Company Overview

CMS Energy Corporation (CMS) is a leading energy company operating primarily in the state of Michigan. Established in 1987, the company has grown to become the state's largest utility provider, serving 6.8 million of Michigan's 10 million residents across all 68 counties in the Lower Peninsula. CMS Energy's success is rooted in its unwavering commitment to delivering safe, reliable, and affordable energy to its customers, while also leading the charge in the state's transition to a cleaner energy future.

Historical Background

CMS Energy's history is marked by strategic acquisitions and a relentless focus on operational excellence. In 1988, the company acquired Consumers Power Company, which would later become its principal subsidiary, Consumers Energy. This transformative move solidified CMS Energy's position as a dominant player in Michigan's energy landscape. Throughout the 1990s, the company continued to expand its footprint through strategic acquisitions, growing its natural gas and electric utility operations in Michigan. These moves allowed CMS Energy to significantly expand its customer base and diversify its energy portfolio.

In the early years, CMS Energy faced challenges as it navigated the transition to a more competitive energy market. However, the company's ability to adapt and evolve has been a key factor in its long-term success. A significant milestone in the company's history was the 2002 sale of its interest in the Bay Harbor residential/commercial real estate development. This strategic decision allowed CMS Energy to refocus on its core utility operations, although the company retained environmental remediation obligations related to the site, which it continues to manage to this day.

Throughout the 2000s, CMS Energy encountered regulatory challenges as it worked to comply with evolving environmental regulations, such as the Clean Air Act and regulations surrounding coal combustion residuals. In response, the company made substantial investments to upgrade its generation fleet and infrastructure, including the retirement of several coal-fired power plants. These efforts demonstrate CMS Energy's commitment to environmental stewardship and its ability to adapt to changing regulatory landscapes.

Regulatory Environment

One of the key drivers of CMS Energy's success has been its strong regulatory environment in Michigan. The state's regulatory framework, which is largely codified in law, provides a supportive and constructive environment for the company to make critical investments in its electric and gas infrastructure. This includes features such as 10-month forward-looking rate cases, important financial and fuel recovery mechanisms, and increased energy waste reduction incentives. These regulatory attributes have enabled CMS Energy to consistently execute its investment thesis, which focuses on making necessary and important investments in its system while maintaining customer affordability.

Business Segments

CMS Energy operates through three main reportable segments:

1. Electric Utility Segment: This segment consists of CMS Energy's regulated activities associated with the generation, purchase, distribution, and sale of electricity in Michigan. It generates revenue primarily from the sale of electric utility services at tariff-based rates regulated by the Michigan Public Service Commission (MPSC). During the six months ended June 30, 2024, the electric utility segment contributed $2,358 million in operating revenue and $267 million in net income to CMS Energy's consolidated results.

2. Gas Utility Segment: This segment comprises CMS Energy's regulated activities associated with the purchase, transmission, storage, distribution, and sale of natural gas in Michigan. Like the electric utility, this segment generates revenue primarily from the sale of gas utility services at tariff-based rates regulated by the MPSC. For the six months ended June 30, 2024, the gas utility segment reported $1,272 million in operating revenue and $184 million in net income.

3. NorthStar Clean Energy Segment: This segment consists of CMS Energy's various subsidiaries engaged in domestic independent power production, including the development and operation of renewable generation, as well as the marketing of independent power production. For the six months ended June 30, 2024, NorthStar Clean Energy contributed $153 million in operating revenue and $47 million in net income to CMS Energy's consolidated results.

Financials

CMS Energy's financial performance has been a testament to its strategic approach. In 2023, the company reported annual net income of $887 million and annual revenue of $7.46 billion. Its annual operating cash flow reached $2.31 billion, while its annual free cash flow stood at -$265 million. These robust financial metrics have allowed CMS Energy to maintain a strong balance sheet and continue investing in its infrastructure to better serve its customers.

For the most recent quarter (Q2 2024), CMS Energy reported revenue of $1.61 billion, net income of $198 million, operating cash flow of $707 million, and free cash flow of $26 million. The Q2 2024 results showed year-over-year growth in revenue, net income, and operating cash flow, driven by constructive regulatory outcomes in the company's electric and gas rate cases. The decrease in free cash flow was due to higher capital expenditures.

CMS Energy has consistently achieved 6% to 8% adjusted earnings growth over the past 21 years. For the first half of 2024, the company reported adjusted earnings per share of $1.63, up $0.18 versus the first half of 2023, largely driven by constructive outcomes in their electric and gas rate cases.

Guidance and Outlook

CMS Energy has reaffirmed its full-year 2024 guidance of $3.29 to $3.35 per share, with continued confidence toward the high end of the range. Longer-term, the company continues to guide toward the high end of its adjusted EPS growth range of 6% to 8%, which implies 7% up to 8% growth.

The company's regulatory calendar is mostly complete for the year, with a constructive electric rate order received in March, a settled gas rate case in July, and an upcoming renewable energy plan filing in November as the only major remaining regulatory item. CMS expects $0.12 per share of positive variance for the remainder of 2024 due to the electric rate order and gas rate case settlement.

CMS Energy plans to issue approximately $675 million in utility debt in the second half of 2024 to rebalance the rate-making capital structure.

Liquidity

Despite facing some operational and regulatory hurdles, CMS Energy has maintained its focus on providing safe, reliable, and affordable energy to its customers in Michigan. The company has leveraged its strong regulatory relationships and lean operating model to deliver consistent financial performance over the past two decades, establishing itself as an industry leader in the state. This consistent performance has contributed to the company's solid liquidity position, enabling it to fund its ongoing operations and capital investments.

As of December 31, 2023, CMS Energy's debt-to-equity ratio stood at 2.07, while its current ratio was 1.84 and its quick ratio was 1.24. The company maintains robust liquidity through various credit facilities:

- CMS Energy had $521 million available under its revolving credit facility as of June 30, 2024. - NorthStar Clean Energy had $45 million available under its revolving credit facility as of June 30, 2024. - Consumers had $1.3 billion available under its revolving credit facilities as of June 30, 2024. - Consumers also has a commercial paper program that allows it to issue up to $500 million in commercial paper notes, which are supported by its revolving credit facilities.

Environmental Stewardship

The company's commitment to environmental stewardship is also a key aspect of its business model. CMS Energy's Clean Energy Plan, which was most recently revised and approved by the Michigan Public Service Commission (MPSC) in 2022, outlines the company's strategy to deliver clean, reliable, resilient, and affordable energy to its customers. This plan includes the elimination of coal-fueled generation by 2025, the addition of nearly 8,000 MW of solar generation by 2040, and the deployment of battery storage to support the integration of renewable energy sources.

CMS Energy's focus on sustainability extends beyond its own operations. The company has set ambitious goals to achieve net-zero methane emissions from its natural gas delivery system by 2030 and net-zero carbon emissions from its electric business by 2040. These targets, along with the company's ongoing investments in energy efficiency and demand response programs, demonstrate CMS Energy's holistic approach to environmental stewardship.

Market Position and Investor Perception

The company's strong financial performance and strategic initiatives have not gone unnoticed by the investment community. CMS Energy has consistently maintained its industry-leading financial and operational metrics, and has continued to deliver on its commitments to customers and shareholders.

Industry Trends

CMS Energy operates within the broader utility market, which is experiencing significant growth and transformation. The global utility market was valued at $6.89 trillion in 2024 and is projected to reach $8.83 trillion by 2028, growing at a CAGR of 6.4%. This growth is expected to be driven by factors such as population growth, economic development, investments in renewable energy, and a rise in utility mergers and acquisitions.

Future Outlook

Looking ahead, CMS Energy remains well-positioned to capitalize on the growing demand for clean energy in Michigan. The company's robust investment plan, which includes $17 billion in planned capital expenditures over the next five years, is expected to drive continued growth and support the state's transition to a more sustainable energy future. Additionally, the company's recent acquisition of the Covert Generating Station, a 1,200 MW natural gas-fueled facility, has further strengthened its ability to provide reliable and controllable sources of electricity to its customers.

CMS Energy continues to focus on maintaining customer affordability while making necessary investments, leveraging its CE Way cost management system to provide over $50 million in annual customer savings. This approach, combined with the company's strong regulatory relationships and consistent financial performance, positions CMS Energy well for continued success in the evolving energy landscape.

In conclusion, CMS Energy is a utility giant that has firmly established itself as a leader in Michigan's energy landscape. With its strong regulatory environment, robust financial performance, and unwavering commitment to sustainability, the company is well-poised to continue powering the state's clean energy transformation for years to come. As CMS Energy navigates the evolving energy landscape, investors and stakeholders can take comfort in the company's proven track record of delivering industry-leading results and its steadfast dedication to serving the needs of its customers and the communities it operates in.