CMS Energy Corporation (CMS) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the CMS Energy 2026 Second 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 August 4. 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, Abby. 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. Our investment thesis remains consistent, focused and durable. It is a simple but powerful business model built on more than 2 decades that consist performance, delivered execution, disciplined capital allocation and industry-leading results. With our long capital runway, top-tier regulatory environment, our commitment to affordable customer bills through the CE Way plus digital and other cost savings CMS Energy continues to deliver. This proven model drives a premium total shareholder return, made up of 6% to 8% adjusted EPS growth compounded annually impaired with an approximately 3% dividend yield. For you, our investors, it means predictable earnings growth, a competitive dividend and long-term shareholder value. Today, I'm going to share with you our plans to further simplify and strengthen our model as we plan to exit nonutility renewables development and focus on what we do best. Following a comprehensive strategic review of NorthStar, we are taking a deliberate step to simplify our business model and sharpen our focus on utility investment. We plan to exit nonutility renewable development while retaining a portfolio of Michigan-based assets, including Dearborn Industrial Generation or DIG, several small gas peakers in 4 commercial solar projects, all of which generate strong cash flow and support our long-term growth strategy. Let me share a little more about how this plan benefits the company and our investors. First, we plan to reallocate capital away from NorthStar and exit nonutility renewables development. Our current 5-year plan has approximately $1.7 billion dedicated primarily to nonutility renewables. This shift of capital will reduce parent funding needs. Second, the retained assets will not require significant capital investment, and they generate strong cash flow, further optimizing parent financing and supporting our large utility capital investment plan. Additionally, as we look to the future, proceeds from the sale of our non-Michigan assets and development projects will further reduce external funding needs at the parent, including equity. Collectively, these three items equate to a reduction of over $500 million of funding through 2030, optimizing parent financing. Beyond 2027, we expect NorthStar's earnings to be driven primarily by DIG and the peakers. On a consolidated basis, this means nearly 100% of our earnings and future growth will be rate-based driven within the utility, supporting higher quality growth while simplifying in strengthening our overall business strategy and outlook. We are targeting the restructuring to be complete by the end of this year and anticipate providing an interim update on future earnings calls as we execute the repositioning of this business. Now let's talk about our growth in Michigan. We continue to see momentum across multiple sectors of Michigan's economy. On the data center front, we have made meaningful progress and have taken an additional step reaching an agreement under our large load tariff. This includes both the extraordinary facilities agreement and the rate agreement. We have one of the most constructive frameworks in the country for data center growth. Our large low tariff interest new large load customers bear all costs to serve them, supports economic growth and protects existing customers. In fact, our average residential electric customer could see approximately $7.50 per month of bill benefit with every gigawatt of new large load. Clear evidence of how disciplined growth supports customer affordability. The next step in the process is for the customer to receive local zoning approval and we will incorporate the low growth associated with the agreement into our Integrated Resource Plan, or IRP, which we'll file in September. I continue to be confident in the progress we see here in the future benefit realized for all our customers. In addition to the large load growth we're seeing, year-to-date, we've also contracted roughly 135 megawatts of manufacturing and industrial load. This consistent momentum is a reflection of Michigan's economic growth, and why Michigan for the fourth year in a row was ranked #6 in CNBC's top states for business. We continue to see strong interest from technology, advanced manufacturing and supply chain companies looking to expand in Michigan. These opportunities create new jobs, strengthen our communities and continue to create long-term value for our customers and shareholders. Looking at our regulatory calendar. In June, we filed our electric rate case requesting a $456 million revenue increase, a 10.25% ROE and a 51.75% equity ratio. We've also requested 2-year investment recovery mechanism, or IRM as we make needed customer investments to harden and strengthen our electric grid. In our gas business, in June, we revised our revenue request in our gas rate case to $232 million, well aligned with staff's position on our distribution spend. We also increased our equity ratio to 51.75% to align with our electric rate case and reflect the need for a higher equity ratio to support affordability and efficient financing. These investments are outlined with clear and deliberate plans focused on continuing to deliver safe, reliable and affordable energy for our customers. As I previously highlighted, we have moved our IRP filing to September to reflect the recent data center agreement and ensure we are putting the best plan forward for Michigan. Now on to the financials. For the first half, we reported adjusted earnings per share of $1.50 and are executing on our plan to deliver full year guidance. We are reaffirming our full year 2026 guidance of $3.83 to $3.90 per share with continued confidence toward the high end. We also have a clear line of sight on our 2027 guidance given the change in strategy at NorthStar and are introducing full year 2027 guidance of $4.08 to $4.17, which maintains growth within our long-term guidance range of 6% to 8% off of 2025 actuals. This guidance reinforces and demonstrates our confidence in the continued growth and earnings power of our business post-NorthStar obstruction. Longer term, we continue to guide towards the high end of our adjusted EPS growth range of 6% to 8%. With that, I'll hand the call over to Sri.

Thank you, Garrick, and good morning, everyone. I want to thank those of you who have reached out over the last few weeks with kind words of support as I've stepped into the CFO role. I've enjoyed getting to reconnect with many of you and look forward to seeing those I haven't over the remainder of the year. Today, I'll focus on three things: first half results the path to delivering our 2026 guidance and how our investment and financing plans support durable long-term growth. I'll start on Slide 8, where we have the standard waterfall chart, which illustrates the key drivers of our financial performance through the first 6 months of 2026 and our year-to-go assumptions for meeting our expected guidance range. Through the first half of 2026, the company delivered adjusted net income of $464 million or $1.50 per share. The $0.23 year-over-year unfavorable variance is primarily due to benefits realized in the first half of 2025 from liability management that were already contemplated in our 2026 plan and do not impact our full year guidance. Relative to our planned assumption so far this year, the primary headwind has been the impact of storms, which we identified actions to offset, including, but not limited to, the pending storm referral filed with the commission. From a top line perspective, an unfavorable weather comp from last year and slightly lower cooling and heating degree days in Q2 versus normal, resulted in an unfavorable variance of $0.08 for year-to-date results. New rates net of investment costs drove a positive $0.20 of earnings, which continue to move up year-to-date with the benefits of last year's gas rate order, new electric rates, which commenced in May and continued investments in renewable projects at the utility. The $0.19 of unfavorable O&M variance was primarily driven by the previously mentioned storm activity. The $0.16 of unfavorable parent and other includes items planned in our full year guidance as well as positive sales trends year-to-date. For the remaining 6 months ago, we'll continue to plan for normal weather, the unfavorable variance of $0.18 reflects the absence of weather upside in 2025. July temperatures have been helpful, we don't count on weather upside as part of our planning. However, it does mitigate potential headwinds or allow reinvestment to benefit customers and strengthen the plan for the future. As I mentioned, we continue to see ongoing benefits from the previously mentioned rate orders and renewable investments. We are also planning a constructive outcome in our pending gas case. In total, we see rates, net of investment costs driving $0.22 of positive earnings in the second half. We expect a positive $0.25 of O&M driven earnings in part by constructive outcome in the pending storm deferral docket as well as normalized storm activity through the balance of the year. The last piece of the to-go portion of the walk results in a positive variance of $0.16 to $0.23 and has several components, including one, the absence of pull-aheads from last year that were funded by favorable weather in 2025; second, the continued performance of NorthStar, including DIG's higher contribution since last year's outage and new contracts this year; and third, a conservative assumption for non-weather sales, which, as I mentioned, are trending positively year-to-date. While Garrik has already affirmed our financial objectives, I'll reiterate my confidence in our ability to deliver on this year's EPS guidance, our 2027 guidance that we have initiated today and our long-term EPS growth. Turning to Slide 9. The foundation of our long-term growth is the robust $24 billion utility investment plan, which drives 10.5% compounded rate base growth. Our decision to reposition NorthStar enables us to efficiently fund the current 5-year plan and over time, allocate incremental capital to the utility, providing high-quality durable earnings with strong long-term value. You'll note, we are highlighting a $2 billion capital opportunity for utility renewables related to the already approved renewable energy plan or REP. And an additional $1 billion of electric distribution reliability opportunity represented in the road map we've already filed with the commission. These investments are opportunities in the back half of the plan as we continue to improve distribution reliability and meet Michigan's energy law requirements. As we have highlighted in the past, non-rate base earnings differentiate our model from a typical utility and have future growth potential. Energy efficiency incentives and the financial compensation mechanism for FCM on power purchase agreements are key parts of Michigan's legislative framework and benefit customers and investors. While energy efficiency remains a component of our long-term plan, it's a relatively mature program. The SEM has the potential to drive additional opportunity through this decade and the next as we continue to procure electric supply resources that ensure reliability as well as meet the renewable energy, clean energy and battery storage requirements of Michigan's energy law. Let's move to Slide 10, where I'll cover the company's funding needs and progress in 2026. We remain on track to complete our 2026 financing plan, including planned debt issuances at the utility, and the remainder of our common equity issuance under our established ATM program. While we don't typically update our long-term financing plans during the year, in the context of the NorthStar decision, I would like to provide direction as to when and how future financings will likely be impacted. Our current 5-year plan assumes a total of $3.75 billion of new equity. This year, we plan to issue $700 million and have already completed nearly $500 million at attractive prices. This leaves approximately $3 billion over the remainder of the plan. As we redeploy cash from NorthStar, we would anticipate reducing at least $350 million of equity from the current plan. We'll provide an update on our financing plan during the Q4 call as part of our normal annual planning process. Turning to Slide 10. I want to spend a moment describing what gives us confidence in our investment thesis and how it delivers customer value and maintains affordability. This slide depicts how growth and affordability reinforce one another and do so year in and year out, delivering 6% to 8% earnings growth for investors, while keeping customer build growth at below inflation. Our utility investments drive 10.5% rate base growth, and those investments help reduce customer costs and drive earnings growth. Long-term investments in electric supply and natural gas storage allow us to deliver significant cost savings as well as resiliency and reliability benefits to customers during the hottest day of the summer and the coldest days of the winter. We have demonstrated the ability to manage operating costs through our lean operating system, the CE Way. This relentless focus on eliminating waste and driving efficiency through better process and automation enables us to deliver savings year after year, creating the headroom to make needed investments in distribution reliability and gas safety. Support for financially healthy utilities in both legislation and regulation means we can use our balance sheet to make long-term investments and leverage efficient financing to lower costs for our customers. Finally, with 2% to 3% sales growth anticipated, and the ongoing customer benefits of energy efficiency, which is up to 2% on the electric side, we see lower customer bills as individual customer consumption is reduced and fixed costs are spread across increasing load. This proven and durable business model allows us to provide safe, reliable and affordable service to our customers and deliver consistent financial performance for you, our investors. While I'm new to my role, I'm not new to CMS. The foundation of our business model is strong. And in the 12 years I've been with the company, the opportunities to serve our customers grow our state and drive long-term value for our investors have never been better. I'm confident in the strategy we are executing in the years and decades to come. Now I'll turn it back to Garrick before we take your questions.

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

[Operator Instructions] And our first question comes from the line of Richard Sunderland with Truist Securities.

I guess starting with NorthStar, to throw out the first question of kind of why now, is this all with an eye to higher utility growth and are you thinking about other opportunities related or outside of that business any differently, whether it's big recontracting or the progress on the data center efforts -- just kind of want to get the big picture here. Can you speak a little bit more to the process and timing?

Yes. Let me just walk a little bit through from a process perspective, leading up to this, and then I'm sure Sri's going to want to jump in as well to the conversation here. You would expect as good fiduciaries of the business that we're always looking on a regular basis on our businesses, and we do that. And we look at it from all stakeholder perspective, from customers all the way to investors. And from an investor standpoint, we're looking at how we deploy capital to bring the highest value back to our owners. And so the decision we're sharing here today does just that, right? We talked about reallocation of capital, the capital assets we're going to maintain with light capital investment and bring cash back to the parent, the disposition of assets. We walk through all that, and Sri will go into some additional details of that. But I would also point out just the guidance we've provided as well, long term, 6% to 8% towards the high end. And we were deliberate about 2027 guidance because we're giving you the visibility but also sharing our confidence in the growth and earnings power of this business. And so what you should read through that is no rebate. That's what you should see in there. And then just the bigger picture here. We talked about what other things we could do, we are simplifying. That is the key message, right? And we are improving the financials of our overall business, and we are focused on the utility. Nearly 100% of the earnings after '27 come right out of regulated utility. That is a high-quality earnings that high-quality growth. That's what our investors expect. But Sri, please.

Yes, Rich, I appreciate the question. I'll hit on Garrick's comment. We're focused on utility investment. We have a robust plan. I hit that in my prepared remarks at $24 billion. What this repositioning of NorthStar and restructuring does allows us to more efficiently finance that capital, both at the parent because we're reducing our financing needs. So that really strengthens and lengthens our plan. And then it improves our balance sheet flexibility as we continue to finance utility capital. So really, across the financing as well as the allocation of capital, we're strengthening the business and simplifying it.

And then turning towards the utility, it looks like great progress in terms of the agreement with the data center. Curious if you could speak a little bit more to what still has to go on the customer side, your thoughts on that in light of expected inclusion in your IRP filing and just, I guess, progress overall there relative to sort of expectation earlier in the year and how things currently stand on sort of final, final agreements.

As I shared in the Q1 call, we'd continue to provide updates on progress, and I'm pleased with the progress. We talked about the signature, both in the rate construct and a rate agreement as well as the extraordinary facilities agreement. All that kind of fits under this large load tariff, and I talked about the benefit of that in my prepared remarks, and what that means for not only economic growth and capital investment but ensures existing customers don't pay for that. In fact, there's a benefit associated with that. And we're very clear to share the zoning is still underway. The customer is working through that. And we want to be respectful of the locals and they're doing their due diligence. I've also talked about that on calls in the past. So we're going to let that play out. But what gives me optimism is the customer is working through multiple locations in the state. And that tariff because it's tariff, that contractual piece can apply anywhere in our service territory, which is great. And then we'll build that in September into our integrated resource plan that load growth. But Sri, would you like to add anything to that?

No. The only thing I'd add, Garrick, is that the capital plan that we have today doesn't reflect that load growth. So there continues to be upside opportunity that will be reflected in the IRP that we'll incorporate over time into ourplans.

And our next question comes from the line of Jeremy Tonet with JPMorgan.

I just wanted to dive in on the '27 guide. A little bit more if I could. Just wondering any preliminary thoughts at this point in time, obviously, depends on where full year fall for '26. But how you think you could land within the range there. And I imagine the renewable timing would also come into play here. But just any thoughts on how you think you could trend within that range?

Jeremy, it's Sri. Thanks for the question. I'll give you a couple of things. One, we're not biasing the range. We provided confidence in that range. It's really driven by the utility growth. That's the underlying assumptions to the plan. As you think about 2027, we've already incorporated the repositioning of NorthStar into that guidance. So we're confident with the assumptions we've made. Now as we execute over the course of '26 and into '27, we'll update our part of our normal planning process as we go through the course of this year and next.

Got it. And then I just wanted to maybe dive in a little bit more, you talked about cost efficiencies in NorthStar restructuring. Just wondering if you could talk a little bit more detail about what categories these can look like and what type of magnitude.

Yes. Jeremy, as we exit renewables development, there is costs associated with having that type of platform, both from an engineering and development perspective so we can get cost efficiencies from our business as we get that business and deploy capital elsewhere.

And our next question comes from the line of Nick Campanella with Barclays.

Thanks for all the information and the early look on '27. I guess just -- I'm just trying to frame NorthStar last year was about $0.30, and our understanding is about half of that is the renewables and there's some debt costs in there as well. So what is the offset besides lower parent financing or maybe that's just entirely it? And when I kind of think about the year to go, there is about $0.16 to $0.23 of benefit from parent financing, tax and other And I'm just wondering like how much of that is kind of onetime in nature that we have to kind of take out of '27 and really just trying to understand is parent going to continue to see a year-over-year benefit net of all these drivers as we look towards '27?

Jeremy -- sorry, Nick, I'll break the question apart a little bit. As you think about '27 and beyond, we are retaining DIG and a handful of renewables assets. Those will continue to provide earnings into '27 and beyond. And then when you think about the incremental cash from those assets that are no longer being deployed into renewables development, they'll offset parent financing. So over time, the utility growth will be more efficiently financed so you'll see continuing benefit at the parent year-over-year.

Continued benefit year-over-year. Okay. And then maybe just an update on how you're thinking about the storm deferrals in the plan that you've outlined today, maybe based off precedent and what's currently pending in front of the commission and just your underlying assumptions there?

Yes. We are assuming a constructive order in that pending docket. But as I noted in my prepared remarks, that's not the limit to how we're going to consider plan or identifying offsets to storm costs over the course of the year. But we do have a good precedent for that from last year, and our performance continues to get better. So we expect a constructive outcome in that docket.

And our next question comes from the line of Julien Dumoulin-Smith with Jefferies.

Just wanted to come back on the announcement here this morning. Just with respect to the outlook, I wanted to ask, how accretive is this transaction the best you guesstimate here today? I mean, obviously, there's a number of different moving pieces here, but is there any way to kind of give us a number by 2030 and how to think about what the increment decrement is based on what you're announcing? I know that obviously, '27, '27, but as you look at the tail end of the outlook here, if you can comment to that and the relative accretion?

Julien, nice to hear, yes, appreciate the congrats. A couple of things. Our outlook, our long-term growth trajectory hasn't changed, 6% to 8%. Garrick reiterated that, I'll reiterate the same. And what really this plan does is it doesn't change our growth outlook. It changes the composition of growth. we're reallocating capital away from NorthStar. So more of the upside and more of the growth will come from the utility. And over time, we're financing that more efficiently by not allocating capital to renewable development at NorthStar. So you'll see us strengthen and lengthen our plan over time as we have more efficient financing at the parent.

Is there a way to think about what the contribution would have been, shall we say it this way, like when you think about the prior plan for 2030 and just what the assets would have contributed out in that time period, just that pre and post? Like what -- had it not been for this transaction, what the composition would have been out in the 2030 time period from those assets?

So Julien, we are exiting the renewable development piece of it. So those were generating largely development gains related to developing those assets. What we're retaining is DIG, and so the earnings from that and the cash from that are being retained. And what that's doing is offsetting parent drag over time. So as you're thinking about -- you're kind of modeling out to 2030, you're seeing more -- the outlook for the utility state is the same. We have 10 5.5% rate base growth there. But you're going to see less and less drag at the parent, which is offsetting any of the renewables development earnings over time.

Right. So it was a positive earnings contribution in the 2030 time frame previously the way [ in ] is what you're selling it and replacing it go forward.

Yes. And the way I think about it, Julien is 6% to 8%. We continue to have confidence in that growth. This is strengthening and lengthening the plan and is creating more durable earnings as we go out, not only through the plan but beyond the plan.

And our next question comes from the line of Shar Pourreza with Wells Fargo.

So Garrick, I know we've seen, obviously, Microsoft struggle a little bit with zoning in some of their sites in Michigan. I guess does the 20-year contract survive if zoning drags materially or fails outright? Is there kind of a drop dead date or a ramp in the agreement? And then obviously, you just mentioned that you're looking at -- they could be looking at multiple locations in the state. Could that be outside of your territory, maybe closer to Detroit?

Let me -- here's one of the wonderful things about our succession plan when you've got a financial expert assuming the role of CFO, who's also spent time in the operations, who has also not only dealt with power supply costs, but been in the conversations with the data centers. I'm going to ask him to respond to the question, just given his expertise.

There's a couple of pieces to this, Shar. It's more than one customer. It's more than one location. And so that's what's giving us confidence. Like Garrick said, our construct or large load, I think, is one of the best in the country. It protects customers, it drives affordability and it drives certainty from an investment and credit perspective over the long run. And so I think we are well positioned to continue to attract large loads, both in the near term and long term.

And what I would just add to that, and I said it in my prepared remarks or in response to the question, that tariff has -- it's a tariff, right? And so as that customer thinks about different locations in the state, that has the flexibility to move along with them in those other locations. And so that's really the beauty of it. Thanks for your question, Shar.