that perspective. But Sri, please.

Yes. The only thing I would add is, as you know, we're on track and the use of funding we noted in the Q2 call, at least $500 million, like I said here, I mean just wondering if we were above that, and so trending positively relative to that. All of that will help parent funding needs, which will roll into our Q4 financing plan along with our capital programs.

Turning back to some of the broader policy considerations, elections, pre and post considerations. Can you speak a little bit more to kind of the utility issue side, particularly regulatory changes and the appetite to address that? Maybe how stakeholder conversations on that front are trending? And if you have any updated thoughts on how that may or may not get picked up after the elections in 2027.

Yes. The -- just from an investment community, there appears to be a lot of noise on Michigan. And I would tell you right here on the ground, I'm confident in our ability to navigate. And frankly, we've got -- we've built good relationships with all the governor candidates, many of the legislature and as a result of just doing business here in Michigan for a long time. And as I shared here, we've delivered 23 years by finding common ground by this principle we work with everyone. When it comes to common ground, particularly around affordability, whether you're public an independent or Democrat, people can align around that. And I've talked about it on a number of these calls and investor meetings of the 2 papers I run around with and talk about affordability and look for common ground, and I think there's a lot of ways to do that. One is in the context of multiyear rate plans that provide editability for our customers. One -- two, we've talked about in terms of personal property tax and hundreds of millions of savings for customers and that pass-through that shows up. We've talked about it in state permitting reform. I know we're talking about federal right now, but also state permitting reform it help from a cost perspective. Chair scripts within the corner set a letter to the governor. And if you go through that letter like I have, you can say, yes, yes, yes, we should be doing a number of those things, particularly in terms of low to moderate income, that's right now in the state, there's all kinds of policy improvement that can be done in the context of low to moderate income customers. So what I'm laying out, Rich, is like, here's the place for common ground and how do we work for affordability. And so again, we see that as important steps as we go into 2027 and further and beyond that, to be able to continue to find and continue our position as 15 plus builds from a nation perspective in terms of electric and just continue to position utility in the right way to make the important investments for all stakeholders. So I hope that offers some good context for you.

No, that's great. Appreciate the flavor for all of that. Thanks, Garrick.

Your next question comes from James Ward with Jefferies.

We've got another NorthStar question for you here. So NorthStar has contributed $0.62 through September. Guidance for the year was $0.25 to $0.30 back in February. How should we think about the NorthStar contribution in your current full year guidance? And then how much of the third quarter benefit reverses in the fourth quarter? And what sort of tail amount, if any, is left for 2027?

Yes. Thanks, James, for the question. A couple of things on NorthStar related to guidance. Obviously, realizing benefits as we brought some of those projects to COD. So let's having NorthStar overperforming our planned guidance for the year. Some of that will reverse some of that's just timing on taxes. So when we book kind of effective tax rates, you kind of do it evenly and some of that will reverse in the fourth quarter. And in terms of kind of rolling into '27, we've already incorporated the fact that we're selling some of the assets, so that's already been our '27 guide. And then some of the taxable equity pieces will roll off into '27 that's already baked in. We'll share kind of segment guidance as we go through the fourth quarter.

Got you. And then on '27, your reliability storms and productivity bucket is about $0.12 lower for the year than the July plan, but weather is obviously $0.12 better is that reinvestment? And is the 2027 range built off the higher 2026 cost base or the July 1? And then how much of the fourth quarter spend will be 2027 were pulled forward? Just trying to get a sense as we head into next year at a level set as we go much more utility nearly all utility focused.

Got it. You're kind of mixing the '26 and '27, so I'll see if I can parse that out for a second. Some of what you have on the to-go is just conservative planning, right? We're playing conservatively for storms to make sure we have enough there for that. But then that number is net of reinvestments that we're going to be making here over the course of the fourth quarter. So significant flexibility there to kind of reinvest in the business. That all derisks '27. Some of that will be pull forward, and we'll continue to have those options as we go through the year. But we've got to keep in mind, we're not decoupled. So we're also making sure that we have enough contingency as we look forward to the year for sales as well.

Terrific. And we look forward to kicking off EEI with you guys at lunch on Sunday.

Your next question comes from Nicholas Campanella with Barclays.

I just wanted to be clear and follow up on the prior question from Jeremy on just the data center opportunity set. Just the 745 megawatts in the context of you talking about making more progress after the election here, is that something that we can just kind of wrap in to expect in the full year update that you're going to give in the fourth quarter? Is that where that is trending? Or I just wanted to level set there.

Let me offer some context and Sri may want to also join in some context on this. So what we've framed there is 745 megawatts, that does not include the large load agreement data center. So that's just -- I call it singles and doubles. We're just stacking up semiconductor manufacturing, food processing. There's one medium-sized data center in that mix, but much of that is already online. And so again, that's built into the plan. It's built into our IRP. We're showing, again, the 2% to 3% load growth that we have in our current 5-year plan. The capital investments that will come with this new data center are not yet incorporated to our plan. We'll see that through from a zoning perspective. And again, I have optimism as I see that playing out from in multiple jurisdictions. But Sri, please.

Yes. Like Garrick said that the 2% to 3% sales growth already baked into our 5-year plan, the debt adding a data center would push us above that as well as the capital above that. So that would get incorporated as we execute on that. So this is already incorporated into plan. It's just executing against it and we continue to see strong momentum in that space as we sign up customers across a number of industries.