CMS ENERGY CORP Q4 2025 earnings call

Thank you, Adam. 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. And now I'll turn the call over to Garrick.

Thank you, Jason, and good morning, everyone. Before we get into the financial results, I'm very proud of the team in 2025, as you see from the slide. I want to highlight a few of the big wins the CMS Energy team delivered in 2025. First, I'm very pleased with our Large Load Tariff, which was approved in November. Supplying energy for data centers is a national story, and the rush to serve is on the mind of utility leaders. I'm very proud of the tariff the team worked so hard on this year because it's strategic and thoughtful. It protects our customers and supports growth in the state. This tariff provides certainty for our data centers as we bring new load onto the system and ensures existing customers don't pay a single cent for the investments.

In some cases, they will see tangible benefits as this new load supports more affordable rates as we grow Michigan. Next, we received approval for our 20-year renewable energy plan, another area the team worked hard on to put the right plan together that meets the requirements in our state's energy law. More importantly, this approval highlights the constructive regulatory environment in Michigan and provides visibility and certainty for our long-term investments in solar and wind, providing roughly $14 billion of customer investment opportunity over the next decade. On this last one, we have a saying around here, "Victory loves preparation." And I want to talk about our gas business. It's been a cold start to the winter, and as always, we have been prepared to serve our customers. That doesn't happen by luck or accident.

That is a deliberate commitment of our team who work every day to buy gas at the lowest price, store it in some of the largest storage fields in the nation, and deliver it safely and reliably to our customers. We're reducing the price of gas when it is needed most by our customers. This is affordability in action. This reflects our ongoing work to replace this important storage and delivery infrastructure, investing over $1 billion in the year so we are there where our customers expect us. At CMS Energy, we wake up every day committed to serve and deliver value for all our stakeholders. 2025 marks our 23rd year of industry-leading performance. As we prepare for these calls, we do a lot of work on slides, and we all have our favorites. This next one is mine.

It highlights the team's commitment to excellence and what we are able to achieve, and it shows results, proof points of the great regulatory construct in Michigan. I know you hear from Rejji and me all the time when we're on the road. Our long history of constructive outcomes, multiple years, multiple cases, and then add the unique mechanisms like incentives on energy waste reduction and on PPAs, all of which is built into the energy law. It's an outstanding construct. More importantly, we have been successful getting top-tier outcomes to support our long track record of performance. This year was no different. Two rate orders, electric and gas, both approved with constructive outcomes, delivering big wins for our customers, supporting critically important work to improve electric reliability and ensure gas safety across our system.

Our 20-year renewable energy plan approved over $14 billion of customer investment opportunity to achieve the state's energy law by 2040, visibility and certainty for the recovery of our investments. We also delivered on the first-ever storm deferral mechanism approved in June. Our large load tariff was approved in November, priming the pump for growth. Like I said, my favorite slide. These important outcomes provide visibility and certainty for necessary customer investments in our electric and gas systems. And this track record of constructive outcomes continues to highlight what the CMS Energy team is able to achieve and further reaffirms Michigan's top-tier regulatory environment. When I look forward, I have confidence in our ongoing electric rate case.

Given the reactions to our recent Proposal for Decision, I would remind the investment community that this is simply a step in the process and is not reflective or consistent with our strong track record of performance. The MPSC staff, professionals, have spent significant time with the testimony and merits of this case. Staff position is constructive, and I would argue much closer to the expected rate case outcome. I would also note that the commissioner's previous public comments from the bench support the need for an improved electric grid and constructive ROEs. This case is built on the fundamentals of our reliability roadmap, the MPSC Commission Liberty Distribution Audit, and the necessary customer investments to support electric reliability while maintaining affordability. I expect a constructive outcome for our customers and investors. I also expect the ROE to be 9.9% or better.

In our recently filed gas rate case, I'm confident in the investments to ensure the gas system is safe, reliable, and clean, and the value to customers of our proposed full gas decoupling. As I shared a moment ago, our gas price is on the decline, and our residential natural gas rate is 28% below the national average, striking the right balance between investment in the system and affordability for our customers. Now, onto the financials. For 2025, we exceeded our adjusted earnings per share guidance and delivered $3.61 per share. This is up over 8% from 2024's actual result and delivers that compounding of earnings you have come to expect from CMS Energy. Throughout 2025, we continue to see strong performance at the utility, largely driven by constructive regulatory outcomes and robust performance at Northstar driving full-year results.

This performance allowed us the opportunity to exceed or beat guidance at year-end, deliver better service for our customers, and de-risk the business for the coming year. For 2026, we are raising our annual guidance by $0.03, to $3.83-$3.90, which represents 6%-8% growth off of 2025 actual results, and we continue to guide toward the high end. Our practice of rebasing higher off of actuals is a differentiator in this sector and provides a higher quality of earnings for our investors. And we deliver year in and year out, easy, straightforward math, compounding growth, and bringing greater value, how we've done it for years. We are also reaffirming our long-term guidance range of 6%-8% toward the high end.

As part of our total shareholder return, we'll continue to grow the dividend as we have for over 20 years, targeting a dividend payout ratio of approximately 55% over time. Finally, we remain confident in our ability to manage the business and execute year in and year out regardless of circumstances, 23 years now, consistent industry-leading performance. On Slide 6, we've highlighted our 5-year $24 billion utility customer investment plan, up $4 billion from our prior plan. These investments are necessary to deliver better customer service through improved reliability, both in distribution and supply. I want to take a moment to connect the dots on why I'm excited and confident in our ability to execute on this plan. First, we've increased our electric generation investment by approximately $2.5 billion over the previous plan.

Most of this customer investment is already approved in the Renewable Energy Plan with the visibility and certainty I mentioned earlier. Another customer investment that I communicated on previous calls is the addition of natural gas generation and battery storage. Our Integrated Resource Plan that we'll file in mid-2026 will detail additional capacity needed to replace retired plants and support existing and future growth. This customer investment opportunity is not contingent on new data centers, but growth already or soon to be connected to our system. And no, we are well on our way in planning and preparation to deliver this capacity in this five-year window. Second, we continue to roll more of our electric reliability roadmap into our five-year plan to strengthen our electric distribution system, which is increased by approximately $1.2 billion over the previous plan.

This work and these investments are well aligned with the Michigan Public Service Commission and the results of the Liberty Distribution Audit. We've also seen constructive support of our investment recovery mechanism in the rate case process. Finally, our gas investments also increase in this plan in the amount of approximately $400 million. This aligns with our 10-year natural gas delivery plan and is a result of greater demand across the gas transmission system for power generation and industrial growth. So when I step back and objectively look at our 5-year customer investment plan, there is visibility and certainty around the investments. We have an efficient workforce to get the work done. The work provides significant value to our customers, and I have confidence we can do it affordably. This plan supports 10.5% rate base growth through 2030.

In addition to our robust customer investment plan, we have meaningful growth drivers outside traditional rate base, which are unique to Michigan and CMS Energy and are sometimes overlooked. The financial compensation mechanism, which allows us to earn on PPAs, grows over the 5-year period, offering nearly $50 million of incentives by the end of the decade. There's approximately $65 million per year of incentives through our energy efficiency programs enhanced by the 2023 energy law. We also expect incremental earnings from our non-utility business, Northstar Clean Energy, as we continue to see attractive pricing from capacity and energy sold at Dearborn Industrial Generation, or DIG. Now, we make all these investments with a strong focus on customer affordability. We have a proven track record of driving customer savings through the CE Way and digital automation, episodic cost-saving opportunities, load growth, and energy waste reduction.

Thank you, Garrick, and good morning, everyone. To elaborate on the strength of our financial performance in 2025, on slide 9, you'll note that we met or exceeded all of our key financial objectives for the year, most notably our adjusted earnings per share. To avoid being repetitive, I'll just note that we successfully invested $3.8 billion, largely in line with our original guidance, to make our electric and gas systems safer, more reliable, and cleaner on behalf of our 3 million customers at the utility. We managed to do this while funding the business in a cost-efficient manner, largely through operating cash flow, well-priced bond and equity financings, and tax credit transfers.

This prudent funding strategy enabled us to maintain our solid investment-grade credit metrics and associated ratings as affirmed by each of the rating agencies over the course of the year, most recently by S&P for our parent company, CMS Energy, in December. Moving on to our 2026 EPS guidance, on slide 10, you'll note the rebasing off the range higher off of our 2025 adjusted EPS actuals as per our historical practice. More specifically, our 2026 adjusted EPS guidance range has increased by 3 cents per share on both ends of the range to $3.83-$3.90 per share. Our increased 2026 EPS guidance implies 6%-8% growth with continued confidence toward the high end of the range, as Garrick noted, which is effectively 7%-8% given our historical performance.

As you can see in the segment details, our EPS will primarily be driven by the utility providing $4.28-$4.33 of adjusted earnings as we plan for normal weather, constructive regulatory outcomes, and earned returns at or near authorized levels. At Northstar, we're assuming an EPS contribution of $0.25-$0.30, which incorporates normalized operations at DIG, benefiting from an increasingly favorable mix of capacity contracts and the completion of select renewable projects. Lastly, our financing assumptions remain conservative at the parent segment with expected equity issuances of approximately $700 million to support the increased capital plan at the utility. Our guidance in the parent segment also includes a full year of interest expense from last year's successful convertible debt offering in the fourth quarter and assumes the absence of liability management transactions.

To elaborate on the glide path to achieve our 2026 adjusted EPS guidance range, you'll see the usual waterfall chart on slide 11. For clarification purposes, all of the variance analyses herein are measured on a full-year basis and are relative to 2025. From left to right, we plan for normal weather, which in this case amounts to $0.22 per share of negative variance given the absence of favorable temperatures experienced in 2025, largely in our electric business. Additionally, we anticipate $0.37 per share of pickup attributable to rate relief driven by the residual benefits of last year's gas and electric rate cases and the expectation of constructive outcomes in our pending electric and gas rate cases. Outside of the general rate cases, we also expect to see earnings contributions from our investments in renewable generation assets in accordance with our recently approved renewable energy plan.

As always, our rate relief figures are stated net of investment-related costs such as depreciation, property taxes, and utility interest expense. As we turn to the cost structure in 2026, you'll note $0.12 per share of positive variance due to the anticipation of continued productivity driven by the CE Way and more normalized storm activity in our service territory. It is also worth noting that our projected operating expenses reflect the benefits of operational pull-aheads executed in 2025. And as always, we will adjust our cost assumptions in accordance with rate case outcomes given the financial flexibility inherent in the forward-looking test year. Lastly, in the penultimate bar on the right-hand side, you'll note a modest variance, which largely consists of growth at Northstar per my earlier comments.

This bucket also includes the rolloff of 2025 liability management transactions and the usual conservative assumptions around parent financing costs and taxes, among other items. In aggregate, these assumptions equate to a variance of -$0.05 to +$0.02 per share. As always, we'll adapt to changing conditions throughout the year to capitalize on opportunities and mitigate risks to deliver on our operational and financial objectives to the benefit of customers and investors. On slide 12, we have a summary of our near and long-term financial objectives. As Garrick noted, from a dividend policy perspective, we're targeting a payout ratio of approximately 60% in 2026 and roughly 55% over the course of our five-year plan. Given the elevated cost of capital environment and the breadth and depth of customer investment opportunities before us, we continue to believe that it is prudent to retain more earnings to fund growth.

From a balance sheet perspective, we continue to target solid investment-grade credit ratings and will continue to manage our key credit metrics accordingly as we balance the needs of the business. As such, we intend to continue our at-the-market, or ATM, equity issuance program in the amount of approximately $700 million in 2026, as mentioned earlier. Over the course of the five-year plan, our aggregate equity needs will be consistent with our historical ratio of 40 cents of equity for every dollar of incremental CapEx and equates to an average of approximately $750 million per year, given a substantial increase in our five-year customer investment plan. And while we do have some capacity remaining with our existing ATM program, you can expect us to file a new prospectus supplement to reflect our updated needs later this year.

Lastly, we also expect select large multi-year economic development projects to begin ramping up in 2026, yielding approximately 3% weather-normalized load growth for the year, with run rate assumptions of 2%-3% in the outer years of our plan. Slide 13 offers more specificity on the funding needs in 2026 at the utility and the parent. At the utility, we're planning to issue a little over $1.7 billion in aggregate. At the parent, you'll note that our debt financing needs were pulled ahead in November of 2025, which leaves the aforementioned equity issuance needs of roughly $700 million. Needless to say, we'll remain opportunistic throughout the year and will continue to monitor the markets for attractive issuance windows. On Slide 14, we've refreshed our sensitivity analysis on key variables for your planning assumptions.

As you'll note, with reasonable planning assumptions and our track record of risk mitigation, the probability of large variances from our plan is minimized. Our model has served and will continue to serve all stakeholders well. Our customers receive safe, reliable, and clean energy at affordable prices. Our diverse and battle-tested workforce remains committed to our purpose-driven organization, and our investors benefit from consistent industry-leading financial performance. And with that, I'll hand it back to Garrick for his final remarks before the Q&A session.

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