CMS ENERGY CORP Q2 2025 earnings call

Thank you, Seb. Good morning, 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. I'll turn the call over to Garrick.

Thank you, Jason, and thank you, everyone, for joining us today. Our investment thesis: 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 GW of load. This load is incremental to our plan and part of the 9 GW 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 five-year plan. We continue to see positive momentum with data centers within the 9 GW pipeline and expect additional progress once we finalize the data center tariff. In addition to load growth from data centers, Michigan is on the move.

Grand Rapids, the heart of our electric service territory, was recently ranked the number one city on the rise in the U.S. by LinkedIn, highlighting their diverse industries from tech, insurance, manufacturing, and healthcare. This area is growing nicely, bringing jobs and people to the state. CNBC ranked Michigan as the top 10 best state for doing business. 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 this drives our long-term annual sales growth estimates of 2%-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 five-year plan. Specifically, I want to share some early insight into our upcoming Integrated Resource Plan filing. Let me start here. A long runway of customer investments is great, but isn't sustainable if your customers cannot afford them. 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 or we can spread fixed costs over a larger customer base. A win for all. Add to it our ability to realize savings through the CE Way, episodic cost-saving opportunities, and our energy waste reduction program, we have multiple ways to keep bills affordable for our customers.

It is our strong focus on these cost-saving opportunities that keep bills affordable, both gas and electric, and allow us to make needed customer investments. There are many customer investment opportunities, greater than $25 billion, above and beyond our five-year plan. Previously, we've talked 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'll file in mid-2026. We are still preparing for this filing, but getting a clearer picture on 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%-3% sales growth that we are realizing, the need to replace plants, existing capacity that will retire over the next five to seven 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 see 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 five-year plan. Understand that this is an early number and could be higher.

We'll continue to keep you updated as the preparation continues prior to the filing of this important IRP. As I've shared before, CMS Energy 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 five-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 de-risk $4.5 billion of capital, the renewable portion of the five-year plan at the utility. It also 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. Recall that 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, the CE Way, to further take costs out for our customers. Now, let me address NorthStar. Again, this business makes up approximately 5% of the earnings mix, so it is small, with the majority of the 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 one to two solar projects a year with utility-like returns or better.

At NorthStar, our renewable projects are safe harbor through 2027, with some options in 2028. Many of these projects are already contracted with off-takers, 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. We'll be 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 five-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. 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, or DOE, 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. We have filed a request with FERC for recovery from all MISO North and Central customers who are served and benefit from this 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.

Recall, much of the exposure is related to capital equipment, which means any impact would be spread over the life of the asset and with minimal impact to 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 to position CMS Energy for success in what is a 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 isn't a unique aspect in the utility sector, it was noted as a best practice by Liberty Consulting in the third-party distribution audit and was approved by the commission 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. It was commissioned by the MPSC, and the results point directly to the important investments needed to improve reliability for our customers and bolsters the game plan we laid out in our reliability roadmap. We will continue to weave the audit findings into future rate cases. Now, 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 at a $460 million revenue increase and is well aligned to significantly improve reliability for our customers through additional capital investments and O&M, including vegetation management.

To frame this case from an affordability perspective, if we were to achieve 100% of the rate case asked, our residential electric bills will continue to be below the national average. In our gas case, we saw a very constructive recommendation from the staff supporting approximately 80% of our revised ask and about 95% of our capital. While we're always open to settlement, we're confident in the investments we need to make and the quality of our case and comfortable going the distance to a fully adjudicated order. For our longer-term filings, we expect an order in our Renewable Energy Plan, or REP, by mid-September. Our REP will further define our renewable investments and feeds into our Integrated Resource Plan that we'll file in mid-2026.

Thank you, Garrick, and good morning, everyone.

On slide nine, you'll see our standard waterfall chart, which illustrates the key drivers impacting our financial performance for the first six months of 2025 and our year-to-go expectations. For clarification purposes, all of the variance analyses herein are in comparison to 2024, both on a year-to-date and a year-to-go 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 the month of June, coupled with a relatively normal winter in Q1, provided an aggregate benefit of $0.32 per share of positive variance.

It is worth noting that the weather outlook in our service territory remains quite good for the balance of the summer. Rate relief and other 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 a comparable period in 2024, due in large part to increased vegetation management in accordance with our electric reliability roadmap. What is less visible in that bar on the chart, but still quite meaningful, is the favorable impact of the aforementioned service restoration expense deferral granted by the commission in June, which enabled us to establish a regulatory asset on the balance sheet for the substantial costs incurred during the March-April storm. This timely and supportive action by the commission is not only a testament to the historic nature of the storm and our strong restoration efforts, but it is also worth repeating the constructive nature of the Michigan regulatory environment.

Rounding out the first six 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. In addition, we anticipate back-end-weighted tax benefits from select renewable projects at NorthStar. Other notable drivers in this category include the impact of current financing activities thus far in 2025 and slightly lower electric and gas non-weather sales volumes. Looking ahead, as always, we plan for normal weather, which equates to $0.11 per share of 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 seeing $0.18 per share of positive variance, which is 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, in the penultimate bar on the right-hand side of the chart, you'll note an estimated range of $0.14-$0.20 per share of negative variance, which largely consists 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 the second quarter, 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. To that end, it's worth noting that we have executed 40 equity contracts of approximately $350 million, thus de-risking roughly 70% of our planned equity needs for the year. Lastly, 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. Longer term, we'll continue to utilize this funding vehicle as a source of liquidity while available. To that end, as Garrick noted, based on the expected in-service dates of our renewable project pipeline, as well as the construction status on projects in the outer years of our plan, we are well positioned to execute on approximately $700 million of tax credit transfers in our five-year plan.

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 been tried and true year in and year out and has enabled us to deliver on our operational and financial objectives irrespective of the circumstances to the benefit of our customers and investors. This year is no different. 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, Seb, please open the lines for Q&A.