CMS Energy Q3 2021 Earnings Report

CMS Energy EPS Results

• Actual EPS: $0.54
• Consensus EPS: $0.54
• Beat/Miss: Met Expectations
• One Year Ago EPS: $0.77

CMS Energy Revenue Results

• Actual Revenue: $1.73 billion
• Expected Revenue: $1.63 billion
• Beat/Miss: Beat by +$92.86 million
• YoY Revenue Growth: +14.50%

CMS Energy Announcement Details

• Quarter: Q3 2021
• Date: 10/27/2021
• Time: Before Market Opens
• Conference Call Date: Wednesday, October 27, 2021
• Conference Call Time: 8:00PM ET

CMS Energy (NYSE:CMS) (NYSE: CMS) is an energy company based in Jackson, Michigan, whose principal business is the regulated utility operations of its subsidiary, Consumers Energy. The company is primarily focused on providing electric and natural gas service to customers in Michigan, operating the generation, transmission and distribution infrastructure necessary to deliver energy to residential, commercial and industrial customers. Headquartered in Jackson, CMS Energy conducts its core activities within the state and is regulated by state utility authorities.

Through Consumers Energy and related subsidiaries, CMS Energy develops, owns and operates a portfolio of generation assets and delivers a range of customer-facing services, including electricity and natural gas supply, grid management, energy efficiency programs and demand-response offerings. The company has invested in grid modernization, reliability initiatives and distributed-energy resources to support service continuity and evolving customer needs. CMS Energy also undertakes project development and procurement to add capacity and diversify its resource mix, including investments in renewables and energy storage where regulatory and commercial conditions permit.

CMS Energy traces its roots to longstanding utility operations in Michigan and has continued to evolve under the regulatory framework that governs public utilities in the state. Its strategic focus emphasizes maintaining reliable service for its customer base while transitioning elements of its generation portfolio to cleaner resources and upgrading infrastructure to support future demand patterns. The company operates within Michigan’s regulated utility environment and engages with state regulators, local communities and stakeholders as it executes system investments and policy-driven initiatives.

CMS Energy Q3 2021 Earnings Call Transcript

Key Takeaways

• Completed sale of EnerBank for over $1 billion, streamlining the company’s focus on its regulated utility and funding key safety, reliability, resiliency and clean‐energy initiatives.
• Secured approval for a voluntary green pricing program that will add 1,000 MW of owned renewable generation, with demand already oversubscribed and driven by customer sustainability preferences.
• Surpassed full‐year cost‐reduction targets with over $40 million in savings through the “CEway” operational efficiency program, helping keep customer rates competitive and affordable.
• Delivered year-to-date adjusted EPS of $2.18, raised 2021 guidance to $2.63–$2.65, reaffirmed 2022 guidance at $2.85–$2.87, and maintain a 6–8% long-term EPS growth and dividend increase target.
• Filled one of the largest U.S. natural gas storage fields at under $3/MMBtu, providing stable supply and bill protection for customers via pass-through pricing amid current high spot markets.

Presentation

[Operator]

Good morning, everyone, and welcome. This call is being recorded. After the presentation, we will conduct a question-and-answer session. As a reminder, there will be a rebroadcast of this conference call beginning today at 12 P.M. Eastern Time, running through November fourth. 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. Sri Maddipati, Treasurer and Vice President of Finance and Investor Relations. Please go ahead.

[Sri Maddipati, Treasurer and VP of Finance and Investor Relations at CMS Energy]

Thank you, Rocco. 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.

[Sri Maddipati, Treasurer and VP of Finance and Investor Relations at CMS Energy]

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. Now I'll turn the call over to Garrick.

[Garrick Rochow, President and CEO at CMS Energy]

Thank you, Sri, and thank you everyone for joining us today. I'm pleased to share we've delivered another strong quarter and continue to be ahead of plan for the year. I'll walk through the specifics in a moment, but I couldn't be more pleased with the strong execution demonstrated by the team, both operationally and financially. We continue to deliver every day for our customers, coworkers, and for you, our investors.

[Garrick Rochow, President and CEO at CMS Energy]

Earlier this month, we completed the sale of EnerBank, grossing over $1 billion in proceeds. I want to thank the entire team that brought this to close. The sale of the bank simplifies and focuses our business model squarely on energy, primarily the regulated utility, an important step as we continue to lead the clean energy transformation.

[Garrick Rochow, President and CEO at CMS Energy]

The proceeds from this sale will fund key initiatives in our utility business related to safety, reliability, resiliency, and our clean energy transformation. As shared in previous calls, we have eliminated our equity needs from 2022 through 2024. Furthermore, Rejji will highlight in his prepared remarks how we have continued to reduce this year's equity needs as well.

[Garrick Rochow, President and CEO at CMS Energy]

The keyword there, continued. As we double down on the clean energy transformation, I am also pleased to share that we received approval for our Voluntary Green Pricing Program, which would add an additional 1,000 MW of owned renewable generation to our growing renewable portfolio. This program is in high demand and currently oversubscribed. More importantly, it's what our customers are asking for, an important step in offering renewable energy solutions for our customers.

[Garrick Rochow, President and CEO at CMS Energy]

As we prepare for the grid of the future, we have a highly visible and detailed capital plans outlined in our recently filed Electric Distribution Infrastructure Investment Plan. This plan provides a five-year view of the projects down to the circuit level where we plan to invest to ensure the reliability and resiliency of our electric infrastructure and aligns with our operational and financial plans. As always, we balance these investments with customer affordability.

[Garrick Rochow, President and CEO at CMS Energy]

Our prices remain competitive as the average residential customer pays about $2 a day to heat their home and $4 a day to keep the lights on. Because we know our most vulnerable customers still struggle, our team has mobilized resources at the state and federal levels to ensure their protection. In fact, as we approach the winter heating season, our 90-day arrears are back to pre-pandemic levels with an 80% reduction in our uncollectible accounts. Our commitment to identifying and eliminating waste means that we keep our prices affordable.

[Garrick Rochow, President and CEO at CMS Energy]

This commitment is evident in our results. In the first nine months of this year, we surpassed our full year cost reduction target of more than $40 million. The CE Way is in our DNA, and we continue to deliver savings in the near term and well into the future. Speaking of the future, this year we grew our EV program with PowerMIFleet. This is part of our long-term planning and collaboration with Michigan businesses, government, and school systems looking to electrify their vehicle fleets.

[Garrick Rochow, President and CEO at CMS Energy]

Within just a few months of the program introduction, we are working with nearly 20 different customers on their fleets and have another 50 who have indicated interest for the next launch, exceeding our expectations. This is an important contribution to our long-term sales growth. Finally, one of my favorites, which speaks to our culture, our coworkers, and our ability to attract the best talent.

[Garrick Rochow, President and CEO at CMS Energy]

Our commitment to diversity, equity, and inclusion continues to be recognized nationwide, and most recently by Forbes, where we were ranked the number one utility in the U.S. for both America's Best Employers for Women and number one for diversity. Delivering excellence every day continues to position the business for sustainable long-term growth. Strong execution leads to strong results. The two are linked. One drives the other. In early August, we experienced one of the worst storms in our company's history.

[Garrick Rochow, President and CEO at CMS Energy]

Our team established an incident command structure to deploy resources and took decisive action to restore customers. We had a record number of crews on our system. The speed of our response led to the highest positive customer sentiment we have ever received during a major storm. I would be remiss if I didn't take a moment to thank all our coworkers who responded to the call. During this storm, we had more than 3,700 members of our team working around the clock to safely restore customers.

[Garrick Rochow, President and CEO at CMS Energy]

Like we do every year, through storms, pandemics, and unseasonal weather, we continue to deliver. When there's upside, we reinvest. This is the CMS model of responding to changing conditions that allows us to deliver consistently year-after-year. Year-to-date, we've delivered ahead of plan with adjusted earnings per share of $2.18 for continuing operations.

[Garrick Rochow, President and CEO at CMS Energy]

Our strong performance, coupled with the completion of the EnerBank transaction and the financial flexibility that provides, gives us further confidence in our ability to meet our full-year guidance, which we've raised to $2.63 to $2.65 from $2.61 to $2.65 for continuing operations. For 2022, we are reaffirming our adjusted full-year guidance of $2.85 to $2.87 per share, and our continued strong performance in 2021 builds momentum for 2022 and beyond.

[Garrick Rochow, President and CEO at CMS Energy]

Longer term, we are committed to growing our adjusted EPS toward the high end of our 6% to 8% growth range, as we highlighted on our Q2 call. As previously stated, we are committed to growing the dividend in 2022 and beyond. It's what you expect, why you own us, and we know it's a big part of our value. As we move forward, we continue to see long-term dividend growth of 6% to 8% with a targeted payout ratio of about 60% over time. Many of you have asked about gas prices and the impact on our business and, more importantly, our customers.

[Garrick Rochow, President and CEO at CMS Energy]

Let me tell you about our gas business. We have one of the largest storage fields in the U.S. and compression resources to match. That is a significant advantage. We started putting natural gas into our storage fields in April and continued throughout the summer when natural gas prices were low. Right now, our fields are full and ready to deliver for our customers' heating needs throughout the winter months.

[Garrick Rochow, President and CEO at CMS Energy]

Most of the gas is already locked in at just under $3 per 1,000 cubic feet, which is well below current levels in the spot market and offers tremendous customer value. Given the operational certainty of storage, as well as the financial protection of a pass-through clause, our customers stay safe and warm all winter long and have affordable bills. Heat in Michigan is not an option, and we don't leave it up to the market. We buy, store, and deliver.

[Garrick Rochow, President and CEO at CMS Energy]

That's what we do. Michigan's strong regulatory construct is known across the industry as one of the best. It includes the integrated resource plan process, which is a result of legislation designed to ensure timely recovery of the necessary investments to advance safe, reliable, and clean energy in our state. Michigan's forward-looking test years and three-year pre-approval structure of the IRP process gives visibility on our future growth.

[Garrick Rochow, President and CEO at CMS Energy]

It enables the company and the commission to align on long-term generation supply planning and provide certainty as we invest in our clean energy transformation. Here's what I like about our recently filed IRP. There is a win in it for everyone.

[Garrick Rochow, President and CEO at CMS Energy]

It is a remarkable plan that addresses many of the interests of our stakeholders. It ensures supply reliability, it reduces costs, and it delivers industry-leading carbon emission reductions. It's clean. We continue to have constructive dialogue with the staff and other stakeholders, and we anticipate seeing their positions later today. With that, I'll turn the call over to Rejji.

[Rejji Hayes, EVP and CFO at CMS Energy]

Thank you, Garrick, and good morning, everyone. I'm pleased to offer the details of another strong quarter of financial performance at CMS as a result of solid execution across the company.

[Rejji Hayes, EVP and CFO at CMS Energy]

As a brief reminder, throughout our materials, we report the financial performance of EnerBank as discontinued operations, thereby removing it as a reportable segment in reporting our quarterly and year-to-date results from continuing operations in accordance with generally accepted accounting principles. Now on to the results. For the third quarter, we delivered adjusted net income of $156 million or 54 cents per share.

[Rejji Hayes, EVP and CFO at CMS Energy]

The key drivers for the quarter were higher service restoration expenses attributable to the August storms that Garrick mentioned, and planned increases in other operating and maintenance expenses in support of key customer and operational initiatives. These sources of negative variance for the quarter were partially offset by favorable weather, the continued recovery of commercial and industrial sales in our electric business, and higher rate relief net of investment-related expenses.

[Rejji Hayes, EVP and CFO at CMS Energy]

Year to date, we've delivered adjusted net income of $628 million or $2.18 per share, which is up $0.19 per share versus the first nine months of 2020, exclusive of EnerBank's financial performance. All in, we continue to trend ahead of plan and have substantial financial flexibility heading into the fourth quarter.

[Rejji Hayes, EVP and CFO at CMS Energy]

The waterfall chart on slide 8 provides more detail on the key year-to-date drivers of our financial performance versus 2020. For the first nine months of the year, rate relief continues to be the primary driver of our positive year-over-year variance to the tune of $0.45 per share, given the constructive regulatory outcomes achieved in the second half of 2020 for our electric and gas businesses.

[Rejji Hayes, EVP and CFO at CMS Energy]

As a reminder, our rate relief figures are stated net of investment-related costs such as depreciation and amortization, property taxes, and funding costs of the utility. This upside has been partially offset by the aforementioned storms in the quarter, which drove $0.16 per share of negative variance versus the third quarter of 2020, and $0.11 per share of downside on a year-to-date basis versus the comparable period in 2020.

[Rejji Hayes, EVP and CFO at CMS Energy]

To round out the customer initiatives bucket, planned increases in our operating and maintenance expenses to fund safety, reliability, and decarbonization initiatives added the balance of spend for the first nine months of the year, which in addition to the August storm activity, added $0.35 per share of negative variance versus the comparable period in 2020.

[Rejji Hayes, EVP and CFO at CMS Energy]

As a reminder, these cost categories are shown net of cost savings realized to date, which, as Garrick mentioned, have already exceeded our target for the year with more upside to come. To close out our year-to-date performance, we also benefited from favorable weather relative to 2020 in the amount of $0.07 per share and another $0.02 per share of upside, largely driven by recovering commercial and industrial load.

[Rejji Hayes, EVP and CFO at CMS Energy]

As we look ahead to the remainder of the year, we feel quite good about the glide path for delivering on our EPS guidance range, which has been revised upward to $2.63 to $2.65 per share, as Garrick noted. As we look ahead, we continue to plan for normal weather, which in this case translates to $0.06 per share of positive variance given the absence of the unfavorable weather experienced in the fourth quarter of 2020. We'll also continue to benefit from the residual impact of our 2020 rate orders, which equates to $0.07 per share and is not subject to any further MPSC actions.

[Rejji Hayes, EVP and CFO at CMS Energy]

We'll make steady progress on our operational and customer-related initiatives, which are forecasted to have a financial impact of roughly $0.07 per share of negative variance versus the comparable period in 2020. Lastly, we'll assume the usual conservatism in our utility non-weather sales assumptions and our non-utility segment performance. All in, we are pleased with our strong execution to date in 2021 and are well-positioned for the remainder of the year.

[Rejji Hayes, EVP and CFO at CMS Energy]

Turning to slide nine, I'm pleased to highlight that this year's financing plan has been completed ahead of schedule. In the third quarter, we issued $300 million of first mortgage bonds at a coupon rate of 2.65%, one of the lowest rates ever achieved at Consumers Energy. We also remarketed $35 million of tax-exempt revenue bonds earlier this month at a rate of under 1% through 2026.

[Rejji Hayes, EVP and CFO at CMS Energy]

Due to the strong execution implied by these record-setting issuances, coupled with the EnerBank sale, which provided approximately $60 million of upside relative to the sale price announced at signing, we now have the flexibility to reduce our equity needs for the year even further, which will now be limited to the $57 million of equity forwards we have already contracted. With that, I'll turn the call back to Garrick for some concluding remarks before we open it up for Q&A.

[Garrick Rochow, President and CEO at CMS Energy]

Thanks, Rejji. Our simple investment thesis has stood the test of time and continues to be our approach going forward. It's grounded in a balanced commitment to all our stakeholders, enables us to continue to deliver on our financial objectives. As we've highlighted today, we've executed on our commitment to the triple bottom line through the first nine months of the year.

[Garrick Rochow, President and CEO at CMS Energy]

We're pleased to have delivered strong results. We're positioned well to continue that momentum into the last three months of the year as we move past the sale of the bank and continue progress through the IRP process. This is an exciting time at CMS Energy. With that, Rocco, please open the lines for Q&A.

[Operator]

Thank you very much, Garrick. The question and answer session will be conducted electronically. If you'd like to ask a question, please do so by pressing the star key followed by the digit one on your touchtone telephone. If you're using the speaker function, please make sure you pick up your handset. We'll proceed in the order you signal us, and we'll take as many questions as time permits. If you do find that your question has been answered, you may remove yourself by pressing the star key followed by the digit two on your touchtone telephone. We'll pause for just a second. Today's first question comes from Shar Pourreza with Guggenheim Partners. Please go ahead.

[Analyst at Guggenheim Partners]

Hi, good morning, team. It's actually Constantine here for Shar, and congrats on a challenging but successful quarter.

[Garrick Rochow, President and CEO at CMS Energy]

Thanks, Constantine.

[Analyst at Guggenheim Partners]

I have a question, quick question on the cadence of long-term growth that you reiterated today. The 2022 guidance implies a top of the range performance, as you mentioned, and kind of you expect to execute at the high end. One of the opportunities, obviously the IRP, but that may take some time for approval, execution. Just-

[Garrick Rochow, President and CEO at CMS Energy]

Mm-hmm.

[Analyst at Guggenheim Partners]

Does the 8% growth imply some incremental CapEx to the prior plan or any kind of financing items? Is there any change to the glide path or timing for the offset of kind of the near-term dilution from the business optimizations?

[Garrick Rochow, President and CEO at CMS Energy]

Well, let me tag-team this with Rejji, but here's what I'll offer and here's what you should hear from this call. High confidence in 2021, and that momentum carries into 2022. We reaffirmed our guidance for that time period at $2.85 to $2.87. As we said in previous calls, when I look out at 2022 off this 2022 base, it continues to be at this growth rate of 6% to 8%, and I would expect us to be toward the high end of that.

[Garrick Rochow, President and CEO at CMS Energy]

Now, you know we plan conservatively, and in Q4, we'll provide our capital plan. We expect that capital plan to grow with the things you would be familiar with, the gas system, the electric system, and the supply system. However, the IRP and particularly the Covert plant in 2023 and the DIG assets in 2025 are upside to that plan.

[Garrick Rochow, President and CEO at CMS Energy]

Once we have complete certainty on that IRP process, those provide the opportunity for upside to the plan. I mean, that's. There's a great deal of confidence that I have about our, you know, this five-year window when I look at from 2021 through 2025. But certainly, Rejji, jump in to add some additional context.

[Rejji Hayes, EVP and CFO at CMS Energy]

Yeah. Well, Garrick, I think you laid it out well. Constantine, the only thing I would add, just to give you a bit more specifics around the numbers. Our current plan that we're executing on, for five years or 2021 through 2025 is about $13.2 billion. We have not changed that, but we are assuming that we'll increase that by about $1 billion next year in the next vintage into Garrick's comments.

[Rejji Hayes, EVP and CFO at CMS Energy]

That does not presuppose any outcome for the IRP, and there's about $1.3 billion of additional capital investment opportunities that is on the outside looking in, which just gives us more confidence in the plan. We also are not planning to issue equity, and there's a funding efficiency that will also be accretive to our financial performance as we see it.

[Rejji Hayes, EVP and CFO at CMS Energy]

What's also not in the plan from a capital investment perspective that Garrick offered in his prepared remarks was a Voluntary Green Pricing Program that we got approval on, which offers about a gigawatt of capital investment opportunities, specifically renewable spend that we would own, from 2024 through 2027. All of that's on the outside looking in. You can see why we have great confidence in our ability to deliver towards that high end off of the 2022 base.

[Analyst at Guggenheim Partners]

Perfect. I think that's very comprehensive. Maybe just shifting to the regulatory process for a bit. Just on the IRP, can you talk about how you're building kind of some of the stakeholder comfort with the kind of asset retirement and reg asset treatment and the kind of mechanisms that you're proposing? Does any of the thinking change around the generation portfolio in light of the commodity shifts that we have seen?

[Garrick Rochow, President and CEO at CMS Energy]

I'll offer this, one, and then just credit to the team here at Consumers Energy and CMS Energy. There's been an extensive stakeholder process and engagement with staff, with interveners, with the public, that's led up to the filing and has continued through the filing process. I feel really confident about that. The messages and the testimony are strong and solid and will yield really good outcomes.

[Garrick Rochow, President and CEO at CMS Energy]

You know, in my prepared remarks, I said there's a win in this for everyone, and I really believe that. When you look at this plan, you know, our 2018/2019 IRP was a great plan. This is even better. The resiliency and reliability of our electric supply, we've done the modeling. It's more reliable plan than the past.

[Garrick Rochow, President and CEO at CMS Energy]

It's more affordable, $650 million of savings in this plan over the previous plan. We cut carbon emissions by 60% by 2025, well ahead of the Paris Agreement, the equivalent of taking 12.5 million cars off the road. From my standpoint here in the regulatory asset treatment, as I shared in the Q2 call, great testimony, and I think we're going to have a constructive dialogue and certainly a supportive dialogue we'll see this afternoon in the intervener comments.

[Garrick Rochow, President and CEO at CMS Energy]

There is a win in here for everyone. When there's a win in there for everyone, there's a great path to a great outcome. I believe that. We saw that in 2018 and 2019. I'm looking forward to seeing staff and interveners' testimony this afternoon. It's going to be supportive, it'll be balanced, it'll be constructive. Where there are differences, we've done that before. Just look at our 2018/2019 IRP. I feel good about where we're at in the process.

[Analyst at Guggenheim Partners]

Perfect. Thank you. That's very comprehensive, and I'll jump back in the queue. Congrats.

[Garrick Rochow, President and CEO at CMS Energy]

Thank you.

[Operator]

Our next question today comes from Jeremy Tonet with J.PMorgan. Please go ahead.

[Jeremy Tonet, Executive Director and Senior Equity Research Analyst at JPMorgan]

Hi, good morning. I just want to pick up on the CapEx side here and just wanted to see how you're thinking about grid hardening investments at this point. Specifically, do you think, you know, in reaction to the storms this summer, we could kind of see more movement on this side?

[Garrick Rochow, President and CEO at CMS Energy]

Let me offer this. As I shared in my prepared remarks, we had a great response during the storm. I'll be really clear, the fact pattern of storms has been different across the state. We've had one major storm. If you stand back and look at the big picture and look forward, from a strategy perspective, there certainly is a call for greater resiliency and grid hardening.

[Garrick Rochow, President and CEO at CMS Energy]

That's an opportunity from an investment perspective and an opportunity to create greater value for our customers. I think there's a couple things driving that. One, we're seeing more severe weather, not just in Michigan, but across the U.S. That is certainly a driver in the equation.

[Garrick Rochow, President and CEO at CMS Energy]

Then two, when we think about this transition to electric vehicles and be able to support those vehicles, not only do we need the capacity out there to be able to do that, but also we want to ensure that when we do have an interruption in service, today, it's just the refrigerator. Tomorrow, it's the refrigerator and the EV, and their ability to get to work. That's a whole new standard of performance. When again, big picture perspective, looking forward to the future, I see this as an opportunity and an inflection point where we spend more time on thinking about resiliency and grid hardening.

[Garrick Rochow, President and CEO at CMS Energy]

I'll share one last point on this. I've had the opportunity, post-storm to talk with the governor, to talk with the Chair Scripps. You know, I can't speak for them, but certainly a positive direction when we talk about how do we design the grid for the future with climate change and with severe weather in mind. Again, it's an opportunity for investors and an opportunity to create additional value for our customers.

[Jeremy Tonet, Executive Director and Senior Equity Research Analyst at JPMorgan]

Got it. That's very helpful. Thanks for that. Maybe just, you know, thinking about load as we exit the pandemic here, just wondering if you could provide thoughts, I guess, as far as, you know, trends by class and, really, you know, on the residential side, how you're seeing, I guess, you know, stickiness there and just any thoughts that you could share on that side?

[Rejji Hayes, EVP and CFO at CMS Energy]

Yeah, Jeremy, this is Rejji. I can offer some color there. We do have a slide in our appendix of the presentation, which is helpful. Slide 13, I'll point you to also the detailed 15-page digest also has some good content on load. What I can say at a very high level is we continue to be encouraged by the residential weather normalized load we're seeing.

[Rejji Hayes, EVP and CFO at CMS Energy]

You know, you probably saw year-to-date down roughly 2%, but that certainly compares favorable to plan where we assumed a more aggressive return to facilities for workers. We do think that this sort of hybrid format or mass teleworking trend should carry on and potentially be part of a new normal. In our budget, we had much more bearish expectations this year.

[Rejji Hayes, EVP and CFO at CMS Energy]

We actually thought there'd be a quicker recovery, and you see this down 2%. That's in excess of plan. We see performance to the upside there. We also compare it to the pre-pandemic level, and relative to 2019, we're up about 2.5%. We do think there's a very nice bit of resiliency to the residential load. Again, it offers a higher margin relative to the other customer classes as you know.

[Jeremy Tonet, Executive Director and Senior Equity Research Analyst at JPMorgan]

Got it. That's very helpful. Thank you.

[Garrick Rochow, President and CEO at CMS Energy]

Thank you.

[Operator]

Our next question today comes from Insoo Kim at Goldman Sachs. Please go ahead.

[Analyst at Goldman Sachs]

Hi, it's Rebecca on for Insoo. Thanks for taking our questions. For the ALJ decision on your rate case, it was roughly 25% of your requested revenue increase. Can you describe which items constitute the difference? Then if this gets adopted, would this impact your 2022 and 2023 growth trajectory?

[Garrick Rochow, President and CEO at CMS Energy]

Well, I'll offer this. I really view this PFD from the ALJ as a bookend. Michigan's constructive regulatory environment and this commission and previous commissions have really shown a balance and constructive approach. Again, I can't speak for the commissioners, but my interaction with the commissioners would suggest this, that they believe and support healthy utilities, good outcomes from electric and gas rate cases.

[Garrick Rochow, President and CEO at CMS Energy]

When you have those and similar goals, it leads to good outcomes. I view we're gonna get an outcome in this electric order that's in December that's both constructive and balanced, good for Michigan's residents, Michigan, our customers, and frankly, good for CMS Energy. Rejji, if you wanna just jump into some of the differences.

[Rejji Hayes, EVP and CFO at CMS Energy]

Yeah. Rebecca, thanks for the question. What I would add there is you do have a few sources or I'll say buckets of variance that lead to that delta between what we requested and where the PFD ended up. I would say cost of capital is a component. We asked for 10.5% ROE. The ALJ was at 9.7, and that makes up a good portion of the difference.

[Rejji Hayes, EVP and CFO at CMS Energy]

Also you see a difference in equity thickness, and we were at 52% equity relative to debt. The PFD was about a point lower than that. I'd call it 51 and change. Those are the primary sources of difference. There also were differences in opinion on the capital required to really strengthen and harden the system.

[Rejji Hayes, EVP and CFO at CMS Energy]

I think there, if memory serves me, there's about a quarter of a billion of capital investments that we were proposing for resiliency and reliability, which obviously we think is critically important, particularly on the heels of the August storm activity we saw, and we saw that also as a recommended disallowance of future spend. I'd say those are the major buckets there. I think, you know, once you normalize for where the prevailing ROE and equity thickness are, you start to tighten that gap. But it's primarily those buckets.

[Analyst at Goldman Sachs]

Okay, thanks. For the EDIP, how much of that is in your five-year base plan? Would that be incremental to your rate base or earnings growth?

[Rejji Hayes, EVP and CFO at CMS Energy]

I'm sorry, I missed the first part. You said for your what?

[Analyst at Goldman Sachs]

EDIP filing.

[Rejji Hayes, EVP and CFO at CMS Energy]

Oh, yes.

[Analyst at Goldman Sachs]

Is that in your five-year base plan?

[Rejji Hayes, EVP and CFO at CMS Energy]

Yeah. The $4 billion, that does a lot of capital, to be clear. The $4 billion of capital attributable to the EDIP, and for everyone else out there, it's the Electric Distribution Infrastructure Investment Plan. That does align with the spend rate we've been on for some time. In our current five-year capital plan of $13.2 billion, about $5.5 billion of that is attributable to electric distribution. We're on this sort of run rate of over $1 billion a year, $1 billion per year of capital investment, and we think that's appropriate to balance resilience, reliability, as well as affordability. That's effectively what this EDIP proposes.

[Analyst at Goldman Sachs]

Okay. Thanks so much.

[Rejji Hayes, EVP and CFO at CMS Energy]

Thank you.

[Operator]

Our next question today comes from Jonathan Arnold of Vertical Research. Please go ahead.

[Jonathan Arnold, Partner and Head of Utilities and Power Research at Vertical Research]

Hey, good morning, guys.

[Garrick Rochow, President and CEO at CMS Energy]

Good morning.

[Rejji Hayes, EVP and CFO at CMS Energy]

Morning.

[Jonathan Arnold, Partner and Head of Utilities and Power Research at Vertical Research]

Could you just, Rejji, you mentioned that on the roll-forward of the capital plan, you'd probably, you know, probably be out $1 billion associated with that. Could you just, is that the Voluntary Green Pricing being rolled in? Is it something else? Would the VGP be incremental? Maybe a little more color on that comment.

[Rejji Hayes, EVP and CFO at CMS Energy]

Yeah, sure, Jonathan. To be clear, the $1 billion that we'll likely add to our next five-year plan from 2022 to 2026, that does not include the VGP and the opportunity there for that gigawatt of renewables, nor does it include any of the potential capital investment opportunity associated with the IRP.

[Rejji Hayes, EVP and CFO at CMS Energy]

What it will likely entail is, as you may recall, we had when we rolled out our 10-year plan in the back half of 2019, if memory serves me, we said we had about $3 to 4 billion of upside capital investment opportunities which were not part of that 10-year, $25 billion plan, and it largely had to do with electric and gas infrastructure modernization.

[Rejji Hayes, EVP and CFO at CMS Energy]

Those will be the likely components that are added to the capital plan going forward and represent that, call it, roughly $1 billion of upside. I also think we're going to obviously roll forward our IRP related solar investments that are part of just the existing IRP that we're executing on. You'll probably see some of that come into the plan as well as we add another year to our five-year rolling CapEx plan. Is that helpful?

[Jonathan Arnold, Partner and Head of Utilities and Power Research at Vertical Research]

Yeah, very helpful, Rejji. Said another way, that $3 to 4 billion is still there, you know, despite the VGP and the IRP.

[Rejji Hayes, EVP and CFO at CMS Energy]

That's exactly right.

[Jonathan Arnold, Partner and Head of Utilities and Power Research at Vertical Research]

Okay. You mentioned that the VGP is already oversubscribed. Give us any flavor of sort of by how much and what's the pathway to potentially expanding that?

[Garrick Rochow, President and CEO at CMS Energy]

Well, I'd offer this. One, some of those are nondisclosure agreements, but just some public announcements. You know, on Earth Day of this year, I was with the governor and we were announced, we were supporting the state facilities and their move to renewable energy. That's an example. I'll share with you that I was with a large customer just yesterday, a global company, and they were looking at their large manufacturing facilities here in Michigan and looking at renewable type options.

[Garrick Rochow, President and CEO at CMS Energy]

We're seeing a definite directional, a direction in terms of sustainability among our large industrial customers, and this serves their needs. I'm not going to get into how much or from an oversubscription standpoint, but hopefully those examples provide some color on the context of opportunity there.

[Rejji Hayes, EVP and CFO at CMS Energy]

Jonathan, the only thing I would add is if the spirit of your question is whether there will be sufficient demand for that gigawatt of opportunity, we certainly feel very confident that there will be requisite demand to meet the gigawatt of opportunity for the voluntary green program-

[Jonathan Arnold, Partner and Head of Utilities and Power Research at Vertical Research]

The spirit of the question was a bit more if you're oversubscribed, how are you. You know, don't you need to add to it in order to keep having those conversations?

[Rejji Hayes, EVP and CFO at CMS Energy]

As we see it, that's what the voluntary green program would offer up, about a gigawatt of additional capacity, that we would own, in the form of most likely, solar rebuild.

[Garrick Rochow, President and CEO at CMS Energy]

At this point, I mean, to answer your question, Jonathan, at this point, we don't need to add to it. There's some runway there, and we'd look to construct these renewable assets in the 2024 to 2027 timeline. It's oversubscribed from what we have right now, and this will make up a good portion of that 1,000 MW, but there's more room to grow there.

[Jonathan Arnold, Partner and Head of Utilities and Power Research at Vertical Research]

Okay. Thank you.

[Operator]

Thank you. Our next question today comes from Michael Sullivan at Wolfe Research. Please go ahead.

[Michael Sullivan, Director of Equity Research at Wolfe Research]

Yeah. Hey. Hey, good morning, everyone. Sorry to put you on the spot a little bit here, but just seeing some of these filings start to come in on the IRP, looks like some of the environmental parties pushing back on the gas plant additions. I guess, is that surprising to you guys at all, ways to kind of come to some sort of agreement with them path forward? Any thoughts there?

[Garrick Rochow, President and CEO at CMS Energy]

I would offer this. When I say there's a win in there for everyone, it's clear that the environmental community loves the fact that we're eliminating coal and would like natural gas not to be the substitute. But here's what we know, that the only way that you can deliver the resiliency and the supply side of the business and make sure we don't have an interruption in service like was evident in Texas, is to have natural gas as part of the solution. Like I said, the staff and other intervenors are certainly mindful of the resiliency and the importance of natural gas within the state. There's a lot of give and take within these.

[Garrick Rochow, President and CEO at CMS Energy]

I would just offer this: in 2018 and 2019, we had a lot of different points of view from an intervener perspective, and we settled that case. Differences are expected, and we work through those, just like we have done and we have a track record of doing that.

[Michael Sullivan, Director of Equity Research at Wolfe Research]

Makes sense. Yeah, just sticking with the IRP, the other key focus area I think you touched on a little was the regulatory asset treatment. Any parties in particular you would expect to maybe push back on that initially as we start to see testimony?

[Garrick Rochow, President and CEO at CMS Energy]

Again, I would offer this. I've said this in the Q2 call and in other settings. This is an integrated resource plan and it's not a buffet. We've put together a great plan for Michigan. There's a win in it for everyone. You know, we've been really clear about the need for recovery of and on the asset. Going forward, I mean, that's part of the plan.

[Garrick Rochow, President and CEO at CMS Energy]

We've got testimony to support that. As I stated earlier, when there's a win in there for everyone, there's a path to a good order and a good outcome. Where there's differences, we've shown we have the ability to work with everyone. Again, I just see a nice positive outcome here next in next year in 2022.

[Michael Sullivan, Director of Equity Research at Wolfe Research]

Great. Thanks a lot, Garrick.

[Operator]

Our next question today comes from Julien Dumoulin-Smith with Bank of America. Please go ahead.

[Julien Dumoulin-Smith, Senior Research Analyst at Bank of America]

Hey, good morning, team. Thanks for the time. Appreciate the opportunity to connect.

[Garrick Rochow, President and CEO at CMS Energy]

Good morning.

[Julien Dumoulin-Smith, Senior Research Analyst at Bank of America]

Hey, good morning. So just in brief here, if we can talk about the supportive commentary you brought up a moment ago around the testimony here. Can you elaborate a little bit of specifically what your expectations are this afternoon? Perhaps more specifically, as you stated, supportive, I imagine that you see perhaps latitude towards the settlement here. I just want to make sure I'm equating one towards the other, right? I mean, in terms of what this translates to next, in terms of order.

[Garrick Rochow, President and CEO at CMS Energy]

Well, I would offer this. I mean, I don't have a visibility into the testimony until it's published. I mean, obviously we had a great discussion with a number of the interveners. We know some of their points of view, where there might be good support and where there might be small differences. I would reflect on it this way. Again, we've done this in the past many times on, you know, rate cases and the like, and we've certainly done this with an IRP.

[Garrick Rochow, President and CEO at CMS Energy]

Where there's differences, we find a way to work through those. I see. I think this afternoon we're going to see, and I look forward to reading it, I think we're going to see supportive comments in general. When, again, there's a win in there for everyone, there's a path to a successful outcome. Now, I don't know if it's going to go down the path of settlement or we'll take it to the full order, but again, when there's a win there's an opportunity for success. That's what I'm confident about.

[Julien Dumoulin-Smith, Senior Research Analyst at Bank of America]

Excellent. All right. Just coming back to the rate case a little bit here. You know, given the discrepancy between the ALJ and the staff, does that inform your strategy heading into your next filing here in Q1 at all? I mean, obviously, there's some specific deltas there that you alluded to a moment ago, Rejji, but can you elaborate a little bit more and maybe how you move forward, especially in the next cases? If there's anything yet.

[Garrick Rochow, President and CEO at CMS Energy]

This is a constructive regulatory environment. Julian, you know that, I know that. I really see this PFD as a bookend, as I stated earlier. You know, the conversations that we have with staff, you know, in and outside of cases is really how do we continue to ensure a safe and reliable natural gas system? How do we ensure and bring clean energy to Michigan?

[Garrick Rochow, President and CEO at CMS Energy]

How do we ensure the reliability and resiliency of the electric grid? Those are in line with our goals and what we want to do as well. You know, we'll continue to be thoughtful about that process to make sure we balance customers' affordability with that. I don't see any real change in plans as a result of a specific ALJ PFD at all.

[Rejji Hayes, EVP and CFO at CMS Energy]

Julian

[Julien Dumoulin-Smith, Senior Research Analyst at Bank of America]

Yeah. No, I appreciate your. Oh, go for it.

[Rejji Hayes, EVP and CFO at CMS Energy]

Yeah. Julian, this is Rejji. The only thing I would add is, you know, at the end of the day, it also speaks just the benefit of the Michigan regulatory construct and the legislation in that. In the event there is misalignment, because ultimately, at the end of the day, the commission's order will dictate, you know, where we end up. In the event there is a misalignment, there's a forward-looking test here.

[Rejji Hayes, EVP and CFO at CMS Energy]

Obviously we have not incurred the expenses on the capital or the O&M side. If we see misalignment in terms of where we'd like to go versus where the commission ends up, well, we can toggle the capital and spend program accordingly. Again, it just speaks to the constructive nature, not just of decisions we've seen in the past, but also the rate construct and the legislation itself.

[Julien Dumoulin-Smith, Senior Research Analyst at Bank of America]

Excellent. Yeah. I hear you. Bookend is the key word here. Excellent, guys. Best of luck. We'll speak soon.

[Garrick Rochow, President and CEO at CMS Energy]

Thanks, Julien. Thank you.

[Operator]

Our next question today comes from Travis Miller at Morningstar. Please go ahead.

[Travis Miller, Senior Equity Analyst at Morningstar]

Good morning. Thank you.

[Garrick Rochow, President and CEO at CMS Energy]

Good morning, Travis.

[Rejji Hayes, EVP and CFO at CMS Energy]

Hi.

[Travis Miller, Senior Equity Analyst at Morningstar]

I have two questions going back to the storms. First one is, in your discussions that you referenced with regulators, the governor, either within or outside of the rate cases, has there been any talk, in addition to some of the public comments about fines or penalties or other kinds of pushback on the storm response? That's my first question. The second question was the $0.16. Can you kind of break that down in terms of how you offset that to stay on track with the guidance and for this year?

[Garrick Rochow, President and CEO at CMS Energy]

Well, we'll two-part this one between, I'll have Rejji take the second question, and I'll take the first piece. I would offer this. One, again, conversation with the governor's office and with Chair Scripps have been constructive. Again, I don't want to speak for the chair, but I would offer this. You know, the commission has been supportive of both our electric reliability spend as of recent, the capital investments, as well as increased forestry spend.

[Garrick Rochow, President and CEO at CMS Energy]

We increased our forestry spend this year by a little over 60%, and that was supported through a rate case process by the commission. You know, the commissioners understand that we're in the first year of that. The number one cause for outages is tree trimming. We have a very aggressive program now in place which will benefit our customers.

[Garrick Rochow, President and CEO at CMS Energy]

Our commissioners, I believe, understand that we're in the early years of these larger investments and operational maintenance expense, which will help our customers. I think there's full recognition of that. I have not heard any talk at all, zero, from the governor's office or from the commission on any sort of penalties associated with the storms in August.

[Travis Miller, Senior Equity Analyst at Morningstar]

Okay, great.

[Rejji Hayes, EVP and CFO at CMS Energy]

Yeah. Travis, the only thing I would add is, with respect to the $0.16 of negative variance that I noted in my prepared remarks for Q3 of this year versus Q3 of last year, it was in large part offset as a result of just good weather we saw throughout the quarter. It was quite warm in the month of August, and that offset a lot of the incremental service restoration costs that we incurred. I also want to give credit where credit is due.

[Rejji Hayes, EVP and CFO at CMS Energy]

I think the fact that we've already exceeded our expectations on cost savings across the organization was also quite helpful in offsetting some of the service restoration. Then lastly, again, as I mentioned, residential down 2% year-to-date, roughly, versus year-to-date last year. It's ahead of plan two, and so you've got a little favorable mix as well versus plan. All of those factors have largely offset the service restoration expense that we saw in Q3.

[Travis Miller, Senior Equity Analyst at Morningstar]

Great. Yes, thanks. Just a quick clarification on the $0.16. That was incremental to plan, or did that include typical storm-related expenses I assume you include in all of your planning?

[Rejji Hayes, EVP and CFO at CMS Energy]

Yeah, the $0.16 was incremental to Q3 of 2020. It's just that's a historical comp, and that's what that estimate is predicated on.

[Travis Miller, Senior Equity Analyst at Morningstar]

Okay.

[Rejji Hayes, EVP and CFO at CMS Energy]

Versus plan, you know, a little higher than planned. Remember, in addition to having a decent amount of service restoration in our budget, we also utilized some regulatory mechanisms, both what we call a voluntary refund mechanism that we put in place at the end of 2020 that provided additional budgetary support. Then we also shared a gain on the sale of some assets related to our transmission assets in 2020 that offered additional, I'll say, regulatory liability support that provided additional budgetary insulation for the service restoration expense this year.

[Travis Miller, Senior Equity Analyst at Morningstar]

Okay. Great. Thanks so much. I appreciate the details.

[Rejji Hayes, EVP and CFO at CMS Energy]

Thank you.

[Operator]

Our next question comes from Ryan Levine at Citi. Please go ahead.

[Ryan Levine, Senior Equity Analyst of Utilities at Citi]

Good morning. One on financing proposal or in your plan, it looks like you reduced your equity needs for this year by about $43 million. Can you walk us through what's the driver of that and how much has really contributed to the purchase price adjustment for the recent asset sale, and if there's any other factors that are driving that number, if there's some conservatism baked in there?

[Rejji Hayes, EVP and CFO at CMS Energy]

Hey, Ryan, thanks for the question. The EnerBank sale, gross proceeds and the upside associated therewith was the key driver that enabled us to reduce our equity financing needs for the year. The way it works, and it's a little nuanced. I've been doing M&A for almost 20 years, but for fincos or financial service companies, you know, you have your traditional adjustments from sign to close on the working capital side.

[Rejji Hayes, EVP and CFO at CMS Energy]

For financial service companies, you also get credit, if the book equity of the business increases from sign to close. We saw that with EnerBank's outperformance over those handful of months. That led to about $60 million of upside from the gross proceeds we announced at signing, which was $960 million.

[Rejji Hayes, EVP and CFO at CMS Energy]

That's the amount that we ultimately saw at closing, which was over $1 billion, call it just under $1.02 billion. That's what gave us the upside and financial flexibility to reduce the equity needs. It's really a function of just that really strong performance at the bank that accreted their book equity that gave us more proceeds at close.

[Ryan Levine, Senior Equity Analyst of Utilities at Citi]

I mean, that's a bigger number than the amount of equity you reduced. Is there some conservative baked into your reduction in equity needs, or is this effectively, you know, $a few million worth of pre-funding of future equity needs or future capital needs?

[Rejji Hayes, EVP and CFO at CMS Energy]

Yeah. Remember, we have about $57 million of equity forwards that we've already put in place. You know, we have been putting those in place even before, you know, we announced the sale of the bank. That gives you effectively a floor for how low you're going to go, because at some point we will settle that. That's why we stopped at that sort of $57 million. It's because of the existing equity forwards we already have in place.

[Ryan Levine, Senior Equity Analyst of Utilities at Citi]

Okay, great. I guess that helps you for future years for capital needs.

[Rejji Hayes, EVP and CFO at CMS Energy]

That's right.

[Ryan Levine, Senior Equity Analyst of Utilities at Citi]

Appreciate it. That's all I had.

[Rejji Hayes, EVP and CFO at CMS Energy]

Thanks.

[Operator]

Ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to Garrick Rochow for closing remarks.

[Garrick Rochow, President and CEO at CMS Energy]

Thanks, Rocco. I'd like to thank you all again for joining us today. We're looking forward to seeing you at EEI in the near future here, and take care and stay safe.

[Operator]

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may disconnect your lines, and have a wonderful day.

Participants

Executives

• Garrick Rochow, President and CEO
• Rejji Hayes, EVP and CFO
• Sri Maddipati, Treasurer and VP of Finance and Investor Relations

Analysts

• Jeremy Tonet, Executive Director and Senior Equity Research Analyst at JPMorgan
• Jonathan Arnold, Partner and Head of Utilities and Power Research at Vertical Research
• Julien Dumoulin-Smith, Senior Research Analyst at Bank of America
• Michael Sullivan, Director of Equity Research at Wolfe Research
• Ryan Levine, Senior Equity Analyst of Utilities at Citi
• Travis Miller, Senior Equity Analyst at Morningstar
• Analyst at Goldman Sachs
• Analyst at Guggenheim Partners